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FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NUMBER 333-34137
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 8, 1998)
1,200,000 SHARES
SERIES B 10.5% CUMULATIVE CONVERTIBLE PREFERRED STOCK
($25 LIQUIDATION PREFERENCE PER SHARE)
IMPAC MORTGAGE HOLDINGS, INC.
This prospectus relates to a public offering of 1,200,000 shares of Series
B 10.5% Cumulative Convertible Preferred Stock of Impac Mortgage Holdings, Inc.
Our common stock is traded on the American Stock Exchange under the symbol
"IMH." We do not intend to list the Series B Preferred Stock on a stock
exchange or an over-the-counter market. On December 18, 1998, the closing sales
price of our common stock was $4.50 per share.
We are a speciality finance company that originates, purchases, sells,
securitizes and invests in residential mortgage loans. We choose to be taxed at
the corporate level as a real estate investment trust, or a "REIT," for federal
income tax purposes.
Dividends on the Series B Preferred Stock will accumulate from the date of
issuance and will be payable quarterly, in cash or our common stock starting
April 27, 1999. The per share dividend amount will be the greater of:
. $0.656250 per quarter or
. the quarterly aggregate distributions declared on the number of shares
of common stock into which a share of Series B Preferred Stock is
convertible.
Each share of Series B Preferred Stock will initially be convertible into
5.050505 shares of our common stock, subject to adjustment under certain
circumstances. Beginning on the second anniversary of the date of the first
issuance of the Series B Preferred Stock, we have the right to redeem, under
certain circumstances, any then outstanding Series B Preferred Stock at $25 per
share, plus any accumulated and unpaid dividends. You will also have the right
to require that we redeem the Series B Preferred Stock under certain
circumstances. For a more complete description of the terms of the Series B
Preferred Stock, you should refer to "Description of Series B Preferred Stock"
on page S-7.
________________________________
YOUR PURCHASE OF SERIES B PREFERRED STOCK OFFERED BY THIS PROSPECTUS
INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER PURCHASING THESE SHARES
ONLY IF YOU CAN AFFORD THE COMPLETE LOSS OF YOUR INVESTMENT. FOR A DISCUSSION
OF THE RISKS YOU SHOULD CONSIDER BEFORE MAKING AN INVESTMENT DECISION, SEE "RISK
FACTORS" BEGINNING AT PAGE S-6.
________________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PER SHARE TOTAL
--------- -----
Public Offering Price $25.00 $30,000,000
Commissions and Fees $ 1.00 $ 1,200,000
Proceeds to Us/(1)/ $24.00 $28,800,000
____________________
(1) Before deducting our expenses related to this offering, which we estimate
to be $300,000.
________________________________
We have retained EVEREN Securities, Inc. to act as our agent to arrange
this transaction. The agent is not required to sell any specific number or
dollar amount of securities but will use its best efforts to sell the Series B
Preferred Stock offered. The Series B Preferred Stock will only be delivered in
certificated form. We will deliver certificates to investors as soon as is
practicable after we receive their payment in full for the Series B Preferred
Stock.
________________________________
EVEREN SECURITIES, INC.
The date of this prospectus supplement is December 21, 1998.
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PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all the information that you need to consider in
making your investment decision. To understand all of the terms of this
offering of Series B Preferred Stock, you should carefully read all the
information in this prospectus supplement. In addition, important information,
including the definitions of capitalized terms used but not defined in this
prospectus supplement, is incorporated by reference from the prospectus.
THE COMPANY
We are a specialty finance company that originates, purchases, sells,
securitizes and invests in residential mortgage loans. To date, we have
purchased and invested primarily in non-conforming residential mortgages. 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 and the Federal Home Loan Mortgage Corporation.
We conduct our business through three operations:
. our conduit operations purchases and sells or securitizes residential
mortgages
. our long-term investment operations invests in mortgages and
securities backed by mortgages
. our warehouse lending operations provides warehouse and repurchase
financing facilities to originators of mortgage loans
We choose to be taxed at the corporate level as a real estate investment
trust, or a "REIT," for federal income tax purposes. This generally allows us
to pass through our income to you without payment of federal income tax.
Conduit Operations
Our conduit operations primarily purchases non-conforming mortgage loans
from our network of third party correspondents. We subsequently securitize or
sell these loans to permanent investors, including our long-term investment
operations. We compete effectively with other non-conforming mortgage loan
conduits by designing non-conforming mortgage loans which suit the needs of our
correspondent loan originators and their borrowers. We provide an efficient
loan purchasing process, flexible purchase commitment options and competitive
pricing. Our conduit operations:
. generates revenues from securitizations and loan sales to third party
investors
. supplies our long-term investment operations with non-conforming
mortgage assets
Long-Term Investment Operations
Our long-term investment operations invests in mortgage loans and
securities backed by mortgages. To date, our long-term investment operations
has invested primarily in non-conforming residential mortgage assets and to a
lesser extent in second mortgage loans. We earn income from the net interest
income that we receive on our mortgage assets.
We finance the purchase of our mortgage assets with:
. borrowings under mortgage financing facilities
. proceeds from the sale of our loans on a whole loan basis or through
securitizations
. our own capital
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Our conduit operations helps our investment objectives by selling to our long-
term investment operations non-conforming residential mortgage assets at similar
prices paid by institutional investors and other third parties.
Warehouse Lending Operations
Our warehouse lending operations provides warehouse and repurchase
financing facilities to our conduit operations and other third party mortgage
banks. Third party mortgage banks use these financing facilities to finance
their purchase of mortgage loans until they are able to sell the loans. We earn
income from interest paid to us by these third party entities under these
financing facilities.
Recent Developments
During the third quarter of 1998, we experienced a significant decrease in
our liquidity because of the deterioration of the mortgage-backed securities
market and the margin calls our lenders made on our financings and warehouse
facilities. Margin calls result when our lenders deem the market value of the
collateral securing our financings to be below the amount of our borrowings and
require us either to reduce the amount of our borrowings under the financing
facilities or to provide them with additional equity or collateral to secure our
borrowings. We delayed the payment of our third quarter dividend and sold
mortgage loans and mortgage-backed securities as a result of these margin calls.
Future margin calls will adversely affect our ability to pay dividends in future
periods. Depending upon the state of the mortgage industry, any future margin
calls and the terms of any sale of mortgage assets, we may incur future losses.
We reduced our exposure to margin calls on our existing borrowings under
our current warehouse lines and repurchase facilities by selling mortgage loans
and paying down outstanding borrowings on these facilities with the proceeds.
After the quarter ended September 30, 1998, we made changes in our business
strategy to compete more effectively in the new market environment and increase
our liquidity by:
. raising interest rates on our loan programs
. decreasing and capping the amount of premiums paid on our loan
acquisitions
. reducing our staffing levels by approximately 25%
After the end of the third quarter, we sold $250.4 million of mortgage
loans and $8.9 million of mortgage-backed securities, which increased our
liquidity by $13.6 million, after we paid down borrowings related to those
assets. However, we took a $41.7 million non-cash charge in the third quarter
for certain write downs of our mortgage loans, equity investments and investment
securities available-for-sale portfolios. Largely as a result of these charges,
we incurred a net loss of $20.6 million for the three months ended September 30,
1998.
We expect our loan originations to decrease in the fourth quarter of 1998
and possibly the first quarter of 1999 which may reduce our borrowing needs
during this period of market volatility. We have reduced our staff in response
to these lowered expectations, believing that this will provide additional
liquidity from operating activities. Even with our sale of mortgage loans and
mortgage-backed securities, we do not believe our current operating cash flows
are sufficient both to fund any further growth of our operations and to pay cash
dividends.
_______________________
We are located at 20371 Irvine Avenue, Santa Ana Heights, California 92707
and our telephone number is (714) 556-0122.
S-3
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THE OFFERING
The following is a summary of the terms of the Series B Preferred Stock.
You should refer to "Description of Series B Preferred Stock" on page S-7 for a
more complete description of the terms of the Series B Preferred Stock.
<TABLE>
<S> <C>
Securities Offered........................ 1,200,000 shares of Series B 10.5% Cumulative Convertible
Preferred Stock (the "Series B Preferred Stock").
Dividends................................. We will pay either cash or common stock dividends quarterly on
each share of Series B Preferred Stock, beginning April 27,
1999, at the greater of $0.656250 per quarter or the total amount
of our quarterly aggregate distributions declared on the number
of shares of common stock into which a share of Series B
Preferred Stock is then convertible. The dividends will be
cumulative from the date of original issuance. We will prorate
the initial dividend based on the number of days in the initial
distribution period.
Conversion Rights......................... Each share of Series B Preferred Stock will initially be
convertible into 5.050505 shares of our common stock, subject
to adjustment under certain circumstances. You may convert all
or any part of your Series B Preferred Stock into our common
stock at any time.
Liquidation Preference.................... If we liquidate, dissolve or wind up our company, you will
receive a liquidation preference over the holders of our common
stock of $25 per share of Series B Preferred Stock.
Optional Redemption; Maturity; Sinking
Fund...................................... We may redeem the Series B Preferred Stock at $25 per share
plus any accumulated and unpaid dividends any time between the
second anniversary of the date of the first issuance of Series B
Preferred Stock and the fifth anniversary of the date of the first
issuance of the Series B Preferred Stock if the closing sales price
of our common stock, as reported by the principal stock
exchange or over-the-counter trading market where our common
stock is listed, averages more than 150% of the conversion price
of the Series B Preferred Stock for at least 20 consecutive
trading days. We may redeem the Series B Preferred Stock at
$25 per share plus any accumulated and unpaid dividends any
time after the fifth anniversary of the date of the first issuance of
the Series B Preferred Stock. We may redeem the Series B
Preferred Stock for cash or, under certain circumstances, for
shares of our common stock. Shares of our Series B Preferred
Stock do not have a stated maturity. We will not establish a
sinking fund to provide for any redemption.
Special Redemption........................ We may redeem the Series B Preferred Stock at any time if
necessary to preserve our REIT status for federal income tax
purposes.
</TABLE>
S-4
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<TABLE>
<S> <C>
Mandatory Redemption...................... You may require us to redeem all or some of your shares for
cash in the amount of $25 per share (plus accumulated and
unpaid dividends) if we merge or consolidate or sell all or
substantially all of our assets or if any person acquires more than
half of our voting stock and you receive consideration in the
transaction that is valued at less than 110% of the conversion
price in effect at the time of the transaction. You may also
require us to redeem your shares of Series B Preferred Stock for
cash under certain other limited circumstances.
Ranking................................... The Series B Preferred Stock will rank senior to our common
stock with respect to the payment of dividends and amounts
upon liquidation. We may issue shares of preferred stock that
have equal rights as to the payment of dividends or amounts
upon liquidation, dissolution and winding up as does our
Series B Preferred Stock.
No Voting Rights.......................... Except under certain limited circumstances, you will not be
entitled to vote along with our common stockholders on any
matter put before them.
Use of Proceeds........................... We intend to use the net proceeds of this offering for general
corporate purposes.
Risk Factors.............................. See "Risk Factors" beginning on page S-6 for a discussion of
factors to be considered before purchasing any of our Series B
Preferred Stock.
</TABLE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERENCE DIVIDENDS
The following is a computation of the ratio of earnings to combined fixed
charges and preference dividends, including CMO debt(1):
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------- ----------------------------------------------------
PRO PRO
FORMA 1998 FORMA 1997 1996 1995 1994 1993
----- ---- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to
combined fixed
charges and preference
dividends.................. 1.0x 1.0x --(2) --(2) 1.2x 1.6x(3) 1.6x(3) 9.9x(3)
</TABLE>
_________________________
(1) Earnings used in computing the ratio of earnings to combined fixed charges
and preference dividends consist of earnings before income taxes plus fixed
charges. Combined fixed charges and preference dividends consist of interest
expense, rental expense deemed to represent the interest factor and preferred
stock dividend requirements.
(2) Earnings were insufficient to cover fixed charges. The amount of the
coverage deficiency (including the effect of a non-recurring non-cash charge of
$44.4 million) at December 31, 1997 on a pro forma and actual basis was $19.2
million and $16.0 million, respectively.
(3) Data prior to our initial public offering on November 20, 1995 is based
upon the historical operations of Impac Warehouse Lending Group, as a division
of Southern Pacific Bank, formerly Southern Pacific Thrift and Loan, and
includes our company's equity interest in Impac Funding Corporation, as a
division of Imperial Credit Industries, Inc.
S-5
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RISK FACTORS
An investment in the Series B Preferred Stock involves a high degree of
risk. You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our business. Please refer to our Current Report on Form 8-K,
filed with the Commission on December 18, 1998, for risk factors which relate to
our business operations. Additional risks and uncertainties that we are not
presently aware of or that we currently deem immaterial may also impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, you may lose all or part of your investment. All of
these risk factors are dependent on each other and so you should read this risk
factors section, and those included in the Form 8-K referenced above, as a
whole.
This prospectus supplement also contains forward-looking statements that
involve risks and uncertainties. These forward-looking statements can be
identified by the use of words such as: "believes," "anticipates," "plans,"
"expects," "may," "will," "intends," "estimates" and their derivatives,
opposites and similar expressions. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks described below and to those we referred
you to.
RISKS RELATED TO ISSUANCE OF ADDITIONAL PREFERRED STOCK AND INCURRENCE OF DEBT
The terms of the Series B Preferred Stock restrict our ability to issue
securities senior to the Series B Preferred Stock; however, we may issue
securities ranking on a parity with the Series B Preferred Stock and additional
shares of Series B Preferred Stock. The issuance of additional preferred stock
on a parity with or senior to the Series B Preferred Stock could have the effect
of diluting the interests of holders of the Series B Preferred Stock. None of
the terms of the Series B Preferred Stock restrict our ability to incur debt.
Therefore, we could enter into a highly leveraged or other transaction that
might adversely affect our ability to pay dividends on the Series B Preferred
Stock.
A PUBLIC MARKET FOR SERIES B PREFERRED STOCK WILL NOT DEVELOP
Prior to this offering, there has been no public market for the Series B
Preferred Stock, and we do not intend to list the shares of Series B Preferred
Stock on a stock exchange or an over-the-counter market. Therefore, it is
highly unlikely that an active trading market will develop and be maintained in
the Series B Preferred Stock. If an active market does not develop, you may not
be able to sell your shares promptly or perhaps at all or to sell your shares at
a price equal to or above the price you paid for the shares.
OUR SHARE PRICES HAVE BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE
The market price of our common stock has been extremely volatile. On
September 1, 1998, the closing price was $13.06 and on October 15, 1998, the
closing price was $3.38. On December 18, 1998, the closing price was $4.50.
The market price of our common stock is likely to continue to be highly volatile
and could be significantly affected by factors including:
. availability of liquidity
. volatility in the securitization market
. whole loan sale pricing
. margin calls by warehouse lenders
. actual or anticipated fluctuations in our operating results
. interest rates
. prepayments on mortgages
. valuations of securitization related assets
. cost of funds
. general market conditions
S-6
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In addition, significant price and volume fluctuations in the stock market have
particularly affected the market prices for the common stocks of specialty
finance companies such as ours. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our common
stock.
If our results of operations fail to meet the expectations of securities
analysts or investors in a future quarter, the market price of our common stock
could also be materially adversely affected.
GRANT OF EXCEPTED HOLDER STATUS TO THE PURCHASER OF OUR SERIES B PREFERRED STOCK
MAY AFFECT OUR STATUS AS A REIT
The Internal Revenue Code prohibits ownership of more than 50% of a REIT's
shares by five or fewer individuals during the last half of a REIT's taxable
year. Our charter generally precludes anyone from beneficially owning in excess
of 9.5% of our capital stock to ensure that 50% of our capital stock is not held
by five or fewer individuals at any time. However, our charter permits our
board of directors to make exceptions to this ownership limitation, upon the
provision of certain representations and undertakings by a prospective purchaser
of our capital stock, with such person becoming an excepted holder. In
connection with the offering of the Series B Preferred Stock, our board of
directors has authorized excepted holder status to the initial two purchasers of
the Series B Preferred Stock. While our charter permits us to redeem the Series
B Preferred Stock at any time if necessary to preserve our REIT status, we
cannot assure you that we will have the funds legally available to redeem a
sufficient number of shares of Series B Preferred Stock to remain a REIT. The
loss of REIT status will have a material adverse affect on our business,
financial condition and results of operations.
CAPITALIZATION
The following table sets forth our actual capitalization (1) as of
September 30, 1998 and (2) as adjusted to give effect to receipt of the net
proceeds (expected to be approximately $28.5 million) from the offering of the
Series B Preferred Stock. Our capitalization should be read in conjunction with
our consolidated financial statements and the notes thereto incorporated by
reference into the prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
----------------------------
Actual As Adjusted
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Unaudited (in thousands)
<S> <C> <C>
Credit Facilities....................... $635,818 $619,351
Stockholders' Equity.................... 231,415 259,915
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TOTAL CAPITALIZATION.................... $867,233 $879,266
========== ================
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USE OF PROCEEDS
The net proceeds to us from the offering of our Series B Preferred Shares,
which are expected to be approximately $28.5 million, will be used by us to
reduce outstanding indebtedness under our financing facilities and for general
corporate purposes, including the payment of our $12.0 million dividend declared
in September 1998 and payable in January 1999. As of September 30, 1998, the
outstanding amounts of indebtedness to be repaid with the proceeds from this
offering bore interest at various floating and fixed rates and had a weighted
average annual rate of 7.04% and had maturities prior to or on September 29,
1999.
DESCRIPTION OF SERIES B PREFERRED STOCK
Prior to this offering, we classified and designated 1,200,000 shares of
our authorized Preferred Stock as Series B Preferred Stock and authorized the
issuance of the Series B Preferred Stock. You will be purchasing validly
issued, fully paid and nonassessable shares of our Series B Preferred Stock. As
holders of our Series B Preferred Stock, you will have no preemptive rights with
respect to any of our shares of capital stock or any of our other securities
that are convertible into or carrying rights or options to purchase any shares
of our capital stock. We
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are not obligated to redeem or retire our Series B Preferred Stock, except under
very limited circumstances described below, or to establish a sinking fund to
redeem or retire our Series B Preferred Stock. The Series B Preferred Stock does
not have a maturity and it will remain outstanding so long as it is not
converted or redeemed.
Our common stock is listed on the American Stock Exchange under the symbol
"IMH." We do not intend to list the Series B Preferred Stock on any stock
exchange or over-the-counter trading market.
RANKING
Our Series B Preferred Stock will rank senior to any Junior Shares with
respect to payment of dividends or other distributions and amounts upon
liquidation, dissolution or winding up. "Junior Shares" are our common stock,
our Series A Junior Participating Preferred Stock, and any other class or series
of our capital stock that is now or hereafter issued and outstanding that our
board of directors has not designated as ranking senior to or on a parity with
the Series B Preferred Stock. While any Series B Preferred Stock is
outstanding, we may not authorize or create any class or series of shares that
ranks senior to the Series B Preferred Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up without the
consent of the holders of four-fifths of the outstanding shares of Series B
Preferred Stock. However, we may without the consent of the holders of the
Series B Preferred Stock:
. create additional classes of shares ranking junior to or on a parity
with the Series B Preferred Stock
. increase the authorized number of shares of preferred stock, including
the Series B Preferred Stock
. issue additional series of preferred stock ranking junior to or on a
parity with the Series B Preferred Stock
DIVIDENDS
You may receive, when, as and if declared by our board of directors, out of
funds that are legally available for payment of dividends, cumulative cash or
common stock dividends. These dividends will be payable quarterly in an amount
per share equal to the greater of
. $0.656250 (equal to a rate of 10.5% of the $25 per share liquidation
preference, per annum) or
. the quarterly aggregate distributions declared on the number of shares
of common stock into which a share of Series B Preferred Stock is
convertible.
Dividends on the Series B Preferred Stock are payable quarterly in arrears
on or about the fourth Tuesday of January, April, July and October of each year,
beginning on April 27, 1999 (and, in the case of any accumulated but unpaid
dividends, at such additional times and for such interim periods, if any, as
determined by our board of directors). If we choose not to pay cash dividends
in any period and we have not paid cash dividends on any Junior Shares in such
period, we will pay dividends on the Series B Preferred Stock in our common
stock at a price per share equal to the average closing sales price of our
common stock as reported by the principal exchange or over-the-counter trading
market where our common stock is traded for the 20 trading days immediately
prior to the payment date. Each regular quarterly dividend is payable to
holders of record on our share records at the close of business on or about the
last Friday of December, March, June and September. Dividends will accumulate
from the date of the original issuance of the Series B Preferred Stock. The
initial distribution period will end at the end of the first full quarter
following the quarter in which the Series B Preferred Stock is first issued. The
initial dividend will be prorated based on the number of days in the initial
distribution period. The dividend first payable after issuance and any other
dividends payable on the Series B Preferred Stock for any period greater or less
than a full dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends are cumulative from the most
recent dividend payment date to which full dividends have been paid, whether or
not in any dividend period or periods such dividends shall be declared or
whether or not we have funds legally available
S-8
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for the payment of those dividends. Accumulations of dividends on the Series B
Preferred Stock will not bear interest.
"Parity Shares" are shares of our preferred stock that our board of
directors designates as ranking on a parity with the Series B Preferred Stock as
to the payment of dividends or amounts upon liquidation, dissolution or winding
up. We may declare dividends on Parity Shares at the same time that we declare
dividends on the Series B Preferred Stock. However, if we have not paid regular
dividends on the Series B Preferred Stock and the Parity Shares in full, then we
will declare any dividend on the Series B Preferred Stock and any Parity Shares
ratably in proportion to accumulated and unpaid dividends on the Series B
Preferred Stock and the Parity Shares.
Our board of directors will not authorize, pay or set aside for payment any
distribution on the Series B Preferred Stock if the action is prohibited by any
of our agreements or would constitute a default of any agreements or would be a
breach of any of our agreements, including any agreement relating to our
indebtedness. In addition, our board of directors will not authorize, pay or
set aside for payment, any funds, if we are restricted or prohibited from doing
so by law.
We will not:
(1) declare, pay or set apart funds for the payment of any dividend or
other distribution with respect to any Junior Shares (other than in
Junior Shares), or
(2) redeem, purchase or otherwise acquire for consideration any Junior
Shares through a sinking fund or otherwise (other than a redemption or
purchase or other acquisition of common stock made for purposes of an
employee incentive or benefit plan of our company or any of its
subsidiaries, a conversion into or exchange for Junior Shares or
redemptions for the purpose of preserving our qualification as a REIT),
unless in the case of each of (1) and (2):
(a) all accumulated dividends with respect to the Series B Preferred
Stock and any Parity Shares at the time such dividends are
payable have been paid or such dividends have been declared and
funds or shares of common stock have been set apart for payment
of such dividends; and
(b) sufficient funds or shares of common stock have been paid or set
apart for the payment of the dividend for the current dividend
period with respect to the Series B Preferred Stock and any
Parity Shares.
We will not declare or pay cash dividends on any Junior Shares for any
distribution period, if we have not paid full cumulative distributions on the
Series B Preferred Stock in the same form (i.e., cash, common stock or any
combination of cash and our common stock) as the distributions which we have
declared or paid on any Junior Shares for such distribution period.
We will first credit any distribution payment made on the Series B
Preferred Stock against the earliest accumulated distribution which remains
payable with respect to those shares.
If, for any taxable year, we elect to designate as "capital gain
distribution" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the distributions paid or made available for the year to the
holders of all classes of shares (the "Total Distributions"), then the portion
of the Capital Gains Amount that will be allocable to the holders of Series B
Preferred Stock will be the Capital Gains Amount multiplied by a fraction, the
numerator of which will be the total distributions (within the meaning of the
Code) paid or made available to the holders of the Series B Preferred Stock for
the year and the denominator of which shall be the Total Distributions.
The term "dividend" does not include dividends payable solely in Junior
Shares on Junior Shares, or in options, warrants or rights to holders of Junior
Shares to subscribe for or purchase any Junior Shares.
S-9
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REDEMPTION
We may redeem our Series B Preferred Stock for cash in the amount of $25
per share (plus accumulated and unpaid dividends) any time between the second
anniversary of the date of the first issuance of Series B Preferred Stock and
the fifth anniversary of the date of the first issuance of Series B Preferred
Stock, if the closing sales price of our common stock as reported by the
principal stock exchange or over-the-counter trading market where our common
stock is listed averages in excess of 150% of the Conversion Price for a period
of at least 20 consecutive trading days ending within 30 days prior to the
notice of redemption.
We may redeem our Series B Preferred Stock for cash in the amount of $25
per share (plus accumulated and unpaid dividends) any time to protect our status
as a REIT or to prevent our assets from being deemed Plan Assets under the Plan
Asset Regulation. On and after the fifth anniversary of the date of the first
issuance of Series B Preferred Stock, we may redeem the Series B Preferred Stock
upon not less than 30 nor more than 60 days' prior written notice, in whole or
in part, at any time or from time to time at a price equal to the Liquidation
Preference plus accumulated and unpaid dividends, payable at our option in:
(1) shares of common stock, equal in number to the Liquidation Preference
plus accumulated and unpaid dividends divided by the average closing
sales price of our common stock on the principal stock exchange or
over-the-counter trading market where our common stock is listed for
the 20 trading days immediately prior to the business day immediately
preceding the date of redemption; provided, however, that the average
closing sales price of our common stock on the principal stock
exchange or over-the-counter trading market where our common stock is
listed for the 20 trading days immediately prior to the business day
immediately preceding the date of redemption is greater than or equal
to the conversion price on the business day immediately preceding the
date of redemption.
(2) cash.
You may require us to redeem your outstanding shares of Series B Preferred
Stock for cash in the amount of $25 per share (plus accumulated and unpaid
dividends) if:
. our common stock is not listed on the American Stock Exchange,
the New York Stock Exchange or the Nasdaq National Market for
three consecutive trading days;
. our common stock issued upon conversion of the Series B Preferred
Stock, as a distribution in respect of the Series B Preferred
Stock, or upon redemption of the Series B Preferred Stock is not,
at the time the stock certificates are delivered, listed on the
exchange or quotation system where our common stock is listed at
such time;
. we fail to deliver stock certificates issued instead of a cash
distribution within 10 days of the distribution payment date; or
. we merge or consolidate or sell all or substantially all of our
assets or any person acquires more than half of our voting stock
and in either instance you receive consideration valued at less
than 110% of the conversion price in effect at the time of the
transaction.
We will give notice of redemption:
(1) if there are more than 50 holders of Series B Preferred Stock by
publication in a newspaper of general circulation in the City of New
York, the publication will be made once a week for two successive
weeks beginning not less than 30 nor more than 60 days prior to the
redemption date; or
(2) if there are 50 or fewer holders of Series B Preferred Stock, by
mailing of a similar notice, postage prepaid, not less than 30 nor
more than 60 days prior to the redemption date, addressed to the
holders of record of the Series B Preferred Stock to be redeemed at
their addresses as they appear on our stock transfer records and we
will issue a press release concerning the redemption. We will select a
redemption date not less than 30 nor more than 60 days after the date
on which we mail the notice of redemption.
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If we elect to redeem fewer than all of the shares of Series B Preferred
Stock, we may select the shares to be redeemed by lot or pro rata or by any
other method our board of directors determines.
The notice of redemption we mail to holders of the Series B Preferred Stock
will state, among other things,
(1) that we have elected to redeem the Series B Preferred Stock;
(2) the date fixed for redemption;
(3) the number of shares of Series B Preferred Stock to be redeemed (and,
if fewer than all the outstanding Series B Preferred Stock is to be
redeemed, the number of shares of Series B Preferred Stock to be
redeemed from each holder);
(4) the place(s) where (or the manner in which) you should surrender your
shares of Series B Preferred Stock for payment; and
(5) whether your shares will be redeemed for cash or our common stock.
If a redemption date falls after a dividend payment record date and prior
to the related payment date, the holders of the Series B Preferred Stock at the
close of business on that record date will be entitled to receive the dividend
payable on those shares on the corresponding dividend payment date, even though
the redemption date for those shares is before the dividend payment date. We
will not make any other payment or allowance for accumulated dividends on any
Series B Preferred Stock called for redemption.
If we have not paid, declared or set aside for payment full cumulative
dividends on the Series B Preferred Stock, we may not redeem the Series B
Preferred Stock in part and we may not purchase, redeem or otherwise acquire
Series B Preferred Stock or any Parity Shares other than in exchange for Junior
Shares. We may, however, purchase Shares-in-Trust or redeem Series B Preferred
Stock owned by Benefit Plan Investors in order to ensure that we continue to
meet the requirements for qualification as a REIT or to prevent our assets from
being deemed Plan Assets under the Plan Asset Regulation. Also, we may redeem
the Series B Preferred Stock in whole or in part pursuant to a purchase or
exchange offer made on the same terms to all holders of Series B Preferred
Stock.
On and after the date fixed for redemption, provided that we have made
available at the office of the Registrar and Transfer Agent a sufficient amount
of cash or common stock to effect the redemption, dividends will cease to
accumulate on the Series B Preferred Stock called for redemption (except that,
in the case of a redemption date after a dividend record date and prior to the
related payment date, holders of Series B Preferred Stock on the dividend record
date will be entitled on that dividend payment date to receive the dividend
payable on those shares), and those shares will no longer be deemed to be
outstanding and all rights of the holders of those shares as holders of Series B
Preferred Stock will cease except the right to receive any cash or common stock
payable upon redemption, without interest from the date of the redemption. At
the close of business on the redemption date, each holder of Series B Preferred
Stock (unless we default in the delivery of the cash or common stock) will be,
without any further action, deemed a holder of the amount of cash or common
stock, as the case may be, for which his or her Series B Preferred Stock is
redeemable.
Fractional shares of common stock will not be issued upon redemption of the
Series B Preferred Stock, but, in lieu thereof, we will pay cash for any
fractional interest based on the average of the closing sales prices of the
common stock on the 20 trading days prior to the business day immediately
preceding the date fixed for redemption.
At any time prior to the time, if any, as the Series B Preferred Stock
qualifies as a "publicly offered security" under the Plan Asset Regulation, or
qualifies for another exception from the "lookthrough" rule, if we determine
that, as a result of transfers, conversions or otherwise, Benefit Plan Investors
own 25% of the aggregate number of outstanding shares of Series B Preferred
Stock (excluding for this purpose any shares held by persons
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exercising investment management authority over our assets or providing
investment advice for a fee with respect to such assets and any affiliates of
such persons), we will have the right to cause shares of Series B Preferred
Stock that are held by Benefit Plan Investors to be redeemed so that following
such redemption Benefit Plan Investors own less than 25% of the outstanding
shares of Series B Preferred Stock (excluding for this purpose any shares held
by persons exercising investment management authority over our assets or
providing investment advice for a fee with respect to such assets and any
affiliates of such persons). No such redemption may reduce Benefit Plan Investor
ownership to less than 20% of the Series B Preferred Stock. Any such redemption
will follow the redemption procedures set forth herein, except that the
redemption date may be fewer than 30 days after the first notice of redemption
to the extent necessary to prevent our assets from being deemed Plan Assets and
the redemption price shall be the fair market value of such shares of Series B
Preferred Stock, as determined by our board of directors in its sole discretion.
If fewer than all the outstanding Series B Preferred Stock that are held by
Benefit Plan Investors are to be redeemed, the number of Series B Preferred
Stock to be redeemed will be determined by our board of directors and such
shares will be redeemed on a pro rata basis from the holders of such shares that
are Benefit Plan Investors in proportion to the number of Series B Preferred
Stock held by such holders or by any other method as may be determined by our
board of directors in its sole discretion.
LIQUIDATION PREFERENCE
If we liquidate, dissolve or wind up our company, you will be entitled to
receive the Liquidation Preference plus an amount per share of Series B
Preferred Stock equal to all accumulated and unpaid dividends (whether or not
declared) to the date of final distribution.
Until the holders of the Series B Preferred Stock have been paid the
Liquidation Preference and all accumulated and unpaid dividends in full, no
payment will be made to any holder of Junior Shares upon the liquidation,
dissolution or winding up of the Company. If, upon any liquidation, dissolution
or winding up of the Company, the assets of the Company, or proceeds thereof,
distributable among the holders of the Series B Preferred Stock are insufficient
to pay in full the Liquidation Preference and all accumulated and unpaid
dividends, and the liquidation preference and all accumulated and unpaid
dividends with respect to any Parity Shares, then such assets, or the proceeds
thereof, will be distributed among the holders of Series B Preferred Stock and
any such Parity Shares ratably in accordance with the respective amounts which
would be payable on such Series B Preferred Stock and any such Parity Shares if
all amounts payable thereon were paid in full. None of (1) a consolidation or
merger of us with another corporation, (2) a statutory share exchange by us or
(3) a sale or transfer of all or substantially all of our assets will be
considered a liquidation, dissolution or winding up, voluntary or involuntary,
of our company.
VOTING RIGHTS
Except as indicated below, the holders of Series B Preferred Stock will
have no voting rights.
The approval of holders of four-fifths of the outstanding shares of Series
B Preferred Stock, either at a meeting of stockholders or by written consent, is
required in order to amend the Charter or our by-laws:
(1) to authorize or create, or increase the authorized or issued amount of
any class or series of shares ranking prior to the Series B Preferred
Stock with respect to the payment of distributions or the distribution
of assets upon liquidation, dissolution or winding up or to reclassify
any authorized shares of our company into such shares, or to create,
authorize or issue any obligation or security convertible into or
evidencing the right to purchase any of these shares;
(2) to amend, alter or repeal the provisions of the Articles Supplementary
for the Series B Preferred Stock; or
(3) to amend, alter or repeal the provisions of our Charter so as to
materially and adversely affect any right, preference, privilege or
voting power of the Series B Preferred Stock (as determined by our
board of directors in good faith).
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If we merge or consolidate with another entity and our company is not the
surviving entity, so long as the Series B Preferred Stock is converted into a
security with substantially identical rights, preferences, privileges and voting
power, the rights, preferences, privileges or voting power of the Series B
Preferred Stock will not be deemed to have been materially and adversely
affected. In addition, any increase in our authorized preferred stock or the
designation or issuance of any additional shares of Series B Preferred Stock or
Parity Shares, or any increase in the amount of authorized Series B Preferred
Stock or any other preferred stock, of equal ranking or junior to the Series B
Preferred Stock with respect to payment of distributions or the distribution of
assets upon liquidation, dissolution or winding up, will not be deemed to
materially and adversely affect the rights, preferences, privileges or voting
powers of the Series B Preferred Stock.
Our Charter authorizes our board of directors to issue more shares of
preferred stock and to classify or reclassify any unissued shares of preferred
stock into one or more classes or series of stock. Our 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 our board
of directors determines for each class or series of stock subject to the
provisions of our Charter regarding restrictions on the transfer of stock. We
have preferred stock available for possible future financing of, or acquisitions
by, our company and for general corporate purposes without further stockholder
authorization unless such authorization is required by applicable law or the
rules of the principal exchange or over-the-counter trading market where our
common stock is listed or any other principal national securities exchange on
which our stock is listed or admitted for trading. Our 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 our
company 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 our company to make distributions to the
common stockholders. This issuance of our Series B Preferred Stock will be our
first issuance of preferred stock.
CONVERSION RIGHTS
The Series B Preferred Stock is convertible, in whole or in part, at any
time, at your option, into authorized shares of our previously unissued common
stock at a conversion price of $4.95 per share (equivalent to an initial
conversion rate of 5.050505 shares of common stock for each share of Series B
Preferred Stock), subject to adjustment as described below ("Conversion Price").
You may convert your shares of Series B Preferred Stock called for redemption up
until the close of business on the redemption date. For information as to
notices of redemption, see "--Redemption" above.
You may convert any shares of your Series B Preferred Stock by delivering
certificates evidencing the shares you wish to convert, together with a written
notice of conversion and a proper assignment of your certificates to our company
or in blank, to the office or agency we maintain for that purpose. Currently,
the principal corporate trust office of Boston EquiServe, L.P., is the transfer
agent, registrar, dividend disbursing agent, conversion agent and redemption
agent for the Series B Preferred Stock.
You will be deemed to have effected each conversion immediately prior to
the close of business on the date on which you have surrendered your
certificates for Series B Preferred Stock and your notice has been received by
our company as stated above (and if applicable, payment of any amount equal to
the dividend payable on such shares has been received by our company as
described below). The conversion will be at the Conversion Price in effect at
that time and on that date.
Holders of Series B Preferred Stock at the close of business on a dividend
record date will be entitled to receive the dividend payable on their shares on
the corresponding dividend payment date even though the shares will be converted
before the dividend payment date. However, Series B Preferred Stock surrendered
for conversion during the period between the close of business on any dividend
record date and ending with the opening of business on the corresponding
dividend payment date (except shares converted after the issuance of a notice of
redemption with respect to a redemption date during such period or coinciding
with such dividend payment date, which will be entitled to such dividend) must
be accompanied by payment of an amount equal to the dividend payable on such
shares on such dividend payment date. A holder of Series B Preferred Stock on a
dividend record date who (or whose transferee) tenders any such shares for
conversion into common stock on such dividend
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payment date will receive the dividend payable by the Company on such Series B
Preferred Stock on such date, and the converting holder need not include payment
of the amount of such dividend upon surrender of Series B Preferred Stock for
conversion. Except as provided above, the Company will make no payment or
allowance for unpaid dividends, whether or not in arrears, on converted shares
or for dividends on the common stock issued upon such conversion.
We will not issue fractional shares of common stock on conversion but, in
lieu thereof, we will pay cash for any fractional interest based on the current
market price of the common stock on the trading day immediately preceding the
conversion date.
You may not convert your shares of Series B Preferred Stock into our common
stock if, after the conversion, you would beneficially own more than 4.999% of
our then issued and outstanding shares of common stock, unless you provide us
with 75 days' prior notice that you have elected not to have this limitation
apply to your Series B Preferred Stock.
Conversion Price Adjustments
The Conversion Price shall be reduced to $4.50 after August 15, 1999 if our
"Return on Equity" for the six months ended June 30, 1999 (computed by
multiplying the Return on Equity for such period by two) is less than the "Ten
Year U.S. Treasury Rate" plus 200 basis points. "Return on Equity" means the
product obtained by dividing our net income (calculated in accordance with the
terms of our charter), before:
. incentive compensation paid to employees
. deduction for dividends
. amortization of advisor termination fees
. net operating loss deductions arising from prior periods
by the average of the gross proceeds from any sale of our equity securities
outstanding during such period. The "Ten Year U.S. Treasury Rate" means the
average of the weekly per annum average yield to maturity for U.S. Treasury
fixed rate securities published by the Federal Reserve Board during such period.
The Conversion Price is also subject to adjustment upon any subdivision,
combination and reclassification of our common stock and upon certain issuances
of Junior Shares or rights to acquire Junior Shares. We will not adjust the
conversion price for issuances of our securities under any of the following
circumstances: upon conversion of the Series B Preferred Stock, upon exercises
of options and warrants granted to our employees and directors which were
approved by our board of directors, pursuant to any employee plan, or pursuant
to any of our dividend reinvestment plans.
In addition, we will be permitted to make such reductions in the Conversion
Price as we consider advisable in order that any event treated for Federal
income tax purposes as a dividend of shares or share rights will not be taxable
to the holders of our common stock or, if that is not possible, to diminish any
income taxes that are otherwise payable because of such event.
In case we are a party to any transaction (including, without limitation, a
merger, consolidation, statutory share exchange, tender offer for all or
substantially all of the common stock or sale of all or substantially all of our
assets), in each case as a result of which our common stock will be converted
into the right to receive stock, securities or other property (including cash or
any combination thereof), each share of Series B Preferred Stock will thereafter
be convertible into the kind and amount of shares, securities and other property
receivable (including cash or any combination thereof) upon the consummation of
such transaction by a holder of that number of shares of common stock or
fraction thereof into which one share of Series B Preferred Stock was
convertible immediately prior to such transaction (assuming such holder of
common stock failed to exercise any rights of election and received per share of
common stock the kind and amount of shares, securities or other property
received per share of common stock by a plurality of non-electing shares of
common stock). We may not become a party to any such transaction unless the
terms thereof are consistent with the foregoing.
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We are not required to adjust the Conversion Price until cumulative
adjustments amount to 1% or more of the Conversion Price. We will carry forward
any adjustments that we are not required to make and we will take those
adjustments into account in subsequent adjustments.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations,
that may be relevant to a prospective holder of the Series B Preferred Stock.
Brown & Wood has acted as tax counsel to the Company and has reviewed this
summary and is of the opinion that it fairly summarizes the federal income tax
consequences that are likely to be material to a holder of such shares. The
discussion does not address all aspects of taxation that may be relevant to
particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, (except as discussed below), financial
institutions or broker-dealers, and, except as discussed below, foreign
corporations and persons who are not citizens or residents of the United States)
subject to special treatment under the federal income tax laws. The statements
in this discussion are based on current provisions of the Internal Revenue Code
(the "Code"), existing, temporary, and currently proposed Treasury regulations
promulgated under the Code ("Treasury Regulations"), the legislative history of
the Code, existing administrative rulings and practices of the Service, and
judicial decisions. No assurance can be given that future legislative,
judicial, or administrative actions or decisions, which may be retroactive in
effect, will not affect the accuracy of any statements in this Prospectus
Supplement. 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
the Company's control. For further discussion--See "Federal Income Tax
Considerations" in the accompanying Prospectus.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP, AND SALE OF
THE SERIES B PREFERRED STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A
REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES
OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF SERIES B PREFERRED STOCK
Ordinary Dividends. In any year in which the Company qualifies to be taxed
as a REIT, distributions made to its stockholders out of current or accumulated
earnings and profits will be taxed to stockholders as ordinary income, except
that distributions of net capital gains designated by the Company as capital
gain dividends will be taxed as long-term capital gain to the stockholders. For
purposes of determining whether distributions are out of current or accumulated
earnings or profits, the earnings and profits of the Company will be allocated
first to the Series B Preferred Stock and then to the Company's common stock. To
the extent that distributions exceed current or accumulated earnings and
profits, they will constitute a return of capital, rather than dividend or
capital gain income, and will reduce the basis for the stockholder's stock with
respect to which the distribution is paid or, to the extent that they exceed
such basis, will be taxed in the same manner as gain from the sale of that
stock.
If the Company distributes its common stock, rather than cash, as a
dividend to the Series B Stockholder, such common stock distribution would be
taxed in the same manner as a cash distribution to the Series B stockholders.
Capital Gain Dividends. If, for any taxable year, the Company elects to
designate as capital gain dividends any portion (the "Capital Gains Amount") of
the distributions paid or made available for the year to the holders of all
classes of shares, the portion of the Capital Gains Amount that will be
allocable to the holders of Series B Preferred Stock will be the Capital Gains
Amount multiplied by a fraction, the numerator of which will be the total
dividends (within the meaning of the Code) (the "Total Dividends") paid or made
available to the holders of the Series B Preferred Stock for the year and the
denominator of which will be the Total Dividends.
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The Company may designate a Capital Gains Amount, but may choose not to
distribute such amount to the Series B Preferred stockholders (the
"Undistributed Capital Gain"). Holders of the Series B Preferred Stock would be
required to include into their income the Undistributed Capital Gain amount, and
although the Company retains the net capital gain amount, the Series B Preferred
stockholders would be treated as having paid any taxes paid by the Company on
the Undistributed Capital Gain.
Conversion of Series B Preferred Stock to Common Stock. Assuming that
Series B Preferred Stock will not be converted at a time when there are
distributions in arrears, in general, no gain or loss will be recognized for
federal income tax purposes upon the redemption or conversion of the Series B
Preferred Stock at the option of the holder solely into common stock. The basis
that a holder will have for tax purposes in the common stock received will be
equal to the adjusted basis the holder had in the Series B Preferred Stock so
converted and, provided that the Series B Preferred Stock were held as a capital
asset, the holding period for the common stock received will include the holding
period for the Series B Preferred Stock redeemed or converted. A holder,
however, will generally recognize gain or loss on the receipt of cash in lieu of
a fractional share of common stock in an amount equal to the difference between
the amount of cash received and the holder's adjusted basis in such fractional
share.
If a conversion occurs when there is a dividend arrearage on the Series B
Preferred Stock and the fair market value of the common stock exceeds the issue
price of the Series B Preferred Stock, a portion of the common stock received
may be treated as a dividend.
Adjustments to Conversion Price. Section 305(c) of the Code treats certain
actual or constructive distributions of stock with respect to stock or
convertible stock, such as the Series B Preferred Stock, as a distribution
taxable as a dividend to the extent of the issuing corporation's current and
accumulated earnings and profits. Treasury regulations treat holders of
convertible preferred stock as having received such a constructive distribution
when the conversion price of such preferred stock is adjusted to reflect certain
taxable distributions with respect to the stock into which such preferred stock
is convertible. Thus, under certain circumstances, an adjustment to the
conversion price of the Series B Preferred Stock may give rise to a deemed
taxable stock dividend to the stockholders thereof, whether or not such
stockholders exercise their conversion privilege.
Redemption of Series B Preferred Stock. The Company may redeem the Series
B Preferred Stock at anytime if necessary to preserve its REIT status or at its
option, and the holders of the Series B Preferred Stock may require redemption
of their shares under certain limited circumstances, all as more fully set forth
under "Description of Series B Preferred Stock--Redemption". A redemption of
Series B Preferred Stock will be treated under Section 302 of the Code as a
distribution taxable as a dividend (to the extent of the Company's current and
accumulated earnings and profits) unless the redemption satisfies one of the
tests set forth in Section 302(b) of the Code and is therefore treated as a sale
or exchange of the redeemed shares. The redemption will be treated as a sale or
exchange if it (i) is "substantially disproportionate" with respect to the
holder, (ii) results in a "complete termination" of the holder's share interest
in the Company, or (iii) is "not essentially equivalent to a dividend" with
respect to the holder, all within the meaning of Section 302(b) of the Code. In
determining whether any of these tests have been met, stock considered to be
owned by the holder by reason of certain constructive ownership rules set forth
in the Code, as well as stock actually owned by the holder, must generally be
taken into account. If a particular holder of Series B Preferred Stock does not
own (actually or constructively) any common stock, or owns only an insubstantial
percentage of the outstanding common stock (including common stock owned
constructively as a result of the conversion feature of the Series B Preferred
Stock), a redemption of Series B Preferred Stock of that holder is likely to
qualify for sale or exchange treatment because the redemption would not be
"essentially equivalent to a dividend." However, because the determination as
to whether any of the alternative tests of Section 302(b) of the Code will be
satisfied with respect to any particular holder of Series B Preferred Stock
depends upon the facts and circumstances at the time that the determination must
be made, prospective holders of Series B Preferred Stock are advised to consult
their own tax advisors to determine such tax treatment.
If a redemption of Series B Preferred Stock is not treated as a
distribution taxable as a dividend to a particular holder, it will be treated as
to that holder as a taxable sale or exchange. As a result, such holder 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
property received (less any portion thereof attributable to accumulated and
declared but unpaid dividends, which will be taxable as a dividend to the extent
of the Company's current and
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accumulated earnings and profits), and (ii) the holder's adjusted tax basis in
the Series B Preferred Stock. Such gain or loss will be capital gain or loss if
the Series B Preferred Stock has been held as a capital asset, and if such
shares have been hold for more than one year.
If a redemption of Series B Preferred Stock is treated as a distribution
taxable as a dividend, the amount of the distribution will be measured by the
amount of cash and the fair market value of any property received by the holder.
The holder's adjusted tax basis in the redeemed Series B Preferred Stock will be
transferred to the holder's remaining shares of stock of the Company. If the
holder owns no other shares of stock of the Company, such basis may, under
certain circumstances, be transferred to a related person or it may be lost
entirely.
Redemption Premium. Section 305(c) of the Code and the regulations
thereunder provide in certain cases for the accrual of a redemption premium on
preferred stock on a constant yield-to-maturity basis and for the treatment of
such accrual as a distribution with respect to such preferred stock. For such
accrual to apply to a redemption premium on the Series B Preferred Stock, there
would be required a determination of the existence of a "maturity date," at
which it would be considered, as of the issuance of the Series B Preferred
Stock, to be more likely than not that the Company would exercise its redemption
option. The regulations, however, provide a safe harbor under which an issuer
will not be considered to be more likely than not to exercise its redemption
option. In addition to certain other requirements, the safe harbor requires
that the exercise of the redemption option will not reduce the yield of the
stock. Based upon the terms of the Series B Preferred Stock, the safe harbor
will be satisfied. Accordingly, the redemption premium on the Series B
Preferred Stock should not be subject to accrual under Section 305(c).
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing U.S. Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, foreign trusts and
estates and other foreign stockholders (collectively, "Non-U.S. Stockholders")
are complex, and no attempt will be made herein to provide more than a limited
summary of such rules. Prospective Non-U.S. Stockholders should consult with
their own tax advisors to determine the impact of U.S. Federal, state and local
income tax laws with regard to an investment in Series B Preferred Stock,
including any reporting requirements.
Ordinary Dividends. Distributions, other than distributions that are
treated as attributable to gain from sales or exchanges by the Company of U.S.
real property interests and other than distributions designated by the Company
as capital gain dividends, will be treated as ordinary income to the extent that
they are made out of current or accumulated earnings and profits of the Company.
Such distributions to foreign stockholders will ordinarily be subject to a
withholding tax equal to 30% of the gross amount of the distribution, unless an
applicable tax treaty reduces that tax rate. However, if income from the
investment in the Series B Preferred Stock is treated as effectively connected
with the Non-U.S. Stockholder's conduct of a U.S. trade or business, the Non-
U.S. Stockholder generally will be subject to a tax at graduated rates in the
same manner as U.S. Stockholders are taxed with respect to such dividends (and
may also be subject to the 30% branch profits tax if the stockholder is a
foreign corporation). In general, a Non-U.S. Stockholder will not be considered
to be engaged in a U.S. trade or business solely as a result of its ownership of
Series B Preferred Stock.
Capital Gain Dividends. For any year in which the Company qualifies as a
REIT, distributions that are attributable to gain from sales or exchanges by the
Company of U.S. real property interests will be taxed to a Non-U.S. Stockholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-
U.S. Stockholder as if such gain were effectively connected with a U.S.
business. Thus, Non-U.S. Stockholders will be taxed on such distributions at
the same capital gain rates applicable to U.S. Stockholders (subject to any
applicable alternative minimum tax and special alternative minimum tax in the
case of nonresident alien individuals), without regard to whether such
distributions are designated by the Company as capital gain dividends.
Gains recognized by a Non-U.S. Stockholder upon a sale or exchange of
Series B Preferred Stock generally will not be taxed under FIRPTA if the Company
is a "domestically controlled REIT," defined generally as a REIT in respect of
which at all times during a specified testing period less than 50% in value of
the shares was
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held directly or indirectly by foreign persons. It is currently anticipated that
the Company will be a "domestically controlled REIT" and that therefore the sale
of Series B Preferred Stock will not be subject to taxation under FIRPTA.
However, gain not subject to FIRPTA will be taxable to a Non-U.S. Stockholder if
(i) investment in the Series B Preferred Stock is treated as "effectively
connected" with the Non-U.S. Stockholder's U.S. trade or business, in which case
the Non-U.S. Stockholder will be subject to the same treatment as U.S.
Stockholders with respect to such gain, or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, or
maintains an office or a fixed place of business in the United States to which
the gain is attributable, in which case the nonresident alien individual will be
subject to a 30% tax on the individual's capital gains. A similar rule will
apply to capital gain dividend not subject to FIRPTA.
PLAN OF DISTRIBUTION
We are offering our shares of Series B Preferred Stock on a best efforts
basis, principally to selected investors purchasing for investment. We have
retained EVEREN Securities, Inc. (the "Placement Agent") to act as our exclusive
agent in connection with the arrangement of such offers and sales on a best
efforts basis. The Placement Agent is not obligated to and does not intend to
itself take (or purchase) any of the shares of Series B Preferred Stock. Among
other things, the Placement Agent will not be obligated to act as our agent if
certain events occur which could have a material adverse effect on the business
or financial condition of our company, which in the sole judgment of the
Placement Agent make it impracticable or inadvisable to proceed with this
offering.
Settlement for sales of Series B Preferred Stock will occur on the third
business day following the date on which any such sales are made. On the third
business day following the date on which shares of Series B Preferred Stock are
sold by the Placement Agent, we will deliver such shares against payment
thereof. There is no arrangement for funds to be received in an escrow, trust
or similar arrangement.
On or prior to the second business day after the end of each calender week
during which sales of Series B Preferred Stock were made by the Placement Agent
(each such week a "Reporting Period"), we will file a Prospectus Supplement
under the applicable paragraph of Rule 424(b) of the Securities Act of 1933, as
amended, which Prospectus Supplement will set forth:
. the dates included in such Reporting Period
. the number of such shares of Series B Preferred Stock sold through the
Placement Agent
. the net proceeds to us
. the compensation payable by us to the Placement Agent with respect to
sales of Series B Preferred Stock
In connection with the sale of the Series B Preferred Stock on our behalf,
the Placement Agent may be deemed to be an "underwriter" within the meaning of
the Securities Act of 1933, as amended, and the compensation of the Placement
Agent may be deemed to be underwriting commissions or discounts. We have agreed
to provide indemnification and contribution to the Placement Agent against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended. The Placement Agent has in the past provided financial
advisory services to us for which it received customary fees. The Placement
Agent may in the future engage in transactions with, or perform services for, us
in the ordinary course of business. We have agreed to pay up to a maximum of
$30,000 of expenses incurred by the Placement Agent in connection with this
offering.
LEGAL MATTERS
The validity of the Series B Preferred Stock offered hereby will be passed
upon for the Company by Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, Beverly Hills, California. Certain tax matters and certain legal
matters with respect to Maryland law will be passed on for the Company by Brown
& Wood LLP, Washington, D.C.
S-18
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PROSPECTUS
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK, PREFERRED STOCK, DEBT SECURITIES,
WARRANTS TO PURCHASE COMMON STOCK, PREFERRED STOCK AND
DEBT SECURITIES
----------------
Impac Mortgage Holdings, Inc., a Maryland corporation (the "Company"),
directly or through agents, dealers or underwriters designated from time to
time, may issue and sell from time to time one or more of the following types
of its securities (the "Securities"): (i) shares of its Common Stock, $0.01
par value per share ("Common Stock"); (ii) shares of its Preferred Stock,
$0.01 par value per share, in one or more series ("Preferred Stock"); (iii)
debt securities, in one or more series, any series of which may be either
senior debt securities or subordinated debt securities (collectively, "Debt
Securities" and, as appropriate, "Senior Debt Securities" or "Subordinated
Debt Securities"); (iv) warrants to purchase shares of Common Stock ("Common
Stock Warrants"); Preferred Stock ("Preferred Stock Warrants"); and Debt
Securities ("Debt Warrants" and together with Common Stock Warrants and
Preferred Stock Warrants, collectively, "Securities Warrants"); and (v) any
combination of the foregoing, either individually or as units consisting of
one or more of the foregoing types of Securities. The Securities offered
pursuant to this Prospectus may be issued in one or more series, in amounts,
at prices and on terms to be determined at the time of the offering of each
such series. The Securities offered by the Company pursuant to this Prospectus
will be limited to $200,000,000 aggregate initial public offering price,
including the exercise price of any Securities Warrants. As of the date of
this Prospectus, the Company has issued 3,400,000 shares of Common Stock with
an aggregate initial public offering price of $92,650,000.
SEE "RISK FACTORS" STARTING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES.
The specific terms of each offering of Securities in respect of which this
Prospectus is being delivered are set forth in an accompanying Prospectus
Supplement (each, a "Prospectus Supplement") relating to such offering of
Securities. Such specific terms include, without limitation, to the extent
applicable; (1) in the case of any series of Preferred Stock, the specific
designations, preferences, conversion and other rights, voting powers and
restrictions, limitations as to dividends and other distributions,
qualifications or terms or conditions of redemption of such series of
Preferred Stock; (2) in the case of any series of Debt Securities, the
specific designations, rights and restrictions of such series of Debt
Securities, including without limitation whether the Debt Securities are
Senior Debt Securities or Subordinated Debt Securities, the currency in which
such Debt Securities are denominated and payable, the aggregate principal
amount, stated maturity, method of calculating and dates for payment of
interest and premium, if any, and any conversion, exchange, redemption or
sinking fund provisions; (3) in the case of the Securities Warrants, the Debt
Securities, Preferred Stock or Common Stock, as applicable, for which each
such warrant is exercisable, and the exercise price, duration, detachability
and call provisions of each such warrant; and (4) in the case of any offering
of Securities, to the extent applicable, the initial public offering price or
prices, listing on any securities exchange, certain federal income tax
consequences and the agents, dealers or underwriters, if any, participating in
the offering and sale of the Securities. If so specified in the applicable
Prospectus Supplement, any series of Securities may be issued in whole or in
part in the form of one or more temporary or permanent Global Securities, as
defined herein.
----------------
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 Company may sell all or a portion of any offering of its Securities
through agents, to or through underwriters or dealers, or directly to other
purchasers. See "Plan of Distribution." The related Prospectus Supplement for
each offering of Securities sets forth the name of any agents, underwriters or
dealers involved in the sale of such Securities and any applicable fee,
commission, discount or indemnification arrangement with any such party. See
"Use of Proceeds."
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement. The delivery in any jurisdiction of
this Prospectus together with a Prospectus Supplement relating to specific
Securities shall not constitute an offer in such jurisdiction of any other
Securities covered by this Prospectus but not described in such Prospectus
Supplement.
----------------
The date of this Prospectus is May 8, 1998.
<PAGE>
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 OR THE ACCOMPANYING PROSPECTUS
SUPPLEMENT 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 OR THE ACCOMPANYING
PROSPECTUS SUPPLEMENT NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED
PURSUANT TO THIS PROSPECTUS AND AN ACCOMPANYING PROSPECTUS SUPPLEMENT SHALL
UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO
THE DATE HEREOF OR THEREOF. THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT DO 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
(the "AMEX"). 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 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities 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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<PAGE>
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 the offering of all Securities 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 accompanying Prospectus Supplement
relating to a specific offering of Securities 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 or any accompanying Prospectus
Supplement. 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) 438-2100.
3
<PAGE>
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 Street, 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.
("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
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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 number of shares of ICH's
Common Stock. The 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 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.
OPERATING STRATEGY
The Company believes that a structural change has occurred in the mortgage
banking industry which has increased demand for higher yielding non-conforming
mortgage loans. This change has been caused by a number of factors, including:
(1) investors' demand for higher yielding assets due to historically low
interest rates over the past few years; (2) increased securitization of high-
yielding non-conforming mortgage loans by the investment banking industry; (3)
quantification and development of standardized credit criteria by credit
rating agencies for securities backed by non-conforming mortgage loans; (4)
increased competition in the securitization industry, which has reduced
borrower interest rates and fees, thereby making non-conforming mortgage loans
more affordable; and (5) the end of the refinance "boom" of 1992 and 1993,
which has caused many mortgage banks, attempting to sustain origination
volume, to seek out non-conforming mortgage loan borrowers.
The Company's strategy is to take advantage of the increased demand for non-
conforming mortgage loans through IFC's network of correspondents, which sell
non-conforming mortgage loans to IFC for resale or securitization. The
Company's strategic objective is to exploit the structural changes in the non-
conforming mortgage loan market through the Conduit Operations and to invest
in the non-conforming mortgage loans and mortgage-backed securities originated
and created by the Conduit Operations. Management believes that the Long-Term
Investment Operations complements the Conduit Operations by providing IFC with
a reliable investor for a portion of its loan sales and securitizations while
IFC supports the Long-Term Investment Operations by providing non-conforming
mortgage loans and securities backed by non-conforming mortgage loans. The
Company believes the Warehouse Lending Operations provides synergies with the
Company's other operations because it provides funding to the Conduit
Operations and extends the scope of the Company's relationships with certain
of its correspondent loan originators.
The Company purchases mortgage assets, through its network of correspondents
and through bulk purchases, and invests a substantial portion of its long-term
investment portfolio in, non-conforming mortgage loans because management
believes that non-conforming mortgage loans provide an attractive net income
earnings profile and produce higher yields without commensurately higher
credit risks, when compared with conforming mortgage loans. Although a
substantial majority of the non-conforming loans purchased by the Conduit
Operations are "A" and "A-" grade mortgage loans, the Company's strategy
includes the purchase of "B" and "C" grade mortgage loans. In general, "B" and
"C" grade mortgage loans are residential mortgage loans made to borrowers with
lower credit ratings than borrowers of "A" grade mortgage loans, and are
normally subject to greater frequency of losses and delinquency. As a result,
"B" and "C" grade mortgage loans normally bear a higher rate of interest and
higher fees.
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Management believes that IMH's tax and corporate structure as a REIT
provides it with an advantage over other financial institutions and mortgage
banking competitors. As a REIT, IMH can generally pass through qualifying
earnings as dividends to stockholders without federal income tax at the
corporate level. Thus, the Company expects to be able to pay higher annual
dividends than traditional mortgage lending institutions, which are subject to
federal income tax. In addition, management believes that the Company provides
a more attractive method of investing in mortgages than regulated financial
institutions because the Company is not subject to most of the federal and
state regulations imposed upon insured financial institutions, and therefore,
does not incur their related costs.
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.
6
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RISK FACTORS
Before investing in the Securities, 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.
Certain information contained in this Prospectus and the documents
incorporated by reference herein constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21e of
the Exchange Act, which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate" or
"continue" or the negatives thereof or other variations thereon or comparable
terminology. The statements under the captions "Risk Factors" in this
Prospectus constitute cautionary statements identifying important factors,
including certain risks and uncertainties, with respect to such forward-
looking statements that could cause the actual results, performance or
achievements of the Company to differ materially from those reflected in such
forward-looking statements.
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
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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 cause a net interest loss during periods of rapidly rising
interest rates, which could negatively impact the market price of the
Securities. 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
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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 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-
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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 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.
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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
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 "interest-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 "interest-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 "interest-
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.
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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 future 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 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 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
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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.
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.
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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
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.
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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."
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 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."
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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 (before non-recurring charges in
1997) 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 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 Executive 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 Ms. Glass-Schannault has modified his or her employment agreement with IFC
to allow him or her to become an 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
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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 is 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 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 Executive Vice
President, Chief Financial Officer, Treasurer and Secretary, and Senior Vice
President and a Director of IFC, is an Executive 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. In August 1997, RAI, ICH, ICCC, IMH and IFC 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 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
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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, a Director and
Chief Executive Officer of IMH, respectively. The Company also 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
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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 would have a material adverse effect on the
Company's business.
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
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. IMH has received an opinion from Latham & Watkins, tax counsel
to IMH, as of September 8, 1997, to the effect that, commencing with IMH's
taxable year ended December 31, 1995, IMH has been organized in conformity
with the requirements for qualification as a REIT, and its proposed method of
operation has enabled and will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. See "Federal Income Tax
Considerations--Taxation of IMH" and "Legal Matters." Such legal opinion is
based on various assumptions and factual representations by IMH regarding
IMH's ability to meet the various requirements for qualification as a REIT,
and no assurance can be given that actual operating results will meet these
requirements. Such legal opinion is not binding on the Internal Revenue
Service (the "Service") or any court.
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. In
rendering its opinion as to the qualification of IMH as a REIT, Latham &
Watkins is relying on the representation of IMH regarding the value of its
securities in IFC.
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
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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 underaken 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 Considerations--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. 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-off. It is anticipated
that upon any distribution of the shares in connection with a spin-off, that a
right of first refusal would be entered into between IMH and IFC so that IFC
will be obligatged 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 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
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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 THE SECURITIES
The Company in the future intends to increase its capital resources by
making additional private or public offerings of Securities. The actual or
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.
Risk Relating to Common Stock
Shares Eligible for Future Sale May Adversely Affect the Market Price of the
Securities. Sale of substantial amounts of the Company's Common Stock in the
public market or the prospect of such sales could materially and adversely
affect the market price of such Common Stock or other Securities then
outstanding.
Risk Relating to Preferred Stock
Issuance of Preferred Stock Could Adversely Affect Common
Stockholders. IMH's charter (the "Charter") authorizes the Board of Directors
to issue shares of Preferred Stock and to classify or reclassify any unissued
shares of Common Stock or 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 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. Thus, the Board could
authorize the
22
<PAGE>
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 other transaction
which could involve a premium price for holders of Common Stock or otherwise
be in their best interest. 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 but such securities may be offered
hereby. The issuance of any shares of Preferred Stock covered by this
Prospectus would require further action by the Board of Directors. See
"Description of Securities."
Risk Relating to Debt Securities
Substantial Leverage; Ability to Service Outstanding Indebtedness. The
Company's ability to make scheduled payments of the principal of, or to pay
the interest on, any Debt Securities will depend upon its future performance
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control.
There can be no assurance, however, that the Company's business will generate
sufficient cash flow from operations or that future borrowings will be
available in an amount sufficient to enable the Company to service any Debt
Securities. It may be necessary for the Company to refinance all or a portion
of the principal of any Debt Securities on or prior to maturity, under certain
circumstances, but there can be no assurance that the Company will be able to
effect such refinancing on commercially reasonable terms or at all.
The degree to which the Company is leveraged following the issuance of any
Debt Securities could have material adverse effects on the Company and the
holders of any Debt Securities, including, but not limited to, the following:
(i) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, and general corporate or
other purposes may be impaired, (ii) a substantial portion of the Company's
cash flow from operations will be dedicated to debt service and will be
unavailable for other purposes, (iii) certain of the Company's borrowings may
be at variable rates of interest, which could result in higher interest
expense in the event of increases in interest rates and (iv) the Company will
likely be subject to a variety of restrictive covenants, the failure to comply
with which could result in events of default that, if not cured or waived,
could restrict the Company's ability to make payments of principal of, and
interest on any Debt Securities.
Legal Restrictions on Sales of Securities Underlying the Securities Warrants
and the Securities Warrants
The Securities Warrants are not exercisable unless, at the time of the
exercise, the Company has a current prospectus covering the Securities
issuable upon exercise of the Securities Warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the exercising holder of the Securities Warrants.
Although the Company will use its best efforts to have all the Securities
issuable upon exercise of the Securities Warrants registered or qualified on
or before the exercise date and to maintain a current prospectus relating
thereto until the expiration of the Securities Warrants, there can be no
assurance that it will be able to do so. Further, although the Company intends
to seek to qualify the Securities underlying the Securities Warrants for sale
in those states in which such Securities are to be offered, no assurance can
be given that such qualification will be achieved. The Securities Warrants may
be deprived of any value if a current prospectus covering the Securities
issuable upon the exercise thereof is not filed and kept effective or if such
underlying Securities are not, or cannot be, registered in the applicable
states.
Substantial Shares of Common Stock Reserved for Exercise of Warrants
The existence of the Securities Warrants may prove to be a hindrance to
future equity financing by the Company. Further, the holders of such
Securities Warrants may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable
to the Company.
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED STOCK, DEBT SECURITIES AND WARRANTS
All of the Securities when issued will be a new issue of securities with no
established trading market, other than the Common Stock, which is listed on
the AMEX. Any Common Stock sold pursuant to a Prospectus
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<PAGE>
Supplement will be listed on the AMEX, subject to official notice of issuance.
Any underwriters to whom Securities are sold by the Company for public
offering and sale may make a market in such Securities, but such underwriters
will not be obligated to do so and may discontinue any market making at any
time without notice. No assurance can be given as to the liquidity of the
secondary market for any such Securities.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK MAY INHIBIT MARKET ACTIVITY;
POSSIBLE ANTI-TAKEOVER EFFECT MAY DETER TAKEOVER 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 Securities--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 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 Securities--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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<PAGE>
USE OF PROCEEDS
Unless otherwise specified in the applicable Prospectus Supplement for any
offering of Securities, the net proceeds from the sale of Securities offered
by the Company will be available for the general corporate purposes of the
Company. These general corporate purposes may include, without limitation,
funding the Long-Term Investment Operations, the Conduit Operations and the
Warehouse Lending Operations, repayment of maturing obligations, redemption of
outstanding indebtedness, financing future acquisitions (including
acquisitions of mortgage loans and other mortgage-related products), capital
expenditures and working capital. Pending any such uses, the Company may
invest the net proceeds from the sale of any Securities or may use them to
reduce short-term indebtedness. If the Company intends to use the net proceeds
from a sale of Securities to finance a significant acquisition, the related
Prospectus Supplements will describe the material terms of such acquisition.
If Debt Securities are issued to one or more persons in exchange for the
Company's outstanding debt securities, if any, the accompanying Prospectus
Supplement related to such offering of Debt Securities will set forth the
aggregate principal amount of the outstanding debt securities which the
Company will receive in such exchange and which will cease to be outstanding,
the residual cash payment, if any, which the Company may receive from such
persons or which such persons may receive from the Company, as appropriate,
the dates from which the Company will pay interest accrued on the outstanding
debt securities to be exchanged for the offered Debt Securities and an
estimate of the Company's expenses in respect of such offering of the Debt
Securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following is the computation of ratio of earnings to fixed charges,
including CMO debt(1):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
PRO FORMA
1997(2) 1997(3) 1996 1995(4) 1994(4) 1993(4)
--------- ------- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed
charges.................... 1.2x -- 1.2x 1.6x 1.6x 9.9x
==== === ==== ==== ==== ====
</TABLE>
- --------
(1) Earnings used in computing the ratio of earnings to fixed charges consist
of net income before income taxes plus fixed charges. Fixed charges
consist of interest expense on long-term debt (including amortization of
loan premiums and the portion of rental expense deemed to represent the
interest factor).
(2) Earnings used in computing the pro forma ratio of earnings to fixed
charges consist of net income before income taxes, excluding the non-
recurring charge of $44.4 million incurred in connection with the
Termination Agreement, effective December 19, 1997, entered into among the
Company, ICII, ICAI, Richard J. Johnson, William S. Ashmore and Joseph R.
Tomkinson.
(3) Earnings were insufficient to cover fixed charges by $16,029,000.
(4) Data prior to the Contribution Transaction is based upon the historical
operations of IWLG, as a division of SPB, and includes the Company's
equity interest in IFC, as a division of ICII.
These ratios represent a measure of the ability to meet debt service
obligations from funds generated from operations.
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<PAGE>
DESCRIPTION OF SECURITIES
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 applicable 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 Company may offer under this Prospectus one or more of the following
categories of its Securities: (i) shares of its Common Stock, $0.01 par value
per share; (ii) shares of its Preferred Stock, $0.01 par value per share, in
one or more series; (iii) Debt Securities, in one or more series, any series
of which may be either Senior Debt Securities or Subordinated Debt Securities;
(iv) Common Stock Warrants; (v) Preferred Stock Warrants; (vi) Debt Warrants;
and (vii) any combination of the foregoing, either individually or as units
consisting of one or more of the types of Securities described in clauses (i)
through (vi). The terms of any specific offering of securities, including the
terms of any units offered, will be set forth in a Prospectus Supplement
relating to such offering.
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 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. The Company intends to list any additional
shares of its Common Stock which are issued and sold hereunder. The Company
may list any series of its Preferred Stock which is offered and sold
hereunder, as described in the Prospectus Supplement relating to such series
of Preferred Stock.
CAPITAL STOCK
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,
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
26
<PAGE>
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 AMEX or the principal national securities
exchange on which such stock is listed or admitted for 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. The particular terms of any series of Preferred Stock
offered hereby will be described in the applicable Prospectus Supplement.
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 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.
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<PAGE>
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 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
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<PAGE>
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 dividends reinvested automatically in
additional shares of Common Stock of the Company, generally at a discount to
the market price, 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.
SECURITIES WARRANTS
General
The Company may issue Securities Warrants for the Purchase of Common Stock,
Preferred Stock or Debt Securities. Such warrants are referred to herein as
Common Stock Warrants, Preferred Stock Warrants or Debt Warrants, as
appropriate. Securities Warrants may be issued independently or together with
any other Securities covered by the Registration Statement and offered by this
Prospectus and any accompanying Prospectus Supplement and may be attached to
or separate from such other Securities. Each series of Securities Warrants
will be issued under a separate agreement (each, a "Securities Warrant
Agreement") to be entered into between the Company and a bank or trust
company, as agent (each, a "Securities Warrant Agent"), all as set forth in
the Prospectus Supplement relating to the particular issue of offered
evidenced by warrant certificates (the "Securities Warrant Certificates"). The
Securities Warrant Agent will act solely as an agent of the Company in
connection with the Securities Warrant Certificates and will not assume any
obligation or relationship of agency or trust for or with any holders of
Securities Warrant Certificates or beneficial owners of Securities Warrants.
Copies of the definitive Securities Warrant Agreements and Securities Warrant
Certificates will be filed with the Commission by means of a Current Report on
Form 8-K in connection with the offering of such series of Securities
Warrants.
If Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of such Securities Warrants, including in the case of
Securities Warrants for the purchase of Debt Securities, the
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<PAGE>
following where applicable: (i) the offering price; (ii) the currencies in
which such Debt Warrants are being offered; (iii) the designation, aggregate
principal amount, currencies, denominations and terms of the series of Debt
Securities purchasable upon exercise of such Debt Warrants; (iv) the
designation and terms of any Securities with which such Debt Warrants are
being offered and the number of such Debt Warrants being offered with each
such Security; (v) the date on and after which such Debt Warrants and the
related Securities will be transferable separately; (vi) the principal amount
of the series of Debt Securities purchasable upon exercise of each such Debt
Warrant and the price at which the currencies in which such principal amount
of Debt Securities of such series may be purchased upon such exercise; (vii)
the date on which the right to exercise such Debt Warrants shall commence and
the date on which such right shall expire (the "Expiration Date"); (viii)
whether the Debt Warrant will be issued in registered or bearer form; (ix)
certain federal income tax consequences; and (x) any other material terms of
such Debt Warrants.
In the case of Securities Warrants for the purchase of Preferred Stock or
Common Stock, the applicable Prospectus Supplement will describe the terms of
such Securities Warrants, including the following where applicable: (i) the
offering price; (ii) the aggregate number of shares purchasable upon exercise
of such Securities Warrants, and in the case of Securities Warrants for
Preferred Stock, the designation, aggregate number and terms of the series of
Preferred Stock purchasable upon exercise of such Securities Warrants; (iii)
the designation and terms of the Securities with which such Securities
Warrants are being offered and the number of such Securities Warrants being
offered with each such Security; (iv) the date on and after which such
Securities Warrants and the related Securities will be transferable
separately; (v) the number of shares of Preferred Stock or shares of Common
Stock purchasable upon exercise of each such Securities Warrant and the price
at which such number of shares of Preferred Stock of such series or shares of
Common Stock may be purchased upon such exercise; (vi) the date on which the
right to exercise such Securities Warrants shall commence and the Expiration
Date on which such right shall expire; (vii) certain federal income tax
consequences; and (viii) any other material terms of such Securities Warrants.
Securities Warrant Certificates may be exchanged for new Securities Warrant
Certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the appropriate Securities Warrant Agent or other office
indicated in the applicable Prospectus Supplement. Prior to the exercise of
any Securities Warrant to purchase Debt Securities, holders of such Debt
Warrants will not have any of the rights of Holders of the Debt Securities
purchasable upon such exercise, including the right to receive payments of
principal, premium, if any, or interest, if any, on the Debt Securities
purchasable upon such exercise or to enforce covenants in the applicable
Indenture. Prior to the exercise of any Securities Warrants to purchase
Preferred Stock or Common Stock, holders of such Preferred Stock Warrants or
Common Stock Warrants will not have any rights of holders of the respective
Preferred Stock or Common Stock purchasable upon such exercise, including the
right to receive payments of dividends, if any, on the Preferred Stock or
Common Stock purchasable upon such exercise or to exercise any applicable
right to vote.
Exercise of Securities Warrants
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of shares of Preferred Stock or
shares of Common Stock, as the case may be, at such exercise price as shall in
each case be set forth in, or calculable from, the Prospectus Supplement
relating to the offered Securities Warrants. After the close of business on
the Expiration Date (or such later date to which such Expiration Date may be
extended by the Company), unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities Warrant
Agent payment, as provided in the applicable Prospectus Supplement, of the
amount required to purchase the applicable Debt Securities, Preferred Stock or
Common Stock purchasable upon such exercise together with certain information
set forth on the reverse side of the Securities Warrant Certificate. Upon
receipt of such payment and the definitive Securities Warrant Certificates
properly completed and duly executed at the corporate trust office of the
Securities Warrant Agent or any other office indicated in the applicable
Prospectus Supplement, the Company will, as soon as
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practicable, issue and deliver the applicable Debt Securities, Preferred Stock
or Common Stock purchasable upon such exercise. If fewer than all of the
Securities Warrants represented by such Securities Warrant Certificate are
exercised, a new Securities Warrant Certificate will be issued for the
remaining amount of Securities Warrants.
Amendments and Supplements to Securities Warrant Agreements
Each Securities Warrant Agreement may be amended or supplemented without the
consent of the holders of the Securities Warrants issued thereunder to effect
changes that are not inconsistent with the provisions of the Securities
Warrants and that do not adversely affect the interests of the holders of the
Securities Warrants.
Common Stock Warrant Adjustments
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of shares of Common Stock covered by, a
Common Stock Warrant are subject to adjustment in certain events, including:
(i) the issuance of Common Stock as a dividend or distribution on the Common
Stock; (ii) subdivisions and combinations of the Common Stock; (iii) the
issuance to all holders of Common Stock of certain rights or warrants
entitling them to subscribe for or purchase Common Stock within the number of
days, specified in the applicable Prospectus Supplement, after the date fixed
for the determination of the stockholders entitled to receive such rights or
warrants, at less than the current market price (as defined in the Securities
Warrant Agreement governing such series of Common Stock Warrants); and (iv)
the distribution to all holders of Common Stock of evidences of indebtedness
or assets of the Company (excluding certain cash dividends and distributions
described below). The terms of any such adjustment will be specified in the
related Prospectus Supplement for such Common Stock Warrants.
No Rights as Stockholders
Holders of Common Stock Warrants will not be entitled by virtue of being
such holders, to vote, to consent, to receive dividends, to receive notice as
stockholders with respect to any meeting of stockholders for the election of
directors of the Company of any other matter, or to exercise any rights
whatsoever as stockholders of the Company.
Existing Securities Holders
The Company may issue, as a dividend at no cost, such Securities Warrants to
holders of record of the Company's Securities or any class thereof on the
applicable record date. If Securities Warrants are so issued to existing
holders of Securities, the applicable Prospectus Supplement will describe, in
addition to the terms of the Securities Warrants and the Securities issuable
upon exercise thereof, the provisions, if any, for a holder of such Securities
Warrants who validly exercises all Securities Warrants issued to such holder
to subscribe for unsubscribed Securities (issuable pursuant to unexercised
Securities Warrants issued to other holders) to the extent such Securities
Warrants have not been exercised.
DEBT SECURITIES
General
The Company may offer one or more series of its Debt Securities representing
general, unsecured obligations of the Company. Any series of Debt Securities
may either (1) rank prior to all subordinated indebtedness of the Company and
pari passu with all other unsecured indebtedness of the Company outstanding on
the date of the issuance of such Debt Securities ("Senior Debt Securities") or
(2) be subordinated in right of payments to certain other obligations of the
Company outstanding on the date of issuance ("Subordinated Debt Securities").
In this Prospectus, any indenture relating to Subordinated Debt Securities is
referred to as a "Subordinated Indenture," any indenture relating to Senior
Debt Securities is referred to as a "Senior Indenture" and the term
"Indenture" refers to Senior and Subordinated Indentures, collectively.
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The aggregate principal amount of Debt Securities which may be issued by the
Company will be set from time to time by the Board of Directors. Further, the
amount of Debt Securities which may be offered by this Prospectus will be
subject to the aggregate initial offering price of Securities specified in the
Registration Statement. Each Indenture will permit the issuance of an
unlimited amount of Debt Securities thereunder from time to time in one or
more series. Additional debt securities may be issued pursuant to another
registration statement for issuance under any Indenture. Any offering of Debt
Securities may be denominated in any currency composite designated by the
Company.
The following description of the Debt Securities which may be offered by the
Company hereunder describes certain general terms and provisions of the Debt
Securities to which any Prospectus Supplement may relate. The particular terms
and provisions of the Debt Securities and the extent to which the following
general provisions may apply to such offering of Debt Securities will be
described in the accompanying Prospectus Supplement relating to such offering
of Debt Securities. The following descriptions of certain provisions of the
Indentures do not purport to be complete and are qualified in their entirety
by reference to the form of Senior Indenture or Subordinated Indenture, as
appropriate. The definitive Indenture relating to each offering of Debt
Securities will be filed with the Commission by means of a Current Report on
Form 8-K in connection with the offering of such Debt Securities. All article
and section references appearing herein are references to the articles and
sections of the appropriate Indenture and, unless defined herein, all
capitalized terms have the respective meanings specified in the appropriate
Indenture.
The Prospectus Supplement relating to any offering of Debt Securities will
set forth the following terms and other information to the extent applicable
with respect to the Debt Securities being offered thereby; (1) the
designation, aggregate principal amount, authorized denominations and priority
of such Debt Securities; (2) the price (expressed as a percentage of the
aggregate principal amount of such Debt Securities) at which such Debt
Securities will be issued; (3) the currency or currency units for which the
Debt Securities may be purchased and in which; (4) the stated maturity of such
Debt Securities or means by which a maturity date may be determined; (5) the
rate at which such Debt Securities will bear interest or the method by which
such rate of interest is to be calculated (which rate may be zero in the case
of certain Debt Securities issued at a price representing a discount from the
principal amount payable at maturity); (6) the periods during which such
interest will accrue, the dates on which such interest will be payable (or the
method by which such dates may be determined; including without limitation
that such rate of interest may bear an inverse relationship to some index or
standard) and the circumstances under which the Company may defer payment of
interest; (7) redemption provisions, including any optional redemption,
required repayment or mandatory sinking fund provisions; (8) any terms by
which such Debt Securities may be convertible into shares of the Company's
Common Stock, Preferred Stock or any other Securities of the Company,
including a description of the Securities into which any such Debt Securities
are convertible; (9) any terms by which the principal of such Debt Securities
will be exchangeable for any other Securities of the Company; (10) whether
such Debt Securities are issuable as definitive Fully- Registered Securities
(as defined below) or Global Securities and, if Global Securities are to be
issued, the terms thereof, including the manner in which interest thereon will
be payable to the beneficial owners thereof and other book-entry procedures,
any terms for exchange of such Global Securities into definitive Fully-
Registered Securities (as defined below) and any provisions relating to the
issuance of a temporary Global Security; (11) any additional restrictive
covenants included for the benefit of the holders of such Debt Securities;
(12) any additional events of default provided with respect to such Debt
Securities; (13) the terms of any Securities being offered together with such
Debt Securities, (14) whether such Debt Securities represent general,
unsecured obligations of the Company and (15) any other material terms of such
Debt Securities.
If any of the Debt Securities are sold for foreign currency units, the
restrictions, elections, tax consequences, specific terms, and other
information with respect to such issue of Debt Securities and such currencies
or currency units will be set forth in the Prospectus Supplement relating to
thereto.
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Indenture Provisions
The Debt Securities may be issued in definitive, fully registered form
without coupons ("Fully Registered Securities"), or in a form registered as to
principal only with coupons or in bearer form with coupons. Unless otherwise
specified in the Prospectus Supplement, the Debt Securities will only be Fully
Registered Securities. In addition, Debt Securities of a series may be
issuable in the form of one or more Global Securities, which will be
denominated in an amount equal to all or a portion of the aggregate principal
amount of such Debt Securities. See "Global Securities" below.
One or more series of Debt Securities may be sold at a substantial discount
below their stated principal amount, bearing no interest or interest at a rate
that at the time of issuance is below market rates. Federal income tax
consequences and special considerations applicable to any such series will be
described in the Prospectus Supplement relating thereto.
Unless otherwise indicated in the related Prospectus Supplement for a series
of Debt Securities, there are no provisions contained in the Indentures that
would afford holders of Debt Securities protection in the event of a highly
leveraged transaction involving the Company.
Global Securities. Any series of Debt Securities may be issued in whole or
in part in the form of one or more Global Securities that will be deposited
with, or on behalf of, the Depositary identified in the Prospectus Supplement
relating to such series. Unless and until it is exchanged in whole or in part
for Debt Securities in individually certificated form, a Global Security may
not be transferred except as a whole to a nominee of the Depositary for such
Global Security, or by a nominee for the Depositary to the Depositary, or to a
successor of the Depositary or a nominee of such successor.
The specific terms of the Depositary arrangement with respect to any series
of Debt Securities and the rights of, and limitations on, owners of beneficial
interests in a Global Security representing all or a portion of a series of
Debt Securities will be described in the Prospectus Supplement relating to
such series.
Modification of Indentures. Unless otherwise specified in the related
Prospectus Supplement, each Indenture, the rights and obligations of the
Company, and the rights of the Holders may be modified with respect to one or
more series of Debt Securities issued under such Indenture with the consent of
the Holders of not less than a majority in principal amount of the outstanding
Debt Securities of each such series affected by the modification or amendment.
No modification of the terms of payment of principal or interest, and no
modification reducing the percentage required for modification, is effective
against any Holder without his consent.
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, each Indenture, will provide that the following are Events of
Default with respect to any series of Debt Securities issued thereunder: (1)
default in the payment of the principal of any Debt Security of such series
when and as the same shall be due and payable; (2) default in making a sinking
fund payment, if any, when and as the same shall be due and payable by the
terms of the Debt Securities of such series; (3) default for 30 days in
payment of any installment of interest on any Debt Securities of such series;
(4) default for a specified number of days after notice in the performance of
any other covenants in respect of the Debt Securities of such series contained
in the Indenture; (5) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator, or trustee of
the Company or its property; and (6) any other Event of Default provided in
the applicable supplemental indenture under which such series of Debt
Securities is issued. An Event of Default with respect to a particular series
of Debt Securities issued under an Indenture will not necessarily constitute
an Event of Default with respect to any other series of Debt Securities issued
under such Indenture. The trustee under an Indenture may withhold notice to
the Holders of any series of Debt Securities of any default with respect to
such series (except in the payment of principal or interest) if it considers
such withholding in the interests of such Holders.
If an Event of Default with respect to any series of Debt Securities shall
have occurred and be continuing, the appropriate trustee under the Indenture
or the Holders of not less than 25% in the aggregate principal amount of the
Debt Securities of such series may declare the principal, or in the case of
discounted Debt Securities, such
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portion thereof as may be described in the Prospectus Supplement, of all the
Debt Securities of such series to be due and payable immediately.
Within four months after the close of each fiscal year, the Company will
file with each trustee under the indentures a certificate, signed by specified
officers, stating whether or not such officers have knowledge of any default,
and, if so, specifying each such default and the nature thereof.
Subject to provisions relating to its duties in case of default, a trustee
under the Indentures shall be under no obligation to exercise any of its
rights or powers under the applicable Indenture at the request, order, or
direction of any Holder, unless such Holders shall have offered to such
trustee reasonable indemnity. Subject to such provisions for indemnification,
the Holders of a majority in principal amount of the Debt Securities of any
series may direct the time, method, and place of conducting any proceeding for
any remedy available to the appropriate trustee, or exercising any trust or
power conferred upon such trustee, with respect to the Debt Securities of such
series.
Payment and Transfer. Principal of, and premium and interest, if any, on,
Fully Registered Securities will be payable at the Place of Payment as
specified in the applicable Prospectus Supplement, provided that payment of
interest, if any, may be made, unless otherwise provided in the applicable
Prospectus Supplement, by check mailed to the person in whose names such Debt
Securities are registered at the close of business on the day or days
specified in the Prospectus Supplement or transfer to an account maintained by
the payee located inside the United States. The principal of, and premium and
interest, if any, on, Debt Securities in other forms will be payable in the
manner and at the place or places as designated by the Company and specified
in the applicable Prospectus Supplement. Unless otherwise provided in the
Prospectus Supplement, payment of interest may be made, in the case of a
Bearer Security by the transfer to an account maintained by the payee with a
bank outside the United States.
Fully Registered Securities may be transferred or exchanged at the corporate
trust office of the trustee or any other office or agency maintained by the
Company for such purposes, subject to the limitations in the applicable
Indenture, without the payment of any service charge except for any tax or
governmental charge incidental thereto. Provisions with respect to the
transfer and exchange of Debt Securities in other forms will be set forth in
the applicable Prospectus Supplement.
Defeasance. The indentures provide that each will cease to be of further
effect with respect to a certain series of Debt Securities (except for certain
obligations to register the transfer or exchange of Securities) if (a) the
Company delivers to the Trustee for the Securities of such series for
cancellation of all Securities of all series and the coupons, if any,
appertaining thereto, or (b) if the Company deposits into trust with the
Trustee money or United States government obligations, that, through the
payment of interest thereon and principal thereof in accordance with their
terms, will provide money in an amount sufficient to pay all of the principal
of, and interest on, the Securities of such series on the dates such payments
are due or redeemable in accordance with the terms of such Securities.
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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 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.
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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.
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 transaction or 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.
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PLAN OF DISTRIBUTION
The Company may sell Securities (1) to or through underwriters or dealers,
(2) directly to one or more purchasers, or (3) through agents. Each Prospectus
Supplement will set forth the terms of the offering of the Securities offered
thereby, including the name or names of any underwriters, the purchase price
of the Securities, and the proceeds to the Company from the sale, any
underwriting discounts and other items constituting underwriters'
compensation, any initial public offering price, any discounts or concessions
allowed or reallowed or paid to dealers, and any securities exchange on which
the Securities may be listed. Only underwriters so named in the Prospectus
Supplement are deemed to be underwriters in connection with the Securities
offered thereby.
If underwriters are used in the sale in a firm commitment underwriting, the
Securities will be acquired by the underwriters for their own account and may
be resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of the underwriters to purchase the
Securities will be subject to certain conditions precedent, and the
underwriters will be obligated to purchase all the Securities of the series
offered by the Company's Prospectus Supplement if any of the Securities are
purchased. Any initial public offering price and any discounts or concessions
allowed or reallowed or paid to dealers may be changed from time to time.
The Company may grant underwriters who participate in the distribution of
Securities an option to purchase additional Securities to cover over-
allotments, if any.
The place and date of delivery for the Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Securities in respect of which this Prospectus is being delivered (other than
Common Stock) will be a new issue of securities, will not have an established
trading market when issued and may not be listed on any securities exchange.
Any underwriters or agents to or through whom such Securities are sold by the
Company for public offering and sale may make a market in such Securities, but
such underwriters or agents will not be obligated to do so and may discontinue
any market making at any time without notice. No assurance can be given as to
the liquidity of the trading market for any such Securities.
Securities may also be sold directly by the Company or through agents
designated by the Company from time to time. The Securities offered hereby may
also be sold from time to time through agents for the Company by means of (i)
ordinary broker's transactions, (ii) block transactions (which may involve
crosses) in accordance with the rules of the Exchanges, in which such agents
may attempt to sell Securities as agent but may purchase and resell all or a
portion of the blocks as principal, (iii) "fixed price offerings" in
accordance with the rules of the Exchanges, or (iv) a combination of any such
methods of sale. A Prospectus Supplement sets forth the terms of any such
"fixed price offering," "exchange distributions" and "special offerings." If
the agent purchases Securities as principal, it may sell such Securities by
any of the methods described above. Any agent involved in the offering and
sale of Securities in respect of which this Prospectus is delivered is named,
and any commissions payable by the Company to such agent are set forth, in the
Prospectus Supplement. Unless otherwise indicated herein or in the Prospectus
Supplement, any such agent is acting on a best-efforts basis for the period of
its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters, or dealers to solicit offers by certain institutional
investors to purchase Securities providing for payment and delivery on a
future date specified in the Prospectus Supplement. There may be limitations
on the minimum amount which may be purchased by any such institutional
investor or on the portion of the aggregate principal amount of the particular
Securities which may be sold pursuant to such arrangements. Institutional
investors to which such offers may be made, when authorized, include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions, and such other
institutions as may be
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approved by the Company. The obligations of any such purchasers pursuant to
such delayed delivery and payment arrangements will not be subject to any
conditions except (1) the purchase by an institution of the particular
Securities shall not at the time of delivery be prohibited under the laws of
any jurisdiction in the United States to which such institution is subject,
and (2) if the particular Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total principal amount of
such Securities less the principal amount thereof covered by such
arrangements. Underwriters will not have any responsibility in respect of the
validity of such arrangements or the performance of the Company or such
institutional investors thereunder.
Agents and underwriters may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act, or to
contribution with respect to payments which the agents or underwriters and
their affiliates may from time to time be required to make in respect thereof.
Agents and underwriters may engage in transactions with, or perform services
for, the Company in the ordinary course of business and receive customary
compensation therefor.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations to the
Company is based on current law, is for general information only, and is not
tax advice. The tax treatment of a holder of any of the Securities will vary
depending upon the terms of the specific Securities acquired by such holder,
as well as his particular situation, and this discussion provides only a
general summary of certain limited aspects of federal income taxation relating
to holders of Securities. This summary does not purport to deal with the
aspects of taxation that may be relevant to prospective holders of Securities
in light of such holder's particular investment or tax circumstances, or to
certain types of holders subject to special treatment under the federal income
tax laws, including, without limitation, insurance companies, certain
financial institutions, broker-dealers, holders holding Securities 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, or foreign
corporations, foreign partnerships and persons who are not citizens or
residents of the United States. Furthermore, the summary below does not
consider the effect of any foreign, state, local or other tax laws that may be
applicable to the Company or holders of Securities. Certain federal income tax
considerations relevant to holders of the Securities will be provided in the
applicable Prospectus Supplement relating thereto.
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 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
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 AND THE
APPLICABLE PROSPECTUS SUPPLEMENT REGARDING THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE PURCHASE, OWNERSHIP AND SALE OF THE SECURITIES, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
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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.
Latham & Watkins, tax counsel to IMH, rendered an opinion to IMH as of
September 8, 1997 to the effect that commencing with IMH's taxable year ended
December 31, 1995, IMH has been organized in conformity with the requirements
for qualification as a REIT, and its proposed method of operation has enabled
and will enable it to meet the requirements for qualification and taxation as
a REIT under the Code. It must be emphasized that this opinion was based on
various factual assumptions relating to the organization and operation of IMH
and was conditioned upon certain representations made by IMH as to factual
matters. In addition, this opinion was based upon the factual representations
of IMH concerning its business and assets as set forth in this Prospectus.
Furthermore, this opinion relied on, and assumed the accuracy of, the
opinions, dated as of September 8, 1997, of Thacher Proffitt & Wood with
respect to the characterization, as debt, of the CMOs issued by Imperial CMB
Trust Series 1996-1 ("1996 CMB Trust") and Imperial CMB Trust Series 1997-1
(the "1997 CMB Trust"), each on behalf of IMH Assets in August 1996, and May
1997, respectively, and with respect to the classification of each of 1996 CMB
Trust and the 1997 CMB Trust for federal income tax purposes. Moreover, such
qualification and taxation as a REIT depends upon IMH's ability to meet
(through actual annual operating results, distribution levels and diversity of
stock ownership) the various qualification tests imposed under the Code
discussed below, the results of which have not been and will not be reviewed
by Latham & Watkins. Accordingly, no assurance can be given that the actual
results of IMH's operation for any particular taxable year have satisfied or
will satisfy such requirements. Further, the anticipated income tax treatment
described in this Prospectus may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time. See "Risk
Factors--Consequences of Failure to Maintain REIT Status May Include IMH Being
Subject to Tax as a Regular Corporation" and "--Failure to Qualify."
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
"alternative minimum tax" on its items of tax preference. Third, if IMH has
(i) net income from the sale or other disposition of "foreclosure 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
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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 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,
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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 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
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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.
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
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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 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
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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. Latham & Watkins, in rendering its opinion as to
the qualification of IMH as a REIT, relied on the representation of IMH to
such effect. 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.
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
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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 noncash income 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 immeidately
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 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 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 dividends; however, IMH will be
required to pay interest based upon the amount of any deduction taken for
deficiency dividends.
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RECORDKEEPING REQUIREMENTS
A REIT is required to maintain certain records, including records regarding
the actual and constructive ownership of its shares, and within 30 days after
the end of its taxable year, to demand statements from persons owning above a
specified level of the REIT's shares (e.g., if IMH has 2,000 or more
stockholders of record, from persons holding 5% or more of IMH's outstanding
shares of Common Stock; if IMH has over 200 but fewer than 2,000 stockholders
of record, from persons holding 1% or more of IMH's outstanding shares of
Common Stock; and if IMH has 200 or fewer shareholders of record, from persons
holding 1/2% or more of IMH's outstanding shares of Common Stock) regarding
their ownership of shares. In addition, IMH must maintain, as part of its
records, a list of those persons failing or refusing to comply with this
demand. Shareholders who fail or refuse to comply with the demand must submit
a statement with their tax returns setting forth the actual stock ownership
and other information. IMH has maintained and will continue to maintain the
records and demand statements as required by Treasury Regulations.
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 HOLDERS OF SECURITIES
Set forth below is a brief summary of certain federal income tax
consequences to holders of Securities. Holders are urged to consult the
applicable Prospectus Supplement for a more detailed description of such tax
consequences.
Common Stock and Preferred Stock. In general, as long as IMH qualifies as a
REIT, distributions made by IMH with respect to the Common Stock or the
Preferred Stock out of IMH's current or accumulated earnings and profits (and
not designated as capital gain dividends) will constitute dividends taxable as
ordinary income to holders of Common Stock or Preferred Stock, as the case may
be. For purposes of determining whether distributions are out of current or
accumulated earnings and profits, the earnings and profits of IMH will be
allocated first to IMH's Preferred Stock, and then to IMH's Common Stock. Such
distributions will not be eligible for the dividends received deduction in the
case of holders of Common Stock or Preferred Stock that are corporations.
Under certain other circumstances, distributions made by IMH with respect to
the Common Stock or the Preferred Stock may constitute return of capital
and/or capital gain to the holder.
In general, any gain or loss realized upon a taxable disposition of shares
of Common Stock or Preferred Stock will be treated as capital gain or loss
and, in the case of a non-corporate stockholder, mid-term or long-term capital
gain or loss if the shares have been held as a capital asset for more than
twelve months or eighteen months, respectively, and otherwise as short-term
capital gain or loss. However, any loss realized upon a taxable
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disposition of shares held for six months or less will be treated as long-term
capital loss to the extent of any capital gain dividends previously received
with respect to such shares of Common Stock or Preferred Stock.
Debt Securities. Interest and original issue discount, if any, on a Debt
Security will be treated as ordinary income to a holder. Any special tax
considerations applicable to a Debt Security will be described in the related
Prospectus Supplement.
Securities Warrants. Upon a holder's exercise of a Securities Warrant, the
holder will, in general, (i) not recognize any income, gain or loss for
federal income tax purposes, (ii) receive an initial tax basis in the Security
received equal to the sum of the holder's tax basis in the exercised
Securities Warrant and the exercise price paid for such Security and (iii)
have a holding period for the Security received beginning on the date of
exercise. If a holder of a Securities Warrant sells or otherwise disposes of
such Securities Warrant in a taxable transaction (other than by its exercise),
the holder generally will recognize capital gain or loss (in the case of an
individual, mid-term or long-term capital gain or loss if the holder holds
such Securities Warrant as a capital asset and its holding period for the
Securities Warrant exceeds twelve months or eighteen months, respectively, on
the date of disposition, and otherwise, short term capital gain or loss) equal
to the difference between (i) the cash and fair market value of other property
received and (ii) the holder's tax basis (on the date of disposition) in the
Securities Warrant sold. Such a holder generally will recognize a capital loss
upon the expiration of an unexercised Securities Warrant equal to the holder's
tax basis in the Securities Warrant on the expiration date.
BACKUP WITHHOLDING
IMH will report to holders of Common Stock, Preferred Stock and Debt
Securities and the Service the amount of dividends or interest paid during
each calendar year, and the amount of tax withheld, if any. Under the backup
withholding rules, a holder may be subject to backup withholding at the rate
of 31% with respect to dividends or interest 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 holder 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 holder's
income tax liability. In addition, IMH may be required to withhold a portion
of capital gain distributions to any holders who fail to certify their non-
foreign status to 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.
STATE AND LOCAL TAXES
IMH and holders of Securities 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
holders of Securities may not conform to the federal income tax consequences
discussed above. Consequently, prospective holders of Securities should
consult their own tax advisors regarding the effect of state and local tax
laws on an investment in IMH.
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LEGAL MATTERS
The validity of the Securities 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 reference 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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=====================================================================
You should only rely on the information in this prospectus supplement. We
have not authorized anyone to provide you with any information that is different
from the information contained in this prospectus supplement. We are offering to
sell and seeking offers to buy, the Series B Preferred Stock only in
jurisdictions where offers and sales are permitted. The information in this
prospectus supplement is only accurate as of the date of this prospectus
supplement, regardless of the time of delivery of this prospectus supplement or
the time of any sale of the Series B Preferred Stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.............................. S-2
Risk Factors............................................... S-6
Capitalization............................................. S-7
Use of Proceeds............................................ S-7
Description of Series B Preferred Stock.................... S-7
Federal Income Tax Considerations.......................... S-15
Plan of Distribution....................................... S-18
Legal Matters.............................................. S-19
PROSPECTUS
Available Information...................................... 2
Incorporation of Certain Documents
By Reference............................................. 3
The Company................................................ 4
Risk Factors............................................... 7
Use of Proceeds............................................ 25
Ratio of Earnings to Fixed Charges......................... 25
Description of Securities.................................. 26
Certain Provisions of Maryland Law and of
the Company's Charter and Bylaws......................... 35
Plan of Distribution....................................... 37
Federal Income Tax Considerations.......................... 38
Legal Matters.............................................. 48
Experts.................................................... 48
</TABLE>
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1,200,000 Shares
IMPAC
MORTGAGE HOLDINGS, INC.
Series B 10.5% Cumulative
Convertible Preferred Stock
__________________________
PROSPECTUS SUPPLEMENT
__________________________
December 21, 1998
EVEREN SECURITIES, INC.
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