<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1998
REGISTRATION NO. 333-46667
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
Under The Securities Act of 1933
----------------
IMPAC MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<S> <C>
MARYLAND 33-0675505
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(714) 556-0122
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOSEPH R. TOMKINSON
CHIEF EXECUTIVE OFFICER
IMPAC MORTGAGE HOLDINGS, INC.
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(714) 556-0122
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPY TO:
THOMAS J. POLETTI, ESQ.
KATHERINE J. BLAIR, ESQ.
FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN
9100 WILSHIRE BLVD., 8TH FLOOR EAST
BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE: (310) 273-1870
FACSIMILE: (310) 274-8357
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 30, 1998
PROSPECTUS
2,009,310 SHARES
IMPAC MORTGAGE HOLDINGS, INC.
COMMON STOCK
This Prospectus relates to the offer and sale from time to time by Imperial
Credit Industries, Inc., a California corporation (the "Selling Stockholder"),
of up to an aggregate of 2,009,310 shares of Common Stock (the "Shares"), $.01
par value per share (the "Common Stock"), of Impac Mortgage Holdings, Inc., a
Maryland corporation (the "Company"). See "Plan of Distribution" for
information relating to resales of the Shares by the Selling Stockholder.
SEE "RISK FACTORS" STARTING ON PAGE 6 FOR A DISCUSSION OF MATERIAL RISKS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
The Shares may be sold from time to time pursuant to this Prospectus by the
Selling Stockholder. The Shares may be sold by the Selling Stockholder to or
through underwriters, in block trades, purchases and resales by a broker-
dealer, exchange and/or secondary distributions, ordinary brokerage
transactions and in transactions in which brokers solicit purchases, in
privately negotiated transactions, through the writing of options on Shares
(whether such options are listed on an options exchange or otherwise), or in a
combination of such methods of sale, at market prices prevailing at the time of
sale, at prices relating to such prevailing market prices or at negotiated
prices. Broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholder and/or the purchasers
of Shares for whom such broker-dealers may act as agent or to whom they sell as
principal or both (which compensation as to a particular broker-dealer might be
in excess of customary commission). The Selling Stockholder may also sell
Common Stock pursuant to Rule 144 promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), or pledge the Shares as collateral for
margin accounts, and such Shares could be resold pursuant to the terms of such
accounts. See "Plan of Distribution." The Company will receive no part of the
proceeds of sales of Common Stock by the Selling Stockholder. All expenses of
registration incurred in connection with this offering are being borne by the
Company, but all selling and other expenses incurred by the Selling Stockholder
will be borne by the Selling Stockholder.
The Common Stock is listed on the American Stock Exchange under the symbol
"IMH." The last reported sale price of the Common Stock on June 29, 1998, was
$15.125.
The Selling Stockholder and any agents or broker-dealers that participate
with the Selling Stockholder in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of the Shares may be deemed to be
underwriting commissions or discounts under the Securities Act.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<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 AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER, AGENT OR DEALER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES BEING OFFERED
PURSUANT TO THIS PROSPECTUS SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AT ANY
TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE SECURITIES BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company may be inspected and
copied, at prescribed rates, at the public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024, as
well as at the regional offices of the Commission at Seven World Trade Center,
13th Floor, New York, New York 10048, and the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60601. Copies of such
material may also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission maintains a website that contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Commission. The address of the site is
http://www.sec.gov. The Common Stock is listed on the American Stock Exchange.
Reports, proxy statements and other information described above may also be
inspected and copied at the offices of the American Stock Exchange at 86
Trinity Place, New York, New York 10006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (therein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Shares of Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the shares offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Statements
contained herein concerning the provisions of any documents are necessarily
summaries of those documents, and each statement is qualified in its entirety
by reference to the copy of the applicable document filed with the Commission.
The Registration Statement and any amendments thereto, including exhibits
filed as a part thereof, are available for inspection and copying as set forth
above.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents which have been filed with the Commission are
incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K, and as amended by Amendment
No. 1 on Form 10-K/A, 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;
(3) The Company's Quarterly Report on Form 10-Q for the three months
ended March 31, 1998; and
(4) The Company's Current Reports on Form 8-K, dated December 19, 1997
(filed January 16, 1998), as amended (filed February 17, 1998), January 28,
1998 (filed February 11, 1998), as amended (filed February 12, 1998), dated
May 12, 1998 (filed June 4, 1998), and dated May 28, 1998 (filed June 3,
1998).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
in this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. Subject to
the foregoing, all information appearing in this Prospectus is qualified in
its entirety by the information appearing in the documents incorporated herein
by reference.
The Company will furnish without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any and all of the documents described above under "Incorporation of
Certain Documents by Reference," other than exhibits to such documents, unless
such exhibits are specifically incorporated by reference therein. Such
requests should be directed to: Impac Mortgage Holdings, Inc., 20371 Irvine
Avenue, Santa Ana Heights, California 92707, Attention: Investor Relations,
Telephone: (714) 556-0122.
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<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. (the
"Selling Stockholder" or "ICII"), a leading specialty finance company (the
"Contribution Transaction"). IMH is organized as a real estate investment
trust ("REIT") for federal income tax purposes, which generally allows it to
pass through qualified income to stockholders without federal income tax at
the corporate level.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH, invests primarily in non-conforming residential mortgage
loans and mortgage-backed securities secured by or representing interests in
such loans and, to a lesser extent, in second mortgage loans. Non-conforming
residential mortgage loans are residential mortgages that do not qualify for
purchase by government-sponsored agencies such as the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). Such loans generally provide higher yields than conforming loans.
The principal differences between conforming loans and non-conforming loans
include the applicable loan-to-value ratios, the credit and income histories
of the mortgagors, the documentation required for approval of the mortgagors,
the type of properties securing the mortgage loans, the loan sizes, and the
mortgagors' occupancy status with respect to the mortgaged properties. Second
mortgage loans are higher yielding mortgage loans secured by a second lien on
the property and made to borrowers owning single-family homes for the purpose
of debt consolidation, home improvements, education and a variety of other
purposes.
Conduit Operations. The Conduit Operations, conducted by IFC, purchases
primarily non-conforming mortgage loans and, to a lesser extent, second
mortgage loans from its network of third party correspondents and subsequently
securitizes or sells such loans to permanent investors, including the Long-
Term Investment Operations. IFC's ability to design non-conforming mortgage
loans which suit the needs of its correspondent loan originators and their
borrowers while providing sufficient credit quality to investors, as well as
its efficient loan purchasing process, flexible purchase commitment options
and competitive pricing, enable it to compete effectively with other non-
conforming mortgage loans conduits. In addition to earnings generated from
ongoing securitizations and sales to third party investors, IFC supports the
Long-Term Investment Operations of the Company by supplying IMH with non-
conforming mortgage loans and securities backed by such loans. Prior to the
Contribution Transaction, IFC was a division or subsidiary of ICII since 1990.
IMH owns 99% of the economic interest in IFC, while Joseph R. Tomkinson, the
Company's Chief Executive Officer, William S. Ashmore, the Company's
President, and Richard J. Johnson, the Company's Chief Financial Officer, are
the holders of all the outstanding voting stock of, and 1% of the economic
interest in, IFC.
Warehouse Lending Operations. The Warehouse Lending Operations, conducted by
IWLG, provides warehouse and repurchase financing to IFC and to approved
mortgage banks, most of which are correspondents of IFC, to finance mortgage
loans during the time from the closing of the loans to their sale or other
settlement with pre-approved investors.
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IMH's principal sources of income are (1) income from the Long-Term
Investment Operations, (2) income from the Warehouse Lending Operations, and
(3) income from IMH's equity investment in the Conduit Operations. In
addition, the Company expects to receive dividend income from its investment
in the common stock of Impac Commercial Holdings, Inc. (formerly IMH
Commercial Holdings, Inc.) ("ICH"), a REIT in which IMH, as of June 30, 1998,
held 937,084 shares, or 9.8%, of Common Stock and 456,916 shares of non-voting
Class A Common Stock which are convertible into an equivalent number of shares
of ICH's Common Stock. The net income of the Conduit Operations is fully
subject to federal and state income taxes. The principal source of income from
IMH's Long-Term Investment Operations is net interest income, which is the net
spread between interest earned on mortgage loans and securities held for
investment and the interest costs associated with the borrowings used to
finance such loans and securities, including CMO debt. "CMO" means an
adjustable or fixed-rate debt obligation (bond) that is collateralized by
mortgage loans or mortgage certificates and issued by private institutions or
issued or guaranteed by FNMA, FHLMC or the Government National Mortgage
Association. The principal sources of income from the Warehouse Lending
Operations are net interest income, which is the net spread between interest
earned on warehouse loans and the interest costs associated with the
borrowings used to finance such loans, and the fee income received from the
borrowers in connection with such loans. The principal sources of income from
the Conduit Operations are gains recognized on the sale of mortgage loans and
securities, net interest income earned on loans purchased by IFC pending their
securitization or resale, servicing fees, commitment fees and processing fees.
The Company is located at 20371 Irvine Avenue, Santa Ana Heights, California
92707 and its telephone number is (714) 556-0122.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, IMH intends to make annual
distributions to stockholders of at least 95% of its taxable income (which
does not necessarily equal net income as calculated in accordance with
generally accepted accounting principles) determined without regard to the
deduction for dividends paid and excluding any net capital gains. Any taxable
income remaining after the distribution of regular quarterly dividends or
other dividends will be distributed annually, on or prior to the date of the
first regular quarterly dividend payment date of the following taxable year.
The dividend policy is subject to revision at the discretion of the Board of
Directors. All distributions in excess of those required for IMH to maintain
REIT status will be made by IMH at the discretion of the Board of Directors
and will depend on the taxable earnings of IMH, the financial condition of IMH
and such other factors as the Board of Director deems relevant. The Board of
Directors has not established a minimum distribution level.
TAX STATUS OF IMH
IMH has elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ended December 31, 1995, and believes its organization and manner
of operation have enabled and will continue to enable it to meet the
requirements for qualification as a REIT. To maintain REIT status, any entity
must meet a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its taxable income
(determined without regard to the dividends paid deduction and excluding net
capital gains) to its stockholders. As a REIT, IMH generally will not be
subject to federal income tax on net income it distributes currently to its
stockholders. If IMH fails to qualify as a REIT in any taxable year, it
generally will be subject to federal income tax at regular corporate rates.
See "Federal Income Tax Considerations" and "Risk Factors--Consequences of
Failure to Maintain REIT Status May Include IMH Being Subject to Tax as a
Regular Corporation." Even if IMH qualifies for taxation as a REIT, IMH may be
subject to certain federal, state and local taxes on its income. In addition,
IFC is subject to federal and state income tax at regular corporate rates on
its net income.
5
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RISK FACTORS
Before investing in the Shares, prospective investors should give special
consideration to the information set forth below, in addition to the
information set forth elsewhere in this Prospectus. The following risk factors
are interrelated and, consequently, investors should treat such risk factors
as a whole.
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," "except," "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
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ARMs interest rate can change during any given period. The Company's
borrowings are not subject to similar restrictions. Hence, in a period of
rapidly increasing interest rates, the Company could also experience a
decrease in net interest income or a net interest loss in the absence of
effective hedging because the interest rates on borrowings could increase
without limitation by caps while the interest rates on the Company's ARMs and
mortgage-backed securities backed by ARMs would be so limited. Further, some
ARMs may be subject to periodic payment caps that result in some portion of
the interest accruing on the ARMs being deferred and added to the principal
outstanding. This could result in less cash received by the Company on its
ARMs than is required to pay interest on the related borrowings, which will
not have such payment caps. The Company expects that the net effect of these
factors, all other factors being equal, will be to lower the Company's net
interest income or cause a net interest loss during periods of rapidly rising
interest rates, which could negatively impact the market price of the Shares.
No assurance can be given as to the amount or timing of changes in income. To
the extent that the Company utilizes short-term debt financing for fixed rate
mortgages or mortgage-backed securities backed by fixed rate mortgages, the
Company may also be subject to interest rate risks. To the extent that some of
the warehouse loans made by the Company bear interest based upon an
intermediate-term index while the Company's borrowings to fund such loans bear
interest based upon a short-term index, the Company will be subject to the
risk of narrowing interest rate spreads.
Higher rates of interest may have a negative effect, in particular, on the
yield of any Company portfolio of "principal-only" securities and other types
of mortgage-backed securities purchased at a discount. If the Company were
required to dispose of any "principal-only" securities held in its portfolio
in a rising rate environment, a loss could be incurred. Lower long-term rates
of interest may negatively affect the yield on any Company portfolio of
"interest-only" securities, servicing fees receivable, and other mortgage loan
and mortgage-backed securities purchased at a premium. It is also possible
that in certain low interest rate environments the Company would not fully
recoup any initial investment in such securities or investments.
Mortgage prepayment rates vary from time to time and may cause changes in
the amount of the Company's net interest income. Prepayments on ARMs and
mortgage-backed securities backed by ARMs generally increase when mortgage
interest rates fall below the then current interest rates on such ARMs.
Conversely, prepayments of such mortgage loans generally decrease when
mortgage interest rates exceed the then-current interest rate on such mortgage
loans. Prepayment experience also may be affected by the geographic location
of the property securing the mortgage loans, the credit grade of the mortgage
loan, the assumability of the mortgage loans, the ability of the borrower to
convert to a fixed-rate loan, conditions in the housing and financial markets
and general economic conditions. In addition, prepayments on ARMs are affected
by conditions in the fixed-rate mortgage market. If the interest rates on ARMs
increase at a rate greater than the interest rates on fixed-rate mortgage
loans, prepayments on ARMs will tend to increase. In periods of fluctuating
interest rates, interest rates on ARMs may exceed interest rates on fixed-rate
mortgage loans, which may tend to cause prepayments on ARMs to increase at a
greater rate than anticipated. Prepayment rates also vary by credit grade.
Second mortgage loans generally have smaller average principal balances than
first mortgage loans and are not viewed by borrowers as permanent financing.
Accordingly, second mortgage loans may experience a higher rate of prepayment
than first mortgage loans. In addition, any future limitations on the right of
borrowers to deduct interest payments on mortgage loans for Federal income tax
purposes may result in a higher rate of prepayment on mortgage loans.
Prepayments of mortgage loans could affect the Company in several adverse
ways. A substantial portion of the ARMs acquired by the Company (either
directly as mortgage loans or through mortgage-backed securities backed by
ARMs) have been newly originated within six months of purchase and generally
bear initial interest rates which are lower than their "fully-indexed" rates
(the applicable index plus the margin). In the event that such an ARM is
prepaid prior to or soon after the time of adjustment to a fully-indexed rate,
the Company will have experienced an adverse effect on its net interest income
during the time it held such ARM compared with holding a fully-indexed ARM and
will have lost the opportunity to receive interest at the fully-indexed rate
over the expected life of the ARM.
The prepayment of any mortgage loan that had been purchased at a premium by
the Company would result in the immediate write-off of any remaining
capitalized premium amount and a consequent decrease in the
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Company's interest income. The Conduit Operations' strategy at the present
time is to purchase mortgage loans on a "servicing released" basis (i.e., the
Company will acquire both the mortgage loans and the rights to service them).
This strategy requires payment of a higher purchase price by the Company for
the mortgage loans, and to the extent a premium is paid, the Company is more
exposed to the adverse effects of early prepayments of the mortgage loans, as
described above.
COMPANY OPERATIONS MAY BE ADVERSELY AFFECTED IF THE COMPANY FAILS TO
EFFECTIVELY HEDGE AGAINST INTEREST RATE CHANGES OR IF LOSSES ARE INCURRED IN
CONNECTION WITH HEDGING ACTIVITIES
To mitigate risks associated with its Conduit Operations, the Company,
through IFC, enters into transactions designed to hedge interest rate risks,
which may include mandatory and optional forward selling of mortgage loans or
mortgage-backed securities, interest rate caps, floors and swaps and buying
and selling of futures and options on futures. To mitigate risks associated
with its Long-Term Investment Operations, the Company's policy is to attempt
to match 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
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foreclosure or if there is no additional value in such property after
satisfying the borrower's obligation to the first mortgage loan holder, the
borrower's obligation to the Company will likely not be satisfied.
The yield derived from certain classes of mortgage-backed securities created
in connection with securitizations by IFC and subsequently retained by the
Company, including, but not limited to, "interest-only," "principal-only" and
subordinated securities, is particularly sensitive to interest rate,
prepayment and credit risks. The Company's investment portfolio includes each
of these classes of securities. See "--Net Interest Income May be Adversely
Affected by Interest Rate Fluctuations; Prepayment's of Mortgage Loans May
Adversely Affect Net Income." Because subordinated securities, in general,
bear all credit losses prior to the related senior securities, the amount of
credit risk associated with any investment in such subordinated securities is
significantly greater than that associated with a comparable investment in the
related senior securities and, on a percentage basis, the risk is greater than
holding the underlying mortgage loans directly. See "--Value of Interest-Only,
Principal-Only, Residual Interest and Subordinated Securities Subject to
Fluctuation."
The Company also bears risk of loss on any mortgage-backed securities it
purchases in the secondary mortgage market. To the extent third parties have
been contracted to insure against these types of losses, the Company would be
dependent in part upon the creditworthiness and claims paying ability of the
insurer and the timeliness of reimbursement 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.
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IFC endeavors to effect quarterly public securitizations of its loan pools.
However, market and other considerations, including the volume of IFC's
mortgage acquisitions and the conformity of such loan pools to the
requirements of insurance companies and rating agencies, may affect the timing
of such transactions. Any delay in the sale of a loan pool beyond the end of a
fiscal quarter would postpone the recognition of gain related to such loans
and would likely result in lower income or a loss for such quarter being
reported by IFC.
In order to gain access to the securitization market, the Company has
relied, and in the future may rely, on credit enhancements provided by
insurance companies to guarantee senior interests in the related trusts to
enable them to obtain "AAA/Aaa" ratings for such interests. Any unwillingness
of insurance companies to guarantee the senior interests in the Company's loan
pools could have a material adverse effect on the Company's results of
operations and financial condition.
The Company also relies on securitizations in the form of CMO borrowings to
finance a substantial portion of the loans held by the Long-Term Investment
Operations. Any reduction in the Company's ability to complete additional
securitizations would require the Company to utilize other sources of
financing which may be on less favorable terms.
VALUE OF INTEREST-ONLY, PRINCIPAL-ONLY, RESIDUAL INTEREST AND SUBORDINATED
SECURITIES SUBJECT TO FLUCTUATION
The Company's assets include "interest-only," "principal-only," residual
interest and subordinated securities, valued by the Company in accordance with
SFAS No. 115, "Accounting for Certain Debt and Equity Securities," if
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.
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The Company also bears risk of loss on any mortgage-backed securities it
purchases in the secondary market. To the extent third parties have contracted
to insure against these types of losses, the Company would be dependent in
part upon the creditworthiness and claims paying ability of the insurer and
the timeliness of reimbursement in the event of a default on the underlying
obligations. Further, the insurance coverage for various types of losses is
limited, and losses in excess of the limitation would be borne by the Company.
MORTGAGE SERVICING RIGHTS SUBJECT TO VOLATILITY
When IFC purchases loans that include the associated servicing rights or
originates loans, the allocated cost of the servicing rights will be reflected
on its financial statements as Mortgage Servicing Rights ("MSRs"). MSRs are
amortized in proportion to, and over the period of, expected net servicing
income.
SFAS No. 125 requires that a portion of the cost of acquiring a mortgage
loan be allocated to the mortgage loan servicing rights based on its fair
value relative to the fair value of the components of the loan. To determine
the fair value of the servicing rights created, IFC uses a valuation model
that calculates the present value of future net servicing revenues to
determine the fair value of the servicing rights. In using this valuation
method, IFC incorporates assumptions that it believes market participants
would use in estimating future net servicing income which include estimates of
the cost of servicing, an inflation rate, ancillary income per loan, a
prepayment rate, a default rate and a discount rate commensurate with the
risks involved.
MSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the
time MSRs are recorded could result in a decline in the fair value of the MSRs
below their carrying value requiring a provision to increase the MSRs'
valuation allowance. The rate of prepayment of loans is affected by a variety
of economic and other factors, including prevailing interest rates and the
availability of alternative financing. The effect of those factors on loan
prepayment rates may vary depending on the 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
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generally between 8% to 13%, although such ratio may vary substantially
depending upon, among other things, the timing of IFC's securitizations and
the Company's offerings of equity capital.
The use of CMOs as financing vehicles tends to increase the Company's
leverage as mortgage loans held for CMO collateral are retained for investment
rather than sold in a secondary market transaction. Retaining mortgage loans
as CMO collateral exposes the Company to greater potential credit losses than
from the use of securitization techniques that are treated as sales. The
creation of a CMO involves an equity investment by the Company to fund
collateral in excess of the amount of the securities issued. Should the
Company experience credit losses greater than expected, the value of the
Company's equity investment in its CMOs would decrease and the Company's
financial condition and results of operations would be materially adversely
affected.
A majority of other Company borrowings are collateralized, primarily in the
form of reverse repurchase agreements, which are based on the market value of
the Company's assets pledged to secure the specific borrowings. The cost of
borrowings under a reverse repurchase agreement corresponds to the referenced
interest rate (e.g., the CMT Index or LIBOR) plus or minus a margin. The
margin over or under the referenced interest rate varies depending upon the
lender, the nature and liquidity of the underlying collateral, the movement of
interest rates, the availability of financing in the market and other factors.
If the returns on the assets and mortgage-backed securities financed with
borrowed funds fail to cover the cost of the borrowings, the Company will
experience net interest losses and may experience net losses.
The ability of the Company to achieve its investment objectives depends not
only on its ability to borrow money in sufficient amounts and on favorable
terms but also on the Company's ability to renew or replace on a continuous
basis its maturing short-term borrowings. The Company's business strategy
relies on short-term borrowings to fund long-term mortgage loans and
investment securities available for sale. In the event the Company is not able
to renew or replace maturing borrowings, the Company could be required to
sell, under adverse market conditions, all or a portion of its mortgage loans
and investment securities available for sale, and could incur losses as a
result. In addition, in such event the Company may be required to terminate
hedge positions, which could result in further losses to the Company. Such
events could have a materially adverse effect on the Company.
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.
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The Company's liquidity is also affected by its ability to access the debt
and equity capital markets. To the extent that the Company is unable to
regularly access such markets, the Company could be forced to sell assets at
unfavorable prices or discontinue various business activities in order to meet
its liquidity needs. As a result, any such inability to access the capital
markets could have a negative impact on the Company's earnings.
Substantially all of the assets of the Conduit Operations have been pledged
to secure the repayment of mortgage-backed securities issued in the
securitization process, reverse repurchase agreements or other borrowings. In
addition, substantially all of the mortgage loans that the Company has
acquired and will in the future acquire have been or will be pledged to secure
borrowings pending their securitization or sale or as a part of their long-
term financing. The cash flows received by the Company from its investments
that have not yet been distributed, pledged or used to acquire mortgage loans
or other investments may be the only unpledged assets available to unsecured
creditors and stockholders in the event of liquidation of the Company.
REDUCTION IN DEMAND FOR RESIDENTIAL MORTGAGE LOANS AND THE COMPANY'S NON-
CONFORMING LOAN PRODUCTS MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS
The availability of mortgage loans meeting the Company's criteria is
dependent upon, among other things, the size and level of activity in the
residential real estate lending market and, in particular, the demand for non-
conforming mortgage loans. The size and level of activity in the residential
real estate lending market depend on various factors, including the level of
interest rates, regional and national economic conditions and inflation and
deflation in residential property values, as well as the general regulatory
and tax environment as it relates to mortgage lending. To the extent the
Company is unable to obtain sufficient mortgage loans meeting its criteria,
the Company's business will be adversely affected.
FNMA and FHLMC are not currently permitted to purchase mortgage loans with
original principal balances above $227,400. If this dollar limitation is
increased without a commensurate increase in home prices, the Company's
ability to maintain or increase its current acquisition levels could be
adversely affected as the size of the non-conforming mortgage loan market may
be reduced, and FNMA and FHLMC may be in a position to purchase a greater
percentage of the mortgage loans in the secondary market than they currently
acquire.
In general, lower interest rates prompt greater demand for mortgage loans,
because more individuals can afford to purchase residential properties, and
refinancing and second mortgage loan transactions increase. However, if low
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
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borrowers require notices and reminders to keep their loans current and to
prevent delinquencies and foreclosures. A substantial increase in the IFC's
delinquency rate or foreclosure rate could adversely affect its ability to
access profitably the capital markets for its financing needs, including
future securitizations. IFC regularly reviews the delinquencies of its
servicing portfolio. Although the Conduit Operations periodically reviews the
costs associated with establishing operations to service the loans it
purchases, it has no plans to establish and perform servicing operations at
this time.
Each of IFC's sub-servicing agreements with its third-party sub-servicers
provides that if IFC terminates the agreement without cause (as defined in the
agreement), IFC will be required to pay the third-party sub-servicer a fee.
Further, one such agreement provides that IFC shall pay the third-party sub-
servicer a transfer fee per loan for any mortgage loan which IFC transfers to
another sub-servicer without terminating the agreement. Depending upon the
size of IFC's loan portfolio sub-serviced at any point in time, the
termination penalty that IFC would be obligated to pay upon termination
without cause, may be substantial.
IFC also subcontracts with sub-servicers to service the loans in each of the
Company's public securitizations. With respect to such loans, the related
pooling and servicing agreements permit IFC to be terminated as servicer under
specific conditions described in such agreements, which generally include the
failure to make payments, including advances, within specific time periods.
Such termination would generally be at the option of the trustee and/or the
financial guaranty insurer for such securitization, if applicable, but not at
the option of the Company. If, as a result of a sub-servicer's failure to
perform adequately, IFC were terminated as servicer of a securitization, the
value of any servicing rights held by IFC would be adversely impacted. In
addition, poor performance by a sub-servicer with respect to any such
securitization may result in greater than expected delinquencies and losses on
the related loans, which would adversely impact the value of any "interest-
only," "principal-only" and subordinated securities held by the Company in
connection with such securitization, which are more sensitive to credit risk.
See "--Value of Interest-Only, Principal-Only, Residual Interest and
Subordinated Securities Subject to Fluctuation."
RISKS REGARDING PURCHASE OF MORTGAGE LOANS FROM PREFERRED
New Product Offerings May Entail Substantial Risks
Pursuant to a mortgage loan purchase agreement (the "Preferred Purchase
Agreement") entered into in July 1997, as amended and restated in August 1997,
with Preferred Credit Corporation ("Preferred"), the Company agreed to
purchase up to $500.0 million in mortgage loans. During the year ended
December 31, 1997, the Company had purchased an aggregate of $576.1 million in
principal balance of mortgage loans from Preferred. The Company did not
purchase any mortgage loans from Preferred during the three months ended March
31, 1998. The Company has limited experience with the type of mortgage loans
originated by Preferred, and there can be no assurance that the return on the
Company's investment in these new products will be consistent with the
Company's historical financial results.
Representations and Warranties
Resale of mortgage loans purchased from Preferred may subject the Company to
risk. As of March 31, 1998, $448.4 million in principal balance of mortgage
loans purchased from Preferred have been sold by the Company. IFC currently
intends to securitize the remaining mortgage loans purchased from Preferred.
In connection with the issuance of mortgage backed securities by IFC, such
securities have been, and are expected to be, non-recourse to IFC, except in
the case of a breach of the standard representations and warranties made by
IFC when the mortgage loans are securitized. While IFC may have recourse to
Preferred for any such breaches, there can be no assurance of Preferred's
ability to honor its obligations. IFC has generally limited the remedies of
such purchasers to the remedies IFC receives from Preferred. However, in some
cases, the remedies available to a purchaser of mortgage loans from IFC may be
broader than those available to IFC against Preferred and should a purchaser
exercise its remedies against IFC, IFC may not always be able to enforce
whatever remedies IFC may have against Preferred. Furthermore, even if IFC
were able to enforce remedies available against Preferred, the effect of such
enforcement may be limited by the current financial position and operations of
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Preferred. There can be no assurance that sanctions imposed on Preferred by
the Department of Real Estate or the effect of the settlement with the
Department of Corporations will not have a material adverse effect on the
financial condition and results of operations of Preferred, the effect of
which could adversely affect the ability of Preferred to honor its repurchase
or indemnity obligations under the Preferred Purchase Agreement.
Limited Information Regarding Loss and Prepayment History; Lack of Seasoning
Preferred has had a limited operating history and, as a result, Preferred's
historical loss and prepayment experience may be of limited relevance in
quantifying delinquency, loss, prepayment or other characteristics of these
loans. Furthermore, Preferred's mortgage loans represent a relatively new loan
product within the consumer finance industry and accordingly the Company
cannot rely on the historical experience of other companies issuing a
comparable product. Any material change in delinquencies, prepayments and
losses from management's assumptions and estimates may adversely affect the
Company's financial condition and results of operations including the value of
any residual interest retained in any securitization of such loans. The actual
performance of such mortgage loans will not be known until sometime in the
future.
Credit Risk Associated with Preferred's Loan Products
Although mortgage loans originated by Preferred and purchased by the Company
under the Preferred Purchase Agreement are secured by real estate, because of
the relatively high loan-to-value ("LTV") ratio of said loans, in most cases
the value of the underlying collateral will be less than the principal amount
of the mortgage loans, with the difference being effectively unsecured. The
weighted average combined LTV ratio of the approximately $576.0 million of
mortgage loans purchased from Preferred is 116.73%. Accordingly, in making
underwriting decisions, Preferred relies principally on the creditworthiness
of the borrower, rather than the underlying collateral for repayment. Because
of the relatively high combined LTV ratios of such mortgage loans and because
the mortgage loans are second mortgages giving the Company a position as a
subordinate lien holder with respect to the collateral underlying such
mortgage loans, the Company is likely to incur a total loss in the event that
a customer defaults on its mortgage loan obligations to the Company or to the
senior lien holder.
Credit Risks Associated With Mortgage Loans Not Securitized
Mortgage loans purchased from Preferred may not be readily securitizeable,
or may be securitizeable only after individual mortgage loan portfolio
characteristics become apparent over time. To the extent that such mortgage
loans are not securitized, the Company must fund such assets with borrowings
or internally generated funds and bear the credit risk associated with such
assets. The Company's inability ultimately to sell or securitize substantially
all of the mortgage loans it purchases from Preferred could have a material
adverse effect on the Company's business and results of operations.
RISKS REGARDING PURCHASE OF MORTGAGE LOANS FROM GREENWICH
Representations and Warranties
In August 1997, IFC purchased $80.2 million of non-conforming residential
mortgage loans from Greenwich Capital Financial Products, Inc. ("Greenwich")
pursuant to a mortgage loan purchase agreement (the "WSI Purchase Agreement").
This bulk purchase from Greenwich was a one-time event. Greenwich previously
purchased such loans from Walsh Securities, Inc. ("WSI") a firm affiliated
with James Walsh, a Director of the Company. Resale of mortgage loans
purchased from Greenwich may subject the Company to risk. As of December 31,
1997, an aggregate of $68.8 million in principal balance of the mortgage loans
had been sold and $7.3 million in principal balance of the mortgage loans were
repurchased by WSI, which together consists of all of the loans purchased from
Greenwich. The Company recorded a loss of $112,000 on the resale of the
mortgage loans to WSI, In connection with such bulk whole loan sales, IFC has
entered into agreements that provide for recourse by the purchaser against IFC
(and, in certain cases, IMH as guarantor) in the event of a breach of
representation or warranty made by IFC, any fraud or misrepresentation during
the mortgage loan origination process or upon early default on such mortgage
loans. IFC has generally limited the remedies of such purchasers
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to the remedies IFC receives from WSI and Greenwich. However, in some cases,
the remedies available to a purchaser of mortgage loans from IFC may be
broader than those available to IFC against WSI or Greenwich, and should a
purchaser exercise its remedies against IFC, IFC may not always be able to
enforce whatever remedies IFC may have against WSI or Greenwich.
Furthermore, even if IFC were able to enforce remedies available against WSI
or Greenwich, the effect of such enforcement may be limited by the current
financial position and operations of WSI or Greenwich. Pursuant to the WSI
Purchase Agreement, WSI and Greenwich made representations and warranties
regarding the mortgage loans. In the event of a breach of their respective
representations and warranties, WSI and Greenwich would be responsible for the
repurchase of an affected mortgage loan or for indemnifying IFC for losses
suffered in connection with such loan. According to published reports, WSI
financed loans for independent mortgage loan brokers that engaged in
fraudulent misconduct in connection with the origination of such mortgage
loans. There can be no assurance that the effect of such fraudulent activity
will not result in a material adverse effect on the financial condition and
results of operations of WSI which would adversely affect its ability to
repurchase any mortgage loan or honor any indemnification obligations under
the WSI Purchase Agreement.
LIMITED HISTORY OF OPERATIONS OF LIMITED RELEVANCE IN PREDICTING FUTURE
PERFORMANCE
The Company commenced operations on November 20, 1995. Prior to the date of
the Contribution Transaction, IFC was a division or subsidiary of ICII, and
IWLG was a division of Southern Pacific Bank (formerly Southern Pacific Thrift
and Loan Association) ("SPB"), a subsidiary of ICII. Although the Company has
experienced substantial growth in mortgage loan originations and total
revenues, there can be no assurance that the Company will be profitable in the
future or that these rates of growth will be sustainable or indicative of
future results. Prior to the Company's initial public offering in November
1995 (the "Initial Public Offering"), each of IFC and IWLG benefited from the
financial, administrative and other resources of ICII and SPB, respectively.
In light of this growth, the historical financial performance of the Company
may be of limited relevance in predicting future performance. Since the
Company commenced operations in November 1995, its growth in purchasing loans
has been significant. Also, the loans purchased by the Company and included in
the Company's securitizations have been outstanding for a relatively short
period of time. Consequently, the delinquency and loss experience of the
Company's loans to date may not be indicative of future results. It is
unlikely that the Company will be able to maintain delinquency and loan loss
ratios at their present levels as the portfolio becomes more seasoned.
COMPETITION FOR MORTGAGE LOANS MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS
In purchasing non-conforming mortgage loans and issuing securities backed by
such loans, the Company competes with established mortgage conduit programs,
investment banking firms, savings and loan associations, banks, thrift and
loan associations, finance companies, mortgage bankers, insurance companies,
other lenders and other entities purchasing mortgage assets. Continued
consolidation in the mortgage banking industry may also reduce the number of
current sellers to the Conduit Operations, thus reducing the Company's
potential customer base, resulting in the Company purchasing a larger
percentage of mortgage loans from a smaller number of sellers. Such changes
could negatively impact the Conduit Operations. Mortgage-backed securities
issued through the Conduit Operations face competition from other investment
opportunities available to prospective investors. See "--Reduction in Demand
for Residential Mortgage Loans and the Company's Non-Conforming Loan Products
May Adversely Affect the Company's Operations."
The Company's operations may be affected by the activities of ICII and its
affiliates. As an end-investor in non-conforming mortgage loans, SPB may
compete with the Company. Also, Southern Pacific Funding Corporation ("SPFC")
is an affiliate of ICII whose business is primarily to act as a wholesale
originator and a bulk purchaser of non-conforming mortgage loans. ICII or any
of its affiliates may compete with the Company's Long-Term Investment
Operations, the Conduit Operations and the Warehouse Lending Operations. While
the Company believes such activities will not have a material adverse effect
on the Company's operations, there can be no assurance of this. See "--
Relationship with ICII and its Affiliates; Conflicts of Interest."
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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. RAI has entered into a submanagement agreement with
IMH and IFC to provide administrative services as 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 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 his or her time to
the operations of ICH as is necessary. ICH reimburses RAI, which reimburses
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 reimburses 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 pays 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 is 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
is only responsible
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for reimbursing expenses and services provided, plus the 15% service charge
for amounts due to 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, Chief Financial Officer, Secretary and a Director of IFC, is
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 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.
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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.
LACK OF EXPERIENCE OF OFFICERS IN MANAGING A REIT MAY HAVE AN ADVERSE EFFECT
ON THE COMPANY
The Company is dependent for the selection, structuring and monitoring of
its assets and associated borrowings on the diligence and skill of its
officers whose experience in managing a REIT extends only to the commencement
of the Company's operations in November 1995.
RISKS OF INVESTMENT IN ICH
As of June 30, 1998, IMH held 937,084, or 9.8%, shares of ICH Common Stock
and 456,916 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.
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.
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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 ICII, and ICII's affiliates, including ICAI. 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
relies upon ICAI to provide the services under the Services Agreement. All
other operations of the Company are conducted through IFC and IWLG. No
assurance can be given that the Company's relationships with ICAI and its
affiliates will continue indefinitely. The failure or inability of ICAI to
provide the services required of it under the Services Agreement or any other
agreements or arrangements with the Company may have a material adverse effect
on the Company's business.
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, be 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.
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CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS MAY INCLUDE IMH BEING SUBJECT
TO TAX AS A REGULAR CORPORATION
Commencing with its taxable year ended December 31, 1995, IMH has operated
and intends to continue to operate so as to qualify as a REIT under the Code.
Although IMH believes that it has operated and will continue to operate in
such a manner, no assurance can be given that IMH was organized or has
operated, or will be able to continue to operate, in a manner which will allow
it to qualify as a REIT. Qualification as a REIT involves the satisfaction of
numerous requirements (some on an annual and others on a quarterly basis)
established under highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations, and involves the
determination of various factual matters and circumstances not entirely within
IMH's control. For example, in order to qualify as a REIT, at least 95% of
IMH's gross income (including the gross income of IWLG and IMH Assets) in any
year must be derived from qualifying sources, and IMH must pay distributions
to stockholders aggregating annually at least 95% of its (including IWLG's and
IMH Assets') taxable income (determined without regard to the dividends paid
deduction and by excluding net capital gains). No assurance can be given that
IMH's actual operating results will meet the various requirements for
qualification as a REIT. Moreover, no assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of such qualification. See "Federal Income
Tax Considerations--Taxation of IMH."
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed the value of 5% of the
REIT's total assets on certain testing dates. See "Federal Income Tax
Considerations--Taxation of IMH--Requirements for Qualification." IMH believes
that the aggregate value of the securities of IFC held by IMH have been and
will continue to be less than 5% of the value of IMH's total assets.
IMH owns 100% of the nonvoting preferred stock of IFC, which represents
approximately 99% of the economic value of all classes of stock of IFC. IMH
does not and will not own any of the voting securities of IFC, and therefore
IMH will not be considered to own more than 10% of the voting securities of
IFC (which would be prohibited by the REIT asset tests currently set forth in
the Code). President Clinton's 1999 federal budget proposal contains a
provision which would amend the REIT asset tests so as to prohibit REITs from
owning stock of a corporation possessing more than 10% of the vote or value of
all classes of stock of the corporation. This proposal would be effective with
respect to stock acquired on or after the date of the first Congressional
committee action with respect to the proposal (the "Action Date"). In
addition, to the extent that a REIT's stock ownership is grandfathered by
virtue of this effective date, such grandfathered status would terminate if
the subsidiary corporation engages in a trade or business that it is not
engaged in on the Action Date or acquires substantial new assets on or after
such date. Accordingly, if this provision of the budget proposal were enacted
in its present form, IMH's stock ownership in IFC would be grandfathered, but
such grandfathered status would terminate if IFC engages in a trade or
business that it is not engaged in on the Action Date or acquires substantial
new assets (including additional mortgage loans) on or after such date, even
if such activities are undertaken or assets are acquired prior to the adoption
of the proposal. In such case, IMH's continued ownership of more than 10% of
the economic value of IFC beyond IMH's next quarterly asset testing date
following the Action Date (which could occur prior to the adoption of the
proposal) could cause IMH to fail to qualify as a REIT. See "Federal Income
Tax 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, a right of first
refusal would be entered into between IMH and IFC so that IFC will be
obligated to first offer mortgage assets to IMH. A sale of IFC, whether if
required pursuant to the proposal or otherwise, would leave IMH without a
concentrated origination source which would require IMH to purchase mortgage
assets from other
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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 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.
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FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD OF
DIRECTORS MAY BE AFFECTED WITHOUT STOCKHOLDER CONSENT
The Board of Directors, including a majority of the Unaffiliated Directors,
has established the investment policies and operating policies and strategies.
With respect to other matters, the Company may, in the future, but currently
has no present plans to, invest in the securities of other REITs for the
purpose of exercising control, offer securities in exchange for property or
offer to repurchase or otherwise reacquire its shares or other securities. The
Company may also, but does not currently intend to underwrite the securities
of other issuers. However, any of the policies, strategies and activities
referenced above or described in this Prospectus may be modified or waived by
the Board of Directors, subject in certain cases to approval by a majority of
the Unaffiliated Directors, without stockholder consent.
EFFECT OF FUTURE OFFERINGS MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK
The Company in the future may increase its capital resources by making
additional private or public offerings of its Common Stock, securities
convertible into its Common Stock, preferred stock or debt securities. The
actual or perceived effect of such offerings, the timing of which cannot be
predicted, may be the dilution of the book value or earnings per share of the
Company's Common Stock or other securities then outstanding, which may result
in the reduction of the market price of such Common Stock or other securities.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK MAY INHIBIT MARKET ACTIVITY;
POSSIBLE ANTI-TAKEOVER EFFECT MAY DETER TAKE-OVER OF THE COMPANY
In order for IMH to maintain its qualification as a REIT, not more than 50%
in value of the outstanding shares of IMH's stock, including Common Stock, may
be owned, actually or constructively, by or for five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of a taxable year (other than the first year for which the election to be
treated as a REIT has been made). Furthermore, after the first taxable year
for which the REIT election was made, IMH's shares of stock, including Common
Stock, must be held by a minimum of 100 persons for at least 335 days of a 12-
month taxable year (or a proportionate part of a shorter taxable year). In
order to protect IMH against the risk of losing REIT status due to a
concentration of ownership among its stockholders, the Charter limits actual
or constructive ownership of (i) the outstanding shares of Common Stock by any
person to 9.5% (the "Ownership Limit") (in value or in number of shares,
whichever is more restrictive) of the then outstanding shares of Common Stock
or (ii) the outstanding shares of stock of IMH by any person to 9.5% in value
(the "Aggregate Ownership Limit"). See "Description of Capital Stock--Capital
Stock--Repurchase of Shares and Restrictions on Transfer." Although the Board
of Directors presently has no intention of doing so (except as described
below), the Board of Directors, in its sole discretion, could waive the
Ownership Limit or the Aggregate Ownership Limit with respect to a particular
person if it were satisfied, based upon the advice of tax counsel or
otherwise, that ownership by such person in excess of the Ownership Limit
would not jeopardize IMH's status as a REIT. The Board of Directors may from
time to time increase 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
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the trustee has sold the shares held in the trust. Upon such a sale to IMH,
the interest of the charitable beneficiary in the shares sold shall terminate
and the trustee shall distribute the net proceeds of the sale to the intended
transferee. Also, such intended transferee shall have no right to vote such
shares or be entitled to dividends or other distributions with respect to such
shares. See "Description of Capital Stock--Capital Stock--Repurchase of Shares
and Restrictions on Transfer" for additional information regarding the
Ownership Limit.
These provisions may inhibit market activity in shares of Common Stock and
may delay, defer or prevent a change of control or other transaction involving
the opportunity for IMH's stockholders to receive a premium for their shares
that might otherwise exist if any person were to attempt to assemble a block
of shares of Common Stock in excess of the number of shares permitted under
the Charter. Such provisions also may make IMH an unsuitable investment
vehicle for any person seeking to obtain ownership of more than 9.5% of the
outstanding shares of Common Stock.
In addition, certain provisions of the Maryland General Corporation Law
("MGCL") and of IMH's Charter and Bylaws may also have the effect of delaying,
deferring or preventing a change in control of the Company or other
transaction that may involve a premium price for holders of Common Stock or
otherwise be in their best interest. See "Certain Provisions of Maryland Law
and of the Company's Charter and Bylaws."
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<PAGE>
USE OF PROCEEDS
The Selling Stockholder will receive all of the net proceeds from the sale
of the Shares offered hereby. The Company will not receive any proceeds from
the sale of such Shares.
SELLING STOCKHOLDER
The Shares offered by this Prospectus may be offered from time to time by
the Selling Stockholder named below. The following table sets forth the name
of and the number of shares of Common Stock beneficially owned by the Selling
Stockholder as of June 30, 1998 and the maximum number of Shares to be offered
by the Selling Stockholder. Since the Selling Stockholder may sell all, some
or none of its Shares, no estimate can be made of the actual aggregate number
of Shares that will be offered hereby. See "Plan of Distribution." If all of
the Shares offered hereby are sold, the Selling Stockholder will not own any
of the outstanding shares of Common Stock of the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY MAXIMUM NUMBER
NAME OWNED BEFORE OFFERING OF SHARES TO BE OFFERED
---- --------------------- -----------------------
<S> <C> <C>
Imperial Credit Industries,
Inc.(1).................... 2,009,310 2,009,310
</TABLE>
- --------
(1) May be reached at 23550 Hawthorne Blvd., Building #1, Suite 110, Torrance,
California 90505.
The Selling Stockholder received the Shares from ICAI, a subsidiary of the
Selling Stockholder, which obtained the Shares pursuant to the Termination
Agreement. Pursuant to the Termination Agreement, the parties agreed to
terminate the Management Agreement between the Company and ICAI, and IMH
agreed to pay ICAI a $44.0 million termination payment which included the
issuance of shares of IMH Common Stock. IMH and ICAI also entered into a
Registration Rights Agreement (the "Registration Rights Agreement") whereby
IMH agreed to register the Shares and IMH and IFC entered into the Services
Agreement whereby ICAI agreed to provide certain human resource and data
services. In November 1995, in connection with the Contribution Transaction,
the Selling Stockholder contributed to IFC certain operations in exchange for
all of the preferred stock and common stock of IFC. Simultaneously, in
exchange for shares of Common Stock of IMH, which shares were subsequently
sold by the Selling Stockholder, the Selling Stockholder contributed to the
Company certain of its assets and all of the shares of preferred stock of IFC.
Pursuant to the Contribution Transaction, the Selling Stockholder entered into
a non-compete agreement with IMH and a right of first refusal agreement with
IFC, both of which expired in November 1997. IMH and the Selling Stockholder
also entered into a tax agreement allocating certain tax liabilities with
regards to the above-referenced contributed assets and a services agreement,
which expired in December 1997, whereby the Selling Stockholder provided IMH
various administrative services. Lastly, the Company currently subleases its
facilities from ICII. From January 1995 to June 1997, Mr. Tomkinson was a
director of ICAI. H. Wayne Snavely, a director of the Company, is Chairman of
the Board of each of the Selling Stockholder and ICAI. Joseph R. Tomkinson,
Chairman of the Board of the Company, is a director of the Selling
Stockholder.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by the
Selling Stockholder of up to 2,009,310 shares of Common Stock (the "Shares").
Such sales may be made in underwritten offerings or in open market or block
transactions or otherwise on the AMEX, or such other national securities
exchange or automated interdealer quotation system on which shares of Common
Stock are then listed, in the over-the-counter market, in private transactions
or otherwise at market prices prevailing at the time of sale, at prices
related to prevailing market prices at the time of the sale or at negotiated
prices. The methods by which the Shares may be sold include: (a) block
transactions (which may involve crosses) in which the broker-dealer so engaged
will attempt to sell the securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker-dealer as principal and resale by such broker-dealer for its own
account pursuant to this Prospectus; (c) special offerings, exchange
distributions and/or secondary distributions in
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<PAGE>
accordance with the rules of the AMEX; (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; (e) sales "at the
market" to or through a market maker or into an existing trading market, or on
an exchange or otherwise, for such shares; (f) sales not involving market
makers or established trading markets, including direct sales or distributions
to institutions or individual purchasers; or (g) a combination of such methods
of sale. The Selling Stockholder may offer to sell and may sell the Shares in
options transactions (whether such option are listed on an options exchange or
otherwise) or deliver such Shares to cover short sales "against the box." Some
or all of the Shares may be sold through brokers acting on behalf of the
Selling Stockholder or to dealers for resale by such dealers. In connection
with such sales, such brokers and dealers may receive compensation in the form
of discounts or commissions from the Selling Stockholder and may receive
commissions from the purchasers of such shares for whom they act as broker or
agent (which discounts and commissions may exceed those customary in the types
of transactions involved). If necessary, a supplemental or amended Prospectus
will describe the method of sale in greater detail. In effecting sales,
broker-dealers engaged by the Selling Stockholder and/or purchasers of the
Common Stock may arrange for other broker-dealers to participate. In addition,
any of the Shares covered by this Prospectus which qualifies for sale pursuant
to Rule 144 under the Securities Act may be sold under Rule 144 rather than
pursuant to this Prospectus or the Shares may be pledged as collateral for
margin accounts, and such shares could be resold pursuant to the terms of such
account.
If the Shares are sold in an underwritten offering, the Shares will be
acquired by the underwriters for their own accounts and may be resold from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or prices at the time of the sale or at
negotiated prices. The Shares may be offered to the public either through
underwriting syndicates represented by one or more managing underwriters or
directly by one or more firms acting as underwriters. The underwriter or
underwriters with respect to a particular underwritten offering of Shares will
be named in a supplemental or amended Prospectus relating to such offering,
and if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover of such supplemental or amended
Prospectus. Any initial public offering price and any discounts or commissions
allowed or reallowed or paid to dealers may be changed from time to time.
Underwriters may sell shares to or through broker-dealers, and such broker-
dealers may receive compensation in the form of discounts, commissions or
commissions from the underwriters and may receive commissions from the
purchasers of such shares for whom they act as broker or agent or to whom they
sell as principal or both (which discounts and commissions may exceed those
customary in the types of transactions involved).
Pursuant to the Registration Rights Agreement, the Company has agreed to pay
all expenses in connection with the registration of the Shares being offered
hereby. The Selling Stockholder is responsible for paying any other selling
expenses, including underwriting discounts and brokers' commissions, and
expenses of Selling Stockholder's counsel.
The Selling Stockholder and any underwriter, broker, dealer or agent who
acts in connection with the sale of the Shares hereunder may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any compensation received by them and any profit on any resale of the Shares
as principals may be deemed to be underwriting discounts and commissions under
the Securities Act.
In order to comply with the securities laws of certain jurisdictions, the
securities offered hereby will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the securities offered hereby may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied
with.
Pursuant to the Registration Rights Agreement, IMH has agreed to indemnify
the Selling Stockholder, its officers and directors and any person who
controls such Selling Stockholder, against certain liabilities and expenses
arising out of or based upon the information set forth or incorporated by
reference in this Prospectus, and the Registration Statement of which this
Prospectus is a part, including liabilities under the Securities Act.
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<PAGE>
In the event of a "distribution" of the shares, the Selling Stockholder, any
selling broker-dealer or agent and any "affiliated purchasers" may be subject
to Rule 102 under the Exchange Act, which would prohibit, with certain
exceptions, any such person from bidding for or purchasing any security which
is the subject of such distribution until its participation in that
distribution is completed.
DESCRIPTION OF CAPITAL STOCK
The following is a brief description of the material terms of the
Securities. This description does not purport to be complete and is subject
and qualified in its entirety by reference to Maryland law and to the
Company's Charter and Bylaws, copies of which are on file with the Commission,
and are incorporated by reference herein. See "Incorporation of Certain
Documents by Reference" and "Available Information."
GENERAL
The authorized stock of IMH consists of 50,000,000 shares of Common Stock,
$0.01 par value per share, and 10,000,000 shares of Preferred Stock, $0.01 par
value per share. It is expected that meetings of the stockholders of IMH will
be held annually. Special meetings of the stockholders may be called by the
President, Chief Executive Officer, a majority of the entire Board of
Directors or a majority of the Unaffiliated Directors and must be called upon
the written request of holders of shares entitled to cast at least a majority
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.
COMMON STOCK
Each share of Common Stock is entitled to participate equally in dividends
when and as authorized by the Board of Directors and in the distribution of
assets of IMH upon liquidation. Each share of Common Stock is entitled to one
vote, subject to the provisions of the Charter regarding restrictions on
transfer of stock, and will be fully paid and nonassessable by IMH upon
issuance. Shares of Common Stock have no preference, conversion, exchange,
redemption, appraisal, preemptive or cumulative voting rights. The authorized
stock of IMH may be increased and altered from time to time in the manner
prescribed by Maryland law upon the affirmative vote of stockholders entitled
to cast at least a majority of all the votes entitled to be cast on the
matter. The Charter authorizes the Board of Directors to reclassify any
unissued shares of its Common Stock in one or more classes or series of stock.
PREFERRED STOCK
The Charter authorizes the Board of Directors to issue shares of Preferred
Stock and to classify or reclassify any unissued shares of Preferred Stock
into one or more classes or series of stock. The Preferred Stock may be issued
from time to time with such designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption as shall be
determined by the Board of Directors for each class or series of stock subject
to the provisions of the Charter regarding restrictions on transfer of stock.
Preferred Stock is available for possible future financing of, or acquisitions
by, IMH and for general corporate purposes without further stockholder
authorization, unless such authorization is required by applicable law or the
rules of either the American Stock Exchange or the principal national
securities exchange on which such stock is listed or admitted to trading.
Thus, the Board could authorize the issuance of shares of Preferred Stock with
terms and conditions which could have the effect of delaying, deferring or
preventing a change in control of IMH by means of a merger, tender offer,
proxy contest or otherwise. The Preferred Stock, if issued, may have a
preference on dividend payments which could reduce the assets available to IMH
to make distributions to the common stockholders. As of the date hereof, no
shares of Preferred Stock have been issued.
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<PAGE>
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.
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
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<PAGE>
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 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,
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<PAGE>
within 30 days after the end of each taxable year, is required to give written
notice to the Company stating the name and address of such owner, the number
of shares of each class and series of stock of the Company beneficially owned
and a description of the manner in which such shares are held. Each such owner
shall provide to the Company such additional information as the Company may
request in order to determine the effect, if any, of such beneficial ownership
on IMH's status as a REIT and to ensure compliance with the Ownership Limit.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Company has established a Dividend Reinvestment and Stock Purchase Plan
pursuant to which holders of record and beneficial owners of shares of Common
Stock of IMH may elect to have all or a portion of their dividends reinvested
automatically in additional shares of Common Stock of the Company, and to make
optional cash purchases of Common Stock of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe, L.P., North Quincy, Massachusetts.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of the MGCL and of the Charter
and the Bylaws of IMH does not purport to be complete and is subject to and
qualified in its entirety by reference to Maryland law and to the Charter and
the Bylaws of IMH, copies of which are filed with the Commission. See
"Available Information." For a description of additional restrictions on
transfer of the Common Stock, see "Description of Securities--Capital Stock--
Repurchase of Shares and Restrictions on Transfer."
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed from office at any time
but only by the affirmative vote of the holders of at least two-thirds of the
votes entitled to be cast in the election of directors.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an 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.
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CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (1) one-fifth or more but less than one-third, (2) one-third or more
but less than a majority, or (3) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation and adopted at any time before the acquisition of
shares.
The Bylaws of IMH contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of IMH's shares of
stock. There can be no assurance that such provision will not be amended or
eliminated at any time in the future.
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.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(1) pursuant to IMH's notice of the meeting, (2) by the Board of Directors or
(3) by a stockholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the Bylaws and (b) with
respect to special meetings of stockholders, only the business specified in
IMH's notice of meeting may be brought before the meeting of stockholders and
nominations of persons for election to the Board of Directors may be made only
(1) pursuant to IMH's notice of the meeting, (2) by the Board of Directors or
(3) provided that the Board of Directors has determined that directors shall
be elected at such meeting, by a stockholder who is entitled to vote at the
meeting and has complied with the advance notice provisions set forth in the
Bylaws.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of the Charter on ownership and transfer of stock and on removal of
directors and the advance notice provisions of the Bylaws could delay, defer
or prevent a change in control of IMH or other transaction that might involve
a premium price for holders of Common Stock or otherwise be in their best
interest.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations regarding
the Company and holders of Common Stock is based on current law, is for
general information only and is not tax advice. The information set forth
below, to the extent that it constitutes matters of law, summaries of legal
matters or legal conclusions, is the opinion of Latham & Watkins, tax counsel
to the Company. The tax treatment of a holder of Common Stock will vary
depending on his or her particular situation, and this summary does not
purport to deal with all aspects of taxation that may be relevant to
prospective purchasers of Common Stock in light of such purchasers' particular
investment or tax circumstances, or to certain types of purchasers subject to
special treatment under the federal income tax laws, including, without
limitation, insurance companies, certain financial institutions, broker-
dealers, stockholders holding Common Stock as part of a conversion
transaction, as part of a hedge or hedging transaction, or as a position in a
straddle for tax purposes, tax-exempt organizations (except to the extent
discussed under the heading "--Taxation of Tax-Exempt Stockholders"), or
foreign corporations, foreign partnerships and persons who are not citizens or
residents of the United States. In addition, the summary below does not
consider the effect of any foreign, state, local or other tax laws that may be
applicable to prospective purchasers of Common Stock.
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, current administrative interpretations and practices of
the Internal Revenue Service (the "Service") (including its practices and
policies as expressed in certain private letter rulings which are not binding
on the Service except with respect to the particular taxpayers who requested
and received such rulings), and court decisions, all as of the date hereof. No
assurance can be given that future legislation, Treasury Regulations,
administrative interpretations and practices and/or court decisions will not
adversely affect existing interpretations. Any such change could apply
retroactively to transactions preceding the date of the change. IMH has not
requested, and does not plan to request, any ruling from the Service
concerning the tax treatment of IMH. Thus, no assurance can be provided that
the statements set forth herein (which are, in any event, not binding on the
Service or courts) will not be challenged by the Service or will be sustained
by a court if so challenged.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND SALE OF
COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
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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.
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 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.
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Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (i) which is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation but for Sections 856 through 859 of
the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half
of each taxable year not more than 50% in value of the outstanding stock of
which is owned, actually or constructively, by or for five or fewer
individuals (as defined in the Code to include certain entities); and (vii)
which meets certain other tests, described below, regarding the nature of its
income and assets and the amount of its distributions. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year
of twelve months, or during a proportionate part of a taxable year of less
than twelve months. For purposes of conditions (v) and (vi), pension funds and
certain other tax-exempt entities are treated as individuals, subject to a
"look-through" exception in the case of condition (vi). In addition, a
corporation may not elect to become a REIT unless its taxable year is the
calendar year. IMH has a calendar taxable year.
The Company believes that it has previously issued sufficient shares of
Common Stock with sufficient diversity of ownership to allow IMH to satisfy
conditions (v) and (vi). In addition, the Charter provides for restrictions
regarding the transfer and ownership of shares, which restrictions are
intended to assist IMH in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. Such ownership and transfer
restrictions are described in "Description of Capital Stock--Repurchase of
Shares and Restrictions on Transfer." These restrictions, however, may not, in
all cases, ensure that IMH will be able to satisfy the share ownership
requirements described above. If IMH fails to satisfy such share ownership
requirements, IMH's status as a REIT will terminate; provided, however, that
if IMH complies with the rules contained in the applicable Treasury
Regulations requiring IMH to attempt to ascertain the actual ownership of its
shares, and IMH does not know, and would not have known through the exercise
of reasonable diligence, whether it failed to meet the requirement set forth
in condition (vi) above, IMH will be treated as having met such requirement.
See "--Failure to Qualify."
Ownership of IWLG and IMH Assets. IMH has owned 100% of the stock of IWLG
and IMH Assets at all times that IWLG and IMH Assets have been in existence.
As a result, IWLG and IMH Assets will be treated as "qualified REIT
subsidiaries" ("QRSs"). Code Section 856(i) provides that a corporation which
is a "qualified REIT subsidiary" will not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and
credit of a "qualified REIT subsidiary" will be treated as assets, liabilities
and such items (as the case may be) of the REIT for all purposes of the Code
including the REIT qualification tests. Thus, in applying the requirements
described herein, the QRSs will be ignored, and all assets, liabilities and
items of income, deduction and credit of such subsidiaries will be treated as
assets, liabilities and such items (as the case may be) of IMH. For this
reason, references under "Federal Income Tax Considerations" to the income and
assets of IMH shall include the income and assets of the QRSs. Because the
QRSs will be treated as "qualified REIT subsidiaries" they will not be subject
to federal income tax. In addition, IMH's ownership of the voting stock of the
QRSs will not violate the restrictions against ownership of securities of any
one issuer which constitute more than 10% of such issuer's voting securities
or more than 5% of the value of IMH's total assets, described below under "--
Asset Tests."
Income Tests. In order to maintain its qualification as a REIT, IMH annually
must satisfy two gross income requirements. First, at least 75% of IMH's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from: (i) rents from real
property; (ii) interest on obligations secured by mortgages on real property
or on interests in real property; (iii) gain from the sale or other
disposition of real property (including interests in real property and
interests in mortgages on real property) not held primarily for sale to
customers in the ordinary course of business; (iv) dividends or other
distributions on, and gain (other than gain from prohibited transactions) from
the sale or other disposition of, transferable shares in other real estate
investment trusts; (v) abatements and refunds of taxes on real property; (vi)
income and gain derived from foreclosure property; (vii) amounts (other than
amounts the determination of
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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 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
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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 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
failed the 30% gross income test in any taxable year beginning prior to August
5, 1997. 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
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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 are undertaken or assets are acquired
prior to the adoption of the proposal. In such case, IMH's continued ownership
of more than 10% of the economic value of IFC beyond IMH's next quarterly
asset testing date following the Action Date (which could occur prior to the
adoption of the proposal) could cause IMH to fail to qualify as a REIT. See
",Failure to Qualify." It is presently uncertain whether any proposal
regarding REIT subsidiaries, such as IFC, will be enacted, or if enacted, what
the terms of such proposal (including its effective date) will be. At this
time, it is expected that IFC will continue to acquire additional mortgage
loans notwithstanding the proposed legislation regarding REIT subsidiaries.
IMH believes that the aggregate value of its securities of IFC has not at
any time exceeded 5% of the total value of IMH's assets, and will not exceed
such amount in the future. There can be no assurance that the Service will not
contend that the value of the securities of IFC held by IMH exceeds the 5%
value limitation. The 5% asset test requires that IMH revalue its assets at
the end of each calendar quarter in which IMH acquires additional securities
in IFC for the purpose of applying such test. Although IMH plans to take steps
to ensure that it satisfies the 5% asset test for any quarter with respect to
which retesting is to occur, there can be no assurance that such steps will
always be successful, or will not require a reduction in IMH's overall
interest in IFC.
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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 noncompliance. If IMH fails to cure noncompliance with the asset
tests within such time period, IMH would cease to qualify as a REIT.
Annual Distribution Requirements. IMH, in order to maintain its
qualification as a REIT, is required to distribute dividends (other than
capital gain dividends) to its stockholders in an amount at least equal to (i)
the sum of (a) 95% of IMH's "REIT taxable income" (generally, income of IMH
computed without regard to the dividends paid deduction and by excluding its
net capital gain) and (b) 95% of the excess of the net income, if any, from
foreclosure property over the tax imposed on such income, minus (ii) the
excess of the sum of certain items of non-cash income (i.e., income
attributable to leveled stepped rents, original issue discount or purchase
money debt, or a like-kind exchange, that is later determined to be taxable)
over 5% of "REIT taxable income." In addition, if IMH disposes of any Built-In
Gain Asset during its Recognition Period, IMH will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before IMH
timely files its tax return for such year and if paid on or before the first
regular dividend payment date after such declaration and if IMH so elects and
specifies the dollar amount on its tax return. Such distributions are taxable
to holders of Common Stock (other than certain tax-exempt entities, as
discussed below) in the year in which paid, even if such distributions relate
to the prior year for purposes of IMH's 95% distribution requirement. The
amount distributed must not be preferential (e.g., each holder of shares of
Common Stock must receive the same distribution per
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share). To the extent that IMH does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its "REIT taxable income,"
as adjusted, it will be subject to tax on the undistributed portion at regular
ordinary and capital gain corporate tax rates. Furthermore, if IMH should fail
to distribute during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of January immediately following such year) at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain income for such year, and (iii) any undistributed taxable income
from prior periods, IMH would be subject to a 4% excise tax on the excess of
such required distributions over the amounts actually distributed. Any REIT
taxable income and net capital gain on which this excise tax is imposed for
any year is treated as an amount distributed that year for purposes of
calculating such tax. IMH believes that it has and intends to continue to make
timely distributions sufficient to satisfy these annual distribution
requirements.
IMH anticipates that it will generally have sufficient cash or liquid assets
to enable it to satisfy the distribution requirements described above. It is
possible, however, that IMH, from time to time, may not have sufficient cash
or other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of IMH. For instance, IMH may
realize income without a corresponding cash payment, as in the case of
original issue discount or accrued interest on defaulted mortgage loans. In
the event that such timing differences occur, in order to meet the
distribution requirements, IMH may find it necessary to sell assets, arrange
for short-term, or possibly long-term, borrowings, or pay dividends in the
form of taxable stock dividends.
The Service has ruled that if a REIT's dividend reinvestment plan allows
stockholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions reinvested
pursuant to such a plan qualify under the 95% distribution test. IMH expects
that the terms of its DRP will comply with this ruling.
Under certain circumstances, IMH may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in IMH's deduction for
dividends paid for the earlier year. Thus, IMH may be able to avoid being
taxed on amounts distributed as deficiency dividends; however, IMH will be
required to pay interest based upon the amount of any deduction taken for
deficiency dividends.
FAILURE TO QUALIFY
If IMH fails to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, IMH will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which IMH fails to qualify
will not be deductible by IMH nor will they be required to be made. As a
result, IMH's failure to qualify as a REIT would substantially reduce the cash
available for distribution by IMH to its stockholders. In addition, if IMH
fails to qualify as a REIT, all distributions to stockholders will be taxable
as ordinary income, to the extent of IMH's current and accumulated earnings
and profits, and, subject to certain limitations of the Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, IMH will also be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost. It is not possible to state whether
in all circumstances IMH would be entitled to such statutory relief. Failure
to qualify for even one year could result in the IMH's incurring substantial
indebtedness (to the extent borrowings are feasible) or liquidating
substantial investments in order to pay the resulting taxes. In addition,
President Clinton's 1999 federal budget proposal contains a provision which,
if enacted in its present form, would result in the immediate taxation of all
gain inherent in a C corporation's assets upon an election by the corporation
to become a REIT in taxable years beginning after January 1, 1999, and thus
could effectively preclude IMH from re-electing to be taxed as a REIT
following a loss of its REIT status.
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TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any state thereof or the District of Columbia, unless, in the case of a
partnership, Treasury regulations provide otherwise), (iii) is an estate the
income of which is subject to United States federal income taxation regardless
of its source, or (iv) is a trust, the administration of which is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust. Notwithstanding the preceding sentence, to the extent
provided in regulations, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to continue to
be treated as United States persons, shall also be considered U.S.
Stockholders.
As long as IMH qualifies as a REIT, distributions made by IMH out of its
current or accumulated earnings and profits (and not designated as capital
gain dividends) will constitute dividends taxable to its taxable
U.S. Stockholders as ordinary income. Such distributions will not be eligible
for the dividends received deduction in the case of U.S. Stockholders that are
corporations. Distributions made by IMH that are properly designated by IMH as
capital gain dividends will be taxable to taxable U.S. Stockholders as gain
(to the extent that they do not exceed IMH's actual net capital gain for the
taxable year) from the sale or disposition of a capital asset (provided that
the shares have been held as a capital asset). Depending upon the period of
time that IMH held the assets to which such gains were attributable, and upon
certain designations, if any, which may be made by IMH, such gains will be
taxable to non-corporate U.S. Stockholders at a rate of either 20%, 25% or
28%. U.S. Stockholders that are corporations may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income. To the
extent that IMH makes distributions (not designated as capital gain dividends)
in excess of its current and accumulated earnings and profits, such
distributions will be treated first as a tax-free return of capital to each
U.S. Stockholder, reducing the adjusted basis which such U.S. Stockholder has
in his shares of Common Stock for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a U.S.
Stockholder's adjusted basis in his shares taxable as capital gains (provided
that the shares have been held as a capital asset). With respect to non-
corporate U.S. Stockholders, amounts described as being treated as capital
gains in the preceding sentence will be taxable as long-term capital gains if
the shares to which such gains are attributable have been held for more than
eighteen months, mid-term capital gains if the shares have been held for more
than one year but not more than eighteen months, or short-term capital gains
if the shares have been held for one year or less. Dividends declared by IMH
in October, November, or December of any year and payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
IMH and received by the stockholder on December 31 of such year, provided that
the dividend is actually paid by IMH on or before January 31 of the following
calendar year. Stockholders may not include in their own income tax returns
any net operating losses or capital losses of IMH.
IMH may elect to retain, rather than distribute as a capital gain dividend,
its net long-term capital gains. In such event, IMH would pay tax on such
retained net long-term capital gains. In addition, to the extent designated by
IMH, a U.S. Stockholder generally would (i) include its proportionate share of
such undistributed long-term capital gains in computing its long-term capital
gains in its return for its taxable year in which the last day of IMH's
taxable year falls (subject to certain limitations as to the amount so
includable), (ii) be deemed to have paid the capital gains tax imposed on IMH
on the designated amounts included in such U.S. Stockholder's long-term
capital gains, (iii) receive a credit or refund for such amount of tax deemed
paid by it, (iv) increase the adjusted basis of its shares of Common Stock by
the difference between the amount of such includable gains and the tax deemed
to have been paid by it, and (v) in the case of a U.S. Stockholder that is a
corporation, appropriately adjust its earnings and profits for the retained
capital gains in accordance with Treasury Regulations to be prescribed by the
Service.
Distributions made by IMH and gain arising from the sale or exchange by a
U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be
able to apply any "passive losses" against such income or gain. Distributions
made by IMH (to the extent
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they do not constitute a return of capital) generally will be treated as
investment income for purposes of computing the investment interest
limitation. Gain arising from the sale or other disposition of Common Stock
(or distributions treated as such), however, will not be treated as investment
income unless the U.S. Stockholder elects to reduce the amount of such U.S.
Stockholder's total net capital gain eligible for the maximum capital gains
rate by the amount of such gain with respect to such Common Stock.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
other property received on such sale or other disposition and (ii) the
holder's adjusted basis in such shares of Common Stock for tax purposes. Such
gain or loss will be capital gain or loss if the shares have been held by the
U.S. Stockholder as a capital asset, and, with respect to non-corporate U.S.
Stockholders, will be mid-term or long-term gain or loss if such shares have
been held for more than one year or eighteen months, respectively. In general,
any loss recognized by a U.S. Stockholder upon the sale or other disposition
of shares of Common Stock that have been held for six months or less (after
applying certain holding period rules) will be treated as a long-term capital
loss, to the extent of distributions received by such U.S. Stockholder from
IMH which were required to be treated as long-term capital gains.
IMH has not acquired and does not expect to acquire or retain residual
interests issued by REMICs. Such residual interests, if acquired by a REIT,
could generate excess inclusion income taxable to the REIT's stockholders in
proportion to the dividends received from the REIT. Excess inclusion income
cannot be offset by net operating losses of a stockholder. If the stockholder
of a REIT holding a residual interest in a REMIC is a tax-exempt entity, the
excess inclusion income is fully taxable to such stockholder as unrelated
business taxable income. If allocated to a Non-U.S. Stockholder (as defined
below), the excess inclusion income is subject to federal income tax
withholding without reduction pursuant to any otherwise applicable tax treaty.
Potential investors, and in particular, tax-exempt entities, are urged to
consult with their tax advisors concerning this issue. A REIT, rather than its
stockholders, will be taxed (at the highest corporate tax rate) on the amount
of excess inclusion income for the taxable year allocable to shares of capital
stock of IMH held by disqualified organizations (generally, tax-exempt
entities not subject to tax on unrelated business income, including
governmental organizations).
IMH (either directly or through its QRSs) has financed and intends to
continue to finance the acquisition of mortgage assets by entering into
reverse repurchase agreements (which are essentially loans secured by IMH's
mortgage assets), CMOs or other secured lending transactions. If the Service
were to successfully take the position that such transactions result in IMH
having issued debt instruments (i.e., the reverse repurchase agreements, CMOs
or other secured loans) with differing maturity dates secured by a pool of
mortgage loans, IMH or either of the QRSs could be treated, in whole or in
part, as a taxable mortgage pool. In this case, a portion of IMH's income
could be characterized as excess inclusion income which would subject
stockholders (or IMH, to the extent Common Stock is held by disqualified
organizations) to the tax treatment described above with respect to residual
interests in REMICs. IMH intends to take the position that its existing
arrangements do not create a taxable mortgage pool or excess inclusion income.
In the absence of any definitive authority on this issue, there can be no
assurance regarding whether IMH's reverse repurchase agreements, CMOs or other
secured loans will not cause IMH to realize excess inclusion income.
BACKUP WITHHOLDING
IMH will report to its U.S. Stockholders and the Service the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the
backup withholding rules. A U.S. Stockholder that does not provide IMH with
his correct taxpayer identification number may also be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In
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addition, IMH may be required to withhold a portion of capital gain
distributions to any stockholders who fail to certify their non-foreign status
to IMH. See "--Taxation of Non-U.S. Stockholders."
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the "New
Regulations") which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New
Regulations attempt to unify certification requirements and modify reliance
standards. The New Regulations will generally be effective for payments made
after December 31, 1999, subject to certain transition rules. Prospective
investors are urged to consult their own tax advisors regarding the New
Regulations.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Generally, a tax-exempt investor that is exempt from tax on its investment
income, such as an individual retirement account (IRA) or a 401(k) plan, that
holds Common Stock as an investment will not be subject to tax on dividends
paid by IMH. However, if such tax-exempt investor is treated as having
purchased its Common Stock with borrowed funds, some or all of its dividends
from the Common Stock will be subject to tax. In addition, under some
circumstances certain pension plans (including 401(k) plans but not including
IRAs and government pension plans) that own more than 10% (by value) of IMH's
outstanding stock, including Common Stock, could be subject to tax on a
portion of their Common Stock dividends even if their Common Stock is held for
investment and is not treated as acquired with borrowed funds. The ownership
limit set forth in the Company's Charter with respect to the Company's capital
stock, however, should prevent this result. Tax-exempt investors may also be
subject to tax on distributions from IMH to the extent IMH has excess
inclusion income. See "--Taxation of Taxable U.S. Stockholders."
TAXATION OF NON-U.S. STOCKHOLDERS
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of Common Stock by
persons that are not U.S. Stockholders ("Non-U.S. Stockholders"). In general,
Non-U.S. Stockholders may be subject to special tax withholding requirements
on distributions from IMH and with respect to their sale or other disposition
of Common Stock, except to the extent reduced or eliminated by an income tax
treaty between the United States and the Non-U.S. Stockholder's country. A
Non-U.S. Stockholder who is a stockholder of record and is eligible for
reduction or elimination of withholding must file an appropriate form with IMH
in order to claim such treatment. Non-U.S. Stockholders should consult their
own tax advisors concerning the federal income tax consequences to them of a
purchase of shares of IMH's Common Stock including the federal income tax
treatment of dispositions of interests in, and the receipt of distributions
from, IMH.
OTHER TAX CONSEQUENCES
IFC does not qualify as a REIT and will pay federal, state and local income
taxes on its taxable income at normal corporate rates. As a result, IFC is
able to distribute only its net after-tax earnings to its shareholders,
including IMH, as dividend distributions, thereby reducing the cash available
for distribution by IMH to its stockholders.
IMH and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of IMH and its
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in
IMH.
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ERISA INVESTORS
A fiduciary of a pension, profit-sharing, stock bonus plan or individual
retirement account, including a plan for self-employed individuals and their
employees or any other employee benefit plan (collectively, a "Plan") subject
to the prohibited transaction provisions of the Code or the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974 ("ERISA"), should consider (1) whether the ownership of the Common Stock
is in accordance with the documents and instruments governing the Plan, (2)
whether the ownership of the Common Stock is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Subtitle A of
Title I of ERISA (if applicable) and, in particular, the diversification,
prudence and liquidity requirements of Section 404 of ERISA, (3) the
prohibitions under ERISA on improper delegation of control over, or
responsibility for "plan assets" and ERISA's imposition of co-fiduciary
liability on a fiduciary who participates in, or permits (by action or
inaction) the occurrence of, or fails to remedy a known breach of duty by
another fiduciary with respect to plan assets, and (4) the need to value the
assets of the Plan annually.
LEGAL MATTERS
The validity of the Shares offered hereby will be passed on for the Company
by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly
Hills, California, certain tax matters will be passed on for the Company by
Latham & Watkins, Los Angeles, California, and certain legal matters with
respect to Maryland law will be passed on for the Company by Ballard Spahr
Andrews & Ingersoll, LLP, Baltimore, Maryland.
EXPERTS
The financial statements of Impac Mortgage Holdings, Inc. and Impac Funding
Corporation incorporated in this Prospectus by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 have been so
incorporated by 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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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY OF THE COMMON STOCK OFFERED HEREBY IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents By Reference........................... 3
The Company............................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 25
Selling Stockholder....................................................... 25
Plan of Distribution...................................................... 25
Description of Capital Stock.............................................. 27
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 30
Federal Income Tax Considerations......................................... 32
ERISA Investors........................................................... 43
Legal Matters............................................................. 43
Experts................................................................... 43
</TABLE>
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2,009,310 SHARES
IMPAC MORTGAGE
HOLDINGS, INC.
COMMON STOCK
-----------------
PROSPECTUS
-----------------
, 1998
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses, other than registration and NASD fees, in connection
with the registration of Common Stock are:
<TABLE>
<S> <C>
Registration Fee................................................... $ 10,007
NASD Filing Fee.................................................... 3,916
Legal Fees and Expenses............................................ 40,000
Accounting Fees and Expenses....................................... 10,000
American Stock Exchange Listing Fee................................ 17,500
Printing Expenses.................................................. 10,000
Transfer and Registration Fees..................................... 5,000
Miscellaneous...................................................... 3,577
--------
TOTAL............................................................ $100,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Maryland General Corporation Law (the "MGCL") permits a Maryland
corporation to include in its charter a provision limiting the liability of
its directors and officers to the corporation and its stockholders for money
damages except for liability resulting from (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. The charter of the Company contains such a provision which eliminates
such liability to the maximum extent permitted by Maryland law.
The charter of the Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become
subject or which such person may incur by reason of his or her stature as a
present or former director or office of the Company. The Bylaws of the Company
obligate it, to the maximum extent permitted by Maryland law, to indemnify and
to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (a) any present or former director or officer who is made a
party to the proceeding by reason of his service in that capacity or (b) any
individual who, while a director of the Company and at the request of the
Company, serves or has served another corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or any other
enterprise as a director, officer, partner or trustee of such corporation,
real estate investment trust, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity. The charter and Bylaws also permit the
Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to any
employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments,
II-1
<PAGE>
penalties, fines, settlements and reasonable expenses actually incurred by
them in connection with any proceeding to which they may be made a party by
reason of their service in those or other capacities unless it is established
that (a) the act of omission of the director or officer was material to the
matter giving rise to the proceeding and (i) was committed in bad faith or
(ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or
officer had reasonable cause to believe that the act or omission was unlawful.
However, under the MGCL, a Maryland corporation may not indemnify for an
adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only
for expenses. In addition, the MGCL permits a corporation to advance
reasonable expenses to a director or officer upon the corporation's receipt of
(a) a written affirmation by the director or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by the
corporation and (b) a written undertaking by him or on his behalf to repay the
amount paid or reimbursed by the corporation if it shall ultimately be
determined that the standard of conduct was not met.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
4.1 Form of Common Stock Certificate (incorporated herein by reference
to Amendment No. 3 of the Registrant's Registration Statement on
Form S-11 (No. 33-96670), dated November 8, 1995)
4.2 Articles of Incorporation (incorporated herein by reference to the
Registrant's Registration Statement on Form S-11 (No. 33-96670),
dated November 8, 1995)
4.2(a) Amendment to Articles of Incorporation of the Registrant
(incorporated herein by reference to the Registrant's Current
Report on Form 8-K, dated January 28, 1998, as amended)
4.3 Bylaws of the Registrant, as amended (incorporated herein by
reference to exhibit 3.2 to the Registrant's Current Report on
Form 10-Q for the quarter ended March 31, 1998)
4.4 Registration Rights Agreement, dated December 29, 1997, between
the Registrant and Imperial Credit Advisors, Inc. (incorporated
herein by reference to the Registrant's Current Report on Form 8-
K, dated December 19, 1997, as amended)
*5.1 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation
*5.2 Opinion of Ballard Spahr Andrews & Ingersoll, LLP
*8.1 Opinion of Latham & Watkins
23.1 Consent of KPMG Peat Marwick LLP regarding the Registrant
23.2 Consent of KPMG Peat Marwick LLP regarding Impac Funding
Corporation
*23.3 Consent of Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation (contained in Exhibit 5.1)
*23.4 Consent of Ballard Spahr Andrews & Ingersoll, LLP (contained in
Exhibit 5.2)
*23.5 Consent of Latham & Watkins (contained in Exhibit 8.1)
*24.1 Power of Attorney (included on signature page)
</TABLE>
- --------
* Previously filed.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that the undertakings set forth in paragraphs (i)
and (ii) above shall not apply if the information required to be
included in a post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the response to the provisions described in Item 15
above, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefor, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has caused this Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Santa Ana Heights, and the State of
California, on June 30, 1998.
IMPAC MORTGAGE HOLDINGS, INC.
/s/ Richard J. Johnson
By: _________________________________
Richard J. Johnson
Executive Vice President, Chief
Financial Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board and June 30, 1998
____________________________________ Chief Executive Officer
Joseph R. Tomkinson (Principal Executive
Officer)
/s/ Richard J. Johnson Chief Financial Officer June 30, 1998
____________________________________ (Principal Financial and
Richard J. Johnson Accounting Officer)
* Director June 30, 1998
____________________________________
H. Wayne Snavely
* Director June 30, 1998
____________________________________
James Walsh
* Director June 30, 1998
____________________________________
Frank Filipps
* Director June 30, 1998
____________________________________
Stephan R. Peers
* Director June 30, 1998
____________________________________
William S. Ashmore
</TABLE>
/s/ Richard J. Johnson
By: _________________________________
Richard J. Johnson
Attorney-in-fact
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Impac Mortgage Holdings, Inc.
We consent to the use of our report, dated February 9, 1998, incorporated
herein by reference and to the reference to our firm under the heading
"Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Orange County, California
June 30, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Impac Funding Corporation
We consent to the use of our report, dated February 9, 1998, incorporated
herein by reference and to the reference to our firm under the heading
"Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
Orange County, California
June 30, 1998
