<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1997
REGISTRATION NO. 333-25423
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5 TO
FORM S-11 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
JOSEPH R. TOMKINSON
CHIEF EXECUTIVE OFFICER
IMH COMMERCIAL HOLDINGS, INC.
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(714) 556-0122
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:
THOMAS J. POLETTI, ESQ. THOMAS A. HALE, ESQ.
KATHERINE J. BLAIR, ESQ. GARY P. CULLEN, ESQ.
FRESHMAN, MARANTZ, ORLANSKI, SKADDEN, ARPS, SLATE, MEAGHER & FLOM
COOPER & KLEIN (ILLINOIS)
9100 WILSHIRE BOULEVARD, 8TH FLOOR 333 WEST WACKER DRIVE
BEVERLY HILLS, CALIFORNIA 90212 CHICAGO, ILLINOIS 60606
TELEPHONE: (310) 273-1870 TELEPHONE: (312) 407-0700
FACSIMILE: (310) 274-8357 FACSIMILE: (312) 407-0411
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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 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 is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT AGGREGATE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share............................... 5,750,000 shares(2) $16.00 $92,000,000 $27,878.79*
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</TABLE>
* $45,635.95 previously paid.
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
(2) Includes 750,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
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, AS AMENDED, 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 +
+SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED JULY 29, 1997
5,000,000 SHARES
[LOGO OF IMH COMMERCIAL HOLDINGS, INC.]
COMMON STOCK
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All of the shares of Common Stock offered hereby are being sold by IMH
Commercial Holdings, Inc. ("ICH" or the "Company"). Prior to this Offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between $14
and $16 per share. See "Underwriting" for information relating to the
determination of the initial public offering price (the "IPO Price").
The Company's Common Stock has been approved for listing, subject to notice
of issuance, on the American Stock Exchange under the symbol "ICH."
SEE "RISK FACTORS" STARTING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY. THESE RISKS INCLUDE:
<TABLE>
<S> <C>
. Limited History of Operations of Limited Rel- . Environmental Risks May Adversely Affect Value
evance in Predicting Future Performance of Underlying Commercial Mortgages
. No Assurance of Planned Expansion . Reduction in Demand for Commercial Mortgages
and the Company's Loan Products May Adversely
Affect the Company's Operations
. Conflicts of Interest; Executive Officers and . Net Interest Income May be Adversely Affected
Directors to Receive Extensive Benefits by Interest Rate Fluctuations; Commercial
Mortgages Subject to Prepayments
. Competition in the Commercial Mortgage Indus- . Borrowings and Substantial Leverage Have the
try May Adversely Affect the Company's Opera- Potential of Net Interest and Operating Loss-
tions es; Liquidity
. Value of Commercial Mortgages May be Adversely
Affected Due to Characteristics of Underlying
Commercial Properties and Facilities
. Geographic Concentration of Commercial Mort-
gages May Expose Commercial Mortgage Portfolio
to Regional Economic Fluctuations
</TABLE>
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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.
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<TABLE>
<CAPTION>
Underwriting
Discount and Proceeds to
Price to Public Commissions (1) Company (2)
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<S> <C> <C> <C>
Per Share......................... $ $ $
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Total ............................ $ $ $
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Total Assuming Full Exercise of
Over-Allotment Option (3)........ $ $ $
</TABLE>
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(1) See "Underwriting."
(2) Before deducting expenses estimated at $1,050,000, all of which are payable
by the Company.
(3) Assuming exercise in full of the 45-day option granted by the Company to
the Underwriters to purchase up to 750,000 additional shares, on the same
terms, solely to cover over-allotments. See "Underwriting."
----------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected
that delivery of the Common Stock will be made in New York City on or about
, 1997.
----------
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY
INCORPORATED
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (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 and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document referred to as an exhibit to the Registration Statement. A
copy of the Registration Statement may be inspected without charge at the
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices at Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
New York, New York 10048. Copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 upon the payment of the fees prescribed by the
Commission. 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. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete,
and in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
Table of Contents located on inside front cover of Prospectus
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT AUDITORS AND
QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR CONTAINING
UNAUDITED FINANCIAL INFORMATION.
TABLE OF CONTENTS
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<S> <C>
PROSPECTUS SUMMARY......................................................... 1
The Company............................................................... 1
Risk Factors.............................................................. 5
The Offering.............................................................. 7
Tax Status of ICH......................................................... 7
Dividend Policy and Distributions......................................... 7
The Manager............................................................... 8
RISK FACTORS............................................................... 11
General................................................................... 11
Limited History of Operations of Limited Relevance in Predicting Future
Performance............................................................ 11
No Assurance of Planned Expansion....................................... 11
Conflicts of Interest; Executive Officers and Directors to Receive
Extensive Benefits..................................................... 11
Competition in the Commercial Mortgage Industry May Adversely Affect the
Company's Operations................................................... 13
Originating and Investing in Commercial Mortgages May Entail Substantial
Risks.................................................................... 14
General................................................................. 14
Value of Commercial Mortgages May be Adversely Affected Due to
Characteristics of Underlying Commercial Properties and Facilities..... 15
Geographic Concentration of Commercial Mortgages May Expose Commercial
Mortgage Portfolio to Regional Economic Fluctuations................... 16
Prepayment Restrictions on Commercial Mortgages May Be Insufficient to
Deter Prepayments...................................................... 16
Balloon Payment at Maturity and Extension Maturity Increases Lender
Risks.................................................................. 17
Environmental Risks May Adversely Affect Value of Underlying Commercial
Mortgages.............................................................. 17
Investing in CMBSs May Entail Substantial Risks........................... 18
General................................................................. 18
</TABLE>
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Value of Interest-Only, Principal-Only, Residual Interest and
Subordinated Securities Subject to Fluctuation......................... 19
Operational Risks......................................................... 19
Reduction in Demand for Commercial Mortgages and the Company's Loan
Products May Adversely Affect the Company's Operations................. 19
Net Interest Income May be Adversely Affected by Interest Rate
Fluctuations; Commercial Mortgages Subject to Prepayments.............. 20
Borrowings and Substantial Leverage Have the Potential of Net Interest
and Operating Losses; Liquidity........................................ 22
Dependence on Securitizations May Create Liquidity Risks................ 23
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......................... 24
Commercial Mortgage Servicing Rights Subject to Volatility.............. 25
Delinquency Ratios and Company Performance May be Affected by Contracted
Sub-Servicing.......................................................... 25
Costs of Compliance with Americans with Disabilities Act of 1990 May Be
Substantial............................................................ 26
Other Considerations...................................................... 26
Subordinate Indebtedness May Affect Value of Underlying Commercial
Mortgages.............................................................. 26
Junior Mortgages May Affect Company's Rights............................ 27
Lack of Experience of the Manager in Managing a Commercial Mortgage REIT
May Have an Adverse Effect on the Company.............................. 27
Adverse Consequences of Failure to Maintain REIT Status May Include ICH
Being Subject to Taxation as a Regular Corporation..................... 27
</TABLE>
Continued on next page
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Potential Characterization of Distributions as UBTI May Adversely Affect
ICH Tax Status; Potential Adverse Results in the Event of Taxation of
Tax-Exempt Investors Could Subject the Company to Increased Taxation... 28
Classification as a Taxable Mortgage Pool Could Subject the Company to
Increased Taxation..................................................... 28
Company's Operations May be Adversely Affected if Company is Subject to
the Investment Company Act ............................................ 29
Future Revisions in Policies and Strategies at the Discretion of the
Board of Directors May be Effected Without Stockholder Consent......... 29
Effect of Future Offerings May Adversely Affect Market Price of Common
Stock.................................................................. 29
Immediate and Substantial Dilution...................................... 30
Risk of Fluctuation in Market Price of the Company's Common Stock....... 30
Shares Eligible for Future Sale May Adversely Affect the Market Price of
the Company's Common Stock............................................. 30
Classification and Reclassification of Stock Could Adversely Affect
Common Stockholders; Issuance of Preferred Stock Could Adversely Affect
Common Stockholders; Restrictions on Ownership of Common Stock May
Inhibit Market Activity; Possible Anti-Takeover Effect May Deter
Takeover of the Company................................................ 30
USE OF PROCEEDS............................................................ 32
DIVIDEND POLICY AND DISTRIBUTIONS.......................................... 32
DIVIDEND REINVESTMENT PLAN................................................. 32
DILUTION................................................................... 34
CAPITALIZATION............................................................. 35
SELECTED FINANCIAL DATA.................................................... 36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................ 39
Results of Operations; IMH Commercial Holdings, Inc. ..................... 39
Results of Operations; Imperial Commercial Capital Corporation............ 39
Liquidity and Capital Resources........................................... 40
Inflation................................................................. 40
Accounting for Servicing Rights........................................... 41
BUSINESS................................................................... 42
General................................................................... 42
The Company's Operations.................................................. 42
Long-Term Investment Operations........................................... 43
Conduit Operations........................................................ 46
Securitization and Sale Process........................................... 52
Hedging................................................................... 53
Servicing................................................................. 54
</TABLE>
<TABLE>
<S> <C>
Regulation................................................................ 57
Competition............................................................... 58
Employees................................................................. 58
Facilities................................................................ 58
IMH COMMERCIAL HOLDINGS, INC. ............................................. 59
Directors and Executive Officers.......................................... 59
Limitation of Liability and Indemnification............................... 61
Executive Compensation.................................................... 62
Stock Option and Awards Plan.............................................. 63
401(k) Plan............................................................... 65
RAI ADVISORS, LLC ......................................................... 66
The Manager............................................................... 66
Directors and Executive Officers.......................................... 67
Management Agreement...................................................... 67
RELATIONSHIPS WITH AFFILIATES.............................................. 71
CERTAIN TRANSACTIONS....................................................... 72
The Organizational Transactions........................................... 72
Non-Compete Agreement and Right of First Refusal Agreement................ 73
Management, Submanagement and Servicing Agreements........................ 74
Other Transactions........................................................ 74
SHARES ELIGIBLE FOR FUTURE SALE............................................ 75
PRINCIPAL STOCKHOLDERS..................................................... 76
DESCRIPTION OF CAPITAL STOCK............................................... 77
General................................................................... 77
Common Stock.............................................................. 77
Preferred Stock........................................................... 78
Repurchase of Shares and Restrictions on Transfer......................... 80
Transfer Agent and Registrar.............................................. 82
UNDERWRITING............................................................... 83
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND BYLAWS. 84
Removal of Directors...................................................... 84
Business Combinations..................................................... 84
Control Share Acquisitions................................................ 85
Amendment to the Charter.................................................. 85
Dissolution of the Company................................................ 86
Advance Notice of Director Nominations and New Business................... 86
Possible Anti-Takeover Effect of Certain Provisions of Maryland Law and of
the Charter and Bylaws................................................... 86
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 86
Taxation of ICH........................................................... 86
Recordkeeping Requirements................................................ 93
Failure to Qualify........................................................ 93
Taxation of Taxable U.S. Stockholders..................................... 93
Withholding............................................................... 94
Taxation of Tax-Exempt Stockholders....................................... 95
Taxation of Non-U.S. Stockholders......................................... 95
Special Considerations.................................................... 95
Other Tax Consequences.................................................... 96
ERISA INVESTORS............................................................ 96
LEGAL MATTERS.............................................................. 96
EXPERTS.................................................................... 97
GLOSSARY................................................................... 98
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and related notes appearing elsewhere
in this Prospectus. Unless otherwise indicated, the Prospectus (i) gives effect
to the conversion of shares of convertible preferred stock held by Imperial
Credit Mortgage Holdings, Inc. ("IMH") into that number of shares of Common
Stock of IMH Commercial Holdings, Inc. ("ICH") not greater than 9.8% of the
outstanding shares of Common Stock of ICH upon the closing of this Offering and
(ii) assumes that the Underwriters' over-allotment option will not be
exercised. Unless the context otherwise requires, references herein to the
"Company" refer to ICH and Imperial Commercial Capital Corporation ("ICCC"),
collectively. Capitalized and certain other terms used herein shall have the
meanings assigned to them in the Glossary.
This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
THE COMPANY
GENERAL
BACKGROUND
IMH Commercial Holdings, Inc. is a recently formed specialty commercial
property finance company which will elect to be taxed at the corporate level as
a real estate investment trust ("REIT") for federal income tax purposes, which
generally will allow the Company to pass through income to stockholders without
payment of corporate level federal income tax. The Company was incorporated in
February 1997 for the purpose of originating, purchasing, securitizing and
selling commercial mortgages and investing in commercial mortgages and
commercial mortgage-backed securities. Imperial Credit Mortgage Holdings, Inc.
("IMH") capitalized the Company with $15.0 million in cash in March 1997. Upon
the closing of this Offering, IMH will own 9.8% of the Company's outstanding
Common Stock and 818,169 shares of ICH Class A Stock (as defined herein), which
shares represent the right to receive additional shares of ICH Common Stock.
See "--The Organizational Transactions."
IMH was formed in August 1995 for the purpose of purchasing, selling and
securitizing primarily non-conforming residential mortgage loans and investing
in such mortgage loans and securities backed by such loans, and has developed a
management infrastructure to operate its business. The Manager (as defined
herein) was formed as a vehicle through which the IMH management team could
effectively manage the operations of IMH, the Company and future real estate
investment trusts. IMH's infrastructure oversees the daily capital, asset and
operation management, investor relations and human resources functions of IMH
and its affiliates. This management team will oversee the day-to-day operations
of the Company pursuant to a Management Agreement (see "--The Manager"). The
Manager intends to enter into a submanagement agreement with ICI Funding
Corporation ("ICIFC"), the conduit operations of IMH, to provide substantially
all of the administrative services required by the Company. By not having to
duplicate many of the administrative functions which exist at IMH and its
affiliates, the Company believes it will be able to operate with lower costs
than if it were to create a new administrative infrastructure, notwithstanding
the fact that the Company is required to pay a 15% service charge on
Reimbursable Expenses and Reimbursable Executive Amounts (as those terms are
defined herein), and will be able to efficiently and economically manage its
operations.
ICH was formed to seek opportunities in the commercial mortgage market.
William D. Endresen, who has over 24 years of experience in the commercial
mortgage sector, including senior executive positions at two national
commercial lending organizations, will serve as the Company's Senior Vice
President and President of ICCC, the Company's Conduit Operations.
1
<PAGE>
Commercial mortgage assets include mortgage loans on condominium-conversions,
multifamily and cooperative apartment properties and mortgage loans on
commercial properties, such as industrial and warehouse space, office
buildings, retail space and shopping malls, hotels and motels, nursing homes,
hospitals, congregate care facilities and senior living centers (collectively,
"Commercial Mortgages"). The Company will also purchase mortgage-backed
securities on commercial properties, such as pass-through certificates, and
REMICs (collectively, "CMBSs").
COMMERCIAL MORTGAGE INDUSTRY
The Commercial Mortgage securitization market has experienced significant
growth in recent years. In 1996, $43.5 billion of Commercial Mortgages and
multifamily mortgages were securitized, representing a 73% increase over 1995
and a 106% increase over 1994 according to the Mortgage Market Statistical
Annual for 1997 published by Inside Mortgage Finance Publications, Inc. The
Company believes that the growth of the Commercial Mortgage securitization
market (including the emergence of an efficient secondary market for Commercial
Mortgages and CMBSs) and the creation of uniform underwriting and document
standards for Commercial Mortgages are significant factors driving Commercial
Mortgage originations by conduits.
PURPOSE OF THE OFFERING
General. The Company believes that the market for Commercial Mortgages has
historically been underserved by financial service providers. In addition, the
Company believes that the consolidation and recent changes to various regulated
financial services providers have created an opportunity for unregulated
financial service providers to increase their participation in this market.
Commercial Mortgages historically have had higher yields than residential
mortgages; the Company has developed its Commercial Mortgage programs to allow
it to invest in Commercial Mortgages on terms the Company believes are
attractive. Key aspects of these Commercial Mortgage programs generally include
the protection against pre-payment risks through short-term lock-outs and
prepayment penalties, compensating cash reserves, conservative loan-to-value
and debt service coverage ratios ("DSCRs"), personal guarantees and upfront
fees to the originator.
The Company believes that ICH's tax and corporate structure as a REIT will
provide it with an advantage over certain other financial institutions and
commercial mortgage originators. As a REIT, the Company generally will be able
to pass through earnings as dividends to stockholders without payment of
corporate level federal income tax. Thus, ICH expects to be able to pay higher
dividends than traditional commercial mortgage lending institutions, which are
subject to corporate level federal income tax. In addition, management believes
that ICH, as an unregulated company, provides a more attractive method of
investing in commercial mortgages than regulated financial institutions because
ICH will not be subject to the costs associated with the federal and state
regulations imposed upon insured financial institutions.
2
<PAGE>
THE COMPANY'S OPERATIONS
The Company currently operates the Long-Term Investment Operations, which
invests primarily in Commercial Mortgages and CMBSs and, as of the closing of
this Offering, will engage in the Conduit Operations, which originates,
purchases and sells or securitizes Commercial Mortgages. ICH has secured a
$200.0 million warehouse line agreement to finance the origination and purchase
of Commercial Mortgages. The Company's Conduit Operations will operate through
three divisions: the Condominium Division, the Retail Division, and the
Correspondent and Bulk Purchase Division.
LONG-TERM INVESTMENT OPERATIONS
The Long-Term Investment Operations invests primarily in adjustable rate
Commercial Mortgages and CMBSs backed by such Commercial Mortgages for long-
term investment. Income is earned principally from the net interest income
received by the Company on the Commercial Mortgages and CMBSs purchased and
held in its portfolio. At March 31, 1997, the Company's investment portfolio
consisted of $17.5 million in Commercial Mortgages and a $10.0 million CMBS.
CONDUIT OPERATIONS
The Company's Conduit Operations will operate through three divisions: the
Condominium Division, the Retail Division, and the Correspondent and Bulk
Purchase Division.
Condominium Division. This Division will offer on a retail basis adjustable
rate financing to developers and project owners who have completed the
development of a condominium complex or the conversion of an apartment complex
to a condominium complex on property with a typical loan amount of $3.0 million
to $10.0 million. All originations, underwriting, processing and funding will
be performed at ICCC's executive offices. The Company anticipates that the
Condominium Division's Commercial Mortgages will be offered on a nationwide
basis and that Commercial Mortgages originated through the Condominium Division
will be financed through the utilization of CMO borrowings by the Long-Term
Investment Operations.
Retail Division. This Division, which is expected to become operational by
the closing of the Offering, will originate Commercial Mortgages for properties
including general purpose apartment complexes, general retail property such as
shopping centers, super markets and department stores, light industrial
property, and office buildings. The Retail Division will offer smaller balance
($500,000 to $1.5 million) fixed and adjustable rate Commercial Mortgages to
developers and project owners for smaller properties and projects than those
funded by the Correspondent and Bulk Purchase Division. Although processing and
funding operations relating to these Commercial Mortgages will be performed
centrally at ICCC's executive offices, the Company has targeted major
metropolitan areas for the opening of satellite offices for regional
originations. A portion of the adjustable rate Commercial Mortgages that will
be originated by the Retail Division may be held in portfolio by the Long-Term
Investment Operations, while the balance thereof and a substantial portion of
the fixed rate Commercial Mortgages originated will be resold by the Conduit
Operations through REMIC securitizations.
Correspondent and Bulk Purchase Division. This Division will both originate
Commercial Mortgages on a retail basis and purchase Commercial Mortgages on a
bulk and flow basis. This Division will offer larger principal balance ($1.5
million to $10.0 million) Commercial Mortgages for commercial projects than
those funded by the Retail Division. The Correspondent and Bulk Purchase
Division will offer adjustable rate and fixed rate Commercial Mortgages offered
through specified correspondents who may in the future be provided with
Company-sponsored warehouse facilities. In addition, the Division will purchase
Commercial Mortgages in bulk and flow from selected financial institutions and
mortgage bankers. A portion of the adjustable rate Commercial Mortgages
originated or purchased by this Division may be held in portfolio by the Long-
Term Investment Operations, while the balance thereof and a substantial portion
of the fixed rate Commercial Mortgages originated or purchased will be resold
through REMIC securitizations.
3
<PAGE>
THE ORGANIZATIONAL TRANSACTIONS
The following is a summary of transactions entered into or to be entered into
in connection with the organization of the Company:
. In January and February 1997, ICCC and ICH were incorporated,
respectively.
. In February 1997, Joseph R. Tomkinson, ICH's Chairman of the Board and
Chief Executive Officer, William S. Ashmore, ICH's President and Chief
Operating Officer, Richard J. Johnson, ICH's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary, William D. Endresen, ICH's
Senior Vice President, Mary C. Glass-Schannault, ICH's Senior Vice
President, and each of James Walsh, Frank P. Filipps, Stephan R. Peers
and Thomas J. Poletti, Directors of ICH, and H. Wayne Snavely, purchased
76,800, 76,800, 62,400, 12,000, 12,000 and 12,000 shares of the Common
Stock of ICH, respectively, at a per share price of $.01. In addition,
IMH purchased 299,000 shares of the Common Stock of ICH at a per share
price of $.01.
. In February 1997, IMH purchased all of the non-voting preferred stock of
ICCC, which represents 95% of the economic interest in ICCC, for
$500,000, and each of Messrs. Tomkinson, Ashmore, Johnson and Endresen
purchased all of the outstanding shares of common stock of ICCC (125
shares each at a per share price of $1.00), which represents 5% of the
economic interest in ICCC.
. In February 1997, ICCC brokered ICH's purchase of $7.3 million and $10.2
million of condominium conversion loans which were financed with $16.6
million in borrowings under a warehouse lending facility provided by a
subsidiary of IMH, and $900,000 in borrowings from IMH. All of such
condominium conversion loans were purchased from ICIFC, the conduit
operations of IMH, and $7.3 million of such mortgage loans were
originated by a company with which William D. Endresen was an affiliate.
IMH owns all of the outstanding non-voting preferred stock of ICIFC,
which represents 99% of the economic interest in ICIFC and Messrs.
Tomkinson, Johnson and Ashmore own 100% of the Common Stock of ICIFC,
representing 1% of the economic interest. As of February 1997, Imperial
Credit Industries, Inc. ("ICII") owned 100% of the Common Stock of ICIFC.
Other than the fact that Joseph R. Tomkinson, ICH's Chairman of the Board
and Chief Executive Officer, is currently a director of ICII, and H.
Wayne Snavely, ICII's Chairman of the Board, owns 12,000 shares of
ICH Common Stock, there is no affiliation or relationship between ICH and
ICII.
. In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note
convertible into shares of the non-voting Class A Convertible Preferred
Stock of ICH (the "ICH Preferred Stock") at the rate of one share of ICH
Preferred Stock for each $5.00 principal amount of said note (the
"Conversion Rate").
. In March 1997, IMH converted the aforementioned $15.0 million principal
amount promissory note into an aggregate of 3,000,000 shares of ICH
Preferred Stock. All ICH Preferred Stock is automatically convertible
upon the closing of this Offering into shares of ICH Common Stock
determined by multiplying the number of shares of ICH Preferred Stock to
be converted by a fraction, the numerator of which is $5.00 and the
denominator of which is the IPO Price. Notwithstanding the foregoing,
consistent with IMH's classification as a REIT, IMH shall not be entitled
to have converted into ICH Common Stock more than that number of shares
of ICH Preferred Stock whereby IMH would own, immediately after such
conversion, greater than 9.8% of ICH's outstanding Common Stock. Any
shares of ICH Preferred Stock not converted into ICH Common Stock upon
the closing of this Offering shall on such date automatically convert
into shares of ICH non-voting Class A Common Stock (the "ICH Class A
Stock") at the same rate as the ICH Preferred Stock converted into Common
Stock on said date. Shares of ICH Class A Stock convert into shares of
Common Stock on a one-for-one basis and each such class of Common Stock
is entitled to cash dividends on a pro rata basis. Upon any subsequent
issuances of Common Stock by ICH or sales of ICH Common Stock held by
IMH, shares of ICH Class A Stock shall automatically convert into
additional shares of the Common Stock of ICH, subject to said 9.8%
limitation.
4
<PAGE>
. In March 1997, ICH purchased a $10.1 CMBS from ICIFC which was financed
with a promissory note. In March 1997, the promissory note was repaid
with cash from IMH's above-referenced $15.0 million investment.
Concurrently therewith, ICH repaid the $900,000 owed to IMH in connection
with its purchase of condominium conversion loans.
. In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held
by it for an equivalent number of shares of ICH Class A Stock.
. On the closing of this Offering, IMH will contribute to ICH (the
"Contribution") 100% of the outstanding shares of non-voting preferred
stock of ICCC in exchange for 95,000 shares of ICH Class A Stock. Upon
the closing of this Offering, IMH will own 575,831 shares of ICH Common
Stock and 818,169 shares of ICH Class A Stock.
----------------
ICH was incorporated in Maryland in February 1997 under the name Imperial
Credit Commercial Holdings, Inc. and changed its name to IMH Commercial
Holdings, Inc. in June 1997. Its headquarters is located at 20371 Irvine
Avenue, Santa Ana Heights, California 92707 and its telephone number is (714)
556-0122.
----------------
RISK FACTORS
Each prospective purchaser of the Shares offered hereby should review "Risk
Factors" beginning on page 11 for a discussion of certain factors that should
be considered before investing in the Shares, including, without limitation:
. Limited history of operations of limited relevance in predicting future
performance;
. No assurance of planned expansion;
. Conflicts of interest; executive officers and directors to receive
extensive benefits;
. Competition in the commercial mortgage industry may adversely affect the
Company's operations;
. Value of commercial mortgages may be adversely affected due to
characteristics of underlying commercial properties and facilities;
. Geographic concentration of commercial mortgages may expose commercial
mortgage portfolio to regional economic fluctuations;
. Prepayment restrictions on commercial mortgages may be insufficient to
deter prepayments;
. Balloon payment at maturity and extension maturity increases lender
risks;
. Environmental risks may adversely affect value of underlying commercial
mortgages;
. Value of interest-only, principal-only, residual interest and
subordinated securities subject to fluctuation;
. Reduction in demand for commercial mortgages and the Company's loan
products may adversely affect the Company's operations;
. Net interest income may be adversely affected by interest rate
fluctuations; commercial mortgages subject to prepayments;
5
<PAGE>
. Borrowings and substantial leverage have the potential of net interest
and operating losses; liquidity;
. Dependence on securitizations may create liquidity risks;
. Company operations may be adversely affected if the Company fails to
effectively hedge against interest or if losses are incurred in
connection with hedging activities;
. Delinquency ratios and Company performance may be affected by contracted
subservicing;
. Cost of compliance with Americans with Disabilities Act of 1990 may be
substantial;
. Subordinated indebtedness may affect value of underlying commercial
mortgages;
. Junior mortgages may affect Company's rights;
. Lack of experience of the Manager in managing a commercial mortgage REIT
may have an adverse effect on the Company;
. Adverse consequences of failure to maintain REIT status may include ICH
being subject to taxation as a regular corporation;
. Potential characterization of distributions as UBTI may adversely affect
ICH tax status; potential adverse results in the event of taxation of
tax-exempt investors;
. Classification as a taxable mortgage pool could subject the Company to
increased taxation;
. Company's Operations May be Adversely Affected if Company is Subject to
the Investment Company Act;
. Future revisions in policies and strategies at the discretion of the
Board of Directors may be affected without stockholder consent;
. Effect of future offerings may adversely affect market price of the
Company's Common Stock;
. Immediate and Substantial Dilution;
. Risk of Fluctuation in Market Price of the Company's Common Stock;
. Shares eligible for future sale may adversely affect the market price of
the Company's Common Stock; and
. Classification and reclassification of stock could adversely affect
common stockholders; issuance of preferred stock could adversely affect
common stockholders; restrictions on ownership of common stock may
inhibit market activity; possible anti-takeover effect.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company(1).......... 5,000,000 Shares
Common Stock to be Outstanding after the
Offering(1)(2)................................. 5,875,831 Shares
Use of Proceeds................................. To provide funding for the Company's
Long-Term Investment Operations and its
Conduit Operations and for general
corporate purposes.
Proposed American Stock Exchange Symbol......... "ICH"
</TABLE>
- --------
(1) Assumes that the Underwriters' option to purchase up to an additional
750,000 shares of Common Stock to cover over-allotments is not exercised.
(2) Does not include 500,000 shares reserved for issuance pursuant to the
Company's Stock Option and Awards Plan. Options to acquire 190,000 shares
will be granted to executive officers, employees and Directors of ICH at
the effective date of this Offering at a per share exercise price equal to
the IPO Price. The 310,000 shares reserved for future issuance pursuant to
the Company's Stock Option and Awards Plan will be increased or decreased
in an amount equal to 10% of the Shares sold in this Offering, subject to a
minimum of 400,000 shares. See "Capitalization," "IMH Commercial Holdings,
Inc.--Stock Option and Awards Plans" and "Description of Capital Stock."
TAX STATUS OF ICH
ICH will elect 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 ending December 31, 1997, 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, an 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, ICH generally will not be
subject to federal income tax on net income it distributes currently to its
stockholders. If ICH fails to qualify as a REIT in any taxable year, it will be
subject to federal income tax at regular corporate rates. See "Federal Income
Tax Considerations" and "Risk Factors--Adverse Consequences of Failure to
Maintain REIT Status; ICH Subject to Tax as a Regular Corporation." Even if ICH
qualifies for taxation as a REIT, ICH may be subject to certain federal, state
and local taxes on its income. In addition, ICCC is subject to federal and
state income tax at regular corporate rates on its net income.
DIVIDEND POLICY AND DISTRIBUTIONS
To maintain its qualification as a REIT, ICH intends to make annual
distributions to its stockholders of at least 95% of its REIT taxable income
(which does not necessarily equal net income as calculated in accordance with
GAAP) determined without regard to the deduction for dividends paid and by
excluding any net capital gains. Any taxable income remaining after the
distribution of regular quarterly dividends will be distributed annually in a
special dividend 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 ICH to maintain REIT status will
be made by the Company at the discretion of the Board of Directors and will
depend on the taxable earnings of the Company, the financial condition of ICH
and such other factors as the Board of Directors deems relevant. The Board of
Directors has not established a minimum distribution level.
7
<PAGE>
The Company anticipates adopting a Dividend Reinvestment Plan ("DRP") that
allows stockholders of ICH who have enrolled in the DRP to reinvest their
dividends automatically in additional shares of Common Stock at a discount from
the current market price, in some cases. The shares of Common Stock to be
acquired for distribution under the DRP may be purchased on the open market or
directly from the Company at the option of the Company. The shares issuable by
ICH pursuant to the DRP are not being registered by means of the Registration
Statement of which this Prospectus forms a part. See "Dividend Reinvestment
Plan."
THE MANAGER
RAI Advisors, LLC ("RAI" or the "Manager") will oversee the day-to-day
operations of the Company, subject to the supervision of the Company's Board of
Directors, pursuant to a management agreement (the "Management Agreement")
which will become effective on the closing of this Offering. The Company has
selected an outside advisor in order to coordinate, assist and manage the
duties and responsibilities of the Company. In order to utilize the IMH
infrastructure, which oversees the daily capital, asset and operations
management, investor relations and human resources functions of IMH and its
affiliates, RAI intends to enter into a submanagement agreement with ICIFC, the
conduit operations of IMH, upon the closing of this Offering to provide
substantially all of the administrative services required by the Company
including facilities and costs associated therewith, technology, human
resources, management information systems, general ledger accounts, check
processing and accounts payable as RAI deems necessary. IMH owns all of the
outstanding non-voting preferred stock of ICIFC, which represents 99% of the
economic interest in ICIFC and Messrs. Tomkinson, Johnson and Ashmore own 100%
of the Common Stock of ICIFC representing 1% of the economic interest.
RAI was formed as a vehicle through which the IMH management team could
effectively manage the operations of ICH, IMH and any future Affiliated REIT.
ICH believes that contracting directly with IMH to provide services required
under the Management Agreement would have proved unwieldy and cumbersome, if
and when any Affiliated REITs are formed of which RAI is the manager. If ICH
were required to independently hire an executive management team to duplicate
the services to be provided by RAI, ICH believes that it would be subjected to
substantial expenses in terms of fixed salaries, which salary expenses will not
be incurred under the Management Agreement. In addition, ICH believes that the
allocation of expenses on an as needed basis will allow ICH to avoid the costs
to establish the infrastructure currently existing at IMH, notwithstanding the
fact that the Company is required to pay a 15% service charge on Reimbursable
Expenses and Reimbursable Executive Amounts (as those terms are defined
herein).
The Manager will be involved in three primary activities: (1) asset-liability
management--primarily the analysis and oversight of the purchasing, financing
and disposition of Company assets; (2) capital management-- primarily the
oversight of the Company's structuring, analysis, capital raising and investor
relations activities; and (3) operations management--primarily the oversight of
ICH's operating subsidiaries. The Management Agreement will have an initial
term of five years, renewable annually by agreement between the Company and the
Manager, subject to the approval of a majority of the Unaffiliated Directors.
The Management Agreement may be terminated by the Company at any time upon 60
days' written notice. In the event that the Management Agreement is terminated
or not renewed by the Company without cause, the Company will be obligated to
pay the Manager a termination or non-renewal fee determined by an independent
appraisal. See "RAI Advisors, LLC--Management Agreement."
RAI is owned equally by each of Messrs. Tomkinson, Ashmore and Johnson.
Pursuant to a voting trust agreement, the Chief Executive Officer of RAI has
the right to control the vote of 51% of the outstanding voting securities of
RAI. See "RAI Advisors, LLC."
All of the persons designated to become officers of the Manager upon the
closing of this Offering are also officers of IMH and ICIFC. Each of these
officers has modified his or her employment agreement with ICIFC to
8
<PAGE>
also become an officer of the Manager (and of ICH and ICCC) upon the closing of
this Offering. The Manager will agree to cause each of its officers to devote
as much of his or her time to the operations of the Company as is reasonably
necessary. ICH will reimburse the Manager, who will reimburse ICIFC on a dollar
for dollar basis (including the service charge referenced below), for the
actual cost of providing the services of its officers to the Company based upon
the compensation payable to them by ICIFC, plus a 15% service charge. ICH will
reimburse the Manager for expenses incurred by the Manager, plus a service
charge of 15% on all expenses owed by the Manager to ICIFC for costs and
services under any submanagement agreement between ICIFC and the Manager. The
Manager will pay all such third parties on a dollar for dollar basis for the
aformentioned amounts received by it from the Company; no such 15% service
charge will be paid to third party service providers other than ICIFC. For the
first three years of the Management Agreement, there will be a minimum annual
amount of $500,000 (including the 15% service charge) payable by the Company in
connection with services provided and expenses incurred by RAI and payable by
RAI to ICIFC. After the third year, the Company will only be responsible for
reimbursing expenses and services provided, with the 15% service charge for
amounts due to ICIFC. The Company does not believe that its operations will be
adversely affected as a result of these relationships. In addition, the Company
will pay the Manager, as compensation for each fiscal quarter, an amount equal
to 25% of the Net Income of the Company, before deduction of such compensation,
in excess of the amount that would produce an annualized Return on Equity equal
to the Ten Year U.S. Treasury Rate plus 2% (the "25% Payment"). "Return on
Equity" is computed on Average Net Worth and has no necessary correlation with
the actual distributions received by stockholders. The 25% Payment to the
Manager will be calculated quarterly in arrears before any income distributions
are made to stockholders for the corresponding period. See "RAI Advisors, LLC--
Management Agreement" for a more detailed explanation of the management fee
arrangement and "Glossary" for full definitions of the terms "Net Income,"
"Return on Equity," "Ten Year U.S. Treasury Rate" and "Average Net Worth."
9
<PAGE>
The following chart demonstrates the relationships between ICH, ICCC and
RAI(1).
<TABLE>
<S> <C> <C>
REIT MANAGER
__________________________________________________ _______________________
| | | |
| IMH COMMERCIAL HOLDINGS, INC. ("ICH") | RAI will oversee the | RAI ADVISORS, LLC |
| Invests in Commercial Mortgages and Commercial | day-to-day operations | ("RAI") |
| Mortgage-Backed Securities ("CMBSs") | of ICH and ICCC | |
| | +---------------------- | |
__________________________________________________ _______________________
+
|
|
Commercial Mortgages
CMBSs
|
|
CONDUIT OPERATIONS(2)
__________________________________________________ _______________________
| | Commercial Mortgages sold | |
|IMPERIAL COMMERCIAL CAPITAL CORPORATION ("ICCC")| via securitization or whole | Third Party |
| (formerly affiliated with IMH) | loan sales | Purchasers |
| Originates and Purhcases Commercial Mortgages | -----------------------------+ | |
| and CMBSs | CMBSs sold via | |
| | securitization | |
__________________________________________________ _______________________
+ + +
| | |
Bulk and Flow Commercial CMBSs
Commercial Mortgages |
Mortgages | |
| | |
| | |
__________________ _______________ __________________
| | | Commercial | | |
| | | Property | | |
| | | Builder/ | | |
| Correspondents | | Developer/ | | Broker/Dealers |
| | | Project | | |
| | | Owners | | |
__________________ _______________ __________________
</TABLE>
- --------
(1) Joseph R. Tomkinson, ICH's Chairman of the Board and Chief Executive
Officer, is a one-third owner of RAI, an owner of 25% of the common stock
of ICCC and owns 76,800 shares of ICH Common Stock. William S. Ashmore,
ICH's President and Chief Operating Officer, is a one-third owner of RAI,
an owner of 25% of the common stock of ICCC and owns 76,800 shares of ICH
Common Stock. Richard J. Johnson, ICH's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary, is a one-third owner of RAI, a
25% owner of the common stock of ICCC and owns 62,400 shares of ICH Common
Stock. William D. Endresen, ICH's Senior Vice President, is an owner of 25%
of the Common Stock of ICCC and owns 12,000 shares of ICH Common Stock.
(2) Upon the closing of the Offering, ICH will own all of the outstanding
shares of non-voting preferred stock of ICCC, representing 95% of the
economic interest in ICCC. Ownership of 100% of the common stock of ICCC
entitles the owners thereof (Messrs. Tomkinson, Ashmore, Johnson and
Endresen) to an aggregate of 5% of the economic interest in ICCC.
10
<PAGE>
RISK FACTORS
Before investing in the Shares offered hereby, prospective investors should
give special consideration to the information set forth below, in addition to
the information set forth elsewhere in this Prospectus. The following risk
factors are interrelated and, consequently, investors should treat such risk
factors as a whole.
This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in this Prospectus.
GENERAL
LIMITED HISTORY OF OPERATIONS OF LIMITED RELEVANCE IN PREDICTING FUTURE
PERFORMANCE
Since ICCC commenced operations in February 1997, its historical performance
may be of limited relevance in predicting future performance of the Company.
Also, ICH is a recently formed entity whose only assets consist of $17.5
million of Commercial Mortgages purchased in February 1997. 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 the Company will be able to maintain delinquency and loan loss
ratios at their present levels as the portfolio grows and becomes more
seasoned.
NO ASSURANCE OF PLANNED EXPANSION
The Company intends 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 and its Conduit 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
planned expansion or, if achieved, that the expansion will result in profitable
operations.
CONFLICTS OF INTEREST; EXECUTIVE OFFICERS AND DIRECTORS TO RECEIVE EXTENSIVE
BENEFITS
Benefit to Insiders; Interlocking Relationships; Other Considerations. The
Company is subject to conflicts of interest arising from its relationships with
IMH, RAI and their officers, directors and affiliates. First, after this
Offering, IMH will own a substantial number of shares of the Company's Common
Stock. Second, RAI, will render management services to the Company and will be
paid the 25% Payment on a quarterly basis, resulting in a direct benefit to its
owners, who are officers or directors of ICH. Third, ICIFC, the conduit
operations of IMH, will enter into a submanagement agreement with RAI pursuant
to which the Company will pay ICIFC (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 IMH, RAI and
ICCC. See "IMH Commercial Holdings, Inc.--Directors and Executive Officers,"
"RAI Advisors, LLC--Directors and Executive Officers," and "Principal
Stockholders."
On the closing of this Offering, IMH will effectuate the Contribution to ICH
of 100% of the outstanding shares of non-voting preferred stock of ICCC in
exchange for 95,000 shares of ICH Class A Stock. Upon the closing of this
Offering, IMH will own 575,831 shares of ICH Common Stock and 818,169 shares of
ICH Class A Stock.
11
<PAGE>
RAI will oversee the day-to-day operations of the Company, subject to the
supervision of ICH's Board of Directors, pursuant to the Management Agreement.
RAI is owned one-third by Joseph R. Tomkinson, ICH's Chairman of the Board and
Chief Executive Officer, one-third by William S. Ashmore, ICH's President and
Chief Operating Officer, and one-third by Richard J. Johnson, ICH's Senior Vice
President, Chief Financial Officer, Treasurer and Secretary. Pursuant to the
Management Agreement, ICH will pay the 25% Payment to RAI on a quarterly basis,
resulting in a direct benefit to its owners. See "RAI Advisors, LLC--Management
Fees."
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 will become officers of RAI upon the closing of the Offering
are also officers or directors of IMH. In order to utilize the IMH
infrastructure, RAI intends to enter into a submanagement agreement with ICIFC,
the conduit operations of IMH, upon the closing of this Offering to provide
substantially all of the administrative services required by the Company. IMH
owns all of the outstanding shares of non-voting preferred stock of ICIFC,
representing 99% of the economic interest in ICIFC, and Messrs. Tomkinson,
Johnson and Ashmore own all of the outstanding shares of common stock of ICIFC,
representing 1% of the economic interest. Each of these persons who are
officers of ICIFC has modified his or her employment agreement with ICIFC to
allow him or her to become an officer of RAI (and of ICH and ICCC) upon the
closing of this Offering. RAI will agree to cause each of its officers to
devote as much of his or her time to the operations of the Company as is
necessary. The Company will reimburse RAI, who will reimburse ICIFC, on a
dollar for dollar basis (including the service charge referenced below), for
the actual cost of providing the services of its officers to the Company based
upon the compensation payable to them by ICIFC, plus a 15% service charge. ICH
will reimburse the Manager for expenses incurred by the Manager, plus a service
charge of 15% on all expenses owed by the Manager to ICIFC for costs and
services under any submanagement agreement between ICIFC and the Manager. The
Manager will pay all such third parties on a dollar for dollar basis for the
aformentioned amounts received by it from the Company; no such 15% service
charge will be paid to third party service providers other than ICIFC. For the
first three years of the Management Agreement, there will be a minimum amount
of $500,000 (including the 15% service charge) payable by the Company in
connection with services provided and expenses incurred by RAI and payable by
RAI to ICIFC. After the third year, the Company will only be responsible for
reimbursing expenses and services provided, with the 15% service charge for
amounts due to ICIFC. However, such officers are expected to devote the
majority of their time and effort towards the management and operations of IMH
and ICIFC. Should the operations of IMH and ICIFC 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. No assurance can be given
that the Company's relationships with RAI and its affiliates will continue
indefinitely. The failure or inability of RAI to provide the services required
of it under the Management Agreement (or of ICIFC to perform its obligations
under its submanagement agreement with RAI) or any other agreements or
arrangements with the Company would have a material adverse effect on the
Company's business.
Many of the affiliates of IMH, RAI and ICCC have interlocking executive
positions and share common ownership. Joseph R. Tomkinson, ICH's Chairman of
the Board and Chief Executive Officer, is the Chief Executive Officer and Vice
Chairman of the Board of IMH, a one-third owner of RAI and an owner of 25% of
the common stock of ICCC. William S. Ashmore, ICH's President and Chief
Operating Officer, is the President and a Director of IMH, a one-third owner of
RAI and an owner of 25% of the common stock of ICCC. Richard J. Johnson, ICH's
Senior Vice President, Chief Financial Officer, Treasurer and Secretary, is a
Senior Vice President, Chief Financial Officer, Treasurer and Secretary of IMH,
a one-third owner of RAI and a 25% owner of the common stock of ICCC. William
D. Endresen, ICH's Senior Vice President, is an owner of 25% of the common
stock of ICCC. Mary Glass-Schnault, ICH's Senior Vice President, is a Senior
Vice President of IMH. Each of James Walsh, Frank P. Filipps and Stephan R.
Peers, Directors of ICH, are Directors of IMH. In addition, since Messrs.
Tomkinson, Ashmore, Johnson and Endresen own all of the outstanding shares of
voting stock of ICCC, they have the right to elect all directors of ICCC and
the ability to control the outcome of all matters for which the consent of the
holders of the common stock of ICCC is required. Ownership of 100%
12
<PAGE>
of the common stock of ICCC entitles the owners thereof to an aggregate of 5%
of the economic interest in ICCC.
Effect of Non-Compete Agreement. The Company's operations may be affected by
the activities of IMH and ICIFC. Pursuant to a non-compete agreement (the
"Non-Compete Agreement") between IMH, ICIFC, ICH and ICCC which will become
effective upon the closing of this Offering, for a period of the earlier of
nine months from the closing of this Offering or the date upon which the
Company accumulates (for investment or sale) $300.0 million of Commercial
Mortgages and/or CMBSs, neither IMH nor ICIFC will originate or acquire any
Commercial Mortgages or CMBSs; however, this Agreement shall not preclude IMH
(either directly or through ICIFC) from purchasing any Commercial Mortgages or
CMBSs as permitted under the Right of First Refusal Agreement (as that term is
defined below). After the termination of the Non-Compete Agreement, and
subject to the Right of First Refusal Agreement, IMH, as a mortgage REIT, and
ICIFC, as its conduit operations, may compete with the operations of the
Company.
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, IMH, 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. Upon the closing of this
Offering, RAI, ICH, ICCC, IMH and ICIFC will enter 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 (other than IMH) will actually become parties to the Right of
First Refusal Agreement. Pursuant to this Agreement, RAI will agree that any
mortgage loan or mortgage-backed security investment opportunity (an
"Investment Opportunity") which is offered to it on behalf of either the
Company, IMH or any Affiliated REIT will first be offered to that entity (the
"Principal Party") whose initial primary business as described its initial
public offering documentation (the "Initial Primary Business") most closely
aligns with such Investment Opportunity. In addition, both IMH and ICIFC on
the one hand and ICH and ICCC on the other will agree that any Investment
Opportunity offered to either of them which falls outside the scope of its
Initial Primary Business should 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 REITs 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 IMH, ICIFC 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.
Unaffiliated Directors. It is the intention of the Company and IMH that any
agreements and transactions, taken as a whole, between the Company, on the one
hand, and IMH or its affiliates, on the other hand, are fair to both parties.
To minimize or avoid potential conflicts of interests, all Unaffiliated
Directors must 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. See "IMH Commercial
Holdings, Inc.," "RAI Advisors, LLC," "Relationships with Affiliates" and
"Certain Transactions."
COMPETITION IN THE COMMERCIAL MORTGAGE INDUSTRY MAY ADVERSELY AFFECT THE
COMPANY'S OPERATIONS
In purchasing Commercial Mortgages and issuing CMBSs, the Company will
compete with established mortgage conduit programs, investment banking firms,
savings and loan associations, banks, thrift and loan
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associations, finance companies, mortgage bankers, insurance companies, other
lenders and other entities purchasing mortgage assets. Continued consolidation
in this industry may also reduce the number of current correspondents to the
Conduit Operations, thus reducing the Company's potential customer base,
resulting in the Company purchasing a larger percentage of Commercial
Mortgages from a smaller number of correspondents. Such changes could
negatively impact the Conduit Operations. CMBSs issued through the Conduit
Operations will face competition from other investment opportunities available
to prospective investors. See "--Reduction in Demand for Commercial Mortgages
and the Company's Loan Products May Adversely Affect the Company's
Operations," "Business--Conduit Operations," and "Business--Competition."
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 the Company's
Commercial Mortgages will compete with the mortgaged properties of such types
to attract residents, retail correspondents, tenants and customers. The
leasing of real estate is highly competitive. The principal means of
competition are price, location and the nature and condition of the facility
to be leased. A borrower under a Commercial Mortgage competes with all lessors
and developers of comparable types of real estate in the area in which the
mortgaged property is located. Such lessors or developers could have lower
rentals, lower operating costs, more favorable locations or better facilities.
While a borrower under a Commercial Mortgage may renovate, refurbish or expand
the mortgaged property to maintain it and remain competitive, such renovation,
refurbishment or expansion may itself entail significant risk. Increased
competition could adversely affect income from the market value of the
mortgaged properties. In addition, the business conducted at each mortgaged
property may face competition from other industries and industry segments.
ORIGINATING AND INVESTING IN COMMERCIAL MORTGAGES MAY ENTAIL SUBSTANTIAL RISKS
GENERAL
The Company makes long-term investments in Commercial Mortgages.
Accordingly, during the time it holds Commercial Mortgages for investment, the
Company 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. In the event of a default on any Commercial Mortgage
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 owed on the
Commercial Mortgage. Defaulted Commercial Mortgages 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.
The profitable operation of multifamily properties and multitenant retail
office and industrial properties is also dependent on the performance and
viability of the property manager of such project. The property manager is
responsible for responding to changes in the local market, planning and
implementing the rental structure, including establishing appropriate rental
rates, and advising the borrower so that maintenance and capital improvements
can be carried out in a timely fashion all of which may impact the borrower's
ability to make payments under the related Commercial Mortgage, which may
adversely affect the timing and amount of payments received by the Company
with respect to such Commercial Mortgages. There is no assurance regarding the
performance of any operators and/or managers or persons who may become
operators and/or managers upon the expiration or termination of leases or
management agreements or following any default or foreclosure under a
Commercial Mortgage.
Commercial Mortgages generally are non-recourse to the borrower. In the
event of foreclosure on a Commercial Mortgage, the value of the property and
other collateral securing the Commercial Mortgage may be
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less than the principal amount outstanding on the Commercial Mortgage and the
accrued but unpaid interest. Also, there may be costs and delays involved in
enforcing rights of a property owner against tenants in default under the
terms of leases with respect to commercial properties, who may seek the
protection of the bankruptcy laws which can result in termination of lease
contracts all of which may adversely affect the timing and amount of payment
received by the Company with respect to such Commercial Mortgages.
VALUE OF COMMERCIAL MORTGAGES MAY BE ADVERSELY AFFECTED DUE TO
CHARACTERISTICS OF UNDERLYING COMMERCIAL PROPERTIES AND FACILITIES
Multifamily Properties. Adverse economic conditions, either local, regional
or national, may limit the amount of rent that can be charged and may result
in a reduction in timely rent payments or a reduction in occupancy levels.
Further, the costs of operating a property may increase, including the costs
of utilities and the costs of required capital expenditures. Occupancy and
rent levels may also be affected by construction of additional housing units,
local military base closings and national and local politics, including
current or future rent stabilization and rent control laws and agreements. In
addition, the level of mortgage interest rates may encourage tenants to
purchase single-family housing. All of these conditions and events may
increase the possibility that a borrower may be unable to meet its obligation
under the related Commercial Mortgage all of which may adversely affect the
timing and amount of payment received by the Company with respect to such
Commercial Mortgages.
Retail, Office and Industrial Properties. Income from and the market value
of properties which are retail or office properties would be adversely
affected if space in such properties could not be leased, if tenants are
unable to meet their lease obligations, if a significant tenant were not able
to make its lease payments or were to become a debtor in a bankruptcy case
under the United States Bankruptcy Code and the lease of the related property
was rejected, or if for any other reason rental payments could not be
collected. If tenant sales in the properties that contain retail space were to
decline, percentage rents may decline or tenants may be unable to pay their
base rent or delays in enforcing the lessor's rights could be experienced.
Repayment of the related Commercial Mortgages will be affected by the
expiration of space leases and the ability of the respective borrowers to
renew their leases or relet the space on comparable terms. Even if vacated
space is successfully relet, the costs associated with reletting, including
tenant improvements and leasing commissions (to the extent not reserved),
could be substantial and could reduce cash flow from the properties. Shopping
centers (and other retail properties) are, in general, affected by the health
of the retail industry, which is currently undergoing a consolidation and is
experiencing changes due to the growing market share of "off-price" and direct
mail retailing, and a particular shopping center may be adversely affected by
the bankruptcy, decline in drawing power, departure or cessation of operations
of an anchor tenant, a shift in consumer demand due to demographic changes
(for example, population decreases or changes in average age or income) and/or
changes in consumer preference.
Office properties may also be adversely affected if there is an economic
decline in the business operated by their tenants. The risk of such an adverse
effect is increased if revenue is dependent on a single tenant or if there is
a significant concentration of tenants in a particular business or industry.
Office properties generally require their owners to expend significant amounts
of cash to pay for general capital improvements, tenant improvements and costs
or re-leasing space. Also, office properties that are not equipped to
accommodate the needs of modern businesses may become functionally obsolete
and thus non-competitive.
Industrial and warehouse properties may be adversely affected by reduced
demand for industrial space occasioned by a decline in a particular industry
segment (for example, a decline in defense spending), and a particular
industrial or warehouse property that suited the needs of its original tenant
may be difficult to relet to another tenant or may become functionally
obsolete relative to newer properties.
Self-Storage Facilities. Self-storage properties are considered vulnerable
to competition, because both acquisition costs and break-even occupancy are
relatively low. The conversion of self-storage facilities to alternative uses
would generally require substantial capital expenditures. Thus, if the
operation of any of the self-storage properties becomes unprofitable due to
decreased demand, competition, age or improvements or other
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factors such that the borrower becomes unable to meet its obligations on the
related Commercial Mortgage, the liquidation value of that self-storage
property may be substantially less, relative to the amount owing on the
Commercial Mortgage, than would be the case if the self-storage property were
readily adaptable to other uses. Tenant privacy, anonymity and efficient
access may heighten environmental risks.
Congregate Care Facilities. Mortgaged properties that operate as hospitals
and nursing homes may present special risks to lenders due to the significant
governmental regulation of the ownership, operation, maintenance and financing
of health care institutions.
GEOGRAPHIC CONCENTRATION OF COMMERCIAL MORTGAGES MAY EXPOSE COMMERCIAL
MORTGAGE PORTFOLIO TO REGIONAL ECONOMIC FLUCTUATIONS
Although the Company anticipates no geographic diversification of the
properties underlying the Company's Commercial Mortgages, it does not expect
to 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). For the period from the Company's
commencement of operations to March 31, 1997, 58% and 42% of the Commercial
Mortgages purchased by the Company were secured by properties located in
Arizona and California, respectively. Concentration in any one area will
increase exposure of the Company's portfolio to the economic and natural
hazard risks associated with such area. Repayments by borrowers and the market
value of the mortgaged properties on the related Commercial Mortgage may be
affected by economic conditions generally or in regions where the mortgaged
properties are located, conditions in the real estate market where the
mortgaged properties securing the related Commercial Mortgage are located,
changes in governmental rules and fiscal policies, acts of nature, including
floods, tornadoes and earthquakes (which may result in uninsured losses), and
other factors which are beyond the control of the borrowers.
Management estimates that a majority of the Commercial Mortgages held by the
Company for portfolio investment will be secured by properties in California.
Certain parts of California have experienced an economic downturn in recent
years, particularly in areas of high defense industry concentration, and have
suffered the effects of certain natural hazards such as earthquakes, fires and
floods.
PREPAYMENT RESTRICTIONS ON COMMERCIAL MORTGAGES MAY BE INSUFFICIENT TO DETER
PREPAYMENTS
It is expected that substantially all of the Commercial Mortgages (other
than Commercial Mortgages associated with condominium conversions and other
multifamily properties) originated by the Company will contain provisions
restricting prepayments of such Commercial Mortgages. Such restrictions may
prohibit prepayments in whole or in part during a specified period of time
and/or require the payment of a prepayment charge in connection with the
prepayment thereof. Such prepayment restrictions can, but do not necessarily,
provide a deterrent to prepayments. Prepayment charges may be in an amount
which is less than the figure which would fully compensate for the difference
in yield upon reinvestment of the prepayment proceeds against its expected
yield to maturity of the Commercial Mortgage. There can be no assurance that
the borrower on a Commercial Mortgage which is being prepaid will have
sufficient financial resources to pay all or a portion of any required
prepayment charges, particularly where the prepayment results from
acceleration of the Commercial Mortgage following a payment default. No
assurance can be given that, at the time any prepayment charges are required
to be made in connection with a defaulted Commercial Mortgage, foreclosure
proceeds will be sufficient to make such payments. No representation or
warranty is made as to the effect of such prepayment charges on the rate of
prepayment of the related Commercial Mortgage. In addition, prepayments on
Commercial Mortgages held by the Long-Term Investment Operations during
periods of low or declining interest rates may decrease net income if the
Long-Term Investment Operations is unable to invest in Commercial Mortgages
with a comparable interest rate.
The enforceability, under the laws of a number of states, of provisions
similar to the provisions in the Commercial Mortgages providing for the
payment of prepayment charges upon a voluntary or involuntary prepayment is
unclear. In particular, no assurance can be given that, at any time that any
prepayment charge is
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required to be made in connection with an involuntary prepayment, the
obligation to pay such prepayment charge will be enforceable under applicable
law or, if enforceable, that foreclosure proceeds will be sufficient to make
such payment. Proceeds recovered in respect of any defaulted Commercial
Mortgage will, in general, be applied to cover outstanding property protection
expenses and servicing expenses and unpaid principal and interest prior to
being applied to cover any prepayment charge due in connection with the
liquidation of such Commercial Mortgage.
BALLOON PAYMENT AT MATURITY AND EXTENSION MATURITY INCREASES LENDER RISKS
The Company expects that a substantial percentage of its 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. Neither ICH nor any of its affiliates
is under any obligation to refinance any Commercial Mortgage. As of March 31,
1997, the Company was not aware of any material costs associated with balloon
payments to which it may be subject.
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. A "Phase I" environmental site assessment
will generally be performed on mortgaged properties with a loan balance over
$1.5 million. For loan balances below $1.5 million, the Company will require
the borrower to prepare an environmental worksheet. Depending on the results
of the worksheet, the Company may require a Phase I environmental site
assessment. For certain of the mortgaged properties, depending on the result
of the Phase I environmental site assessment, a further regulatory file review
and/or Phase II environmental site assessment will be performed.
ICCC's servicing guidelines require it to obtain an environmental site
assessment of a mortgaged property prior to acquiring title thereto or
assuming its operation. Such requirement effectively precludes enforcement of
the security for the related Commercial Mortgage until a satisfactory
environmental site assessment is obtained or until any required remedial
action is thereafter taken but will decrease the likelihood that ICH will
become liable for a material adverse environmental condition at the mortgaged
property. However, there can be no assurance that the servicing guidelines
will effectively insulate ICH from potential liability for a materially
adverse environmental condition at any mortgaged property.
On April 29, 1992, the United States Environmental Protection Agency ("EPA")
issued a final rule intended to protect lenders from liability under the
federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"). This rule was in response to a 1990 decision
of the United States Court of Appeals for the Eleventh Circuit, United States
v. Fleet Factors Corp., which narrowly construed the security interest
exemption under CERCLA to hold lenders liable if they had the capacity to
influence their borrower's management of hazardous waste. On February 4, 1994,
the United States Court of Appeals for the District of Columbia Circuit in
Kelley v. Environmental Protection Agency invalidated this EPA rule. As a
result of the Kelley case, the state of the law with respect to the secured
creditor exemption and the scope of permissible activities in which a lender
may engage to protect its security interest remain uncertain. EPA and the
Department of Justice ("DOJ"), however, issued a joint policy memorandum in
which these agencies announced that they would continue to follow the "Lender
Liability Rule" vacated by the Kelley case. These agencies indicated that
prior to its invalidation, several courts adhered to the terms of the "Lender
Liability Rule" or interpreted CERCLA in a manner consistent with the "Lender
Liability Rule." EPA and DOJ
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indicated in the September 22, 1995 memorandum that they intend to follow this
line of cases. This EPA/DOJ policy, however, would not necessarily affect the
potential for lender liability in actions by parties other than EPA or under
laws or legal theories other than CERCLA. If a lender is or becomes liable, it
can bring an action for contribution against the owner or operator who created
the environmental hazard, but that person or entity may be bankrupt or
otherwise judgment proof.
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 the
Company's Common Stock if such remedial costs were incurred. As of March 31,
1997, the Company was not aware of any environmental remedial costs to which
it may be subject.
INVESTING IN CMBSS MAY ENTAIL SUBSTANTIAL RISKS
GENERAL
CMBSs are securities that represent an interest in, or are secured by,
Commercial Mortgages. The CMBS market is newer and in terms of total
outstanding principal amount of issues is relatively small compared to the
total size of the market for residential mortgage-backed securities. CMBSs
have been issued in public and private transactions by a variety of agency and
private-label issuers. CMBSs have been issued using a variety of structures,
some of which were developed in the residential mortgage context, including
multi-class structures featuring senior and subordinated classes. Because of
the great diversity in characteristics of the Commercial Mortgages that secure
CMBSs, however, such securities have unique features and characteristics.
CMBSs may pay fixed or floating rates of interest. CMBSs generally have been
structured as mortgage pass-through securities or as mortgage pay-through
securities, although other structures are possible. With a typical mortgage
pass-through security, payment of principal and interest on the underlying
mortgages, following deduction of servicing expenses, is passed through
directly to holders of the securities. Mortgage pay-through securities
represent an obligation of the issuer, secured by a pool of mortgage loans
pledged as collateral for payments of principal and interest on the debt
instrument. The issuer's obligation to pay principal and interest under a
mortgage pay-through security is limited to the pledged collateral.
CMBSs generally are structured with some form of credit enhancement to
protect against potential losses on the underlying Commercial Mortgages.
Credit support increases the likelihood of timely and full payment of
principal and interest to the more senior class of CMBSs. Because of the
particular risks that accompany CMBSs, the amount of such credit support may
be substantial. Credit supports used in the CMBSs market has included issuer
guarantees, reserve funds, subordinated securities (which bear the risks of
default before more senior classes of securities of the same issuer), cross-
collateralization and over-collateralization.
In addition to credit support, CMBSs may be structured with liquidity
protections intended to provide assurance of timely payment of principal and
interest. Such protections may include surety bonds, letters of credit and
payment advance agreements. The value of a liquidity credit support provided
by a third party will depend on the continued ability of the party providing
the support to do so. Consequently, as part of the process of monitoring the
credit quality of a CMBSs, rating agencies will monitor the creditworthiness
of providers of related liquidity supports. Unanticipated demands for
liquidity assistance or other difficulties encountered by the liquidity
support provider that may adversely affect its ability to provide support to
an issue may lead to a decline in credit quality and rating downgrades. Delays
or difficulties encountered in servicing CMBSs may cause earlier reliance on
liquidity supports than was originally anticipated and also may lead to
downgrades in credit quality.
The CMBS market is relatively new and unseasoned. Rating agencies have not
had substantial experience over a long period through different economic
cycles in assigning ratings to CMBSs or monitoring previously rated CMBSs. The
process of rating CMBSs generally involves a more complicated credit analysis
than applies to ratings of residential mortgage-backed securities. The process
of servicing CMBSs also is more complicated than the servicing of residential
mortgage-backed securities, and difficulties encountered in servicing may
cause a rating agency to reevaluate or downgrade the credit quality of an
issue of CMBSs.
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VALUE OF INTEREST-ONLY, PRINCIPAL-ONLY, RESIDUAL INTEREST AND SUBORDINATED
SECURITIES SUBJECT TO FLUCTUATION
ICH's assets will 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 Commercial Mortgages held for sale by ICCC. ICH will record
its retained interest in ICCC's securitizations (including "interest-only,"
"principal-only" and subordinated securities) as investments classified as
trading securities and will record 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 that subordinated securities receive payments
of principal and interest after such payments on related senior securities and
the underlying Commercial Mortgages. The Company will estimate future cash
flows from these "interest-only," "principal-only," residual interest and
subordinated securities and value 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 therefore 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 Commercial 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. See "Business--Long-Term Investment
Operations--Investments in Commercial Mortgage-Backed Securities."
The risks of investing in CMBSs 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 CMBSs may cause greater losses and,
therefore, greater resort to credit support than was originally anticipated,
and may cause a rating agency to downgrade a security.
The Company also bears risk of loss on any CMBSs it purchases in the
secondary 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.
OPERATIONAL RISKS
REDUCTION IN DEMAND FOR COMMERCIAL MORTGAGES AND THE COMPANY'S LOAN PRODUCTS
MAY ADVERSELY AFFECT THE COMPANY'S OPERATIONS
The availability of Commercial Mortgages meeting the Company's criteria is
dependent upon, among other things, the size and level of activity in the
commercial and multi-family real estate lending market. The size and level of
activity in the commercial and multifamily real estate lending market depend
on various factors,
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including the level of interest rates, regional and national economic
conditions and inflation and deflation in commercial and multifamily property
values, as well as the general regulatory and tax environment as it relates to
mortgage lending. See "Business--Regulation." To the extent the Company is
unable to obtain sufficient Commercial Mortgages meeting its criteria, the
Company's business will be adversely affected.
In general, lower interest rates prompt greater demand for Commercial
Mortgages, because more entities can afford to purchase commercial and multi-
family properties, and refinancing transactions increase. However, if low
interest rates are accompanied by a weak economy and high unemployment, demand
for Commercial Mortgages may decline. Conversely, higher interest rates and
decreased levels of commercial and multi-family activity may lower Commercial
Mortgage purchase volume levels, resulting in decreased economies of scale and
higher costs per unit, reduced fee income, smaller gains on the sale of
Commercial Mortgages and lower net income.
NET INTEREST INCOME MAY BE ADVERSELY AFFECTED BY INTEREST RATE FLUCTUATIONS;
COMMERCIAL MORTGAGES SUBJECT TO PREPAYMENTS.
The Company's earnings 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 Commercial Mortgages at a fixed price and the time the Company sells
or securitizes those Commercial Mortgages. An increase in interest rates will
generally result in a decrease in market value of Commercial Mortgages 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 borrowers from refinancing
Commercial Mortgages or borrowing to purchase or expand a multifamily building
or office complex or other type of commercial mortgage property, thus
decreasing the volume of Commercial Mortgages available to be purchased by the
Conduit Operations. In addition, an increase in short-term interest rates may
decrease or eliminate or, in certain circumstances, cause to be negative, the
Company's net interest spread during the accumulation of Commercial Mortgages
held for sale or the net interest spread on Commercial Mortgages 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 earnings on any
servicing portfolio held by the Company to the extent prepayments on the
underlying Commercial Mortgages increased as long-term interest rates
declined. See "--Dependence on Securitizations May Create Liquidity Risks."
In conducting its Long-Term Investment Operations, a significant portion of
the Company's commercial mortgage assets held for long-term investment consist
of Commercial Mortgages that bear interest at an adjustable rate ("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. Commercial
Mortgages owned by the Company that are ARMs or CMBSs backed by ARMs are
subject to periodic interest rate adjustments based on objective indices such
as the Prime Rate, CMT Index or LIBOR. Interest rates on the Company's
borrowings are also based on short-term indices. To the extent any of the
Company's commercial mortgage assets are financed with borrowings bearing
interest based on an index different from that used for the related commercial
mortgage assets, so-called "basis" interest rate risk may arise. In such
event, if the index used for the subject commercial 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 commercial 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
loss because the interest rates on borrowings could adjust faster than the
interest rates on the Company's Commercial Mortgages that are ARMs or CMBSs
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backed by ARMs. Moreover, ARMs are typically subject to periodic and lifetime
interest rate caps, which limit the amount an ARMs interest rate can change
during any given period. The Company's borrowings are not subject to similar
restrictions. Hence, in a period of rapidly increasing interest rates, the
Company could also experience a decrease in net interest income or a net 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 Commercial Mortgages that are ARMs and CMBSs 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 Commercial Mortgages that are ARMs than is required to pay
interest on the related borrowings, which will not have such payment caps and
may result in an increased level of default on such Commercial Mortgages. 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 loss
during periods of rapidly rising interest rates, which could negatively impact
the market price of the Company's Common Stock. 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 Commercial Mortgages or
CMBSs backed by fixed rate mortgages, the Company may also be subject to
interest rate risks. To the extent that any 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" CMBSs and other types of
CMBSs purchased at a discount. If the Company were required to dispose of any
"principal-only" CMBSs 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" CMBSs, servicing
fees receivable, and other Commercial Mortgages and CMBSs 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. See "--Borrowings and Substantial Leverage Have the Potential
of Net Interest and Operating Losses; Liquidity."
Although the Company's Commercial Mortgages that are ARMs generally contain
lock-outs on prepayments and prepayment penalties to reduce exposure to
prepayments, mortgage prepayment rates vary from time to time and may cause
changes in the amount of the Company's net interest income. Prepayments on
Commercial Mortgages that are ARMs and CMBSs backed by ARMs generally increase
when fixed mortgage interest rates fall below the then-current interest rates
on such Commercial Mortgages and generally decrease when fixed mortgage
interest rates exceed the then-current interest rate on such Commercial
Mortgages. Prepayment experience also may be affected by the geographic
location of the property securing the Commercial Mortgages, the credit grade
of the Commercial Mortgage, the assumability of the Commercial Mortgage, the
ability of the borrower to convert to a fixed-rate loan, conditions in the
Commercial Mortgage and financial markets and general economic conditions. In
addition, prepayments on ARMs are affected by conditions in the fixed-rate
mortgage market. Furthermore, the existence of balloon payments may result in
obligors refinancing their Commercial Mortgage earlier than if such mortgages
fully amortize over the maturity of the Commercial Mortgage. See "Business--
Conduit Operations."
Prepayments of Commercial Mortgages could affect the Company in several
adverse ways. A substantial portion of the ARMs purchased by the Company
(either directly as Commercial Mortgages or through CMBSs backed by ARMs) will
be newly originated within six months of purchase and generally may 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. In the event that the Company experiences a
significant level of prepayments on Commercial Mortgages that are ARMs in a
declining interest rate environment, the Company could experience a
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drop in net interest income due to an inability to reinvest such prepayments
in comparable Commercial Mortgages or CMBSs.
The prepayment of any Commercial Mortgages that had been purchased at a
premium by the Company would result in the immediate write-off of any
remaining capitalized premium amount and a consequent decrease in the
Company's interest income. The Conduit Operations' strategy at the present
time is to originate or purchase Commercial Mortgages on a "servicing
released" basis (i.e., the Company will acquire both the Commercial Mortgages
and the rights to service them). This strategy requires payment of a higher
purchase price by the Company for the Commercial Mortgages, and to the extent
a premium is paid, the Company is more exposed to the adverse effects of early
prepayments of the Commercial Mortgages, as described above, and may not
recognize a significant level of gain or may experience a loss with respect to
its servicing operations.
BORROWINGS AND SUBSTANTIAL LEVERAGE HAVE THE POTENTIAL OF NET INTEREST AND
OPERATING LOSSES; LIQUIDITY
The Company anticipates employing a financing strategy to increase the size
of its investment portfolio by borrowing a substantial portion (up to
approximately 88%, depending on the nature of the underlying asset) of the
market value of substantially all of its investments in Commercial Mortgages
and CMBSs. The Company initially intends to maintain a ratio of equity capital
(book value of stockholders' equity) to total assets of approximately 15%. The
Company has elected to utilize CMO borrowings to a substantial degree because
CMOs are more consistent with ICH'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 ICCC 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.
A majority of other Company borrowings are collateralized, currently in the
form of warehouse line agreements. In the future, such borrowings may be
collateralized in the form of reverse repurchase agreements. Both forms of
collateralization are based on the market value of the Company's assets
pledged to secure the specific borrowings. The cost of borrowings under such
agreements corresponds to the referenced interest rate (e.g., the Prime Rate,
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 Commercial Mortgages and CMBSs financed with borrowed funds fail to cover
the cost of the borrowings, the Company will experience net interest losses.
See "Business--Long-Term Investment Operations."
The use of CMOs as financing vehicles tends to increase the Company's
leverage as Commercial Mortgages 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.
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 Commercial Mortgages 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 Commercial
Mortgages and investment securities available for
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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 material adverse
effect on the Company.
Certain of the Company's Commercial Mortgages 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 Commercial Mortgages to re-establish the ratio of
the amount of the borrowing to the value of the collateral). The Company could
be required to sell Commercial Mortgages under adverse market conditions in
order to maintain liquidity. If these sales were made at prices lower than the
carrying value of its Commercial Mortgages, 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. See
"Business--Long-Term Investment Operations--Financing."
To the extent the Company is compelled to liquidate Commercial Mortgages or
CMBSs classified as Qualified REIT Assets to repay borrowings, ICH may be
unable to comply with the REIT asset and income tests, possibly jeopardizing
ICH's status as a REIT. Gain from the sale or other disposition of such assets
may be included under the 30% gross income test, which requires, in general,
that 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 represent less than
30% of the REIT's gross income for each taxable year. The Code does not
provide for any mitigating provisions with respect to the 30% gross income
test. Accordingly, if ICH failed to meet the 30% gross income test, its status
as a REIT would terminate automatically. See "Federal Income Tax
Considerations--Taxation of ICH--Income Tests."
The REIT provisions of the Code require ICH to distribute to its
stockholders substantially all of its taxable income. As a result, such
provisions restrict the Company's ability to retain earnings and replenish the
capital committed to its business activities.
The Company's liquidity is also affected by its ability to access the debt
and equity capital markets. To the extent that the Company is unable to
regularly access such markets, the Company could be forced to sell assets at
unfavorable prices or discontinue various business activities in order to meet
its liquidity needs. As a result, any such inability to access the capital
markets could have a negative impact on the Company's earnings.
Substantially all of the assets of the Conduit Operations will be pledged to
secure the repayment of reverse repurchase agreements or other borrowings. In
addition, substantially all of the Commercial Mortgages that the Company has
originated or purchased and will in the future originate or purchase 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 originate or purchase Commercial Mortgages or other investments may be
the only unpledged assets available to unsecured creditors and stockholders in
the event of liquidation of the Company. ICH, as an independent entity, has
secured a $200.0 million warehouse line agreement. For a description of this
facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON SECURITIZATIONS MAY CREATE LIQUIDITY RISKS
In connection with its Conduit Operations, ICCC will engage in
securitizations and bulk whole loan sales. In connection with the issuance of
CMBSs by ICCC, such securities are expected to be non-recourse to ICCC,
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except in the case of a breach of the standard representations and warranties
made by ICCC when Commercial Mortgages are securitized. While ICCC may have
recourse to the correspondents of Commercial Mortgages for any such breaches,
there can be no assurance of such correspondents' abilities to honor their
respective obligations. ICCC may engage in bulk whole loan sales pursuant to
agreements that provide for recourse by the purchaser against ICCC (and, in
certain cases, ICH as guarantor) in the event of a breach of representation or
warranty made by ICCC, any fraud or misrepresentation during the Commercial
Mortgage origination process or upon early default on such Commercial
Mortgages. ICCC has generally limited the remedies of such purchasers to the
remedies ICCC receives from the persons from whom ICCC purchased such
Commercial Mortgages. However, in some cases, the remedies available to a
purchaser of Commercial Mortgages from ICCC are broader than those available
to ICCC against its correspondents, and should a purchaser exercise its
remedies against ICCC, ICCC may not always be able to enforce whatever
remedies ICCC may have against its correspondents. ICCC may from time to time
provide provisions for loan losses related to estimated losses from the breach
of a standard representation and warranty.
The Company plans on securitizing a substantial portion of the Commercial
Mortgages it originates and purchases. ICCC expects to rely significantly upon
securitizations to generate cash proceeds for repayment of any warehouse lines
and to create credit availability. Further, gains on sales from ICCC's
securitizations are expected to represent a significant portion of ICCC's
earnings. Several factors are expected to affect the Company's ability to
complete securitizations of its Commercial Mortgages, including conditions in
the securities markets generally, conditions in the CMBSs market specifically,
the credit quality of the Commercial Mortgages originated or purchased by the
Conduit Operations, the volume of ICCC's Commercial Mortgage originations and
purchases, and the Company's ability to obtain credit enhancement. If ICCC
were unable to securitize profitably a sufficient number of its Commercial
Mortgages in a particular financial reporting period, then the Company'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 ICCC's interest rate risk by increasing the
warehousing period for its Commercial Mortgages.
The Company also expects to rely on securitizations in the form of CMO
borrowings to finance a substantial portion of the Commercial Mortgages held
by the Long-Term Investment Operations. Any reduction in the Company's ability
to complete securitizations would require the Company to utilize other sources
of financing which may be on less favorable terms.
In connection with its securitizations the Company will endeavor to sell all
securities subjecting it to a first loss risk. However, the market for such
securities in securitizations of Commercial Mortgages is generally limited.
Such investment decision may subject the Company to a greater degree of credit
risk than in traditional securitizations involving residential mortgage loans.
As a result, the Company may be required to hold securities subjecting the
Company to a first loss risk in order to effectuate its securitizations of
Commercial Mortgages.
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 ICCC, enters into transactions designed to hedge interest rate risks,
which may include mandatory and optional forward selling of Commercial
Mortgages or CMBSs, U.S. Treasuries, 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 Company based on various factors, including
market conditions and the expected volume of Commercial Mortgage originations
and purchases, and there have been no limitations placed on the Company's use
of certain
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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. As of March 31, 1997, the
Company was not aware of any material losses associated with its hedging
operations. See "Business--Hedging."
COMMERCIAL MORTGAGE SERVICING RIGHTS SUBJECT TO VOLATILITY
When ICCC purchases Commercial Mortgages that include the associated
servicing rights or originates Commercial Mortgages, the allocated cost of the
servicing rights will be reflected on its financial statements as Commercial
Mortgage Servicing Rights ("CMSRs"). CMSRs are amortized in proportion to, and
over the period of, expected future net servicing income.
SFAS No. 125 requires that a portion of the cost of acquiring a mortgage
loan be allocated to the mortgage loan servicing rights based on its fair
value relative to the loan as a whole. To determine the fair value of the
servicing rights created, ICCC 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, ICCC 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 Commercial Mortgage, a prepayment
rate, a default rate and a discount rate commensurate with the risks involved.
CMSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the
time CMSRs are recorded could result in a decline in the fair value of the
CMSRs below their carrying value requiring a provision to increase the CMSRs'
valuation allowance. The rate of prepayment of Commercial Mortgages 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 Commercial Mortgage prepayment rates may vary depending on
the particular type of Commercial Mortgage. 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 ICCC's Commercial
Mortgages, and other considerations. There can be no assurance of the accuracy
of the Company's prepayments estimates. If actual prepayments with respect to
loans serviced occur more quickly than were projected at the time such
Commercial Mortgages were sold, the carrying value of the CMSRs may have to be
reduced through a provision recorded to increase the CMSRs' valuation
allowance in the period the fair value declined below the CMSRs' carrying
value. If actual prepayments with respect to Commercial Mortgages occur more
slowly than estimated, the carrying value of CMSRs would not increase,
although total income would exceed previously estimated amounts and the
related valuation allowances, if any, could be unnecessary.
DELINQUENCY RATIOS AND COMPANY PERFORMANCE MAY BE AFFECTED BY CONTRACTED SUB-
SERVICING
ICCC currently contracts for the sub-servicing of all Commercial Mortgages
it originates or purchases and holds for sale or investment with third-party
sub-servicers. As with any external service provider, ICCC is subject to risks
associated with inadequate or untimely services. Many of ICCC's borrowers
require notices and reminders to keep their Commercial Mortgages current and
to prevent delinquencies and foreclosures. A substantial increase in the
ICCC's delinquency rate or foreclosure rate could adversely affect its ability
to access profitably the capital markets for its financing needs, including
future securitizations. ICCC 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. See "Business--Servicing."
Each of ICCC's sub-servicing agreements with its third-party sub-servicers
are expected to provide that if ICCC terminates the agreement without cause
(as defined in the agreement), ICCC may be required to pay the third-party
sub-servicer a fee. Further, one such agreement currently provides that ICCC
shall pay the third-party sub-servicer a transfer fee per Commercial Mortgage
for any Commercial Mortgage which ICCC transfers to another sub-servicer
without terminating the agreement. Depending upon the size of ICCC's loan
portfolio sub-serviced at any point in time, the termination penalty that ICCC
would be obligated to pay upon termination without cause, may be substantial.
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ICCC intends to subcontract with sub-servicers to service the Commercial
Mortgages for any of the Company's public securitizations. With respect to
such Commercial Mortgages, the related pooling and servicing agreements would
permit ICCC 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 but not at the option of the
Company. If, as a result of a sub-servicer's failure to perform adequately,
ICCC were terminated as servicer of a securitization, the value of any
servicing rights held by ICCC would be adversely impacted. In addition, if a
new sub-servicer were selected with respect to any such securitization, the
change in sub-servicing may result in greater delinquencies and losses on the
related loans, which would adversely impact the value of any "interest-only,"
"principal-only," residual interest and subordinated securities held by the
Company in connection with such securitization.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT OF 1990 MAY BE
SUBSTANTIAL
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. To the extent a mortgaged property
securing one of the Company's Commercial Mortgages does not comply with the
ADA, ICH or the related borrower, as the case may be, is likely to incur costs
of complying with the ADA. In addition, noncompliance could result in the
imposition of fines by the federal government or an award of damages to
private litigants. As of March 31, 1997, the Company was not aware of any
material costs associated with compliance with the ADA to which it may be
subject.
OTHER CONSIDERATIONS
In connection with a commercial or multifamily property, the property owner
may utilize tenant leases, including anchor tenant leases, which contain
certain provisions that require the tenant to attorn to (that is, recognize as
landlord under the lease) a successor owner of the property following
foreclosure. Some of such leases, including anchor tenant leases, may be
either subordinate to the liens created by the Commercial Mortgages purchased
by the Company or else contain a provision that requires the tenant to
subordinate the lease if the mortgagee agrees to enter into a non-disturbance
agreement. In some states, if tenant leases are subordinate to the liens
created by the Commercial Mortgages and such leases do not contain attornment
provisions, such leases may terminate upon the transfer of the property to a
foreclosing lender or purchaser at foreclosure. Accordingly, in the case of
the foreclosure of a mortgaged property located in such a state and leased to
one or more desirable tenants under leases that do not contain attornment
provisions, such mortgaged property could experience a further decline in
value if such tenants' leases were terminated (e.g., if such tenants were
paying above-market rents). If a Commercial Mortgage is subordinate to a
lease, the lender will not (unless it has otherwise agreed with the tenant)
possess the right to dispossess the tenant upon foreclosure of the property,
and if the lease contains provisions inconsistent with the Commercial Mortgage
(e.g., provisions relating to application of insurance proceeds or
condemnation awards), the provisions of the lease will take precedence over
the provisions of the Commercial Mortgage. Part of the foregoing could have a
material adverse effect on the value of the Commercial Mortgage.
Certain of Commercial Mortgages may be secured in part by an assignment of
leases and rents pursuant to which the borrower typically assigns its right,
title and interest as landlord under the leases on the related mortgaged
property and the income derived therefrom to the lender as further security
for the related Commercial Mortgage, while retaining a license to collect
rents for so long as there is no default. In the event the borrower defaults,
the license terminates and the lender is entitled to collect rents. Such
assignments are typically not perfected as security interests prior to actual
possession of the cash flows. Some state laws may require that the lender take
possession of the mortgage property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect to the
borrower, the lender's ability to collect the rents may be adversely affected.
SUBORDINATE INDEBTEDNESS MAY AFFECT VALUE OF UNDERLYING COMMERCIAL MORTGAGES
Substantially all of the Company's Commercial Mortgage documents either
permit the borrower or do not prohibit the borrower from entering into
subordinate indebtedness. Where subordinate indebtedness is permitted,
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the subordinate lender is not required to enter into an intercreditor
agreement; however, in many cases there are preconditions (such as minimum
combined debt service coverage ratios) which must be satisfied prior to the
mortgagor being permitted to incur subordinate indebtedness. The encumbrance
of a property by subordinate indebtedness without execution of an
intercreditor agreement increases the risk to the senior lienholder posed by
the subordinate debt. In such cases, there would be no restriction on the
junior lienholder's exercise of remedies. The presence of subordinate debt can
hinder conveyance to the senior lienholder by deed in lieu of foreclosure,
effectively forcing foreclosure. Similarly, the presence of subordinate debt
can hinder loan modification due to the concern that modification may corrupt
subordination and place the subordinate lender in pari passu status with the
senior lienholder in whole or in part.
JUNIOR MORTGAGES MAY AFFECT COMPANY'S RIGHTS
In certain circumstances, Commercial Mortgages originated by the Company may
be secured by junior mortgages which are subordinate to senior mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
ICH, as beneficiary under a junior mortgage, are subordinate to those of the
mortgagee or beneficiary under the senior mortgage or deed of trust, including
the prior rights of the senior mortgagee or beneficiary to receive rents,
hazard insurance and condemnation proceeds and to cause the mortgaged property
securing the junior mortgage unless the ICH's subordinate interest in the
mortgaged property in foreclosure litigation or satisfies the defaulted senior
loan.
LACK OF EXPERIENCE OF THE MANAGER IN MANAGING A COMMERCIAL MORTGAGE REIT MAY
HAVE AN ADVERSE EFFECT ON THE COMPANY
The Company will be dependent for the monitoring of its day-to-day
operations, including, but not limited to, the selection, structuring and
monitoring of its assets and associated borrowings and on the diligence and
skill of the officers and employees of the Manager. The Manager is a recently
formed entity with no significant assets and no prior history of operations;
the Manager has not previously acted as a Manager or advisor with respect to
any other company. Although all of the persons who will become officers of the
Manager upon the closing of this Offering have experience in the operations of
a REIT due to their involvement as officers of IMH, none of such persons has
any prior experience in managing a Commercial Mortgage REIT. See "RAI
Advisors, LLC" for further descriptions of the business experience of key
management personnel.
ADVERSE CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS MAY INCLUDE ICH BEING
SUBJECT TO TAXATION AS A REGULAR CORPORATION
ICH has operated and intends to continue to operate so as to qualify as a
REIT under the Code. Although ICH believes that it has operated and will
continue to operate in such a manner, no assurance can be given that ICH 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 ICH's control. For example, in order to
qualify as a REIT, at least 95% of ICH's gross income in any year must be
derived from qualifying sources, and ICH must pay distributions to
stockholders aggregating annually at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding
net capital gains). No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of such qualification. At the closing of
the Offering, ICH will receive an opinion from Latham & Watkins, tax counsel
to ICH, that, commencing with ICH's taxable year ending December 31, 1997, ICH
has been organized in conformity with the requirements for qualification as a
REIT, and its proposed method of operation has enabled and will enable it to
meet the requirements for qualification and taxation as a REIT under the Code.
See "Federal Income Tax Considerations--Taxation of ICH" and "Legal Matters."
Such legal opinion is based on various assumptions and factual representations
by ICH regarding ICH's ability to meet the various requirements for
qualification as a REIT, and no assurance can be given that actual operating
results will meet these requirements. Such legal opinion is not binding on the
Internal Revenue Service (the "Service") or any court.
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Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the value of the
REIT's total assets on certain testing dates. See "Federal Income Tax
Considerations--Taxation of ICH--Requirements for Qualification." ICH believes
that the aggregate value of the securities of ICCC held by ICH have been and
will continue to be less than 5% of the value of ICH's total assets. In
rendering its opinion as to the qualification of ICH as a REIT, Latham &
Watkins is relying on the representation of ICH regarding the value of its
securities in ICCC.
If ICH were to fail to qualify as a REIT in any taxable year, ICH would be
subject to federal income tax (including any applicable alternative minimum
tax) on its 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, ICH 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 earnings of ICH available for investment or
distribution to stockholders because of the additional tax liability to ICH
for the years involved. In addition, distributions to stockholders would no
longer be required to be made. See "Federal Income Tax Considerations--
Taxation of ICH--Requirements for Qualification."
Even if ICH maintains its REIT status, it may be subject to certain federal,
state and local taxes on its income. For example, if ICH has net income from a
prohibited transaction, such income will be subject to a 100% tax. See
"Federal Income Tax Considerations--Taxation of ICH." In addition, the net
income, if any, from the Conduit Operations conducted through ICCC is subject
to federal income tax at regular corporate tax rates. See "Federal Income Tax
Considerations--Other Tax Consequences."
POTENTIAL CHARACTERIZATION OF DISTRIBUTIONS AS UBTI MAY ADVERSELY AFFECT ICH
TAX STATUS; POTENTIAL ADVERSE RESULTS IN THE EVENT OF TAXATION OF TAX-
EXEMPT INVESTORS COULD SUBJECT THE COMPANY TO INCREASED TAXATION
In the event that (i) the Company is subject to the rules relating to
taxable mortgage pools (discussed below) or the Company is a "pension-held
REIT," (ii) a tax-exempt stockholder has incurred indebtedness to purchase or
hold its Common Stock or is not exempt from federal income taxation under
certain special sections of the Code, or (iii) the residual REMIC interests
acquired by the Company generate "excess inclusion income," distributions to
and, in the case of a stockholder described in (ii), gains realized on the
sale of Common Stock by, such tax-exempt stockholder may be subject to federal
income tax as unrelated business taxable income as defined in section 512 of
the Code ("UBTI"). See "Federal Income Tax Considerations."
CLASSIFICATION AS A TAXABLE MORTGAGE POOL COULD SUBJECT THE COMPANY TO
INCREASED TAXATION
A REIT that incurs debt obligations with two or more maturities and which
are secured by mortgage loans or mortgage-backed securities may be classified
as a "taxable mortgage pool" under the Code if payments required to be made on
such debt obligations bear a relationship to the payments received on such
assets. If all or a portion of the Company was treated as a taxable mortgage
pool, the Company's status as a REIT would not be impaired, but a portion of
the taxable income generated by the Company may, under regulations to be
issued by the Treasury Department, be characterized as "excess inclusion"
income and allocated to the stockholders. Any such excess inclusion income (i)
would not be allowed to be offset by the net operating losses of a
stockholder, (ii) would be subject to tax as UBTI to a tax-exempt stockholder
(iii) would be subject to the application of federal income tax withholding at
the maximum rate (without reduction for any otherwise applicable income tax
treaty) with respect to amounts allocable to foreign stockholders, and (iv)
would be taxable (at the highest corporate tax rate) to a REIT, rather than
its stockholders, to the extent allocable to shares of stock held by
disqualified organizations (generally, tax-exempt entities not subject to tax
on unrelated business income, including governmental organizations). See
"Federal Income Tax Considerations."
The Company intends to enter into reverse repurchase agreements, warehouse
lines agreement, CMOs and other secured lending transactions pursuant to which
the Company may borrow funds with differing maturity dates which are cross-
collateralized by specific Commercial Mortgages or CMBSs. The Company intends
to take
28
<PAGE>
the position that its existing financing arrangements do not create a taxable
mortgage pool. No assurances can be given, however, that the IRS might not
successfully maintain that the Company's financing arrangements constitute a
taxable mortgage pool. In addition, the Company may enter into arrangements
creating such excess inclusion income in the future.
COMPANY'S OPERATIONS MAY BE ADVERSELY AFFECTED IF 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 maintain
at least 55% of its assets directly in Commercial Mortgages, qualifying pass-
through certificates and certain other Qualifying Interests in real estate. In
addition, unless certain CMBSs represent all the certificates issued with
respect to an underlying pool of Commercial Mortgages, such CMBs may be
treated as securities separate from the underlying Commercial Mortgages and,
thus, may not qualify as Qualifying Interests for purposes of the 55%
requirement. The Company's ownership of certain Commercial Mortgages 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, 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 Commercial Mortgages and CMBSs than would otherwise be the case and may
be precluded from acquiring certain types of such mortgage assets whose yield
is somewhat higher than the yield on assets that could be purchased in a
manner consistent with the exemption. The net effect of these factors will be
to lower at times the Company's net interest income, although the Company does
not expect the effect to be material. If the Company fails to qualify for
exemption from registration as an investment company, its ability to use
leverage would be substantially reduced, and it would be unable to conduct its
business as described herein. Any such failure to qualify for such exemption
could have a material adverse effect on the Company.
FUTURE REVISIONS IN POLICIES AND STRATEGIES AT THE DISCRETION OF THE BOARD OF
DIRECTORS MAY BE EFFECTED WITHOUT STOCKHOLDER CONSENT
The Board of Directors, including a majority of the Unaffiliated Directors,
has established the investment policies and operating policies and strategies
set forth in this Prospectus as the investment policies and operating policies
and strategies of the Company. With respect to other matters, the Company may,
in the future, except as described in this Prospectus 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
Common Stock outstanding, which may result in the reduction of the market
price of the Common Stock.
29
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of shares of Common Stock offered hereby will incur an immediate
and substantial dilution of approximately 16.3% or $2.45 of their investment
in the shares of Common Stock. The pro forma net tangible book value of the
Company's Common Stock after this Offering will be approximately $12.55 per
share. See "Dilution" and "Capitalization."
RISK OF FLUCTUATION IN MARKET PRICE OF THE COMPANY'S COMMON STOCK
Prior to this Offering, there has not been a public market for the Common
Stock, and there can be no assurance that a regular trading market for the
shares of Common Stock offered hereby will develop or, if developed, that any
such market will be sustained. In the absence of a public trading market, an
investor may be unable to liquidate his investment in the Company. There can
be no assurance that the price at which the shares of Common Stock will sell
in the public market after the Offering will not be lower than the price at
which they are sold by the Underwriters. While there can be no assurance that
a market for the Company's Common Stock will develop, the Company has applied
to list the Common Stock on the American Stock Exchange under the symbol
"ICH."
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF THE
COMPANY'S COMMON STOCK
Sale of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Common Stock. The 5,000,000 Shares of Common Stock offered
hereby will be immediately eligible for sale in the public market without
restriction. The remaining 875,831 shares of Common Stock to be outstanding
upon the closing of this Offering, will be restricted in nature; 300,000 of
such Shares will not be saleable pursuant to Rule 144 or otherwise until
February 1998 and the balance of such shares will not be saleable until March
1998. In addition, upon the closing of this Offering, IMH will also hold
818,169 shares of ICH Class A Stock. The number of shares of ICH Common Stock
and ICH Class A Stock held by IMH, and the eligibility of such shares for
future sales, will be affected by future issuances of ICH Common Stock by the
Company and dispositions of shares of ICH Common Stock by IMH. The Company,
IMH and other stockholders of the Company have agreed with the Underwriters
that, for a period of 120 days following the commencement of this Offering,
they will not sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares (other than pursuant to employee
plans or the DRP) without the prior written consent of PaineWebber
Incorporated. See "Shares Eligible for Future Sale." Stock options for 190,000
shares of Common Stock will be granted to executive officers, employees and
Directors of the Company upon the closing of this Offering exercisable at the
IPO Price, none of which, except in the event of a change of control of the
Company, will be exercisable until 1998; an estimated additional 310,000
shares of Common Stock are reserved for future issuance after the closing date
of this Offering pursuant to the Company's Stock Option and Awards Plan. The
shares reserved for issuance pursuant to the Company's Stock Option and Awards
Plan will be increased or decreased to an amount equal to 10% of the Shares
sold in this Offering, subject to a minimum of 400,000 shares. The Company
intends to register under the Securities Act shares reserved for issuance
pursuant to the DRP and the Stock Option and Awards Plan. See "Dividend
Reinvestment Plan," "IMH Commercial Holdings, Inc.--Stock Option and Awards
Plan" and "Description of Capital Stock."
CLASSIFICATION AND RECLASSIFICATION OF STOCK COULD ADVERSELY AFFECT COMMON
STOCKHOLDERS; ISSUANCE OF PREFERRED STOCK COULD ADVERSELY AFFECT COMMON
STOCKHOLDERS; RESTRICTIONS ON OWNERSHIP OF COMMON STOCK MAY INHIBIT MARKET
ACTIVITY; POSSIBLE ANTI-TAKEOVER EFFECT MAY DETER TAKEOVER OF THE COMPANY
ICH's Articles of Incorporation and the amendments thereto (the "Charter")
authorize the Board of Directors to issue shares of Preferred Stock, to
reclassify any unissued shares of Common Stock and to classify any unissued
shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock into one or more classes or series of
stock. Unissued shares of Preferred Stock may be issued from time to time in
one or more classes or series of stock with such designations, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or
30
<PAGE>
conditions of redemption as shall be determined by the Board of Directors,
subject to the provisions of the Charter regarding restrictions on transfer of
stock. Preferred Stock is available for possible future financing of, or
acquisitions by, ICH and for general corporate purposes without further
stockholder authorization. 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 ICH or other
transaction that might involve a premium price for holders of Common Stock or
otherwise be in their best interest. The Preferred Stock, if issued, may have a
preference on dividend payments which could reduce the assets available to ICH
to make distributions to the common stockholders. See "Description of Capital
Stock."
In order for ICH to maintain its qualification as a REIT under the Code not
more than 50% in value of the outstanding shares of ICH'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 a REIT election is made, ICH'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 ICH against the risk of losing REIT status
due to a concentration of ownership among its stockholders, the Charter limits
actual or constructive ownership of the outstanding shares of Common Stock by
any person to 9.8% (the "Ownership Limit") (in value or in number of shares,
whichever is more restrictive) of the then outstanding shares of Common Stock.
See "Description of 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 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 ICH's status
as a REIT. The Board of Directors may from time to time increase or, subject to
certain limitations, decrease the Ownership Limit. Actual or constructive
ownership of shares of Common Stock in excess of the Ownership Limit, or, with
the consent of the Board of Directors, such other limit, 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 in 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 payable to
the intended transferee will be paid immediately to the charitable beneficiary.
In addition, shares of Common Stock held in trust shall be deemed to have been
offered for sale to ICH, 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
ICH, or its designee, accepts such offer. ICH shall have the right to accept
such offer until the trustee has sold the shares held in the trust. Upon such a
sale to ICH, 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--Repurchase of Shares
and Restrictions on Transfer" for additional information regarding the
Ownership Limit.
These provisions may inhibit market activity and the resulting opportunity
for ICH'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 ICH an unsuitable investment vehicle for any
person seeking to obtain ownership of more than 9.8% of the outstanding shares
of Common Stock.
In addition, certain provisions of the Maryland General Corporation Law
("MGCL") and of ICH'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 might 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."
31
<PAGE>
USE OF PROCEEDS
The net proceeds of this Offering are estimated to be $84.0 million (or
$94.5 million if the Underwriters' over-allotment option is exercised in full,
in each case assuming a $15.00 per share offering price). It is expected that
approximately 70% and 25% of such proceeds will be used to provide funding for
the Company's Long-Term Investment Operations and its Conduit Operations,
respectively. The balance of such proceeds will be used for working capital
and general corporate purposes. Pending these uses, the proceeds may be
invested temporarily to the extent consistent with the REIT provisions of the
Code.
A material portion of the minimum net proceeds has not been committed to
specific Commercial Mortgages or CMBSs. The Company anticipates that it will
fully invest its net proceeds of this Offering in Commercial Mortgages, CMBSs
and finance receivables within 90 days after completion of this Offering.
DIVIDEND POLICY AND DISTRIBUTIONS
The Company intends to distribute 95% or more of its taxable income (which
may not necessarily equal net income as calculated in accordance with GAAP) to
its common stockholders in each year so as to comply with the REIT provisions
of the Code. The Company intends to declare regular quarterly dividends
distributions on or about the twenty-second day of the month following said
quarter. The Company intends to declare its initial dividend on or about
September 30, 1997. Any taxable income remaining after the distribution of the
regular quarterly dividends will be distributed annually in a special dividend
or prior to the date of the first regular quarterly dividends 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 the Company to maintain REIT status will be made by the Company
at the discretion of the Board of Directors and will depend on the taxable
earnings of the Company, the financial condition of the Company and such other
factors as the Board of Directors deems relevant. The Board of Directors has
not established a minimum distribution level. See "Federal Income Tax
Considerations."
Distributions to stockholders will generally be taxable as ordinary income,
although a portion of such distributions may be designated by the Company as
capital gain or may constitute a tax-free return of capital. The Company will
furnish annually to each of its stockholders a statement setting forth
distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital. For a discussion of the
federal income tax treatment of distributions by the Company, see "Federal
Income Tax Considerations."
DIVIDEND REINVESTMENT PLAN
The Company intends to adopt a Dividend Reinvestment Plan ("DRP") for
stockholders who wish to reinvest their dividend distributions in additional
shares of Common Stock. All ICH common stockholders will be eligible to
participate in the DRP. The following is a description of the anticipated
terms of the DRP, which may be subject to change. The DRP will provide common
stockholders of ICH with a convenient method of investing cash dividends (in
some cases, at a discount and without payment of any brokerage commission or
service charge) and investing optional cash payments in additional shares of
Common Stock. The price to be paid for shares of Common Stock purchased under
the DRP will likely be a price reflecting (i) a discount of approximately 3%
(subject to change) from the current market price for the reinvestment of cash
dividends and the investment of optional cash payments of up to $10,000, to
the extent shares are purchased directly from ICH, (ii) no discount (subject
to change) from the market price for the reinvestment of cash dividends and
for the investment of optional cash payments of up to $10,000, to the extent
shares are purchased on the open market, and (iii) a discount of 0% to 5% (the
"Waiver Discount") from the market price for the investment of optional
32
<PAGE>
cash payments that exceed $10,000. Each of the discounts will be subject to
change (but will not vary from the range of 0% to 5%) from time to time or
discontinuance at ICH's discretion after a review of current market
conditions, the level of participation in the DRP and ICH's current and
projected capital needs. Except with respect to the Waiver Discount, ICH will
provide participants with written notice of a change in the applicable
discount rate at least thirty days prior to the relevant record date. In
addition, participants will be responsible for their pro rata share of
brokerage commissions incurred in connection with the purchase of shares on
the open market. However, the Board of Directors may in the future determine
that ICH will pay such brokerage commissions on behalf of participants.
Subject to the availability of shares of Common Stock registered for issuance
under the DRP, there will be no total maximum number of shares that can be
issued pursuant to the reinvestment of dividends and no pre-established
maximum limit applies to optional cash payments that may be made pursuant to
Requests for Waiver. BankBoston, N.A., the Company's transfer agent, will act
as the trustee and administrator of the DRP (the "Plan Administrator"). All
dividends and cash distributions paid with respect to the Common Stock owned
by participants in the DRP will be paid directly to the Plan Administrator. If
the dividend paid to any common stockholder is not sufficient to purchase one
whole share of Common Stock, such common stockholder will be credited with
fractional shares, computed to three decimal places. DRP participants will
generally be treated as having received a dividend distribution in an amount
equal to the fair market value of the Common Stock purchased with the
reinvested dividends generally on the date the Plan Administrator credits such
Common Stock to the DRP participant's account, plus brokerage commissions and
fees, if any, subtracted from the participant's distribution.
Participants electing to invest optional cash payments in additional shares
of Common Stock will be subject to a minimum per month purchase limit of $50
and a maximum per month purchase limit of $10,000 (subject to a waiver).
Optional cash payments in excess of $10,000 may be made only upon acceptance
by the Company of a completed Request for Waiver form from a participant. Each
month, at least three business days prior to each record date, the Company
will establish the Waiver Discount applicable to optional cash payments that
exceed $10,000. The Waiver Discount, which may vary each month, will be
established in the Company's sole discretion after a review of current market
conditions, the level of participation in the DRP and the Company's current
and projected capital needs. Optional cash payments that do not exceed $10,000
and the reinvestment of dividends in additional shares of Common Stock will
not be subject to the Waiver Discount. Optional cash payments of less than $50
and that portion of any optional cash payment which exceeds the maximum
monthly purchase limit of $10,000, unless such limit has been waived, will be
subject to return to the participant without interest. Participants may
request that any or all shares held in the DRP be sold by the Plan
Administrator on behalf of such Participants.
Common stockholders will not be automatically enrolled in the DRP. Each
common stockholder desiring to participate must complete and deliver to the
Plan Administrator an enrollment form, which will be sent to each eligible
common stockholder by the Plan Administrator. Participation in the DRP will
commence with all dividends and distributions payable after receipt of a
participant's authorization, provided that the authorization must be received
by the Plan Administrator prior to the record date for any dividends in order
for any common stockholder to be eligible for reinvestment of such dividends.
A participant may terminate participation in the DRP at any time upon delivery
of a written notice to that effect to the Plan Administrator, provided that
the termination notice must be received by the Plan Administrator prior to the
record date for any dividends in order for the termination to be effective
with respect to such dividends. Upon termination, the Plan Administrator will
send to the participant certificates evidencing the whole shares in the
participant's account and a check for any fractional shares based on the
current market value of the Common Stock on the date of termination.
Participants will be sent detailed statements showing the amount of dividend
or distribution received, the number and price of shares of the Common Stock
purchased for their accounts and the total number of shares held by the Plan
Administrator for their accounts. Tax information for each calendar year of
the DRP will be sent to participants by the Plan Administrator.
ICH may suspend, terminate, or amend the DRP at any time. Notice will be
sent to the participants of any suspension or termination, or of any amendment
that alters the DRP terms and conditions, as soon as practicable after such
action by ICH.
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $15.3 million or approximately $9.03 per share. After giving
effect to the sale by the Company of the 5,000,000 shares of Common Stock in
this Offering at an assumed IPO Price of $15.00 per share and the application
of the estimated net proceeds therefrom, as set forth in "Use of Proceeds,"
the as adjusted pro forma net tangible book value of the Company as of March
31, 1997 would have been approximately $84.0 million (excluding $41,000 of
intangible assets) respectively, or approximately $12.55 per share. This
represents an immediate increase in pro forma net tangible book value of $3.52
per share, respectively, to existing stockholders and an immediate dilution of
$2.45 per share, respectively, or 16.3%, to new investors purchasing shares in
this Offering. The following tables illustrate the dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed Initial Public Offering Price Per Share(1)................. $15.00
Pro forma net tangible book value before this Offering(2)........ 9.03
Increase attributable to the sale of shares to new investors..... 3.52
----
Pro forma net tangible book value after this Offering(3)........... 12.55
------
Dilution in pro forma net tangible book value of Common Stock to
new investors(3).................................................. $ 2.45
======
</TABLE>
- --------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
(2) Pro forma net tangible book value per share is determined by dividing the
pro forma net tangible book value of the Company (tangible assets less
liabilities) by the pro forma number of shares of Common Stock
outstanding. For purposes of this calculation, the number of shares deemed
outstanding prior to this Offering includes the 818,169 shares of ICH
Class A Stock to be held by IMH upon the closing of this Offering.
(3) After deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The following tables set forth on a pro forma basis (i) the number of shares
of Common Stock purchased from the Company, (ii) the total consideration and
the average price per share contributed by the existing stockholders based on
the Company's book value at March 31, 1997, and (iii) the total consideration
and the average price per share paid by new investors.
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED CONSIDERATION AVERAGE
----------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(1)..... 1,694,000 25.3% $15,005,990(2) 16.7% $ 8.86
New Investors................ 5,000,000 74.7 75,000,000 83.3 $15.00
--------- ----- ----------- -----
Total...................... 6,694,000 100.0% $90,005,990 100.0%
========= ===== =========== =====
</TABLE>
- --------
(1) Upon the closing of this Offering, IMH will own 575,831 shares of ICH
Common Stock and 818,169 shares of ICH Class A Stock. For purposes of this
calculation, the number of shares held by existing stockholders includes
said 818,169 shares.
(2) Excludes approximately $2.6 million in stock compensation expense and
$323,000 representing IMH's investment in ICCC. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
March 31, 1997, (ii) pro forma to reflect the Contribution and the exchange by
IMH in April 1997 of 299,000 shares of ICH Common Stock held by it for an
equivalent number of shares of ICH Class A Stock and (iii) as adjusted to
reflect the sale of the Common Stock offered hereby at an assumed IPO Price of
$15.00 per Share and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
<TABLE>
<CAPTION>
PRO AS ADJUSTED
ACTUAL FORMA (1)(2)(3)
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Borrowings under warehouse facilities............ $16,563 $16,563 $ 16,563
Stockholders' equity:
Preferred Stock, $.01 par value per share;
6,000,000 shares authorized; no shares issued
and outstanding actual and pro forma; Class A
Preferred Stock, $.01 par value per share;
4,000,000 shares authorized; 3,000,000 shares
issued and outstanding actual and pro forma;
no shares issued and outstanding as adjusted.. 30 30 --
Common Stock, $.01 par value per share;
46,000,000 shares authorized; 599,000 shares
issued and outstanding actual; 300,000 shares
issued and outstanding pro forma; and
5,875,831 issued and outstanding as adjusted.. 6 3 59
Class A Common Stock, $.01 par value per share;
4,000,000 shares authorized; no shares issued
and outstanding actual; 394,000 shares issued
and outstanding pro forma, and 818,169 issued
and outstanding as adjusted (4)............... -- 4 8
Additional paid-in capital..................... 14,970 14,970 83,640
Contributed capital(5)......................... 2,697 3,019 3,019
Accumulated deficit............................ (2,686) (2,686) (2,686)
------- ------- --------
Total stockholders' equity................... 15,017 15,340 84,040
------- ------- --------
Total capitalization......................... $31,580 $31,903 $100,603
======= ======= ========
</TABLE>
- -------
(1) After deducting estimated underwriting discounts and commissions and
estimated offering expenses of $1,050,000 payable by the Company, and
assuming no exercise of the Underwriters' over-allotment option to
purchase up to an additional 750,000 shares of Common Stock. Assumes an
IPO Price of $15.00 per share. Gives effect to the conversion of shares of
ICH Preferred Stock held by IMH into 575,831 shares of ICH Common Stock.
See "Underwriting."
(2) Does not include 700,000 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option and Awards Plan. Options to acquire
190,000 shares of Common Stock will be granted to the executive officers,
employees and Directors of the Company upon the closing of this Offering
at the Subscription Price. The shares reserved for issuance pursuant to
the Company's Stock Option and Awards Plan will be increased or decreased
to an amount equal to 10% of the Shares sold in this Offering, subject to
a minimum of 400,000 shares. See "IMH Commercial Holdings, Inc.--Stock
Option and Awards Plan."
(3) All ICH Preferred Stock is automatically convertible upon the closing of
this Offering into shares of ICH Common Stock determined by multiplying
the number of shares of ICH Preferred Stock to be converted by a fraction,
the numerator of which is $5.00 and the denominator of which is the IPO
Price. Notwithstanding the foregoing, consistent with IMH's classification
as a REIT, IMH shall not be entitled to have converted into ICH Common
Stock more than that number of shares of ICH Preferred Stock whereby IMH
would own, immediately after such conversion, greater than 9.8% of ICH's
outstanding Common Stock. Any shares of ICH Preferred Stock not converted
into ICH Common Stock upon the closing of this Offering shall on such date
automatically convert into shares of ICH Class A Stock at the same rate as
the ICH Preferred Stock converted into Common Stock on said date. Shares
of ICH Class A Stock convert into shares of the ICH Common Stock on a one-
for-one basis. Upon any subsequent issuances of ICH Common Stock, shares
of ICH Class A Stock shall automatically continue to convert into
additional shares of the ICH Common Stock, subject to said 9.8%
limitation. Upon the closing of this Offering, IMH would hold 575,831
shares of ICH Common Stock and 818,169 shares of ICH Class A Stock.
(4) Gives effect to 95,000 shares of ICH Class A Stock to be issued in
connection with the Contribution.
(5) The pro forma balance sheet effect of the Contribution if it had occurred
on March 31, 1997 would be an increase to ICH's Investment in ICCC of
$323,000 and a corresponding increase to Class A Common Stock and
contributed capital, representing the 95% economic interest in ICCC's net
book value at March 31, 1997.
35
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of March 31, 1997, and for the
period from January 15, 1997 (commencement of operations) through March 31,
1997, was derived from the Company's financial statements audited by KPMG Peat
Marwick LLP ("KPMG"), independent auditors, whose reports with respect thereto
appear elsewhere herein. Such selected financial data should be read in
conjunction with the financial statements and the notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein.
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 4,400
Commercial Mortgages held for investment, net...................... 17,522
Residual interest in securitization................................ 10,025
Total assets....................................................... 32,250
Borrowings from IWLG............................................... 16,563
Preferred stock.................................................... 30
Common stock....................................................... 6
Additional paid in capital......................................... 14,970
Contributed capital................................................ 2,697
Total stockholders' equity......................................... 15,017
STATEMENT OF OPERATIONS DATA:
Interest income.................................................... $ 366
Interest expense................................................... 279
Stock compensation expense(1)...................................... 2,697
Net income (loss).................................................. (2,686)
Pro forma net (loss) per share (unaudited)......................... (1.71)
</TABLE>
- --------
(1) Stock compensation expense represents the difference between the price at
which ICH issued 300,000 shares of its Common Stock on February 3, 1997
($.01 per share) and the estimated fair value of such shares for financial
reporting purposes as determined by the Company's management, as of
February 3, 1997 ($9.00 per share).
IMPERIAL COMMERCIAL CAPITAL CORPORATION
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE SHEET AND STATEMENT OF OPERATIONS DATA:
Total assets.......................................................... $ 554
Total shareholders' equity............................................ 340
Stock compensation expense(1)......................................... 25
Net income (loss)..................................................... (186)
</TABLE>
- --------
(1) Stock compensation expense represents the difference between the price at
which ICCC issued 500 shares of its common stock on February 10, 1997
($1.00 per share) and the net book value which the Company's management
believes approximated the fair value of the 5% economic interest in ICCC
represented by such common stock.
36
<PAGE>
PRO FORMA FINANCIAL DATA (UNAUDITED)
The unaudited pro forma financial data gives effect to the Contribution as
if it occurred on March 31, 1997 for the pro forma condensed balance sheet
data and on January 15, 1997 (commencement of operations) for the pro forma
condensed statement of operations data. Such pro forma financial information
should be read in conjunction with the Company's financial statement and notes
relating hereto included elsewhere herein.
PRO FORMA CONDENSED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT MARCH 31, 1997
------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
ASSETS ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................. $ 4,400 $-- $ 4,400
Commercial Mortgages held for investment,
net....................................... 17,522 -- 17,522
Residual interest in securitization........ 10,025 -- 10,025
Investment in ICCC......................... -- 323(a) 323
Other assets............................... 303 -- 303
------- ---- -------
$32,250 $323 $32,573
======= ==== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings from IWLG....................... $16,563 -- $16,563
Other affiliated borrowings................ 520 -- 520
Accrued interest expense................... 150 -- 150
------- ---- -------
Total liabilities........................ 17,233 -- 17,233
Stockholders' equity:
Preferred Stock, $.01 par value;
10,000,000 shares authorized; 3,000,000
shares issued and outstanding historical
and pro forma (liquidation preference of
$15,000)................................ 30 -- 30
Common Stock, $.01 par value;
46,000,000 shares authorized; 599,000
shares issued and outstanding historical
and 300,000 shares issued and
outstanding pro forma................... 6 (3)(b) 3
Class A Common Stock $.01 par value;
4,000,000 shares authorized, no shares
issued and outstanding historical and
394,000 shares issued and outstanding
pro forma............................... -- 4(a),(b) 4
Additional paid-in capital................ 14,970 -- 14,970
Contributed capital....................... 2,697 322(a) 3,019
Accumulated deficit....................... (2,686) -- (2,686)
------- ---- -------
Total stockholders' equity............... 15,017 323 15,340
------- ---- -------
$32,250 $323 $32,573
======= ==== =======
</TABLE>
37
<PAGE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997 (COMMENCEMENT OF
OPERATIONS) THROUGH MARCH 31, 1997
----------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income:
Commercial Mortgages held
for investment............ $ 219 -- $ 219
Other...................... 147 -- 147
------------ ---------- ------------
Total interest income..... 366 -- 366
Interest expense:
Borrowings for IWLG........ 150 -- 150
Other affiliated
borrowings................ 129 -- 129
------------ ---------- ------------
Total interest expense.... 279 -- 279
------------ ---------- ------------
Net interest income before
provision for Commercial
Mortgage losses.......... 87 -- 87
Provision for Commercial
Mortgage losses............ 13 -- 13
------------ ---------- ------------
Net interest income....... 74 -- 74
Stock compensation expense.. 2,697 -- 2,697
Equity in net loss of ICCC.. -- 177 (c) 177
Other expenses.............. 63 42 (d) 105
------------ ---------- ------------
2,760 219 2,979
------------ ---------- ------------
Net income (loss):........ $ (2,686) $ (219) $ (2,905)
============ ========== ============
Pro forma net income (loss)
per share.................. $ (1.71)(e)
============
</TABLE>
NOTES TO FINANCIAL DATA (UNAUDITED)
(a) Reflects ICH's 95% economic interest in ICCC's net book value at March 31,
1997 contributed pursuant to the Contribution for 95,000 shares of ICH
Class A Stock.
(b) Reflects the exchange by IMH of 299,000 shares of ICH's Common Stock for
an equivalent number of shares of ICH Class A Stock as if it had occurred
on March 31, 1997.
(c) Reflects ICH's 95% economic interest in ICCC's results of operations for
the period from January 15, 1997 (commencement of operations) through
March 31, 1997.
(d) Reflects the effect of the Management Agreement as if it were effective
January 15, 1997.
(e) Pro forma net loss per share has been computed by dividing pro forma net
loss by the pro forma weighted average number of shares outstanding
(1,694,000 shares) which includes the 818,169 shares of ICH Class A Stock
to be held by IMH upon the closing of this Offering.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that inherently involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following section, in "Risk
Factors" and elsewhere in this Prospectus. The following discussion should be
read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
RESULTS OF OPERATIONS; IMH COMMERCIAL HOLDINGS, INC.
The following discussion relates to the Long-Term Investment Operations
prior to the Contribution and excludes the Company's equity interest in ICCC
which the Company would obtain pursuant to the Contribution. Historical
financial information presented herein should be regarded solely as background
information and is not indicative of future results which may vary
substantially from those shown herein.
For the period from January 15, 1997 (commencement of operations) through
March 31, 1997
Revenues were $366,000. Such revenues were comprised primarily of $219,000
of interest income earned on Commercial Mortgages held for investment and
$131,000 of interest income from a CMBS held by the Long-Term Investment
Operations. Giving effect to the Contribution, the Company's equity interest
in the net loss of ICCC for the period from January 15, 1997 (commencement of
operations) through March 31, 1997 would have been $177,000. Net loss,
excluding the equity interest in the net loss of ICCC was $2,686,000,
primarily due to $2,697,000 in stock compensation expense relating to the
issuance of 300,000 shares of ICH Common Stock. Stock compensation expense
represents the difference between the price at which ICH issued 300,000 shares
of its Common Stock on February 3, 1997 ($.01 per share) and the estimated
fair value of such shares for financial reporting purposes as determined by
the Company's management, as of February 3, 1997 ($9.00 per share). Fair value
was based primarily on management's projection of the Company's future cash
flow and net earnings. Management believes a 40% discount from the
Subscription Price was justified for a number of reasons, including, but not
limited to, the lack of liquidity of said shares at the date of issuance and
the uncertainty of certain future events regarding the development of the
Company's business and organization structure including, but not limited to,
obtaining independent financing for the organization and purchase of
Commercial Mortgages, funding and closing Commercial Loans, developing a
pipeline of future Commercial Loan originations and successfully concluding
this Offering.
Expenses, excluding stock compensation expense, were $355,000, comprised
primarily of $279,000 of interest expense related to borrowings from Imperial
Warehouse Lending Group, Inc., a subsidiary of IMH ("IWLG"), and borrowings
from other affiliates and professional expenses of $60,000. The Company
anticipates that expenses will increase in the future as the Company builds
its infrastructure, increases its borrowings under warehouse lines of credit
and reverse repurchase facilities and relies more heavily on the Manager for
its day-to-day operations.
RESULTS OF OPERATIONS; IMPERIAL COMMERCIAL CAPITAL CORPORATION
The following discussion relates to the operations of ICCC prior to the
Contribution. Historical financial information presented herein should be
regarded solely as background information and is not indicative of future
results which may vary substantially from those shown herein.
For the period from January 15, 1997 (commencement of operations) through
March 31, 1997
Revenues were $8,000 comprised of $6,000 of interest income and $2,000 of
loan servicing income. ICCC incurred a net loss of $186,000.
Total expenses were $194,000 comprised primarily of $25,000 of stock
compensation expense relating to the issuance of 500 shares of ICCC common
stock, $63,000 of professional services, $57,000 of personnel expenses and
$19,000 of general and administrative and other expense. Stock compensation
expense represents the difference between the price at which ICCC issued 500
shares of its common stock on February 10, 1997 ($1.00 per share) and the net
book value which the Company's management believes approximated the fair value
39
<PAGE>
of the 5% economic interest in ICCC represented by such common stock. Total
expenses will increase in the future as ICCC expands its infrastructure and
servicing portfolio.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements result from the need to fund
the origination or purchase of Commercial Mortgages held for sale by ICCC, and
the investment in Commercial Mortgages and CMBSs by ICH. Prior to the
Contribution, ICCC was funded by intercompany borrowings and $500,000 from the
issuance of capital stock and ICH was funded by $15.0 million in investments
by IMH, $900,000 in borrowings from IMH and a $200.0 million warehouse line
agreement as described below. After the Contribution, the Long-Term Investment
Operations and the Conduit Operations will be funded by warehouse lines of
credit, reverse repurchase agreements, the issuance of CMOs and CMBSs, and the
proceeds from the issuance of capital stock.
For the period from January 15, 1997 (commencement of operations) through
March 31, 1997, net cash provided by operating activities was $10.0 million,
affected by $2,697,000 in stock compensation expense related to the issuance
of 300,000 shares of the Common Stock by ICH in February 1997 and the purchase
of a $10.1 million CMBS.
For the period from January 15, 1997 (commencement of operations) through
March 31, 1997, net cash used in investing activities was $17.5 million,
affected by the purchase by ICH of $17.5 million in Commercial Mortgages.
For the period from January 15, 1997 (commencement of operations) through
March 31, 1997 net cash provided by financing activities was $32.0 million
affected by the issuance by ICH of a $15.0 million promissory note to IMH in
March 1997 (which was converted into 3,000,000 shares of ICH Preferred Stock
in March 1997) and borrowings by ICH of $16.6 million from IWLG in connection
with the purchase by the Company of $17.5 million of Commercial Mortgages
loans from ICIFC in February 1997.
In April 1997, ICH as a stand-alone entity, entered into a warehouse line
agreement to provide up to $200.0 million to finance the Company's businesses.
Terms of the warehouse line of credit require that the Commercial Mortgages be
held by an independent third party custodian, which gives the Company the
ability to borrow against the collateral as a percentage of the fair market
value of the Commercial Mortgages. The borrowing rates are expressed in basis
points over one-month LIBOR, depending on the type of collateral provided by
the Company. The margins on the warehouse line agreement are based on the type
of mortgage collateral used and generally range from 85% to 88% of the fair
market value of the collateral. The warehouse line agreement is guaranteed by
IMH until the Company reaches $50.0 million in stockholders' equity, which
will occur upon the closing of this Offering.
The Company anticipates that approximately 70% and 25% of the net proceeds
of this Offering will be used to provide funding for the Company's Long-Term
Investment Operations and its Conduit Operations, respectively. The Company
believes that cash flow from operations and the aforementioned financing
arrangement will be sufficient to meet the current liquidity needs of the two
businesses.
INFLATION
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased costs
of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company's operations are monetary in nature. As
a result, interest rates have a greater impact on the Company's operations'
performance than do the effects of general levels of inflation. Inflation
affects the Company's operations primarily through its effect on interest
rates, since interest rates normally increase during periods of high inflation
and decrease during periods of low inflation. During periods of increasing
interest rates, demand for mortgage loans and a borrower's ability to qualify
for mortgage financing in a purchase transaction may be adversely affected.
40
<PAGE>
ACCOUNTING FOR SERVICING RIGHTS
When ICCC purchases Commercial Mortgages that include the associated
servicing rights, the allocated price paid for the servicing rights, net of
amortization based on assumed prepayment rates, is reflected on its financial
statements as CMSRs.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," which supersedes SFAS 122.
SFAS No. 125 requires that a portion of the cost of purchasing or
originating a mortgage loan be allocated to the mortgage loan servicing rights
based on its fair value relative to the loan as a whole. To determine the fair
value of the servicing rights created, ICCC 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, ICCC
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.
ICCC determines servicing value impairment by desegregating the conduit
operations' servicing portfolio into its predominant risk characteristics.
ICCC determines those risk characteristics to be Commercial Mortgage program
type and interest rate. These segments of the portfolio are then evaluated,
using market prices under comparable servicing sale contracts, when available,
or alternatively using the same model as was used to originally determine the
fair value at acquisition, using current assumptions at the end of the
quarter. The calculated value is then compared to the capitalized recorded
value of each Commercial Mortgage type and interest rate segment to determine
if a valuation allowance is required.
CMSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the
time CMSRs are recorded could result in a decline in the fair value of the
CMSRs below their carrying value requiring a provision to increase the CMSRs'
valuation allowance. The rate of prepayment of Commercial Mortgages 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 Commercial Mortgage prepayment rates may vary depending on
the particular type of Commercial Mortgage. 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 ICCC's Commercial
Mortgages, and other considerations. There can be no assurance of the accuracy
of management's prepayments estimates. If actual prepayments with respect to
Commercial Mortgages serviced occur more quickly than were projected at the
time such Commercial Mortgages were sold, the carrying value of the CMSRs may
have to be reduced through a provision recorded to increase the CMSRs'
valuation allowance in the period the fair value declined below the CMSRs'
carrying value. If actual prepayments with respect to Commercial Mortgages
occur more slowly than estimated, the carrying value of CMSRs would not
increase, although total income would exceed previously estimated amounts and
the related valuation allowances, if any, could be unnecessary.
41
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual result could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
GENERAL
ICH was incorporated in February 1997. ICH's only current operations consist
of its Long-Term Investment Operations that, to date, has purchased a limited
number of Commercial Mortgages and one CMBS. ICCC was incorporated in January
1997 and currently conducts the origination of Commercial Mortgages through an
affiliation with IMH. The Company will not commence its operations on a full-
time basis until closing of this Offering when IMH will effectuate the
Contribution to ICH. See "Certain Transactions--The Organizational
Transactions."
THE COMPANY'S OPERATIONS
The Company currently operates the Long-Term Investment Operations, which
invests primarily in Commercial Mortgages and CMBSs and, as of the closing of
this Offering, will engage in the Conduit Operations, which originates,
purchases and sells or securitizes Commercial Mortgages. ICH, as a stand-alone
entity, has secured a $200.0 million warehouse line agreement to finance the
origination and purchase of Commercial Mortgages. The Conduit Operations will
operate through three divisions: the Condominium Division, the Retail
Division, and the Correspondent and Bulk Purchase Division.
LONG-TERM INVESTMENT OPERATIONS
The Long-Term Investment Operations invests primarily in adjustable rate
Commercial Mortgages and CMBSs backed by such Commercial Mortgages for long-
term investment. Income is earned principally from the net interest income
received by the Company on the Commercial Mortgages and CMBSs acquired and
held in its portfolio. At March 31, 1997, the Company's investment portfolio
consisted of $17.5 million in Commercial Mortgages and a $10.0 million CMBS.
CONDUIT OPERATIONS
The Company's Conduit Operations will operate through three divisions: the
Condominium Division, the Retail Division, and the Correspondent and Bulk
Purchase Division.
Condominium Division. This Division will offer on a retail basis adjustable
rate financing to developers and project owners who have completed the
development of a condominium complex or the conversion of an apartment complex
to a condominium complex on property with a typical loan amount of $3.0
million to $10.0 million. All originations, underwriting, processing and
funding will be performed at ICCC's executive offices. The Company anticipates
that the Condominium Division's Commercial Mortgages will be offered on a
nationwide basis and that Commercial Mortgages originated through the
Condominium Division will be financed through the utilization of CMO
borrowings by the Long-Term Investment Operations.
Retail Division. This Division, which is expected to become operational
shortly, will originate Commercial Mortgages for properties including general
purpose apartment complexes, general retail property such as shopping centers,
super markets and department stores, light industrial property, and office
buildings. The Retail Division will offer smaller balance ($500,000 to $1.5
million) fixed and adjustable rate Commercial Mortgages to developers and
project owners for smaller properties and projects than those funded by the
Correspondent and Bulk Purchase Division. Although processing and funding
operations relating to these loans will be performed centrally at ICCC's
executive offices, the Company has targeted major metropolitan areas for the
opening of satellite offices for regional originations. A portion of the
adjustable rate Commercial Mortgages that will be originated by the Retail
Division may be held in portfolio by the Long-Term Investment Operations,
while the balance thereof and a substantial portion of the fixed rate product
originated will be resold by the Conduit Operations through REMIC
securitizations.
42
<PAGE>
Correspondent and Bulk Purchase Division. This Division will both originate
Commercial Mortgages on a retail basis and purchase Commercial Mortgages on a
bulk and flow basis. This Division will offer larger principal balance ($1.5
million to $10.0 million) Commercial Mortgages for commercial projects than
those funded by the Retail Division. The Correspondent and Bulk Purchase
Division will offer adjustable rate and fixed rate Commercial Mortgages
offered through specified correspondents who may in the future be provided
with Company-sponsored warehouse facilities. In addition, the Division will
purchase Commercial Mortgages in bulk and flow from selected financial
institutions and mortgage bankers. A portion of the adjustable rate Commercial
Mortgages originated or purchased by the Correspondent Division may be held in
portfolio by the Long-Term Investment Operations, while the balance thereof
and a substantial portion of the fixed rate Commercial Mortgages originated or
purchased will be resold by the Conduit Operations through REMIC
securitizations.
LONG-TERM INVESTMENT OPERATIONS
GENERAL
ICH purchases Commercial Mortgages and CMBSs, principally adjustable-rate
Commercial Mortgages and securities backed by such loans, for long-term
investment. Income is earned principally from the net interest income received
by the Company on the Commercial Mortgages and CMBSs purchased and held in its
portfolio. Such purchases will be financed with a portion of the Company's
capital, as well as long-term financing through CMOs and borrowings under
warehouse line agreements and reverse repurchase agreements. ICCC will support
the investment objectives of ICH by selling all Commercial Mortgages and CMBSs
to ICH at costs which the Company believes will be comparable to those
available through investment bankers and other third parties.
INVESTMENT POLICIES
The following is a summary of some of the investment policies of the
Company, any of which may be changed by the Company's Board of Directors
without a vote of security holders. The executive officers of the Company are
empowered to make day-to-day investment decisions, including the issuance of
commitments on behalf of the Company to purchase Commercial Mortgages and
CMBSs meeting the investment criteria set from time to time by the Company's
Board of Directors. Other than statutory limitations imposed in order to have
IMH classified as a REIT, there is no current limitation set by the Board of
Directors on the percentage of assets which the Company may invest in any one
type of investment or the percentage of CMBs of any one issue which the
Company may acquire.
The Company does not anticipate wide geographic diversification of the
properties underlying the Company's Commercial Mortgages and does not expect
to 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). Management estimates that a majority of the
Commercial Mortgages held by the Company for portfolio investment will be
secured by properties in California. It is the Company's policy to acquire
assets primarily for income and to finance its operations by warehouse lines
of credit, reverse repurchase agreements, the issuance of CMOs and CMBs and
the proceeds from the issuance of capital stock.
COMMERCIAL MORTGAGES HELD IN THE PORTFOLIO
The Company will originate, and invest a substantial portion of its assets
in Commercial Mortgages. The Company will also purchase Commercial Mortgages
from third parties for long-term investment and for resale.
INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES
General. The Company may also acquire CMBSs generated through its own
securitization efforts as well as those generated by third parties. In
connection with the issuance of CMBSs by the Company in the form of REMICs,
ICH may retain the senior or subordinated securities as regular interests of a
REMIC on a short-term or long-term basis. Any such retained CMBS may include
"principal only," "interest only" or residual interest securities or other
interest rate or prepayment sensitive securities or investments. Any such
retained securities or investments may subject the Company to credit, interest
rate and/or prepayment risks.
43
<PAGE>
DESCRIPTION OF CMBSS
CMBSs are securities that represent an interest in, or are secured by,
Commercial Mortgages. The CMBS market is newer and in terms of total
outstanding principal amount of issues is relatively small compared to the
total size of the market for residential mortgage-backed securities. CMBSs
have been issued in public and private transactions by a variety of agency and
private-label issuers. CMBSs have been issued using a variety of structures,
some of which were developed in the residential mortgage context, including
multi-class structures featuring senior and subordinated classes. Because of
the great diversity in characteristics of the Commercial Mortgages that secure
CMBSs, however, such securities have unique features and characteristics.
CMBSs may pay fixed or floating rates of interest. CMBSs generally have been
structured as mortgage pass-through securities or as mortgage pay-through
securities, although other structures are possible. With a typical mortgage
pass-through security, payment of principal and interest on the underlying
mortgages, following deduction of servicing expenses, is passed through
directly to holders of the securities. Mortgage pay-through securities
represent an obligation of the issuer, secured by a pool of mortgage loans
pledged as collateral for payments of principal and interest on the debt
instrument. The issuer's obligation to pay principal and interest under a
mortgage pay-through security is limited to the pledged collateral.
CMBSs generally are structured with some form of credit enhancement to
protect against potential losses on the underlying Commercial Mortgages.
Credit support increases the likelihood of timely and full payment of
principal and interest to the more senior class of CMBSs. Because of the
particular risks that accompany CMBSs, the amount of such credit support may
be substantial. Credit supports used in the CMBSs market has included issuer
guarantees, reserve funds, subordinated securities (which bear the risks of
default before more senior classes of securities of the same issuer), cross-
collateralization and over-collateralization.
In addition to credit support, CMBSs may be structured with liquidity
protections intended to provide assurance of timely payment of principal and
interest. Such protections may include surety bonds, letters of credit and
payment advance agreements.
FINANCING
The Long-Term Investment Operations will be principally financed through the
issuance of CMOs and borrowings under warehouse line agreements and reverse
repurchase agreements.
Collateralized Mortgage Obligations. As Commercial Mortgages are
accumulated, the Company intends to issue CMOs secured by such loans as a
means of financing its Long-Term Investment Operations. The decision to issue
CMOs will be based on the Company's current and future investment needs,
market conditions and other factors. For accounting and tax purposes, the
Commercial Mortgages financed through the issuance of CMOs will be treated as
assets of the Company, and the CMOs will be treated as debt of the Company.
Each issuance of CMOs is expected to be fully payable from the principal and
interest payments on the underlying Commercial Mortgages collateralizing such
debt, any cash or other collateral required to be pledged as a condition to
receiving the desired rating on the debt, and any investment income on such
collateral. Long-Term Investment Operations will earn the net interest spread
between the interest income on the Commercial Mortgages and the interest and
other expenses associated with the CMO financing. The net interest spread may
be directly impacted by the levels of prepayment of the underlying Commercial
Mortgages and to the extent CMO classes have variable rates of interest, may
be affected by changes in short-term interest rates.
The Company believes that under prevailing market conditions, an issuance of
CMOs receiving other than an investment grade rating would require payment of
a yield to investors which will reduce net interest spread earned as a result
of such CMO issuance. No assurance can be given that the Company will achieve
the ratings it plans to seek for such CMOs.
Warehouse Line Agreements. ICH has obtained a $200.0 million warehouse line
agreement with a third-party lender and is currently negotiating with another
lender, at interest rates that are consistent with the financing
44
<PAGE>
objectives discussed herein. A warehouse line agreement acts as a financing
under which the Company pledges certain Commercial Mortgages as collateral to
secure a short-term loan. Generally, the lender makes a loan in an amount
equal to 85% to 88% of the fair market value of the pledged collateral. The
Company's warehouse line agreement requires the Company to pledge the
collateral to be held by a third-party custodian. ICH's warehouse line
agreement calls for the Company to pledge cash, additional Commercial
Mortgages or additional securities in the event the market value of the
existing collateral declines. The term of ICH's warehouse line agreement is
for 12 months from the initial start date and stipulates that no Commercial
Mortgage may be on the warehouse line agreement for more than 364 days. The
interest rate is based upon one month LIBOR and is repriced daily. In an event
of default under ICH's warehouse line agreement, the lender may force the
liquidation of the pledged collateral subject to any bankruptcy proceedings
rights and remedies available to a creditor. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and
Capital Resources."
Reverse Repurchase Agreements. The Company may also obtain reverse
repurchase agreements with third-party lenders, at interest rates that are
consistent with its financing objectives described herein. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing vehicle under which the Company pledges certain Commercial
Mortgages and CMBSs as collateral to secure a short-term loan. Generally, the
other party to the agreement makes the loan in an amount equal to a percentage
of the market value of the pledged collateral. At the maturity of the reverse
repurchase agreement, the Company is required to repay the loan in exchange
for the return of its collateral. Under a reverse repurchase agreement, the
Company retains the incidents of beneficial ownership, including the right to
distributions on the collateral and the right to vote on matters as to which
certificate holders vote. Upon a payment default under such agreements, the
lending party may liquidate the collateral. The borrowing agreements may
require the Company to pledge cash, additional Commercial Mortgages or CMBSs
in the event the market value of existing collateral declines. To the extent
that cash reserves are insufficient to cover such deficiencies in collateral,
the Company may be required to sell assets to reduce its borrowings.
In the event of the insolvency or 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 creditor under
such agreements to avoid the automatic stay provisions of the Bankruptcy Code
and to foreclose on the collateral agreements without delay. In the event of
the insolvency or bankruptcy of a lender during the term of a reverse
repurchase agreement, the lender may be permitted, under the Bankruptcy Code,
to repudiate the contract, and the Company's claim against the lender for
damages therefrom may be treated simply as one of the unsecured creditors. In
addition, if the lender is a broker or dealer subject to the Securities
Investor Protection Act of 1970, the Company's ability to exercise its rights
to recover its securities under a reverse repurchase agreement or to be
compensated for any damages resulting from the lender's insolvency may be
further limited by such statute. If the lender is an insured depository
institution subject to the Federal Deposit Insurance Act, the Company's
ability to exercise its rights to recover its securities under a reverse
repurchase agreement or to be compensated for damages resulting form the
lender's insolvency may be limited by such statute rather than the Bankruptcy
Code. The effect of these various statutes is, among other things, that a
bankrupt lender, or its conservator or receiver, may be permitted to repudiate
or disaffirm its reverse repurchase agreements, and the Company's claims
against the bankrupt lender for damages resulting therefrom may 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.
To reduce its exposure to the potential credit risk of reverse repurchase
agreement lenders, the Company may enter into such agreements with different
parties and follow its own credit exposure procedures. The Company would
monitor the financial condition of its reverse repurchase agreement lenders on
a regular basis, including the percentage of mortgage loans that are the
subject of reverse repurchase agreements with any single lender.
Notwithstanding these measures, no assurance can be given that the Company
will be able to avoid such third party risks. Currently, the Company is not
party to any reverse repurchase agreements.
Other CMBSs. As an additional alternative for the financing of its Long-Term
Investment Operations, the Company may issue other CMBSs, if, in the
determination of the Company, the issuance of such other securities
45
<PAGE>
is advantageous. In particular, mortgage pass-through certificates
representing an undivided interest in pools of Commercial Mortgages formed by
the Company may prove to be an attractive vehicle for raising funds.
The holders of CMBSs receive their pro rata share of the principal payments
made on a pool of Commercial Mortgages and interest at a pass-through interest
rate that is fixed at the time of offering. The Company may retain up to a
100% undivided interest in a significant number of the pools of Commercial
Mortgages underlying such pass-through certificates. The retained interest, if
any, may also be subordinated so that, in the event of a loss, payments to
certificate holders will be made before the Company receives its payments.
Unlike the issuance of CMOs, the issuance of CMBSs will not create an
obligation of the Company to securityholders in the event of a borrower
default in a short-fall principal or interest payment on CMBSs. However, as in
the case of CMOs, the Company may be required to obtain various forms of
credit enhancements in order to obtain an investment grade rating for issues
of mortgage pass-through certificates by a nationally-recognized rating
agency.
CONDUIT OPERATIONS
GENERAL
ICCC began its mortgage conduit operations in January 1997. The Company's
Conduit Operations will consist of the origination or purchase and sale of
Commercial Mortgages primarily secured by first liens on commercial properties
that are originated in accordance with ICCC's underwriting guidelines. As the
Conduit Operations of the Company, ICCC will also act as a bulk and flow
purchaser of Commercial Mortgages. All Commercial Mortgages originated or
purchased by ICCC will be made available for sale to ICH at the same price at
which the loans were originated or purchased by ICCC or fair market value at
the date of sale and subsequent transfer to ICH. The Company's Conduit
Operations will primarily operate through three divisions: the Condominium
Division, the Retail Division and the Correspondent and Bulk Purchase
Division. The Condominium Division is currently being operated by ICCC.
CONDOMINIUM DIVISION
Through its Condominium Division, ICCC markets Commercial Mortgages directly
to developers and project owners who have completed a condominium complex or
the conversion of an apartment complex to a condominium complex, allowing
developers and project owners to structure flexible financing on qualified
condominium projects. Typical uses of the program are where existing financing
precludes release provisions on individual units, to replace existing matured
loans or for acquisition financing. Commercial Mortgages offered by the
Condominium Division are typically adjustable rate mortgages with an interest
rate equal to a spread over the 6 month LIBOR, with an initial interest rate
for the first 12 to 24 months, and are fully amortizing over a 30 year term.
The typical Commercial Mortgage is between $3.0 million and $10.0 million and
the current maximum loan-to-value ratios ("LTV") limits for such loans are (i)
65% of the combined retail market value of the sum of individual units and
(ii) 80% of the value derived from an income approach as an apartment complex.
The Company believes an opportunity has developed for previously constructed
condominium complexes within certain geographic regions. Increases in the
prices of single-family detached homes have decreased the ability of many
potential first time home buyers to purchase such properties. In addition, the
Company believes that rents for high quality apartments have substantially
increased and vacancies for such apartments have substantially decreased. The
Company believes that previously constructed condominium complexes have become
an important alternative for such first time buyers in certain geographic
regions. In many cases tenants or third party buyers can purchase a
condominium unit with a total debt service at or near their existing level of
rent. These results combined with tax benefits and potential future
appreciation provide a significant incentive for the first-time buyer who may
be unable to afford a detached single family residence. The Company believes
that these conditions provide a substantial financing opportunity for the
Company.
The Commercial Mortgages offered by the Condominium Division are designed
for complete or partial condominium complexes that will be marketed to the
home buying community in accordance with market
46
<PAGE>
demand. The final loan amount is based on both the retail value of the
individual condominium unit and the current multi-family value. Each project
must have a verified operating history that will provide adequate net income
to cover the debt service.
The Condominium Division offers Commercial Mortgages which require master
loan agreements that include provisions for cross-collaterization and cross-
default of units within a complex. In addition, Commercial Mortgages offered
by the Condominium Division are generally with full recourse to the
sponsor/developer. The units may be released at par or on an accelerated basis
depending on sales absorption, DSCRs and integrity of sales values. DSCRs of
similar income producing properties will be compared with those of the
property to be financed at time of origination of the Commercial Mortgage. The
Condominium Division originates, underwrites, processes and funds Commercial
Mortgages on a retail basis from ICCC's executive offices.
For the three months ended March 31, 1997, no Commercial Mortgages had been
originated by ICCC.
RETAIL DIVISION
ICCC has formed a Retail Division which is expected to be operational by the
closing of the Offering. The Retail Division will market Commercial Mortgages
directly to property owners who seek Commercial Mortgages to purchase a
building or refinance an existing mortgage. The Retail Division will offer
smaller balance adjustable rate Commercial Mortgages to project owners or
developers for smaller properties and projects than those offered by the
Correspondent and Bulk Purchase Division. The Retail Division's standard
program will be adjustable rate Commercial Mortgages with principal balances
ranging from $500,000 to $1.5 million. Such adjustable rate Commercial
Mortgages bear interest based on LIBOR, 1-Year CMT or Prime Rate Index plus,
in each case, a spread with amortization schedules ranging from 15 to 30 years
and maturities of 5 to 15 years with a substantial balloon payment due at
maturity and with a maximum LTV generally not to exceed 75%. ICCC will utilize
short-term prepayment lock-outs and prepayment penalties to reduce its
exposure to prepayments. The Retail Division will also offer fixed rate
Commercial Mortgages with a principal amount between $500,000 and $1.5
million. The amortization schedules range from 15 to 30 years with maturities
of 5, 7, 10 or 15 years with a substantial balloon payment due at maturities
and with a maximum LTV generally not to exceed 75%. The Division will utilize
prepayment lock-out and prepayment penalties with these Commercial Mortgages
as well. The Commercial Mortgages offered by the Retail Division will
generally utilize non-negotiable loan documents and limited scope third party
reports which will provide more efficient underwriting and closing.
Although processing and funding relating to these Commercial Mortgages will
be performed centrally at ICCC's executive offices, the Company has targeted
major metropolitan areas for the opening of satellite offices for regional
originations. The Retail Division's marketing strategy will be to solicit
Commercial Mortgage originations through direct mailings to selected builders
and commercial and multi-family real estate brokers, and through advertising
in various forms of mass media. The Company believes this centralized approach
to processing and closing will allow the Retail Division to originate
Commercial Mortgages at a competitive cost.
CORRESPONDENT AND BULK PURCHASE DIVISION
The Company's Correspondent and Bulk Purchase Division will originate
Commercial Mortgages on a retail basis and purchases such loan on a bulk or
flow basis.
Correspondent Origination. The Company's Correspondent and Bulk Purchase
Division will offer larger principal balance ($1.5 million to $10.0 million)
Commercial Mortgages through specified correspondents such as savings and loan
associations, banks, mortgage bankers and other mortgage brokers. The terms of
such Commercial Mortgages will be similar to those offered by the Retail
Division except for the size of the principal balance. These Commercial
Mortgages will generally be for projects more substantial than those funded by
the Retail Division. The Correspondent and Bulk Purchase Division's strategic
focus will be to be a low cost national originator through a national
correspondent network of Commercial Mortgages to be held for investment or
sold in the secondary market as whole loans or securitized as CMBSs. A key
feature of this approach is the use of a
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<PAGE>
national network of correspondent originators, which will enable the Company
to shift the high fixed costs of interfacing with the property owner to such
correspondents. The marketing strategy for the Correspondent and Bulk Purchase
Division is designed to accomplish three objectives: (1) attract a
geographically diverse group of correspondent loan originators, (2) establish
relationships with such correspondents and facilitate their ability to offer a
variety of Commercial Mortgage products designed by the Correspondent and Bulk
Purchase Division and (3) purchase the Commercial Mortgage and securitize or
sell them into the secondary market or to ICH.
To facilitate its relationship with its correspondents, reduce the Company's
reliance on the California market and nationally expand the Company's
Commercial Mortgage origination capability, the Company has targeted major
metropolitan areas in the United States for correspondent originations.
Correspondents will be required to meet certain financial, insurance and
performance requirements established by ICCC before they are eligible to
participate in its correspondent program, and must submit to periodic reviews
by ICCC to ensure continued compliance with these requirements. In addition,
correspondents will be required to have comprehensive loan origination quality
control procedures. In connection with its qualification, each correspondent
enters into an agreement that generally provides for recourse by ICCC against
the seller in the event of a breach of representations or warranties made by
the correspondent with respect to Commercial Mortgages sold to ICCC, any fraud
or misrepresentation during the mortgage loan origination process. All
Commercial Mortgages originated through correspondents will be underwritten by
ICCC.
Bulk Purchases. In addition to originating Commercial Mortgages on a
correspondent basis, the Division will purchase Commercial Mortgages in bulk
packages and on a flow basis. Bulk loan purchases will be in the form of
complete loan packages that have been originated and underwritten by financial
institutions or Commercial Mortgage brokers. All Commercial Mortgages
purchased on a bulk basis will be reviewed by ICCC's underwriting staff to
determine that the loan packages are complete and materially comply with to
the Company's underwriting guidelines. Depending on the size of the pool of
Commercial Mortgages purchased, the Company will engage a third-party
underwriter to underwrite the Commercial Mortgages, determine credit grade,
verify the quality of the appraisal, verify the operations of the property,
including the DSCRs, and on Commercial Mortgages with smaller balances, verify
the borrower's employment status.
The Company intends to establish relationships with Commercial Mortgage
brokers who will be reviewed by the Company to ensure the quality and type of
Commercial Mortgages originated. The Company will also analyze the financial
conditions of the Commercial Mortgage brokers, including a review of the
Commercial Mortgage brokers' licenses and financial statements. Upon approval,
the Company expects to require each Commercial Mortgage broker to enter into a
purchase and sale agreement with customary representations and warranties
regarding the loans such Commercial Mortgage broker will sell to the Company.
PRODUCT FOCUS
ICCC's focus on the origination and purchase of Commercial Mortgages may
affect the Company's financial performance. For example, the purchase market
for Commercial Mortgages has typically provided for higher interest rates in
order to compensate for the lower liquidity of such loans, thereby potentially
enhancing the interest income earned by the Company during the accumulation
phase for Commercial Mortgages held for sale and during the holding period for
Commercial Mortgages held for investment. Due to the lower level of liquidity
in the Commercial Mortgage market, the Company may be required from time to
time to hold such Commercial Mortgages or CMBSs. In addition, by retaining for
investment either the Commercial Mortgages or CMBSs, the Company assumes the
potential risk of any increased delinquency rates and/or credit losses as well
as interest rate risk.
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A summary of the Company's Commercial Mortgage purchases by type of
Commercial Mortgage is shown below:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 15,
1997
(COMMENCEMENT
OF OPERATIONS)
THROUGH
MARCH 31, 1997
--------------
(DOLLARS
IN MILLIONS,
EXCEPT FOR
AVERAGE LOAN
SIZE)
<S> <C>
Variable Rate Loans:
Volume of Loans............................................ $ 17.5(*)
Percent of total volume.................................... 100.0%
Fixed Rate Loans:
Volume of Loans............................................ $ --
Percent of total volume.................................... -- %
--------
$ 17.5
========
Average Loan Size............................................ $101,971
</TABLE>
- --------
* Represents two bulk purchases by ICH of $7.3 million and $10.2 million in
February 1997 from ICIFC, the conduit operations of IMH. The $7.3 million
bulk purchase consisted of Commercial Mortgages originated by a company
with which William D. Endresen was an affiliate.
The credit quality of the loans originated or purchased by ICCC will vary
depending upon the specific program under which such loans are purchased.
The following table sets forth the geographic distribution of the Company's
Commercial Mortgage purchases:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH MARCH 31, 1997
-----------------------------------
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Arizona................................ $10.2 58.4%
California............................. 7.3 41.6
----- -----
Total................................ $17.5 100.0%
===== =====
</TABLE>
All of the Commercial Mortgages held by the Long-Term Investment Operations
as of March 31, 1997 consist of condominium conversion loans similar to those
offered by ICCC through its Condominium Division. For a further description of
the terms and conditions of these Commercial Mortgages, see "--Conduit
Operations--Condominium Division." The borrower generates cash flow from the
condominium complex through leases with tenants. The income generated by the
leases, less current operating expenses, provide the net operating income to
service the Commercial Mortgage. The leases underlying condominium conversion
loans are generally standard month to month, six or twelve month leases and
require a security deposit and first month's rent in advance.
For the three months ended March 31, 1997, 58% and 42% of the Commercial
Mortgages purchased by the Company were secured by property located in Arizona
and California, respectively. ICCC's Commercial Mortgage origination and
purchase activities are expected to focus on those regions of the country
where higher volumes of Commercial Mortgages are originated, including
Arizona, California, Colorado, Florida, Illinois, Maryland, New Jersey, New
York, Oregon, Texas and Washington. The highest concentration of Commercial
Mortgages originated or purchased by ICCC are expected to relate to properties
located in California because of the generally higher property values and
mortgage loan balances prevalent there.
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ICCC will generally purchase Commercial Mortgages on a "servicing-released"
basis rather than on a "servicing-retained" basis due to its belief that
control over the servicing and collection functions with respect to such
Commercial Mortgages is important to the realization of a satisfactory return
thereon. In connection therewith, the Company has contracted with Westco and
Wendover Funding for the performance of such servicing functions. As part of
this process, the Company may in the future form a separate collection group
to assist sub-servicers in the servicing of these Commercial Mortgages. See
"--Servicing."
PRICING
ICCC sets purchase prices at least once every business day for Commercial
Mortgages it originates through its Conduit Operations based on prevailing
market conditions. Different prices are established for the various types of
Commercial Mortgages and rate-lock periods. ICCC's standard pricing is based
on factors such as the anticipated price it would receive upon sale or
securitization of such Commercial Mortgages, the anticipated interest spread
realized during the accumulation period, the targeted profit margin and the
anticipated issuance, credit enhancement and ongoing administrative costs
associated with such sale or securitization. The credit enhancement cost
component of ICCC's pricing is established for individual Commercial Mortgages
or pools of Commercial Mortgages based upon the characteristics of such loans
or loan pools. As the characteristics of the Commercial Mortgages or pools of
Commercial Mortgages vary, this cost component is correspondingly adjusted
upward or downward to reflect such variation. ICCC's adjustments are reviewed
periodically by management to reflect changes in the cost of credit
enhancements. "--Securitization and Sale Process."
Following the issuance of a rate-lock, ICCC is subject to the risk of
interest rate fluctuations and enters into hedging transactions to diminish
such risk. Hedging transactions may include mandatory or optional forward
sales of Commercial Mortgages or CMBSs, interest rate caps, floors and swaps,
mandatory forward sales, mandatory or optional sales of futures and other
financial futures transactions including U.S. Treasury obligations. The nature
and quantity of hedging transactions are determined by the Company based on
various factors, including market conditions and the expected volume of
Commercial Mortgage purchases. Gains and losses on hedging transactions are
recorded as incurred.
UNDERWRITING AND QUALITY CONTROL
Origination and Purchase Guidelines. ICCC has developed comprehensive
purchase guidelines for the origination or purchase of Commercial Mortgages by
the Conduit Operations. Subject to certain exceptions, each Commercial
Mortgage originated or purchased must conform to program guidelines with
respect to, among other things, loan amount, type of property, loan-to-value
ratio, type and amount of insurance, credit history of the borrower, DSCRs,
sources of funds, appraisals and loan documentation. ICCC also performs a
legal documentation review prior to the origination or purchase of any
Commercial Mortgage. Additionally, for Commercial Mortgages that are
underwritten by contract underwriters, ICCC does not perform a full
underwriting review prior to origination or purchase, but instead relies on
the credit review and analysis performed by the contract underwriter, as well
as its own pre-purchase eligibility process to ensure that the loan meets the
program acceptance guidelines and a post-purchase quality control review.
Underwriting Methods. Commercial Mortgages have maximum loan amounts and
LTV's and minimum DSCRs which are determined from time to time by the
executive committee of ICCC. The DSCR for any Commercial Mortgage is the ratio
of net operating income produced by the related mortgaged property to the
monthly payment due from the borrower on such property, in most cases as
underwritten by the related originator and verified by the appraiser, to the
amounts of principal and interest due under such Commercial Mortgages.
Generally, net operating income for a mortgaged property equals the operating
revenues for such mortgaged property minus its operating expenses and
replacement reserves, but without giving effect to debt service, depreciation,
non-recurring capital expenditures, tenant improvements, leasing commissions
and similar items. Appraisals and field inspections (performed by outside and
certified inspectors) and title insurance are required for each Commercial
Mortgage.
ICCC's underwriting standards under its Commercial Mortgage lending programs
are primarily intended to assess the economic value of the mortgaged property
and the financial capabilities, credit standing and managerial ability of the
borrower. In determining whether a loan should be made, ICCC will consider,
among other things, the borrower's management experience, DSCRs, the
borrower's overall financial position and the
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<PAGE>
adequacy of such property as collateral for the Commercial Mortgage, and ICCC
may also consider the creditworthiness of the borrower, the borrower's income,
and liquid assets and liabilities. While the primary consideration in
underwriting a Commercial Mortgage is the property securing the Commercial
Mortgage, sufficient documentation on the borrower is required to establish
the financial strength and ability of the borrower to successfully operate the
property and meet its obligations under the note and deed of trust. Generally,
Commercial Mortgages from the Condominium Division require recourse against
the related borrower in the form of a guarantee.
The Commercial Mortgage lending programs require that the property and
records relating to the property are inspected to determine the number of
units that can be rebuilt under current zoning requirements, the number of
buildings on the property, the type of construction materials used, the
proximity of the property to natural hazards, flood zones and fire stations,
whether there are any environmental factors and whether a tract map has been
recorded. The property must front on publicly dedicated and maintained streets
with provisions for an adequate and safe ingress and egress. Properties that
share an ingress and egress through an easement or private road must have a
recorded non-exclusive easement. Recreational facilities and amenities, if
any, must be located on site and be under the exclusive control of the owner
of the premises. If available, engineering reports concerning the condition of
the major building components of the property are reviewed as is a ground
lease analysis if the property is on leased ground. Also, the title is
reviewed to determine if there are any covenants, conditions and restrictions,
easements or reservations of mineral interests in the property. The properties
are appraised by independent appraisers approved by ICCC.
In addition to the considerations set forth above, with respect to
Commercial Mortgages secured by commercial properties, ICCC's underwriting
policies typically require that the usage is permitted under local zoning and
use ordinances and the utilization of the commercial space is compatible with
the property and neighborhood. If the property is an office building, the
office building must have a stable occupancy history, must be located in a
good office market area and in a conforming neighborhood, must have adequate
parking and must be fire sprinkler equipped. Industrial properties must be
located in a conforming industrial marketplace and may not be used for the
production, storage or treatment of toxic waste. Retail properties must be
highly visible and located on a heavily traveled thoroughfare and typically
have tenants on term leases. ICCC does not generally make loans secured by a
property that has any of the following characteristics; inadequate maintenance
or repairs as determined by ICCC, the property is subject to covenants, the
property is not to code or the cost of restoring the property to code is
prohibitive or existence of or potential for contamination by hazardous toxic
materials.
ICCC analyzes the financial statements of the borrower to determine the
borrower's equity in the mortgaged property and overall capitalization,
particularly as it relates to real estate mortgage demands on equity. If the
borrower's holdings are heavily encumbered so that the debt service
requirements consume a high percentage of the rental income from the mortgaged
property, or consist substantially of unimproved or underimproved properties
having little or no gross income, ICCC analyzes whether the borrower will be
able to meet all of the mortgaged property's loan obligations (expenses, debt
service and equity return). In addition to DSCRs, the borrower's income and
expense ratios may be calculated.
In addition to the income from the mortgaged property, ICCC also evaluates
the borrower's income as a possible secondary source of repayment for the
Commercial Mortgage. In analyzing such income, ICCC considers, among other
factors, employment or business history of borrower and the stability and
seasonality of the borrower's current employment or business. If the borrower
derives income from rental property, ICCC evaluates the experience of the
manager of the rental property, type of tenancy and the cash flow generated by
the borrower's real estate portfolio. ICCC also reviews the borrower's credit
history to determine the borrower's ability and willingness to repay debts. In
general, ICCC will not grant a Commercial Mortgage to a borrower who has a
history of slow payments or delinquencies, bankruptcies, collection actions,
foreclosures or judgments against the borrower without adequate explanations
for each exception.
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<PAGE>
SECURITIZATION AND SALE PROCESS
General. The Conduit Operations will utilize warehouse line agreements with
ICH to finance the origination and purchase of Commercial Mortgages. For a
description of the terms of the Company's existing warehouse line agreement,
see "Management's Discussion and Analysis of Financial Conditions and Results
of Operations--Liquidity and Capital Resources." When a sufficient volume of
Commercial Mortgages with similar characteristics has been accumulated,
generally $100 million to $200 million, ICCC will securitize them through the
issuance of a CMBS in the form of a REMIC or resell them in bulk whole loan
sales. It is anticipated that the period between the time ICCC commits to
purchase a Commercial Mortgage and the time it sells or securitizes Commercial
Mortgages will generally range from 90 to 180 days, depending on certain
factors, including the length of the purchase commitment period, the loan
volume by product type and the securitization process.
Any decision to form a REMIC or to sell Commercial Mortgages in bulk by ICCC
is influenced by a variety of factors. REMIC transactions are generally
accounted for as sales of the Commercial Mortgages and can eliminate or
minimize any long-term residual investment in such loans. REMIC securities
consist of one or more classes of "regular interests" and a single class of
"residual interest." The regular interests are tailored to the needs of
investors and may be issued in multiple classes with varying maturities,
average lives and interest rates. These regular interests are predominantly
senior securities but, in conjunction with providing credit enhancement, may
be subordinated to the rights of other regular interests. The residual
interest represents the remainder of the cash flows from the Commercial
Mortgages (including, in some instances, reinvestment income) over the amounts
required to be distributed to the regular interests. In some cases, the
regular interests may be structured so that there is no significant residual
cash flow, thereby allowing ICCC to sell its entire interest in the Commercial
Mortgages. As a result, in some cases, all of the capital originally invested
in the Commercial Mortgages by the Company is redeployed in the Conduit
Operations. As part of its operations, the Company may retain regular and
residual interests on a short-term or long-term basis.
Credit Enhancement. Any REMICs or CMOs created by the Conduit Operations or
the Long-Term Investment Operations are expected to be structured so that one
or more of the classes of such securities are rated investment grade by at
least one nationally recognized rating agency. In contrast to Agency
Certificates in which the principal and interest payments are guaranteed by
the U.S. government or an agency thereof, securities created by Conduit
Operations or the Long-Term Investment Operations do not benefit from any such
guarantee. The ratings for the Conduit Operations' CMBSs or the Long-Term
Investment Operations' CMOs are based upon the perceived credit risk by the
applicable rating agency of the underlying Commercial Mortgages, the structure
of the securities, and the associated level of credit enhancement. Credit
enhancement is designed to provide protection to the security holders in the
event of borrower defaults and other losses including those associated with
fraud or reductions in the principal balances or interest rates on Commercial
Mortgages as required by law or a bankruptcy court.
The Conduit Operations or the Long-Term Investment Operations may utilize
multiple forms of credit enhancement, including special hazard insurance,
letters of credit, surety bonds, over-collateralization and subordination or
any combination thereof. In determining whether to provide credit enhancement
through subordination or other credit enhancement methods, the Conduit
Operations and the Long-Term Investment Operations take into consideration the
costs associated with each method.
Each series of CMBSs is typically fully payable from the mortgage assets
underlying such series, and the recourse of investors is limited to such
assets and any associated credit enhancement features, such as
senior/subordinated structures. To the extent the Company holds subordinated
securities, a form of credit enhancement, the Company generally bears all
losses prior to the related senior security holders. Generally, any losses in
excess of the credit enhancement obtained are borne by the security holders.
Except in the case of a breach of the standard representations and warranties
made by the Company when Commercial Mortgages are securitized, such securities
are non-recourse to the Company. Typically, the Company has recourse to the
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<PAGE>
correspondents of Commercial Mortgages for any such breaches, but there are no
assurances of the correspondent's abilities to honor their respective
obligations.
Ratings of CMBSs are based primarily upon the characteristics of the pool of
underlying Commercial Mortgages and associated credit enhancements. A decline
in the credit quality of such pools (including delinquencies and/or credit
losses above initial expectations), or of any third-party credit enhancer, or
adverse developments in general economic trends affecting real estate values
or the mortgage industry, could result in downgrades of such ratings.
HEDGING
The Company will conduct certain hedging activities in connection with both
its Long-Term Investment Operations, only with respect to its liabilities, and
its Conduit Operations.
Long-term Investment Operations. To the extent consistent with ICH's
election to qualify as a REIT, the Company follows a hedging program intended
to protect against interest rate changes and to enable the Company to earn net
interest income in periods of generally rising, as well as declining or
static, interest rates. Specifically, the Company's hedging program is
formulated with the intent to offset the potential adverse effects resulting
from (1) interest rate adjustment limitations on its Commercial Mortgages and
CMBSs and (2) the differences between the interest rate adjustment indices and
interest rate adjustment periods of its adjustable rate Commercial Mortgages
secured by such loans and related borrowings. As part of its hedging program,
the Company also monitors on an ongoing basis the prepayment risks that arise
in fluctuating interest rate environments.
The Company's hedging program encompasses a number of procedures. The
Company will structure its borrowing agreements to have a range of different
maturities (although substantially all will have maturities of less than one
year). As a result, the Company adjusts the average maturity of its borrowings
on an ongoing basis by changing the mix of maturities as borrowings come due
and are renewed. In this way, the Company minimizes any differences between
interest rate adjustment periods of Commercial Mortgages and related
borrowings that may occur due to prepayments of Commercial Mortgages or other
factors.
The Company may occasionally purchase interest rate caps to limit or
partially offset adverse changes in interest rates associated with its
borrowings. In a typical interest rate cap agreement, the cap purchaser makes
an initial lump sum cash payment to the cap seller in exchange for the
seller's promise to make cash payments to the purchaser on fixed dates during
the contract term if prevailing interest rates exceed the rate specified in
the contract. In this way, the Company generally hedges as much of the
interest rate risk arising from lifetime rate caps on Commercial Mortgages and
from periodic rate and/or payment caps as the Company determines is in the
best interests of the Company, given the cost of such hedging transactions and
the need to maintain ICH's status as a REIT. Such periodic caps on the
Company's Commercial Mortgages may also be hedged by the purchase of mortgage
derivative securities. Mortgage derivative securities can be effective hedging
instruments in certain situations as the value and yields of some of these
instruments tend to increase as interest rates rise and tend to decrease in
value and yields as interest rates decline, while the experience for others is
the converse. The Company intends to limit its purchases of mortgage
derivative securities to investments that qualify as Qualified REIT Assets or
Qualified Hedges so that income from such investments will constitute
qualifying income for purposes of the 95% and 75% gross income tests. To a
lesser extent, the Company, through its Conduit Operations, may enter into
interest rate swap agreements, buy and sell financial futures contracts and
options on financial futures contracts and trade forward contracts as a hedge
against future interest rate changes; however, the Company will not invest in
these instruments unless the Company and the Manager are exempt from the
registration requirements of the Commodity Exchange Act or otherwise comply
with the provisions of that Act. The REIT provisions of the Code may restrict
the Company's ability to purchase certain instruments and may severely
restrict the Company's ability to employ other strategies. See "Federal Income
Tax Considerations." In all its hedging transactions, the Company deals only
with counterparties that the Company believes are sound credit risks.
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<PAGE>
Conduit Operations. In conducting its Conduit Operations, ICCC will be
subject to the risk of rising mortgage interest rates between the time it
commits to purchase Commercial Mortgages at a fixed price and the time it
sells or securitizes those Commercial Mortgages. To mitigate this risk, ICCC
will enter into transactions designed to hedge interest rate risks, which may
include mandatory and optional forward selling of Commercial Mortgages or
CMBSs' interest rate caps, floors and swaps, and buying and selling of futures
and options on futures and U.S. Treasury obligations. The nature and quantity
of these hedging transactions will be determined by the management of ICCC or
RAI based on various factors, including market conditions and the expected
volume of Commercial Mortgage purchases.
Costs and Limitations. The Company has implemented a hedging program
designed to provide a level of protection against interest rate risks.
However, an effective hedging strategy is complex, and no hedging strategy can
completely insulate the Company from interest rate risks. Moreover, as noted
above, certain of the federal income tax requirements that ICH must satisfy to
qualify as a REIT limit the Company's ability to fully hedge its interest rate
risks. The Company monitors carefully, and may have to limit, its hedging
strategies to assure that it does not realize excessive hedging income or hold
hedging assets having excess value in relation to total assets, which would
result in ICH's disqualification as a REIT or, in the case of excess hedging
income, the payment of a penalty tax for failure to satisfy certain REIT
income tests under the Code, provided such failure was for reasonable cause.
See "Federal Income Tax Considerations."
In addition, hedging involves transaction and other costs, and such costs
increase dramatically as the period covered by the hedging protection
increases and also increase in periods of rising and fluctuating interest
rates. Therefore, the Company may be prevented from effectively hedging its
interest rate risks, without significantly reducing the Company's return on
equity.
SERVICING
The Company currently purchases all of its Commercial Mortgages on a
"servicing released" basis and thereby acquires the servicing rights.
Commercial Mortgages purchased on a servicing released basis are unencumbered
by any obligation on the part of the party purchasing the mortgages to pay a
fee to a third party to service the Commercial Mortgages. The rights of any
party to service Commercial Mortgages for a fee are commonly referred to as
"commercial mortgage servicing rights" or "CMSRs." The Company has established
guidelines for the servicing of Commercial Mortgages and for monitoring the
performance of other loan servicers which service Commercial Mortgages for the
Company. Servicing includes collecting and remitting loan payments, making
required advances, accounting for principal and interest, holding escrow or
impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent
borrowers and supervising foreclosures and property dispositions in the event
of unremedied defaults in accordance with the Company's guidelines.
The Company subcontracts all of its servicing obligations under Commercial
Mortgages purchased on a "servicing released basis" or originated pursuant to
sub-servicing agreements (the "Sub-Servicing Agreements") with terms that are
in accordance with ICCC's guidelines, the Commercial Mortgage documents,
customary and usual standards for servicers of Commercial Mortgages and
applicable laws. Commercial Mortgage servicing fees paid to these sub-
servicers generally range from 0.08% to 0.30% per annum on the declining
principal balances of the loans sub-serviced. Each sub-servicer is required to
pay all expenses related to the performance of its duties under the Sub-
Servicing Agreement. Each Sub-Servicing Agreement is cancelable by either
party upon giving notice. The Company believes that the terms of the Sub-
Servicing Agreements are comparable to industry standards.
The Company may terminate a Sub-Servicing Agreement with any sub-servicer
upon the happening of one or more of the events specified in the Sub-Servicing
Agreement. Such events generally relate to the sub-servicer's proper and
timely performance of its duties and obligations under the Sub-Servicing
Agreement and the sub-servicer's financial stability. In addition, the Company
will have the right to terminate any Sub-Servicing Agreement with respect to
any or all of the Commercial Mortgages subserviced thereunder, without cause
upon
54
<PAGE>
30 to 90 days' notice and may require a termination fee that is competitive
with that which is obtainable generally in the industry. If required, the
termination fee will be based on the aggregate outstanding principal amount of
the Commercial Mortgages then serviced under the Sub-Servicing Agreement. Each
Sub-Servicing Agreement will provide that the subservicer may not assign any
of its rights or obligations with respect to the Commercial Mortgages serviced
for the Company without the Company's consent. With respect to Commercial
Mortgages that support CMOs or CMBSs, the Company may not be able to terminate
a sub-servicer without the approval of the trustee or bond insurer for such
securities.
In the future, ICCC may offer its correspondents of Commercial Mortgages the
opportunity to retain commercial mortgage servicing rights to the Commercial
Mortgages sold by them to the Company but only to the extent that it is
consistent with ICH's classification as a REIT. Each servicer will enter into
an agreement with the Company to service the Commercial Mortgages for ICCC in
accordance with ICCC's guidelines, the Commercial Mortgage documents,
customary and usual standards for servicers of Commercial Mortgages and
applicable laws (the "Servicing Agreements"). The Company believes that the
terms of these Servicing Agreements will be comparable to industry standards.
Commercial mortgage servicing fees payable to the servicers under the
Servicing Agreements will generally range from 0.125% to 0.375% per annum on
the declining principal balances of the Commercial Mortgages serviced. As
additional compensation, each servicer will retain any late payment charges
collected from borrowers and assumption and other ancillary fees collected
from borrowers in connection with the servicing of the Commercial Mortgages.
Additionally, each servicer may retain any benefit derived from the interest
earned on principal and interest payments held between the date of receipt and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds to the extent not payable to the borrowers. Each
servicer will be required to pay all of its expenses related to the
performance of its duties under the Servicing Agreement.
The servicer will be required to make advances of principal and interest,
taxes and required insurance premiums that are not collected from borrowers
with respect to any Commercial Mortgage, only if the servicer determines that
such advances are recoverable from the mortgagor, insurance proceeds or other
sources with respect to such Commercial Mortgage. If such advances are made,
the servicer generally will be reimbursed prior to the Company receiving the
remaining proceeds. The servicer also will be entitled to reimbursement by the
Company for expenses incurred by it in connection with the liquidation of
defaulted Commercial Mortgages and in connection with the restoration of
mortgaged property. If claims are not made or paid under applicable insurance
policies or if coverage thereunder has ceased, the Company suffers a loss to
the extent that the proceeds from liquidation of the mortgaged property, after
reimbursement of the servicer's expenses in the sale, are less than the
principal balance of the related Commercial Mortgage. The servicer will be
responsible to the Company for any loss suffered as a result of the servicer's
failure to make and pursue timely claims or as a result of actions taken or
omissions by the servicer which cause the policies to be canceled by the
insurer. Each servicer will be required to represent and warrant that the
Commercial Mortgages it services comply with any loan servicing guidelines
promulgated by the Company and agree to repurchase, at the request of the
Company, any Commercial Mortgage it services in the event that the servicer
fails to make such representations or warranties or any such representation or
warranty is untrue.
At March 31, 1997, there were no delinquencies on those Commercial Mortgages
comprising the Company's servicing portfolio.
55
<PAGE>
During periods of declining interest rates, prepayments on Commercial
Mortgages increase as borrowers look to refinance at lower rates, resulting in
a decrease in the value of the Commercial Mortgage servicing portfolio.
Commercial Mortgages with higher interest rates are more likely to result in
prepayments. For a discussion regarding how prepayments may affect the
Company's operations, see "Risk Factors-- Operational Risks--Net Interest
Income May be Adversely Affected by Interest Rate Fluctuations; Commercial
Mortgages Subject to Prepayments." The following table sets forth certain
information regarding the number of and aggregate principal balance of the
Commercial Mortgages serviced by the Company, including both fixed and
adjustable rate Commercial Mortgages, at various mortgage interest rates.
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH MARCH 31, 1997
-------------------------------------------
NUMBER AGGREGATE WEIGHTED AVERAGE
OF LOANS PRINCIPAL BALANCE INTEREST RATE
-------- ----------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Less than 5%........................ -- -- --
5.00-5.49........................... -- -- --
5.50-5.99........................... -- -- --
6.00-6.49........................... -- -- --
6.50-6.99........................... -- -- --
7.00-7.49........................... -- -- --
7.50-7.99........................... -- -- --
8.00-8.49........................... -- -- --
8.50-8.99........................... 152 $10.2 8.63%
9.00-9.49........................... 20 7.3 9.00%
9.50-9.99........................... -- -- --
10.00-10.49......................... -- -- --
10.50-10.99......................... -- -- --
11.00-11.49......................... -- -- --
11.50 +............................. -- -- --
--- -----
Total........................... 172 $17.5 8.78%
=== =====
</TABLE>
The following table sets forth the geographic distribution of the Company's
servicing portfolio.
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH MARCH 31, 1997
--------------------------------------------
NUMBER AGGREGATE % OF AGGREGATE
OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Arizona............................ 152 $10.2 58.4%
California......................... 20 7.3 41.6
--- ----- -----
Total.......................... 172 $17.5 100.0%
=== ===== =====
</TABLE>
The Commercial Mortgages purchased by the Company since its inception have
not been outstanding for any periods commencing earlier than January 1997.
Consequently, the Company's delinquency and foreclosure experience to date may
not be indicative of future results.
In the future, the Company expects to issue CMBSs or CMOs backed by the
Commercial Mortgages it originates or purchases through its Conduit
Operations. When CMBSs or CMOs are issued, a trust is created, and Commercial
Mortgages are deposited into the trust for the benefit of the holders of the
securities. When the trust is created, the loan servicing function for the
Commercial Mortgages deposited into the trust are commonly divided into two
areas of responsibility: master servicing and special servicing. The trustee
and the depositor of the Commercial Mortgages enter into an agreement,
typically called a pooling and servicing agreement, with one or more parties
who will assume the responsibilities for master servicing and special
servicing. Master
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<PAGE>
servicing generally includes all of the servicing activities associated with
non-defaulted Commercial Mortgages which typically includes collecting and
remitting loan payments, making required advances, accounting for principal
and interest, holding escrow impound or reserve funds for payment of taxes and
insurance, if applicable, making inspections or improvements of the mortgaged
property, and remitting funds and reporting to the trustee. Special servicing
generally includes managing all loan default matters and other more
complicated issues associated with the servicing of the loans. Special
servicing generally includes contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of borrower defaults which
are not remedied. Special servicing also includes overseeing condemnation
issues, insurance claims for casualty losses on collateral property and other
matters of this nature. ICCC will contract with qualified Commercial Mortgage
master servicers to assume the master servicing role in these securitizations
and ICCC expects to act as special servicer. The Company believes that acting
as special servicer will allow it to monitor and manage those matters of
significant risk associated with the Commercial Mortgages. In this manner, the
Company believes it will be best positioned to protect any beneficial interest
it may retain in the trusts it creates. However, the Company reserves the
right to act as either the master servicer, the special servicer, both or
neither in the future. In addition, ICCC acts as the servicer for all loans
purchased by the Long-Term Investment Operations. With respect to its function
as a servicer for the Long-Term Investment Operations, ICCC and ICH entered
into a Servicing Agreement effective in February 1997 having terms
substantially similar to those described above.
When ICCC purchases Commercial Mortgages that include the associated
servicing rights or originates Commercial Mortgages, the allocated cost of the
servicing rights will be reflected on its financial statements as CMSRs. CMSRs
will be amortized in proportion to, and over the period of, expected future
net servicing income.
SFAS No. 125 requires that a portion of the cost of originating or
purchasing a mortgage loan be allocated to the mortgage loan servicing rights
based on its fair value relative to the loan as a whole. To determine the fair
value of the servicing rights created, ICCC 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, ICCC
incorporates assumptions that it believes market participants would use in
estimating future net servicing income which include estimates of the cost of
servicing or subservicing, an inflation rate, ancillary income per Commercial
Mortgage, a prepayment rate, loss severity, a default rate and a discount rate
commensurate with the risks involved.
CMSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the
time CMSRs are recorded could result in a decline in the fair value of the
CMSRs below their carrying value requiring a provision to increase the CMSRs'
valuation allowance. The rate of prepayment of Commercial Mortgages 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 Commercial Mortgage prepayment rates may vary depending on
the particular type of Commercial Mortgage. 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 ICCC's Commercial
Mortgages, and other considerations. There can be no assurance of the accuracy
of the Company's prepayments estimates. If actual prepayments with respect to
Commercial Mortgages serviced occur more quickly than were projected at the
time such Commercial Mortgages were sold, the carrying value of the CMSRs may
have to be reduced through a provision recorded to increase the CMSRs'
valuation allowance in the period the fair value declined below the CMSRs'
carrying value. If actual prepayments with respect to Commercial Mortgages
occur more slowly than estimated, the carrying value of CMSRs would not
increase, although total income would exceed previously estimated amounts and
the related valuation allowances, if any, could be unnecessary.
REGULATION
The rules and regulations applicable to the Conduit Operations, among other
things, prohibit discrimination and establish underwriting guidelines that
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts. Commercial Mortgage
origination and purchase activities are subject to, among other laws, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act and
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<PAGE>
the Real Estate Settlement Procedures Act and the regulations promulgated
thereunder that prohibit discrimination and require the disclosure of certain
basic information to mortgagors concerning credit terms and settlement costs.
Additionally, there are various state and local laws and regulations
affecting Conduit Operations. ICCC is licensed in those states requiring such
a license. Mortgage operations also may be subject to applicable state usury
statutes. The Company is presently in material compliance with all material
rules and regulations to which it is subject.
COMPETITION
In originating Commercial Mortgages and issuing CMBSs, the Company will
compete 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. CMBSs issued by the Conduit Operations
and the Long-Term Investment Operations will face competition from other
investment opportunities available to prospective investors.
The Company will face competition in its Conduit Operations from other
financial institutions, including but not limited to banks and investment
banks. Many of the institutions with which the Company will compete in its
Conduit Operations have significantly greater financial resources than the
Company.
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 the Company's
Commercial Mortgages compete with the mortgaged properties of such types to
attract residents, retail correspondents, tenants and customers. The leasing
of real estate is highly competitive. The principal means of competition are
price, location and the nature and condition of the facility to be leased. A
borrower under a Commercial Mortgages competes with all lessors and developers
of comparable types of real estate in the area in which the mortgaged property
is located. Such lessors or developers could have lower rentals, lower
operating costs, more favorable locations or better facilities. While a
borrower under a Commercial Mortgage may renovate, refurbish or expand the
mortgaged property to maintain it and remain competitive, such renovation,
refurbishment or expansion may itself entail significant risk. Increased
competition could adversely affect income from 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.
EMPLOYEES
As of March 31, 1997, ICCC employed nine persons. ICCC believes that
relations with its employees are good. ICCC is not a party to any collective
bargaining agreement.
FACILITIES
Pursuant to the Management Agreement, RAI will contract with IMH to provide
space for the Company's executive offices and administrative facilities at
IMH's executive offices in Santa Ana Heights, California. ICCC's executive
offices and administrative facilities occupy approximately 3,500 square feet
of space in Irvine, California at an aggregate monthly rental of approximately
$7,000. Management believes that as the Company grows, it may require
additional space and that alternate space at comparable rental rates is
available, if necessary.
58
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
DIRECTORS AND EXECUTIVE OFFICERS
The Company was incorporated in the State of Maryland on February 3, 1997.
The following table sets forth certain information with respect to the
directors and executive officers of ICH and ICCC:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Joseph R. Tomkinson (S)... 49 Chairman of the Board and Chief Executive
Officer of ICH and Chairman of the Board and
Chief Executive Officer of ICCC
William S. Ashmore........ 47 President and Chief Operating Officer of ICH,
Executive Vice President and Director of ICCC
Richard J. Johnson........ 35 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of ICH and ICCC and
Director of ICCC
William D. Endresen....... 42 Senior Vice President of ICH and President and
Director of ICCC
Mary C. Glass-Schannault.. 43 Senior Vice President of ICH and Senior Vice
President of ICCC
James Walsh............... 46 Director of ICH
Frank P. Filipps 0........ 49 Director of ICH
Stephan R. Peers 0........ 44 Director of ICH
Thomas J. Poletti+, (S)... 39 Director of ICH
Timothy R. Busch+, 0, (S). 42 Director of ICH
</TABLE>
- --------
+ Unaffiliated Director
0 Member of Audit Committee
(S)Member of Compensation Committee
JOSEPH R. TOMKINSON has been Chairman of the Board and Chief Executive
Officer of ICH and Chairman of the Board and Chief Executive Officer of ICCC
since their formation. Mr. Tomkinson has been the Vice Chairman of the Board
and Chief Executive Officer of IMH and Chairman of the Board of ICIFC and IWLG
since August 1995. Mr. Tomkinson served as President of ICII (Nasdaq-ICII)
from January 1992 to February 1996 and, from 1986 to January 1992, he was
President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of the
companies that combined to become ICII in 1992. Mr. Tomkinson has been a
Director of ICII since December 1991. From 1984 to 1986, he was employed as
Executive Vice President of Loan Production for American Mortgage Network, a
privately owned mortgage banker. Mr. Tomkinson brings 22 years of combined
experience in real estate, real estate financing and mortgage banking to the
Company.
WILLIAM S. ASHMORE has been President and Chief Operating Officer of ICH and
Executive Vice President and a Director of ICCC since their formation. Mr.
Ashmore has been President and Chief Operating Officer of IMH, Executive Vice
President and a Director of ICIFC and President and a Director of IWLG since
August 1995. In March 1997, Mr. Ashmore became President of ICIFC. From August
1993 to February 1996, he was Executive Vice President and a Director of
Secondary Marketing at ICII, having been its Senior Vice President of
Secondary Marketing since January 1988. From 1985 to 1987, he was Chief
Executive Officer and Vice Chairman of the Board of Century National Mortgage
Corporation, a wholesale mortgage banking company. From 1978 to 1985, Mr.
Ashmore was President and co-owner of Independent Homes Real Estate Company,
which evolved in 1980 into a mortgage banking firm that was sold to Century
National Bank in 1985. Mr. Ashmore has over 20 years of combined experience in
real estate, real estate financing and mortgage banking.
RICHARD J. JOHNSON has been Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of ICH and ICCC and a Director of ICCC since their
formation. Mr. Johnson has been Senior Vice President, Chief Financial
Officer, Treasurer and Secretary of IMH and ICIFC since August 1995, and a
Director of ICIFC since March 1996. From September 1992 to March 1995, Mr.
Johnson was Senior Vice President and Chief Financial Officer of ICII. From
November 1989 to September 1992, Mr. Johnson was Vice President and Controller
of
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<PAGE>
ICII. From February 1988 to October 1989, he was Vice President and Chief
Financial Officer of Bayhill Service Corporation, a mortgage banking company,
and Vice President of Capital Savings and Loan, the parent of Bayhill Service
Corporation. From January 1987 to February 1988, Mr. Johnson was Vice
President of Finance for Merrill Lynch Huntoon Paige, Inc., a mortgage banking
subsidiary of Merrill Lynch Capital Markets. Mr. Johnson is a Certified Public
Accountant.
WILLIAM D. ENDRESEN has been Senior Vice President of ICH and President and
Director of ICCC since their formation. From 1995 through February 1997, Mr.
Endresen was the Chairman and a Director of American Capital Resource, Inc., a
commercial mortgage banking company which originated and closed bulk
condominium and multi-family transactions in the Western United States. Mr.
Endresen was President of Butterfield Mortgage Corporation from May 1993
through 1995 and developed, originated and closed numerous bulk condominium
and multi-family transactions. From 1987 to 1992, Mr. Endresen was Director of
Acquisitions and Project Finance for Monnig Development, Inc., a Southern
California based real estate development company. Mr. Endresen has more than
24 years of combined experience in real estate, real estate financing and
commercial mortgage banking.
MARY C. GLASS-SCHANNAULT has been Senior Vice President of each of ICH and
ICCC since their formation. Ms. Glass-Schannault has been Vice President of
IMH and Senior Vice President, Operations of ICIFC and IWLG since August 1995.
From April 1995 through November 1996, Ms. Glass-Schannault was the Senior
Vice President and Managing Director of Imperial Capital Markets Group, a
division of ICII, and from February 1993 to April 1995, she was Senior Vice
President of ICIFC, a division of ICII. From 1991 through 1993, Ms. Glass-
Schannault acted as a mortgage banking consultant. From 1990 through 1991, she
was an Executive Vice President at PriMerit Mortgage Corporation. From 1988 to
1990, Ms. Glass-Schannault was President of SCS Mortgage. From September 1984
through September 1988, Ms. Glass-Schannault was Senior Vice President of
Concor Financial Services.
JAMES WALSH has been a Director of ICH since February 1997 and a Director of
IMH since August 1995. Mr. Walsh is an Executive Vice President of Walsh
Securities, Inc. where he directs mortgage loan production, sales and
securitization. Mr. Walsh was an executive of Donaldson, Lufkin and Jenrette
Securities Corporation from January 1989 through March 1996 where he oversaw
residential mortgage securitization, servicing brokerage and mortgage banking
services. From February 1987 to December 1988, Mr. Walsh was an executive in
the mortgage banking department at Bear Stearns & Company. From December 1985
to February 1987, Mr. Walsh was a senior banking officer at Carteret Savings
Bank.
FRANK P. FILIPPS has been a Director of ICH since February 1997 and a
Director of IMH since August 1995. Mr. Filipps was elected President of CMAC
Investment Corporation and Chairman, President and Chief Executive Officer of
Commonwealth Mortgage Assurance Company ("CMAC") in January 1995. Mr. Filipps
joined CMAC in 1992 as Senior Vice President and Chief Financial Officer,
where he was responsible for the company's financial, investment and data
processing operations, as well as the legal and human resources functions. In
1994, Mr. Filipps was promoted to Executive Vice President and Chief Operating
Officer for both CMAC Investment Corporation and CMAC, where his additional
responsibilities included the company's sales, marketing, underwriting and
risk management. In 1975, Mr. Filipps joined American International Group and,
from 1989 to 1992, he was Vice President and Treasurer. Prior to that, he was
a Second Vice President for Chase Manhattan Bank, N.A., in New York.
STEPHAN R. PEERS has been a Director of ICH since February 1997 and a
Director of IMH since October 1995. Since April 1993, Mr. Peers has been an
Executive Vice President of International Strategic Finance Corporation, Ltd.,
where he performs corporate finance services for overseas issuers. From April
1989 to April 1993, Mr. Peers was a Vice President in corporate finance at
Montgomery Securities where he specialized in financial services institutions.
From March 1987 to March 1989, Mr. Peers was a Vice President at The First
Boston Corporation in mortgage finance specializing in mortgage related
products. Mr. Peers has served as a Managing Director of Resource Bancshares
Corporation since August 1995.
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<PAGE>
THOMAS J. POLETTI has been a Director of ICH since March 1997. Mr. Poletti
has been with the law firm of Freshman, Marantz, Orlanski, Cooper & Klein
since 1983 and a partner of the firm since 1989. Freshman, Marantz, Orlanski,
Cooper & Klein acts as counsel to the Company and IMH. See "Certain
Transactions" and "Legal Matters."
TIMOTHY R. BUSCH has been a director of ICH since March 1997. Since November
1978, Mr. Busch has been an attorney in private practice. Since October 1984,
Mr. Busch has been the President and Chief Executive Officer of T. R. Busch
Realty Corporation, a licensed real estate corporation, which filed a
voluntary petition pursuant to Chapter 11 of the Bankruptcy Code on February
22, 1994; this corporation has been operating outside of bankruptcy since
February 20, 1995. Mr. Busch is also President and Chief Executive Officer of
TRB Management, Inc., a California corporation, which is the sole general
partner of Mercado del Sol Investors Limited Partners, an Arizona limited
partnership. Mercado del Sol Investors Limited Partnership filed a voluntary
petition pursuant to Chapter 11 of the Bankruptcy Code on August 12, 1993.
All directors are elected at each annual meeting of the Company's
stockholders to serve until the next annual meeting of stockholders and until
their successors are elected and qualify. Replacements for vacancies occurring
among the Unaffiliated Directors will be elected by a majority vote of the
remaining Directors, including a majority of the Unaffiliated Directors. All
officers are elected and may be removed by the Board of Directors. The Company
pays an annual director's fee to each Unaffiliated Director equal to $20,000
and reimburses such Directors' costs and expenses for attending Board
meetings.
LIMITATION OF LIABILITY AND INDEMNIFICATION
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 the MGCL.
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 status as a present or
former director or officer 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, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any
61
<PAGE>
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 or
omission of the director or officer was material to the matter giving rise to
the proceeding and (1) was committed in bad faith or (2) 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 requires the Company, as a condition to advancing expenses, to obtain (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
Company and (b) a written undertaking by him or on his behalf to repay the
amount paid or reimbursed by the Company if it shall ultimately be determined
that the standard of conduct was not met. Insofar as indemnification by the
Company for liabilities arising under the Securities Act may be permitted to
directors, officers and controlling persons of the Company pursuant to
indemnity agreements or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
EXECUTIVE COMPENSATION
On the closing of this Offering, William D. Endresen will enter into a five-
year employment agreement at an annual salary of $120,000, subject to
adjustment for inflation. Mr. Endresen owns 12,000 shares of ICH Common Stock
and on the closing of this Offering will be granted stock options to purchase
an additional 50,000 shares of ICH Common Stock with a per share exercise
price equal to the IPO Price. See "--Stock Option and Awards Plan," "Certain
Transactions" and "Principal Stockholders."
Joseph R. Tomkinson, William S. Ashmore, Richard J. Johnson and Mary C.
Glass-Schannault, who are executive officers of ICH are also officers of IMH
and ICIFC and will become officers of RAI upon the closing of the Offering.
These officers have modified their employment agreements with ICIFC to also
become officers of the Manager (and of ICH and ICCC) upon the closing of this
Offering. The Manager will agree to cause each of its officers to devote as
much of his or her time to the operations of the Company as is reasonably
necessary. The Company will reimburse the Manager which will reimburse ICIFC
on a dollar for dollar basis (includes the service charge referenced below),
for the actual cost of providing the services of these officers to the Company
based upon the compensation payable to them by ICIFC, plus a 15% service
charge. The following is the amount of compensation payable by ICIFC to
Mssers. Tomkinson, Ashmore, and Johnson and Ms. Glass-Schannault for the year
ending December 31, 1997.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CASH COMPENSATION
------------------ ---------------------
<S> <C>
Joseph R. Tomkinson.... $300,000 (1)(2)(3)(4)
William S. Ashmore..... $225,000 (1)(2)(3)(4)
Richard J. Johnson..... $112,500 (1)(3)(4)
Mary C. Glass-
Schannault............ $ 92,930 (1)(3)
</TABLE>
- --------
(1) Each of the persons in the above table is entitled to be paid a quarterly
bonus equal to the aggregate dividend such person would have received from
the Company on all shares of Common Stock underlying unexercised stock
options held by such person which were outstanding as of the date of IMH's
initial public offering and on the date of payment of said bonus, provided
however that quarterly bonuses will be paid for the next four calendar
quarters thereafter only if the dividend that would be payable by the
Company on shares of its Common Stock for the subject quarter after
payment of all such quarterly bonuses equals or exceeds fifteen percent
(15%) (on an annualized basis) of $13.00. Such persons will not be
required to refund any portion of such bonuses previously earned
regardless of the level of dividends in subsequent quarters. For the year
ended December 31, 1996 Messrs. Tomkinson, Ashmore and Johnson and Ms.
Glass-Schannault received bonuses of $221,350, $116,500, $68,250 and
$99,148, respectively.
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<PAGE>
(2) Messrs. Tomkinson and Ashmore are each entitled to performance and
profitability bonuses, in no event to exceed their respective base
salaries. For the year ended December 31, 1996, Messrs. Tomkinson and
Ashmore received bonuses of $249,847 and $121,378, respectively.
(3) Messrs. Tomkinson, Ashmore, Johnson and Ms. Glass-Schannault own 76,800,
76,800, 62,400 and 12,000 shares of ICH Common Stock, respectively, and on
the closing of this Offering each of them will be granted stock options to
acquire 10,000 shares of ICH Common Stock at a per share exercise price
equal to the IPO Price. See "--Stock Option and Awards Plan," "Certain
Transactions" and "Principal Stockholders."
(4) RAI is owned equally by each of Messrs. Tomkinson, Ashmore, and Johnson.
STOCK OPTION AND AWARDS PLAN
In April 1997, the Company adopted a 1997 Stock Option and Awards Plan (the
"Stock Option and Awards Plan") which provides for the grant of qualified
incentive stock options ("ISOs") which meet the requirements of section 422 of
the Code, stock options not so qualified ("NQSOs"), deferred stock, restricted
stock, performance shares, stock appreciation and limited stock appreciation
rights awards ("Awards") and dividend equivalent rights ("DERs").
The purpose of the Stock Option and Awards Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to others whose job performance affects
the Company. The Stock Option and Awards Plan is administered by the Board of
Directors or a Committee, appointed by the Board of Directors (the
"Administrator"). ISOs may be granted to the officers and key employees of the
Company. NQSOs and Awards may be granted to the directors, officers, key
employees and agents and consultants of the Company, any of its subsidiaries
or parent corporation, of RAI, and to the directors, officers and key
employees of ICCC.
The Stock Option and Awards Plan provides for granting of DERs in tandem
with all options granted under the Stock Option and Awards Plan. Such DERs
accrue for the account of the optionee shares of Common Stock upon the payment
of cash dividends on outstanding shares of Common Stock. The number of shares
accrued is determined by a formula and such shares are currently transferred
to the optionee only upon exercise of the related option. The Stock Option and
Awards Plan permits DERs to be granted under the Stock Option and Awards Plan
with certain characteristics. First, DERs can be issued in "current-pay" form
so that payments can be made to the optionee at the same time as dividends are
paid to holders of outstanding Common Stock. Second, DERs can be made eligible
to participate not only in cash distributions but also distributions of stock
or other property made to holders of outstanding Common Stock. Shares of
Common Stock accrued for the account of the optionee pursuant to a DER grant
may also be made eligible to receive dividends and distributions. Finally,
DERs can be made "performance based" by conditioning the right of the holder
of the DER to receive any dividend equivalent payment or accrual upon the
satisfaction of specified performance objectives.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option and Awards Plan currently authorizes the
grant of options to purchase, and Awards of, an aggregate of an estimated
700,000 shares. The shares reserved for issuance pursuant to the Company's
Stock Option and Awards Plan will be increased or decreased to an amount equal
to 10% of the shares sold in the Offering, subject to a minimum of 400,000
shares. If an option granted under the Stock Option and Awards Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance
of further options or Awards under the Stock Option and Awards Plan.
Unless previously terminated by the Board of Directors, the Stock Option and
Awards Plan will terminate in April 2007, and no options or Awards may be
granted under the Stock Option and Awards Plan thereafter.
Options granted under the Stock Option and Awards Plan will become
exercisable in accordance with the terms of the grant made by the
Administrator. Awards will be subject to the terms and restrictions of the
Award
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<PAGE>
made by the Administrator. The Administrator has discretionary authority to
select participants from among eligible persons and to determine at the time
an option or Award is granted when and in what increments shares covered by
the option may be purchased and, in the case of options, whether it is
intended to be an ISO or a NQSO provided, however, that certain restrictions
applicable to ISOs are mandatory, including a requirement that ISOs not be
issued for less than 100% of the then fair market value of the Common Stock
(110% in the case of a grantee who holds more than 10% of the outstanding
Common Stock) and a maximum term of ten years (five years in the case of a
grantee who holds more than 10% of the outstanding Common Stock).
Under current law, ISOs may not be granted to any director of the Company
who is not also an employee, or to directors, officers and other employees of
entities unrelated to the Company. No options or Awards may be granted under
the Stock Option and Awards Plan to any person who, assuming exercise of all
options held by such person, would own or be deemed to own more than 9.8% of
the outstanding shares of equity stock of the Company.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
equity stock). Options may be granted on terms providing for exercise either
in whole or in part at any time or times during their respective terms, or
only in specified percentages at stated time periods or intervals during the
term of the option.
The exercise price of any option granted under the Stock Option and Awards
Plan is payable in full in cash, or its equivalent as determined by the
Administrator. The Company may make loans available to option holders to
exercise options evidenced by a promissory note executed by the optionholder
and secured by a pledge of Common Stock with fair market value at least equal
to the principal of the promissory note unless otherwise determined by the
Administrator.
The Board of Directors may from time to time revise or amend the Stock
Option and Awards Plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may impair the rights of any
participant under any outstanding Award without his consent or may, without
stockholder approval, increase the number of shares subject to the Stock
Option and Awards Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the
Stock Option and Awards Plan, materially increase the benefits accruing to
participants under the Stock Option and Awards Plan or extend the maximum
option term under the Stock Option and Awards Plan.
The following table sets forth the stock options to be granted to the
Company's current executive officers under the Stock Option and Awards Plan
upon the effective date of this Offering:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
NUMBER OF
SHARES PERCENTAGE
UNDERLYING OF OPTIONS EXERCISE
OPTIONS GRANTED TO PRICE EXPIRATION GRANT DATE
NAME GRANTED(#)(1) EMPLOYEES(%) ($SH)(2) DATE(3) VALUE($)(4)
- ---- ------------- ------------ -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
William D. Endresen..... 50,000 25.0 15.00 July 2007 411,941
Joseph R. Tomkinson..... 10,000 5.0 15.00 July 2007 82,388
William S. Ashmore...... 10,000 5.0 15.00 July 2007 82,388
Richard J. Johnson...... 10,000 5.0 15.00 July 2007 82,388
Mary C. Glass-
Schannault.............. 10,000 5.0 15.00 July 2007 82,388
</TABLE>
- --------
(1) Such stock options vest 33.33% per year on each anniversary of the date of
grant and have been granted with related DERs.
(2) The exercise price for all options will equal the IPO Price.
(3) Such stock options expire ten years from the date of grant or earlier upon
termination of employment.
(4) The fair value of the options to be granted was derived using the Black-
Scholes option pricing model with the following assumptions: risk-free
interest rate of 7.05%, expected lives of ten years and expected
volatility of 23%.
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<PAGE>
Upon the effective date of this Offering, the Company will grant to each of
Messrs. Walsh, Filipps, Peers, Poletti and Busch options to purchase 10,000
shares of Common Stock at a per share exercise price equal to the IPO Price,
vesting 50% on the first anniversary of the date of grant and 50% on the
second anniversary date and an aggregate of 60,000 additional options at a per
share price equal to the IPO Price to employees and consultants vesting one-
third per year beginning on the first anniversary of the date of grant.
401(k) PLAN
On the effective date of this Offering, the Company will commence
participation in the ICII contributory retirement plan ("401(k) Plan") for all
full time employees with at least six months of service, which is designed to
be tax deferred in accordance with the provisions of Section 401(k) of the
Code. The 401(k) Plan provides that each participant may contribute from 2% to
14% of his or her salary, and the Company will contribute to the participant's
plan account at the end of each plan year 50% of the first 4% of salary
contributed by a participant. Under the 401(k) Plan, employees may elect to
enroll on the first day of any month, provided that they have been employed
for at least six months.
Subject to the rules for maintaining the tax status of the 401(k) Plan, an
additional Company contribution may be made at the discretion of the Company,
as determined by the Unaffiliated Directors. Should a discretionary
contribution be made, the contribution would first be allocated to those
employees deferring salaries in excess of 4%. The matching contribution would
be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. Should
discretionary contribution funds remain following the allocation outlined
above, any remaining Company matching funds would be allocated as a 50% match
of employee contributions, on the first 4% of the employee's deferrals.
Company matching contributions will be made as of December 31st each year in
the form of Company Common Stock. No contributions were made for any period
presented herein.
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<PAGE>
RAI ADVISORS, LLC
THE MANAGER
The Manager, RAI, will commence operations as of the closing of the
Offering. Each of the persons who will become executive officers of the
Manager upon the closing of this Offering has significant experience in
purchasing, financing, servicing, securitizing and investing in mortgage loans
and mortgage securities and all of such persons are officers of IMH and ICIFC;
however, they have not previously managed a Commercial Mortgage REIT. RAI is a
recently formed entity with no significant assets and no prior history of
operations. RAI is owned equally by each of Messrs. Tomkinson, Ashmore, and
Johnson. IMH owns all of the outstanding shares of non-voting preferred stock
of ICIFC, its conduit operations, representing 99% of the economic interest in
ICIFC, and Mssrs. Tomkinson, Johnson and Ashmore own all of the outstanding
shares of Common Stock of ICIFC, representing 1% of the economic interest. The
officers of RAI have modified their employment agreements with ICIFC to allow
them to become officers of the Manager (and of ICH and ICCC) upon the closing
of this Offering. The Manager will agree to cause each of its officers to
devote as much of his or her time to the operations of the Company as is
reasonably necessary. ICH will reimburse the Manager, who will reimburse ICIFC
on a dollar for dollar basis (including the service charge referenced below),
for the actual cost of providing the services of these officers to the Company
based upon the compensation payable to them by ICIFC, plus a 15% service
charge. ICH will reimburse the Manager for expenses incurred by the Manager,
plus a service charge of 15% on all expenses owed by the Manager to ICIFC for
costs and expenses owed by the Manager to ICIFC for costs and services under
any submanagement agreement between ICIFC and the Manager. The Manager will
pay all such third parties on a dollar for dollar basis for the aforementioned
amounts received by it from the Company; no such 15% service charge will be
paid to third party service providers other than ICIFC. For the first three
years of the Management Agreement there will be a minimum amount of $500,000
per annum (including the 15% service charge) payable by ICH in connection with
services provided and expenses incurred by the Manager and payable by RAI to
ICIFC. After the third year, ICH will only be responsible for reimbursing
expenses and services provided, with the 15% service charge for amounts due to
ICIFC. See "--Management Agreement--Expenses."
The Company has selected an outside advisor in order to coordinate, assist
and manage the duties and responsibilities of the Company. In order to utilize
the IMH infrastructure, which oversees the daily capital, asset and operations
management, investor relations and human resources functions of IMH and its
affiliates, RAI intends to enter into a submanagement agreement with ICIFC,
the conduit operations of IMH, upon the closing of this Offering to provide
substantially all of the administrative services required by the Company
including facilities and costs associated therewith, technology, human
resources, management information systems, general ledger accounts, check
processing and accounts payable as RAI deems necessary.
RAI was formed as a vehicle through which the IMH management team could
effectively manage the operations of ICH, IMH and any future Affiliated REIT.
ICH believes that contracting directly with IMH to provide services required
under the Management Agreement would have proved unwieldy and cumbersome, if
and when any Affiliated REITs are formed of which RAI is the manager. If ICH
were required to independently hire an executive management team to duplicate
the services to be provided by RAI, ICH believes that it would be subjected to
substantial expenses in terms of fixed salaries, which salary expenses will
not be incurred under the Management Agreement. In addition, ICH believes that
the allocation of expenses on an as needed basis will allow ICH to avoid the
costs to establish the infrastructure currently existing at IMH,
notwithstanding the fact that the Company is required to pay a 15% service
charge on Reimbursable Expenses and Reimbursable Executive Amounts (as those
terms are defined herein).
The address of the Manager is 20371 Irvine Avenue, Santa Ana Heights,
California 92707, telephone (714) 556-0122.
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<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The persons who will become directors and executive officers of the Manager
upon the closing of this Offering are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Joseph R. Tomkinson* Chairman of the Board and Chief Executive Officer
William S. Ashmore* President and Director
Richard J. Johnson* Executive Vice President, Chief Financial Officer and Director
Mary C. Glass-
Schannault* Senior Vice President
</TABLE>
- --------
* Each of these persons also serve as directors or executive officers of the
Company.
For biographical information on these persons, see "IMH Commercial Holdings,
Inc.--Directors and Executive Officers."
MANAGEMENT AGREEMENT
The Company will enter into a Management Agreement with the Manager to
become effective upon the closing of this Offering, for an initial term
expiring on December 31, 2002. Successive extensions, each for a period not to
exceed one year, may be made by agreement between the Company and the Manager.
The Management Agreement may be terminated by the Company without cause at any
time upon 60 days' written notice. Any such termination or failure to extend
by the Company without cause shall result in the payment of a termination or
non-renewal fee to the Manager determined by an independent appraisal. In
addition, the Company and the Manager will have the right to terminate the
Management Agreement upon the occurrence of a breach by the other party of any
provision contained in the Management Agreement which remains uncured for 30
days. In addition, the Company may renew or terminate the Management Agreement
by a majority vote of its Unaffiliated Directors or by a vote of the holders
of a majority of the outstanding shares of Common Stock.
The terms of the Management Agreement, including the management fees, were
determined by what management of both RAI and ICH believe are comparable with
other advisory relationships and have been approved by the Board of Directors
of RAI and the Unaffiliated Directors of ICH. ICH's Bylaws provide that the
Unaffiliated Directors shall determine at least annually that the compensation
paid to the Manager is reasonable in relation to the nature and quality of the
services performed by the Manager.
The Manager is at all times subject to the supervision of the Company's
Board of Directors and provides advisory services to the Company in accordance
with the terms of the Management Agreement. The Manager is involved in three
primary activities: (1) capital management--primarily the oversight of the
Company's structuring, analysis, capital raising and investor relations
activities; (2) asset management--primarily the analysis and oversight of the
acquisition, management, securitization and disposition of Company assets; and
(3) operations management--primarily the oversight of ICH's operating
subsidiaries. Specifically, the Manager performs such services and activities
relating to the assets and operations of the Company as may be appropriate,
including:
(1) serving as the Company's consultant with respect to formulation of
investment criteria and interest rate risk management by its Board of
Directors;
(2) advising as to the issuance of commitments on behalf of the Company
to purchase Commercial Mortgages or purchasing Commercial Mortgages and
CMBSs meeting the investment criteria set from time to time by the
Company's Board of Directors;
(3) advising, negotiating, and overseeing the securitization of the
Company's Commercial Mortgages in REMIC or CMOs and negotiating terms with
rating agencies and coordinate with investment bankers as to structure and
pricing of the securities formed by the Company;
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<PAGE>
(4) advising the Company in connection with and assisting in its Long-
Term Investment Operations;
(5) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(6) monitoring and providing to the Board of Directors on an on-going
basis price information and other data, obtained from certain nationally-
recognized dealers who maintain markets in Commercial Mortgages identified
by the Board of Directors from time to time, and providing data and advice
to the Board of Directors in connection with the identification of such
dealers;
(7) providing the executive and administrative personnel, office space
and services required in rendering services to the Company, which includes
contracting with appropriate third parties, which may include IMH and its
affiliates, to provide various services including facilities and costs
related therewith, technology, management information systems, human
resource administration, general ledger accounts, check processing,
accounts payable and other similar operational or administrative services;
(8) overseeing the day-to-day operations of ICH and supervising the
performance of such other administrative functions necessary in the
management of ICH as directed by the Board of Directors of ICH;
(9) advising and negotiating of agreements on behalf of the Company with
banking institutions and other lenders to provide for the short-term
borrowing of funds by the Company;
(10) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders;
(11) subject to an agreement executed by the Company, advising as to the
designation of a servicer for those loans sold by ICCC whereby ICCC elected
not to service such loans;
(12) counseling the Company in connection with policy decisions to be
made by its Board of Directors; and
(13) upon request by and in accordance with the direction of the Board of
Directors of the Company, investing or reinvesting any money of the
Company.
In order to utilize the IMH infrastructure, RAI intends to enter into a
submanagement agreement with ICIFC, the conduit operations of IMH, upon the
closing of this Offering to provide substantially all of the administrative
services required by the Company including facilities and costs associated
therewith, technology, human resources, management information systems,
general ledger accounts, check processing and accounts payable as RAI deems
necessary. The Manager may also enter into additional contracts with other
parties, which may include IMH or its affiliates, to provide any such services
for the Manager, which third party shall be approved by the Company's Board of
Directors. See "--Expenses."
Upon the closing of this Offering, RAI will have a total of four officers
and four directors who will participate in the oversight of the Company's
operations.
MANAGEMENT FEES
The Manager will be entitled to receive for each fiscal quarter, an amount
equal to 25% of the Net Income of the Company, before deduction of such
compensation, in excess of the amount that would produce an annualized Return
on Equity equal to the daily average Ten Year U.S. Treasury Rate plus 2% (the
"25% Payment"). The term "Return on Equity" is calculated for any quarter by
dividing the Company's Net Income for the quarter by its Average Net Worth for
the quarter. For such calculations, the "Net Income" of the Company means the
net income of the Company determined in accordance with the Code before the
Manager's compensation, the deduction for dividends paid and any net operating
loss deductions arising from losses in prior periods. A deduction for all of
the Company's interest expenses for borrowed money is also taken in
calculating Net Income. "Average Net Worth" for any period means the
arithmetic average of the sum of the gross proceeds
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<PAGE>
from any offering of its equity securities by the Company, before deducting
any underwriting discounts and commissions and other expenses and costs
relating to the offering, plus the Company's retained earnings less dividends
declared (without taking into account any losses incurred in prior periods)
computed by taking the daily average of such values during such period. The
25% Payment to the Manager will be calculated quarterly in arrears before any
income distributions are made to stockholders for the corresponding period.
The Manager's fees will be calculated by the Manager within 60 days after
the end of each calendar quarter, with the exception of the fourth quarter for
which compensation will be computed within 30 days, and such calculation shall
be promptly delivered to the Company. The Company will be obligated to pay the
fee within 90 days after the end of each calendar quarter.
EXPENSES
Pursuant to the Management Agreement, ICH will also pay all operating
expenses incurred by the Manager under the Management Agreement. The operating
expenses generally required to be incurred by the Manager and reimbursed by
ICH include out-of-pocket costs, equipment and other personnel required for
the Company's operations, including amounts payable by RAI pursuant to
submanagement agreements with outside third parties, which will include IMH
and its affiliates, to provide various services to the Company including
facilities and costs related therewith, technology, management information
systems, human resource administration, general ledger accounts, check
processing, accounts payable and other similar operational services
("Reimbursable Expenses"). Reimbursable Expenses also include issuance and
transaction costs associated with the purchase, disposition and financing of
investments, regular legal and auditing fees and expenses of the Company, the
fees and expenses of the Company's Directors, premiums for directors' and
officers' liability insurance, premiums for fidelity and errors and omissions
insurance, servicing and sub-servicing expenses, the costs of printing and
mailing proxies and reports to stockholders, and the fees and expenses of the
Company's custodian and transfer agent, if any.
The Company will reimburse the Manager for all Reimbursable Expenses, plus a
service charge of 15% on all Reimbursable Expenses owed by RAI to ICIFC, the
conduit operations of IMH, for costs and services under any subcontract
between RAI and ICIFC. RAI will pay all such third parties on a dollar-for-
dollar basis the aforementioned amounts received by it from the Company; no
such 15% service charge will be paid to third party service providers other
than ICIFC.
All of the persons designated to become officers of the Manager upon the
closing of this Offering are officers of IMH, ICIFC, ICH and ICCC. IMH owns
all of the outstanding shares of non-voting preferred stock of ICIFC, its
conduit operations, representing 99% of the economic interest in ICIFC, and
Messrs. Tomkinson, Johnson and Ashmore all of the outstanding shares of common
stock of ICIFC, representing 1% of the economic interest. Each of these
officers have modified their employment agreements with ICIFC to allow them to
become officers of the Manager (and of ICH and ICCC) upon the closing of this
Offering. The Manager will agree to cause each of its officers to devote as
much of his or her time to the operations of the Company as is reasonably
necessary. The Company will reimburse the Manager, who will reimburse ICIFC on
a dollar for dollar basis, for the actual cost (the "Reimbursable Executive
Amounts") of providing the services of these officers to the Company based
upon compensation payable to them by ICIFC, plus a 15% service charge.
For the first three years of the Management Agreement, there will be a
minimum amount of $500,000 per annum (which includes the 15% service charge)
payable by ICH to RAI for Reimbursable Expenses and Reimbursable Executive
Amounts and payable by RAI to ICIFC. After the third year, ICH will only be
responsible for paying RAI the actual amount of Reimbursable Expenses and
Reimbursable Executive Amounts, with the 15% service charge for amounts due to
ICIFC.
The Company does not believe that its operations will be adversely affected
as a result of these relationships. Payments of Reimbursable Expenses and
Reimbursable Executive Amounts by the Company to RAI will be made monthly.
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<PAGE>
TABULAR PRESENTATION OF AMOUNT PAYABLE TO MANAGER
The following table presents all compensation, fees, profits and other
benefits (including reimbursement of out-of-pocket expenses) which RAI and its
affiliates may earn or receive in connection with the Management Agreement.
<TABLE>
<CAPTION>
RECIPIENT PAYOR AMOUNT
--------- ----- ------
<C> <C> <S>
RAI(1) ICH 25% Payment(2)
RAI(3) ICH Reimbursable Expenses, plus a 15% service charge(4)
RAI(3) ICH Reimbursable Executive Amounts, plus a 15% service
charge(4)
</TABLE>
- --------
(1) RAI is equally owned by each of Messrs. Tomkinson, Ashmore and Johnson;
the 25% payment to RAI will be retained by RAI, resulting in a direct
benefit to its owners.
(2) For a more detailed explanation of the 25% Payment, see "--Management
Fees." There is no minimum or maximum amount of the 25% Payment due in any
year.
(3) All amounts payable by ICH to RAI for Reimbursable Expenses and
Reimbursable Executive Amounts, plus the 15% service charge, are payable
by RAI to ICIFC.
(4) For a more detailed explanation of Reimbursable Expenses and Reimbursable
Executive Amounts see "--Expenses." For the first three years of the
Management Agreement, there will be a minimum amount of $500,000 per annum
(which includes the 15% service charge) payable by ICH to RAI for
Reimbursable Expenses and Reimbursable Executive Amounts due in any year.
There is no maximum amount of Reimbursable Expenses or Reimbursable
Executive Amounts due in any year.
STOCK OPTION AND AWARDS PLAN
The Company has adopted the Stock Option and Awards Plan and the directors,
officers and employees of the Manager will be granted certain options or
rights under the Stock Option and Awards Plan upon the closing of this
Offering, and may in the future be granted additional options or rights under
the Stock Option and Awards Plan. See "IMH Commercial Holdings, Inc.--Stock
Option and Awards Plan."
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors, officers, equityholders and employees will not be liable to the
Company, any mortgage security issuer, any subsidiary of the Company, the
Unaffiliated Directors, the Company's stockholders or any subsidiary's
shareholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager is a recently formed entity
and does not have significant assets. Consequently, there can be no assurance
that the Company would be able to recover any damages for claims it may have
against the Manager. The Company has agreed to indemnify the Manager, and its
directors, officers, equityholders and employees with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from any
acts or omissions of the Manager made in good faith in the performance of its
duties under the Management Agreement. See "Risk Factors--General--Conflicts
of Interest; Executive Officers and Directors to Receive Extensive Benefits."
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<PAGE>
RELATIONSHIPS WITH AFFILIATES
IMH is a publicly traded company whose shares of common stock are listed on
the AMEX. RAI, an entity owned by persons all of whom are officers of ICH and
IMH and who will become officers of RAI upon the closing of this Offering, is
the Manager and will provide advisory services to ICH in accordance with the
terms of the Management Agreement. As previously described, ICH will utilize
the mortgage banking experience, management expertise and resources of RAI in
conducting its business. Upon the closing of this Offering, IMH will own in
the aggregate 575,831 shares of the Common Stock of ICH representing 9.8% of
the outstanding Common Stock, and 818,169 shares of ICH Class A Stock,
excluding the ICH Class A Stock to be issued in connection with the
Contribution, convertible into an equivalent number of shares of ICH Common
Stock. In addition, a number of Directors and officers of ICH and ICCC also
serve as Directors and/or officers of IMH. In order to utilize the IMH
infrastructure, RAI intends to enter into a submanagement agreement with
ICIFC, the conduit operations of IMH, upon the closing of this Offering to
provide substantially all of the administrative services required by the
Company including facilities and costs associated therewith, technology, human
resources, management information systems, general ledger accounts, check
processing and accounts payable as RAI deems necessary.
With a view toward protecting the interests of ICH's stockholders, the
Bylaws of ICH provide that a majority of the Board of Directors (and at least
a majority of each committee of the Board of Directors) must not be
"Affiliates" of RAI, as that term is defined in the Bylaws, and that the
investment policies of ICH must be reviewed annually by the Unaffiliated
Directors. Such policies and restrictions thereon may be established from time
to time by the Board of Directors, including a majority of the Unaffiliated
Directors. In addition, any transaction between ICH and any Affiliated Person
requires the affirmative vote of a majority of the Unaffiliated Directors.
Moreover, approval, renewal or termination of the Management Agreement
requires the affirmative vote of a majority of the Unaffiliated Directors. The
Management Agreement may be terminated by ICH upon 60 days' notice. Any such
termination or failure to extend by ICH without cause shall result in the
payment of a termination or non-renewal fee to the Manager determined by an
independent appraisal.
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<PAGE>
CERTAIN TRANSACTIONS
THE ORGANIZATIONAL TRANSACTIONS
The following is a summary of transactions entered into in connection with
the organization of the Company:
. In January and February 1997, ICCC and ICH were incorporated,
respectively.
. In February 1997, Joseph R. Tomkinson, ICH's Chairman of the Board and
Chief Executive Officer, William S. Ashmore, ICH's President and Chief
Operating Officer, Richard J. Johnson, ICH's Senior Vice President, Chief
Financial Officer, Treasurer and Secretary, William D. Endresen, ICH's
Senior Vice President, Mary C. Glass-Schannault, ICH's Senior Vice
President, and each of James Walsh, Frank P. Filipps, Stephan R. Peers
and Thomas J. Poletti, Directors of ICH, and H. Wayne Snavely, purchased
76,800, 76,800, 62,400, 12,000, 12,000 and 12,000 shares of the Common
Stock of ICH, respectively, at a per share price of $.01. In addition,
IMH purchased 299,000 shares of the Common Stock of ICH, at a per share
price of $.01.
. In February 1997, IMH purchased all of the non-voting preferred stock of
ICCC, which represents 95% of the economic interest in ICCC, for
$500,000, and each of Messrs. Tomkinson, Ashmore, Johnson and Endresen
purchased all of the outstanding shares of common stock of ICCC (125
shares each at a per share price of $1.00), which represent 5% of the
economic interest in ICCC.
. In February 1997, ICCC brokered ICH's purchase of $7.3 million and $10.2
million of condominium conversion loans which were financed with $16.6
million in borrowings under a warehouse lending facility provided by a
subsidiary of IMH and $900,000 in borrowings from IMH. All of condominium
conversion loans were purchased from ICIFC and $7.3 million of such
mortgage loans were originated by a company with which William D.
Endresen was an affiliate. IMH owns all of the outstanding non-voting
preferred stock of ICIFC, which represents 99% of the economic interest
in ICIFC, and Mssrs. Tomkinson, Johnson and Ashmore own 100% of the
Common Stock of ICIFC representing 1% of the economic interest. As of
February 1997, ICII owned 100% of the Common Stock of ICIFC. Other than
the fact that Joseph R. Tomkinson, ICH's Chairman of the Board and Chief
Executive Officer, is currently a director of ICII and H. Wayne Snavely,
ICII's Chairman of the Board, owns 12,000 shares of ICH Common Stock,
there is no affiliation or relationship between ICH and ICII.
. In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note
convertible into ICH Preferred Stock at the Conversion Rate.
. In March 1997, IMH converted the aforementioned $15.0 million principal
amount promissory note into an aggregate of 3,000,000 shares of ICH
Preferred Stock. All ICH Preferred Stock is automatically convertible
upon the closing of this Offering into shares of ICH Common Stock
determined by multiplying the number of shares of ICH Preferred Stock to
be converted by a fraction, the numerator of which is $5.00 and the
denominator of which is the IPO Price. Notwithstanding the foregoing,
consistent with IMH's classification as a REIT, IMH shall not be entitled
to have converted into ICH Common Stock more than that number of shares
of ICH Preferred Stock whereby IMH would own, immediately after such
conversion, greater than 9.8% of ICH's outstanding Common Stock. Any
shares of ICH Preferred Stock not converted into ICH Common Stock upon
the closing of this Offering shall on such date automatically convert
into shares of ICH Class A Stock at the same rate as the ICH Preferred
Stock converted into Common Stock on said date. Shares of ICH Class A
Stock convert into shares of the Common Stock on a one-for-one basis and
each such class of Common Stock is entitled to cash dividends on a pro
rata basis. Upon any subsequent issuances of Common Stock by ICH or sales
of ICH Common Stock held by IMH, shares of ICH Class A Stock shall
automatically continue to convert into additional shares of the Common
Stock of ICH, subject to said 9.8% limitation.
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<PAGE>
. In March 1997, ICH purchased a $10.1 million CMBS from ICIFC which was
financed with a promissory note. In March 1997, the promissory note was
repaid with cash from IMH's above-referenced $15.0 million investment.
Concurrently therewith, ICH repaid the $900,000 owed to IMH in connection
with its purchase of condominium conversion loans.
. In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held
by it for an equivalent number of shares of ICH Class A Stock.
. On the closing of this Offering, IMH will effectuate the Contribution to
ICH of 100% of the outstanding shares of non-voting preferred stock of
ICCC for 95,000 shares of ICH Class A Stock. Upon the closing of this
Offering, IMH will own 575,831 shares of ICH Common Stock and 818,169
shares of ICH Class A Stock.
Prior to the Contribution, ICCC was allocated expenses of various
administrative services provided by IMH. The costs of such services were not
directly attributable to a specific division or subsidiary and primarily
included general corporate overhead, such as accounting and cash management
services, human resources and other administrative functions. These expenses
were calculated as a pro rata share of certain administrative costs based on
head count or relative assets and liabilities of the division or subsidiary,
which management believed was a reasonable method of allocation.
NON-COMPETE AGREEMENT AND RIGHT OF FIRST REFUSAL AGREEMENT
The Company's operations may be affected by the activities of IMH and ICIFC.
Pursuant to a non-compete agreement (the "Non-Compete Agreement") between IMH,
ICIFC, ICH and ICCC which will become effective upon the closing of this
Offering, for a period of the earlier of nine months from the closing of this
Offering or the date upon which the Company accumulates (for investment or
sale) $300.0 million of Commercial Mortgages and/or CMBSs, neither IMH nor
ICIFC will originate or acquire any Commercial Mortgages; however, this
Agreement shall not preclude IMH (either directly or through ICIFC) from
purchasing any Commercial Mortgages or CMBSs under the Right of First Refusal
Agreement discussed below. After the termination of the Non-Compete Agreement,
and subject to the Right of First Refusal Agreement, as defined below, IMH, as
a mortgage REIT, and ICIFC, as its conduit operations, may compete with the
operations of the Company.
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, IMH, 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. Upon the closing of this Offering, RAI, ICH, ICCC, IMH and ICIFC will
enter 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 (other than IMH) will actually become parties
to the Right of First Refusal Agreement. Pursuant to this Agreement, RAI will
agree that any mortgage loan or mortgage-backed security investment
opportunity (an "Investment Opportunity") which is offered to it on behalf of
either the Company, IMH 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 closely aligns with such Investment Opportunity. In addition, both IMH
and ICIFC on the one hand and ICH and ICCC on the other will agree that any
Investment Opportunity offered to either of them which falls outside the scope
of its Initial Primary Business should 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
REITs 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 Opportunity. In such an event there can be no assurance that the
Company will be able to take
73
<PAGE>
advantage of any such Investment Opportunity or that any competitive activity
of IMH, ICIFC 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.
MANAGEMENT, SUBMANAGEMENT AND SERVICING AGREEMENTS
RAI will act as the Manager pursuant to the Management Agreement which will
become effective upon the closing of this Offering. RAI is owned 30% by each
of Messrs. Tomkinson, Ashmore and Johnson. In order to utilize the IMH
infrastructure, RAI intends to enter into a submanagement agreement with
ICIFC, the conduit operations of IMH, upon the closing of this Offering to
provide substantially all of the administrative services required by the
Company including facilities and costs associated therewith, technology, human
resources management information systems, general ledger accounts, check
processing and accounts payable as RAI deems necessary. For a general
description of the persons who will become officers of the Manager upon the
closing of this Offering and the terms of the Management Agreement, see "RAI
Advisors, LLC."
ICCC acts as a servicer of Commercial Mortgages acquired on a "servicing-
released" basis by the Company in its Long-Term Investment Operations pursuant
to the terms of a Servicing Agreement which became effective in February 1997.
For a general description of the terms of such a Servicing Agreement, see
"Business--Servicing." ICCC subcontracts all of its servicing obligations
under such loans to independent third parties pursuant to sub-servicing
agreements.
OTHER TRANSACTIONS
In April 1997, ICH, as a stand-alone entity, entered into a warehouse line
agreement to provide up to $200.0 million to finance the Company's businesses.
Terms of the warehouse line of credit require that the Commercial Mortgages be
held by an independent third party custodian, which gives the Company the
ability to borrow against the collateral as a percentage of the fair market
value of the Commercial Mortgages. The borrowing rates are expressed in basis
points over one-month LIBOR, depending on the type of collateral provided by
the Company. The margins on the warehouse line agreement are based on the type
of mortgage collateral used and generally range from 85% to 88% of the fair
market value of the collateral. The warehouse line agreement is guaranteed by
IMH until the Company reaches $50.0 million in stockholders' equity, which
will occur upon the closing of this Offering.
Thomas J. Poletti, a Director of ICH, is a partner in the law firm Freshman,
Marantz, Orlanski, Cooper & Klein, which is counsel to the Company and IMH.
Mr. Poletti owns 12,000 shares of the Company's Common Stock. See--Directors
and Executive Officers," "--The Organizational Transactions" and "Legal
Matters."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this Offering, the Company will have outstanding
5,875,831 shares of Common Stock, respectively. Of the outstanding shares, the
5,000,000 shares of Common Stock to be sold in this Offering will be freely
tradeable without restriction or further registration under the Securities Act
unless purchased by "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act. The remaining shares will be "restricted
securities" as that term is defined in Rule 144. Of such shares, 300,000
shares will become eligible for future sale under Rule 144 commencing February
1998, and the balance thereof will become eligible for sale in March 1998, at
the earliest. In addition, upon the closing of this Offering, IMH would also
hold 818,169 shares of ICH Class A Stock. The number of shares of ICH Common
Stock and ICH Class A Stock held by IMH, and the eligibility of such shares
for future sales, will be affected by future issuances of ICH Common Stock by
the Company and dispositions of shares of ICH Common Stock by IMH. As
described below, Rule 144, permits resales of restricted securities subject to
certain restrictions. In general, under Rule 144 as currently in effect, a
person (or persons whose shares are aggregated) who beneficially owned shares
for at least one year, including any person who may be deemed an "affiliate"
of the Company, would be entitled to sell within any three-month period a
number of such shares that does not exceed the greater of 1% of the shares of
the Company's Common Stock then outstanding shares upon the closing of this
Offering (1,394,000 shares ) or the average weekly trading volume in the
Company's Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. A person who is not
deemed to have been an "affiliate" of the Company at any time during the three
months immediately preceding a sale and who has beneficially owned shares for
at least two years would be entitled to sell such shares under Rule 144,
without regard to the volume limitation described above.
The Company and its stockholders, including IMH, have agreed with the
Underwriters that, for a period of 180 days following the commencement of this
Offering, they will not sell, contract to sell or otherwise dispose of any of
shares of Common Stock or rights to acquire such shares (other than pursuant
to employee plans) without the prior written consent of PaineWebber
Incorporated.
Additionally, upon the closing of this Offering, there will be outstanding
stock options for 190,000 shares of Common Stock which will be granted at the
IPO Price, to executive officers, Directors and employees of the Company or of
the Manager, none of which, except in the event of a change of control of the
Company, will be exercisable until one year from the date of grant.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock at June 23,
1997, after giving effect to the conversion of ICH Preferred Stock held by IMH
into 9.8% of ICH's Common Stock upon the closing of this Offering, and as
adjusted to reflect the sale of Common Stock being offered hereby, by (1) each
person known to the Company to beneficially own more than five percent of the
Company's Common Stock, (2) each Director, (3) the Company's executive
officers and (4) all Directors and executive officers as a group. Unless
otherwise indicated in the footnotes to the table, the beneficial owners named
have, to the knowledge of the Company, sole voting and investment power with
respect to the shares beneficially owned, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NUMBER OF BENEFICIALLY OWNED (1)
SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING(2) OFFERING(3)
- ------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Imperial Credit Mortgage Holdings, Inc.
(3)(4).................................... 575,831 65.7% 9.8%
Joseph R. Tomkinson....................... 76,800 8.8% *
William S. Ashmore........................ 76,800 8.8% *
Richard J. Johnson........................ 62,400 7.1% *
William D. Endresen....................... 12,000 1.4% *
Mary C. Glass-Schannault.................. 12,000 1.4% *
James Walsh............................... 12,000 1.4% *
Frank P. Filipps.......................... 12,000 1.4% *
Stephan R. Peers.......................... 12,000 1.4% *
Thomas J. Poletti......................... 12,000 1.4% *
All directors and executive officers as a
group (10 persons)........................ 288,000 32.9% 4.9%
</TABLE>
- -------
* less than 1%
(1) Assumes persons listed below do not exercise Subscription Rights offered
to them as IMH Holders.
(2) Assumes 875,831 shares outstanding. Excludes 818,169 shares of ICH Class A
Stock owned by IMH.
(3) Assumes 5,875,831 shares outstanding. Gives effect to the conversion of
3,000,000 shares of ICH Preferred Stock into 575,831 shares of ICH's
Common Stock upon the closing of this Offering. All shares of ICH
Preferred Stock are automatically convertible upon the closing of this
Offering into shares of ICH Common Stock determined by multiplying the
number of shares of Preferred Stock to be converted by a fraction, the
numerator of which is $5.00 and the denominator of which is the IPO Price.
Notwithstanding the foregoing, consistent with IMH's classification as a
REIT, IMH shall not be entitled to have converted into ICH Common Stock
more than that number of shares of ICH Preferred Stock whereby IMH would
own, immediately after such conversion, greater than 9.8% of the Company's
outstanding Common Stock (after giving effect to said conversion). Any
shares of ICH Preferred Stock not converted into ICH Common Stock upon the
closing of this Offering shall on such date automatically convert into
shares of ICH Class A Stock at the same rate as the ICH Preferred Stock
converted into ICH Common Stock. Shares of ICH Class A Stock convert into
shares of the Common Stock of ICH on a one-for-one basis. Upon any
subsequent issuances of Common Stock by ICH or sales of ICH Common Stock
held by IMH, shares of ICH Class A Common Stock shall automatically
convert into additional shares of the Common Stock of ICH, subject to said
9.8% limitation. In April 1997, IMH converted 299,000 shares of ICH Common
Stock into an equal number of shares of ICH Class A Stock. Upon the
closing of this Offering, IMH will own 575,831 shares of ICH Common Stock
and 818,169 shares of ICH Class A Stock; shares beneficially owned by IMH
after this Offering exclude said shares of ICH Class A Stock and the
shares of ICH Common Stock issuable upon their conversion.
(4) IMH's address is 20371 Irvine Avenue, Santa Ana Heights, California,
92707.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized stock of ICH consists of 46,000,000 shares of Common Stock,
$0.01 par value per share, 4,000,000 shares of Class A Non-Voting Common
Stock, $0.01 par value per share, 6,000,000 shares of Preferred Stock, $0.01
par value per share, and 4,000,000 shares of Class A Convertible Preferred
Stock, $0.01 par value per share. It is expected that meetings of the
stockholders of ICH 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 ICH 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.
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 ICH 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 ICH upon
issuance. Shares of Common Stock have no preference, conversion, exchange,
preemptive or cumulative voting rights. The authorized stock of ICH 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.
Class A Non-Voting Common Stock
Designation and Amount. Of the 50,000,000 shares of Common Stock which were
previously authorized, 4,000,000 shares were reclassified and designated as
Class A Non-Voting Common Stock (the "ICH Class A Stock").
Rights, Preferences and Privileges and Voting Rights. The ICH Class A Stock
has the identical preferences, conversion or other rights, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption as the Common Stock except that the holders of shares
of ICH Class A Stock are not entitled to any voting rights. If ICH issues
additional shares of its Common Stock as a dividend on its outstanding Common
Stock, ICH shall simultaneously issue as a dividend on its outstanding ICH
Class A Stock, pro rata among the holders thereof, that number of shares of
Class A Common Stock equal to the number of shares of ICH Common Stock issued
as a dividend multiplied by a fraction, the numerator of which is the number
of shares of ICH Class A Stock outstanding immediately before the record date
for the payment of the ICH Class A Stock dividend and the denominator of which
is the number of shares of ICH Common Stock outstanding immediately before the
record date for the payment of the ICH Common Stock dividend.
Conversion Rights. On any date on which shares of Common Stock are issued by
ICH increasing the number of shares of Common Stock issued and outstanding
(the "Conversion Date"), the shares of ICH Class A Stock held by each person
will automatically convert into that number of shares of Common Stock as
calculated below, except that those shares of ICH Class A Stock (collectively,
"Excess Shares") which would cause the holder thereof to own shares of ICH
Common Stock (i) in excess of the Limit or (ii) in violation of any stock
ownership limitation set forth in the ICH's Charter shall not be converted and
shall remain outstanding shares of ICH Class A Stock. "Limit" shall mean not
greater than 9.8% (in value or in number of shares, whichever is more
restrictive) of the aggregate of the outstanding shares of Common Stock of
ICH. The number and value of outstanding shares of Common Stock shall be
determined by the Board of Directors of ICH in good faith, which determination
shall be conclusive for all purposes hereof.
If, subsequent to the Conversion Date, the conversion of Excess Shares into
shares of ICH Common Stock would no longer cause the holder thereof to own
shares of ICH Common Stock (i) in excess of the Limit or
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(ii) in violation of any stock ownership limitation set forth in the Charter,
such shares shall automatically convert into that number of shares of ICH
Common Stock as calculated below, except that those Excess Shares which, if
converted pursuant to this provision, would cause the holder thereof to own
shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of
any stock ownership limitation set forth in the Charter shall not be converted
and shall remain outstanding shares of ICH Class A Stock.
The shares of ICH Class A Stock are convertible at the principal office of
ICH, and at such other office or offices, if any, as the Board of Directors
may designate, into fully paid and non-assessable shares of Common Stock of
ICH (calculated as to each conversion to the nearest whole share). The number
of shares of Common Stock to be issued upon conversion will be determined by
multiplying the number of shares of ICH Class A Stock to be converted by one,
subject to certain adjustments. No fractional shares of Common Stock will be
issued upon conversion of shares of ICH Class A Stock, and the number of
shares of Common Stock to be issued will be rounded to the nearest whole
share.
PREFERRED STOCK
The Charter authorizes the Board of Directors to issue shares of Preferred
Stock and to classify any unissued shares of Preferred Stock and reclassify
any previously classified but unissued shares of Preferred Stock from time to
time into one or more series of stock. The Preferred Stock may be issued from
time to time with such designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption as shall be
determined by the Board of Directors subject to the provisions of the Charter
regarding restrictions on transfer of stock. Preferred Stock is available for
possible future financing of, or acquisitions by, ICH and for general
corporate purposes without further stockholder authorization. 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 ICH by means of a merger, tender offer, proxy contest or
other transaction that might involve a premium price for the holders of Common
Stock or otherwise be in their best interest. The Preferred Stock, if issued,
may have a preference on dividend payments which could reduce the assets
available to ICH to make distributions to the common stockholders.
Class A Convertible Preferred Stock.
Designation and Amount. Of the 10,000,000 shares of Preferred Stock which
were previously authorized, 4,000,000 shares were reclassified and designated
Class A Convertible Preferred Stock (the "ICH Preferred Stock"). In March
1997, IMH converted $15.0 million principal amount of promissory notes into an
aggregate of 3,000,000 shares of ICH Preferred Stock.
Dividends. Commencing on December 31, 1997, each holder of ICH Preferred
Stock will be entitled to receive, out of any funds legally available
therefor, when and if declared, dividends at the quarterly rate of $.10 per
share and no more, and thereafter quarterly on the last day of March, June,
September and December of each year that any ICH Preferred Stock is
outstanding. Such dividends will not be cumulative, and no rights will accrue
to holders of ICH Preferred Stock by reason of the fact that dividends on such
shares are not declared or paid in any prior quarter.
In determining whether a distribution (other than upon liquidation), by
dividend, redemption or other acquisition of shares or otherwise, is permitted
under Maryland law, amounts that would be needed, if the Company were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of holders of shares of any class or series of stock whose
preferential rights upon dissolution are superior to those receiving the
distribution will not be added to the Company's total liabilities.
Distributions Upon Liquidation, Dissolution or Winding Up. Subject to
conversion as set forth below, upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, subject to the prior
preferences and other rights of any class or series of stock ranking senior to
the ICH Preferred Stock as to
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the distribution of assets upon liquidation, dissolution or winding up of the
affairs of the Company, but before any distribution or payment will be made to
the holders of any class or series of stock ranking junior to the
ICH Preferred Stock as to the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Company, the holders of ICH
Preferred Stock will be entitled to receive out of the assets of the Company
legally available for distribution to its stockholders liquidating
distributions in cash or property at its fair market value as determined by
the Board of Directors of the Company in the amount per share equal to the
liquidation preference, which is $5.00 per share. After payment of the full
amount of the liquidating distributions to which they are entitled, the
holders of ICH Preferred Stock will have no right or claim to any of the
remaining assets of the Company and will not be entitled to any other
distribution in the event of liquidation, dissolution or winding up of the
affairs of the Company.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of the Company are
insufficient to pay the amount of the liquidation preference per share plus
the corresponding amounts payable on each class or series of other stock
ranking on a parity with the ICH Preferred Stock as to the distribution of
assets upon liquidation, dissolution or winding up of the affairs of the
Company, then the holders of the ICH Preferred Stock and all such other stock
will share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they otherwise would be respectively
entitled. Neither the consolidation or merger of the Company into or with
another corporation or corporations or trust or trusts nor the sale, lease,
transfer or conveyance of all or substantially all of the assets of the
Company to another corporation or any other entity shall be deemed a
liquidation, dissolution or winding up of affairs of the Company.
Voting Rights. The holders of shares of ICH Preferred Stock are not entitled
to any voting rights.
Conversion Rights. Upon any "Initial Public Offering," the shares of ICH
Preferred Stock held by each person will automatically convert into that
number of shares of Common Stock as calculated below, except that those shares
of ICH Preferred Stock which, if converted pursuant to this provision, would
cause the holder thereof to own shares of Common Stock (i) in excess of the
Limit or (ii) in violation of any stock ownership limitation set forth in the
Charter shall not be converted into shares of Common Stock. Any shares of
ICH Preferred Stock not converted into shares of Common Stock as a result of
the foregoing limitations shall on such date automatically convert into shares
of ICH Class A Stock at the same rate as shares of ICH Preferred Stock convert
into shares of Common Stock. If the aforementioned event does not occur, the
shares of ICH Preferred Stock shall remain outstanding. All ICH Preferred
Stock is automatically convertible upon the closing of this Offering into
shares of ICH Common Stock determined by multiplying the number of shares of
ICH Preferred Stock to be converted by a fraction, the numerator of which is
$5.00 and the denominator of which is the IPO Price. "Initial Public Offering"
means the sale of Common Stock pursuant to the Company's first effective
registration statement covering the sale of such shares filed under the 1933
Act provided such offering meets the following requirements: (i) said offering
raises gross proceeds of at least $10.0 million to the Company at a per share
offering price of no less than $5.00 per share and (ii) said offering is
completed on or before December 31, 1998.
The shares of ICH Preferred Stock also will be convertible at the principal
office of the Company, and at such other office or offices, if any, as the
Board of Directors may designate, into fully paid and non-assessable shares of
Common Stock or ICH Class A Stock, as the case may be, of the Company. The
number of shares of Common Stock or ICH Class A Stock, as the case may be, to
be issued upon conversion will be determined by multiplying the number of
shares of ICH Preferred Stock to be converted by the Conversion Rate.
"Conversion Rate" is determined by a fraction, the numerator of which will be
the liquidation preference and the denominator of which will be the IPO Share
Price. "IPO Share Price" means the gross per share price of the Company's
Initial Public Offering.
No fractional shares of Common Stock or ICH Class A Stock, as the case may
be, will be issued upon conversion of shares of ICH Preferred Stock and the
number of shares of Common Stock or ICH Class A Stock, as the case may be, to
be issued will be rounded to the nearest whole share.
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REPURCHASE OF SHARES AND RESTRICTIONS ON TRANSFER
For ICH 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) 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 ICH expects to continue to qualify as a REIT, the Charter contains
restrictions on the transfer of Common Stock which are intended to assist ICH
in complying with these requirements. The Ownership Limit set forth in the
Charter prohibits any person, subject to certain specified exceptions
discussed below, from owning, actually or constructively, shares of Common
Stock in excess of 9.8% (in value or in number, whichever is more restrictive)
of the outstanding shares of Common Stock. The constructive ownership rules
are complex, and may cause shares of Common 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 9.8% of the 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 in excess of
9.8% of the outstanding shares of Common Stock and thus violate the 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 if it
determines that such person's ownership of shares of Common Stock will not
jeopardize ICH'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 ICH's status as a REIT.
ICH's Charter further prohibits (a) any person from actually or
constructively owning shares of Common Stock that would result in ICH being
"closely held" under Section 856(h) of the Code or otherwise cause ICH 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 ICH that will
or may violate any of the foregoing restrictions on transferability and
ownership is required to give written notice immediately to ICH and provide
ICH 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 ICH to attempt to
qualify, or to continue to qualify, as a REIT. The Board of Directors may from
time to time increase or, subject to certain limitations, decrease the
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 Common Stock
in excess of the Ownership Limit or in ICH being "closely held" as described
above or otherwise failing to qualify as a REIT, then that number of shares of
Common Stock the actual or constructive ownership of which otherwise would
cause such person to violate such restrictions (rounded up to a whole 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 Common 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 ICH that shares of Common Stock
have been transferred to the Trustee will be paid with respect to such shares
to the Trustee upon demand and any dividend or other distribution authorized
but unpaid will be paid when due to the Trustee. Any dividends or
distributions so paid over to the Trustee will be held in trust for the
Charitable
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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 ICH 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 ICH that shares of Common 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 transferee 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 Common Stock held in Trust will be deemed to have
been offered for sale to ICH, 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 in the Charter) at the time of such devise or gift) and (ii) the
Market Price on the date ICH, or its designee, accepts such offer. ICH will
have the right to accept such offer until the Trustee has sold the shares held
in the Trust. Upon such a sale to ICH, 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 ICH'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-
counter 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 Common Stock would cause ICH to be
beneficially owned by 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.
Under the Charter, every owner of a specified percentage (or more) of the
outstanding shares of Common Stock must file a completed questionnaire with
the Company containing the information regarding their ownership of such
shares, as set forth in the Treasury Regulations. Under current Treasury
Regulations, the percentage will be set between 0.5% and 5.0%, depending upon
the number of record holders of the Company's
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shares. In addition, each stockholder shall upon demand be required to
disclose to the Company in writing such information as the Company may request
in order to determine the effect, if any, of such stockholder's actual and
constructive ownership of Common Stock on the Company's status as a REIT and
to ensure such compliance with the Ownership Limit or such other limit as
otherwise prescribed by the Board of Directors.
The Charter provides that "disqualified organizations" within the meaning of
Section 860E(e)(5) of the Code, which generally include governmental entities
and other tax-exempt persons not subject to tax on unrelated business taxable
income, are ineligible to hold the Company's shares. Accordingly, the shares
offered hereby should not be purchased or held by such disqualified
organizations. See "Federal Income Tax Considerations."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
BankBoston, N.A., parent corporation to Boston EquiServe, L.P.
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UNDERWRITING
Under the terms of and subject to the conditions contained in the
underwriting agreement (the "Underwriting Agreement") between the Company and
the Underwriters named below (the "Underwriters"), for whom PaineWebber
Incorporated, Stifel, Nicolaus & Company, Incorporated and EVEREN Securities,
Inc. and Oppenheimer & Co., Inc. are acting as representatives (the
"Representatives"), the Underwriters have severally agreed to purchase from
the Company and the Company has agreed to sell to the Underwriters severally
the respective number of shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
------------ ------------
<S> <C>
PaineWebber Incorporated........................................
Stifel, Nicolaus & Company, Incorporated........................
EVEREN Securities, Inc. ........................................
Oppenheimer & Co., Inc. ........................................
Total.........................................................
=========
5,000,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Common Stock being sold pursuant to the Underwriting Agreement
(other than those covered by the over-allotment option described below), if
any shares of Common Stock are purchased. In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain
circumstances, the purchase commitments of the nondefaulting Underwriters may
be increased or the Underwriting Agreement may be terminated.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares in part to the public at the public offering price
set forth on the cover page of this Prospectus, and in part to certain
securities dealers (who may include the Underwriters) at such price less a
concession not in excess of $ per share, and that the Underwriters and such
dealers may reallow to certain dealers a discount not in excess of $ per
share. After commencement of the public offering, the public offering price,
concessions to selected dealers and the discount to other dealers may be
changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 45-day period after the date of this Prospectus, to purchase, at the IPO
Price less the underwriting discount and commissions set forth on the cover
page of this Prospectus, 750,000 additional shares of Common Stock. The
Underwriters may exercise such option only to cover over-allotments, if any,
made in connection with the offering of the shares of Common Stock offered
hereby. To the extent the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such option shares as it was obligated to
purchase pursuant to the Underwriting Agreement.
The Company and IMH, jointly and severally, have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Federal securities laws, or to contribute to payments which the Underwriters
may be required to make in respect thereof.
The Company and its stockholders, including IMH, have also agreed with the
Underwriters that, for a period of 180 days following the commencement of this
Offering, they will not offer, sell, contract to sell or otherwise dispose of
any shares of Common Stock or rights to acquire such shares (other than
pursuant to employee plans) without the prior written consent of PaineWebber
Incorporated.
The Representatives have informed the Company that they do not expect the
Underwriters to confirm sales of Common Stock offered by this Prospectus to
any accounts over which they exercise discretionary authority.
The Company's Common Stock has been approved for listing, subject to notice
of issuance, on the American Stock Exchange under the symbol "ICH."
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Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the public offering price has been determined by
negotiations between the Company and the Representatives. Among the factors
which were considered in determining the IPO Price were the Company's future
prospects, the experience of its management, the economic condition of the
financial services industry in general, the general condition of the equity
securities market, the demand for similar securities of companies considered
comparable to the Company and other relevant factors.
The offering price set forth on the cover page of this Prospectus should not
be considered an indication of the actual value of the Common Stock. Such
price is subject to change as a result of market conditions and other factors
and no assurance can be given that the Common Stock can be resold at the IPO
Price.
Certain of the Underwriters, including the Representatives, may from time to
time in the future enter into reverse repurchase agreements or other financing
arrangements with the Company to finance the purchase of mortgage assets.
Certain of the Underwriters, including the Representatives, have in the past
performed, and may continue to perform investment banking, broker-dealer and
financial advisory services for ICII and have received customary compensation
therefor.
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 ICH 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 ICH, copies of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
For a description of additional restrictions on transfer of the Common Stock,
see "Description of 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 of the shares 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.
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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.
The Bylaws of ICH contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of ICH'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
ICH 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.
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DISSOLUTION OF THE COMPANY
The dissolution of ICH must be approved by the affirmative vote of holders
of shares entitled to cast not less than a majority of all the votes entitled
to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(1) pursuant to ICH'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
ICH'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 ICH'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 removal of directors and the advance notice
provisions of the Bylaws could delay, defer or prevent a change in control of
ICH 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 material federal income tax considerations
regarding the Company and the offering described herein 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. 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.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP AND SALE
OR OTHER DISPOSITION OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH ACQUISITION, OWNERSHIP AND SALE OR
OTHER DISPOSITION AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF ICH
General. ICH intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997. ICH 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 commencing with such taxable year, and ICH intends to
continue to operate in such a manner, but no assurance can be given that it
has operated or will continue to operate in such a manner so as to qualify or
remain qualified.
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The sections of the Code and Treasury Regulations governing REITs are highly
technical and complex. The following summary sets forth the material aspects
of the sections that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
Latham & Watkins has acted as tax counsel to ICH in connection with the
Offering. In the opinion of Latham & Watkins, commencing with ICH's taxable
year ending December 31, 1997, ICH has been organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
has enabled and will enable it to meet the requirements for qualification and
taxation as a REIT under the Code. It must be emphasized that this opinion is
based on various factual assumptions relating to the organization and
operation of ICH and is conditioned upon certain representations made by ICH
as to factual matters. In addition, this opinion is based upon the factual
representations of ICH concerning its business and assets as set forth in this
Prospectus and assume that the actions described in this Prospectus are
completed in a timely fashion. Moreover, such qualification and taxation as a
REIT depends upon ICH's ability to meet (through actual annual operating
results, distribution levels and diversity of stock ownership) the various
qualification tests imposed under the Code discussed below, the results of
which have not been and will not be reviewed by Latham & Watkins. Accordingly,
no assurance can be given that the actual results of ICH's operation for any
particular taxable year have satisfied or will satisfy such requirements.
Further, the anticipated income tax treatment described in this Prospectus may
be changed, perhaps retroactively, by legislative, administrative or judicial
action at any time. See "Risk Factors--Other Considerations--Adverse
Consequences of Failure to Maintain REIT Status; ICH Subject to Tax as a
Regular Corporation" and "--Failure to Qualify."
If ICH 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, ICH will be subject to federal
income tax as follows: First, ICH will be taxed at regular corporate rates on
any undistributed "REIT taxable income," including undistributed net capital
gains. Second, under certain circumstances, ICH may be subject to the
"alternative minimum tax" on its items of tax preference. Third, if ICH 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 ICH 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 ICH 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 ICH fails the 75% or 95% test multiplied by (b) a fraction
intended to reflect ICH's profitability. Sixth, if ICH 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,
ICH would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if ICH has excess
inclusion income (attributable to its interest, if any, in a residual interest
in a REMIC or if all or a portion of ICH, 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 ICH, ICH 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 ICH 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 ICH is determined by
reference to the basis of the asset in the hands of the C corporation, if ICH
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 ICH, then, to the extent
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of the Built-In Gain (i.e., the excess of (a) the fair market value of such
asset over (b) ICH'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 ICH will make an election pursuant to
IRS Notice 88-19 and that such treatment is not modified by certain revenue
proposals in President Clinton's 1998 budget proposal.
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. Conditions (v) and (vi) will not apply until after the
first taxable year for which an election is made to be taxed as a REIT. 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).
The Company believes that it will issue sufficient shares of Common Stock
with sufficient diversity of ownership to allow ICH to satisfy conditions (v)
and (vi) on a timely basis. In addition, the Charter provides for restrictions
regarding the transfer and ownership of shares, which restrictions are
intended to assist ICH 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
ensure that ICH will, in all cases, be able to satisfy the share ownership
requirements described above. If ICH fails to satisfy such share ownership
requirements, ICH's status as a REIT will terminate. See "--Failure to
Qualify."
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. ICH has a calendar taxable year.
Ownership of Qualified REIT Subsidiaries. ICH may acquire 100% of the stock
of one or more qualified REIT subsidiaries (each, a "QRS"). A corporation will
qualify as a QRS if 100% of its stock is held by ICH at all times during the
period such QRS was in existence. A QRS will not be treated as a separate
corporation, and all assets, liabilities, and items of income, deduction, and
credit of a QRS will be treated as assets, liabilities and such items (as the
case may be) of ICH for all purposes of the Code including the REIT
qualification tests. For this reason, references under "Federal Income Tax
Considerations" to the income and assets of ICH shall include the income and
assets of any QRS. A QRS will not be subject to federal income tax and ICH's
ownership of the voting stock of a QRS 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 ICH's
total assets, described below under "--Asset Tests."
Income Tests. In order to maintain its qualification as a REIT, ICH annually
must satisfy three gross income requirements. First, at least 75% of ICH'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
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and gain derived from foreclosure property; (vii) amounts (other than amounts
the determination of which depend in whole or in part on the income or profits
of any person) received or accrued as consideration for entering into
agreements (a) to make loans secured by mortgages on real property or on
interests in real property or (b) to purchase or lease real property
(including interests in real property and interests in mortgages on real
property); (viii) gain from the sale or other disposition of a real estate
asset which is not a prohibited transaction; and (ix) qualified temporary
investment income. Second, at least 95% of ICH'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). Third, subject to
certain exceptions in the year in which ICH is liquidated, 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 ICH's gross income (including gross income from prohibited
transactions) for each 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), dividends on stock (including any dividends ICH
receives from ICCC, but not including dividends ICH receives from other
qualifying REITs or from any 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 ICH 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 Qualified Hedges, in which case such income will
qualify under the 95% gross income test.
Furthermore, ICCC receives servicing and processing fees and income from
gain on the sale of certain Commercial Mortgages and CMBSs. Such fees do not
accrue to ICH, but ICH receives dividends on its nonvoting preferred stock in
ICCC. 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, ICH has limited
and will continue to limit substantially all of the assets that it acquires to
Commercial Mortgages or other securities or obligations that are
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treated as obligations secured by mortgages on real property or on interests
in real property or to other Qualified REIT Assets. As a result, ICH 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 Qualified Hedges. See
"Business--Hedging."
In addition, to comply with the 30% gross income test, ICH may have to hold
Commercial Mortgages and CMBSs for four or more years and other securities and
hedges for one year or more at times when ICH might otherwise have opted for
the disposition of such assets for short term gains.
In order to comply with the REIT gross income tests, ICH 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. ICH believes that the aggregate amount
of any nonqualifying income in any taxable year will not exceed the limit on
nonqualifying income under the gross income tests.
If ICH 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 ICH's failure to meet such tests was
due to reasonable cause and not due to willful neglect, ICH 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
ICH would be entitled to the benefit of these relief provisions. For example,
if ICH fails to satisfy the gross income tests because nonqualifying income
that ICH intentionally incurs exceeds the limits on such income, the Service
could conclude that ICH'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 ICH, ICH will not qualify as a REIT. As
discussed above in "Federal Income Tax Considerations--Taxation of ICH--
General," even if these relief provisions apply and ICH 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 ICH failed the 75% or 95%
test multiplied by (b) a fraction intended to reflect ICH's profitability.
There can be no assurance that ICH 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 ICH
fails the 30% gross income test. In such case, ICH would cease to qualify as a
REIT. See "--Failure to Qualify."
Any gain realized by ICH on the sale of any property (including Commercial
Mortgages and CMBSs) 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 ICH'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. ICCC securitizes Commercial Mortgages and sells the resulting
mortgage securities. See "Business--Securitization and Sale Process." If ICH
were to sell such CMBSs 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 will
be made only by ICCC. ICCC is not subject to the 100% penalty tax on income
from prohibited transactions, which is only applicable to a REIT.
Asset Tests. ICH, 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 ICH's total assets must be represented by Qualified REIT
Assets, cash, cash items and government securities. Second, not more than 25%
of ICH'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 ICH may not exceed 5% of the
value of ICH's total assets and ICH may not own more than 10% of any one
issuer's outstanding voting securities. ICH believes that substantially all of
its assets, other than the nonvoting preferred stock of ICCC, are Qualified
REIT Assets.
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The Company provides short-term lines of credit ("hypothecation loans") to
ICCC to finance Commercial Mortgages during the time from the closing of such
loans to their sale or other settlement with pre-approved investors. The
Company's hypothecation loans are secured by assignments of first priority
perfected security interests in and liens on, among other items of collateral,
mortgage 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 the Company's hypothecation
loans 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, the Company believes that its
hypothecation loans are Qualified REIT Assets. However, in the event that the
Company's hypothecation loans are not treated as Qualified REIT Assets, the
Company would likely fail the 5% asset test and fail to qualify as a REIT. See
"--Failure to Qualify."
As described above, ICH owns 100% of the nonvoting preferred stock of ICCC.
ICH does not and will not own any of the voting securities of ICCC, and
therefore ICH will not be considered to own more than 10% of the voting
securities of ICCC. In addition, ICH believes that the aggregate value of its
securities of ICCC has not at any time exceeded 5% of the total value of ICH's
assets, and will not exceed such amount in the future. Latham & Watkins, in
rendering its opinion as to the qualification of ICH as a REIT, is relying on
the representation of ICH to such effect. No independent appraisals have been
obtained to support this conclusion. There can be no assurance that the
Service will not contend that the value of the securities of ICCC held by ICH
exceeds the 5% value limitation.
The 5% asset test requires that ICH revalue its assets at the end of each
calendar quarter in which ICH acquires additional securities in ICCC for the
purpose of applying such test. Although ICH 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 ICH's overall interest in ICCC.
ICH 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 ICH's total assets as of the end of
each calendar quarter. In particular, as of the end of each calendar quarter,
ICH has limited and diversified and will continue to limit and diversify its
ownership of securities of ICCC and other securities that do not constitute
Qualified REIT Assets as necessary to satisfy the REIT asset tests described
above.
When purchasing CMBSs, ICH 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 may have an adverse impact on ICH'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. ICH intends to acquire only REMIC interests which
fully qualify for purposes of the REIT gross income and asset tests. ICH has
acquired a residual interest in a REMIC (the "Acquired REMIC"), which interest
ICH believes is a Qualified REIT Asset. Such belief is based on (i) an opinion
of counsel to the Acquired REMIC which is described in the prospectus
supplement pursuant to which such interest was offered, which opinion was
dated as of September 28, 1995; and (ii) a certification (on form 1066,
Schedule Q) from the Acquired REMIC that at least 95% of the assets of the
Acquired REMIC were Qualified REIT Assets for the quarter ended March 31,
1997. The Acquired REMIC is required to provide such certifications quarterly
and ICH will monitor such certifications. In the event that the Acquired REMIC
has failed or fails to qualify as a REMIC for federal income tax purposes, or
if less than 95% of the Acquired REMIC's assets are Qualified REIT
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Assets, all or a portion of ICH's interest in the Acquired REMIC would not be
treated as a Qualified REIT Asset. If the value of such nonqualifying portion
of ICH's interest in the Acquired REMIC exceeded 5% in value of ICH's assets
or otherwise caused ICH to violate an asset test or an income test, ICH would
fail to qualify as a REIT. See "--Failure to Qualify." Latham & Watkins, in
rendering its opinion as to the qualification of ICH as a REIT, has assumed
that the Acquired REMIC qualifies as a REMIC under the Code and that at least
95% of the assets of the Acquired REMIC are Qualified REIT Assets. However,
Latham & Watkins has undertaken no independent review of such assumptions.
If ICH 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 ICH for purposes of the REIT gross income and
asset tests.
After initially meeting the asset tests at the close of any quarter, ICH
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. ICH 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 ICH fails to cure noncompliance with the asset
tests within such time period, ICH would cease to qualify as a REIT.
Annual Distribution Requirements. ICH, in order to qualify 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 ICH's
"REIT taxable income" (generally, net income of ICH computed without regard to
the dividends paid deduction and by excluding its net capital gain) and (b)
95% of the excess of the net income, if any, from foreclosure property over
the tax imposed on such income, minus (ii) the excess of the sum of certain
items of noncash income over 5% of "REIT taxable income." In addition, if ICH
disposes of any Built-In Gain Asset during its Recognition Period, ICH 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 ICH 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 ICH 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 ICH's 95%
distribution requirement. The amount distributed must not be preferential
(e.g., each holder of shares of Common Stock must receive the same
distribution per share). To the extent that ICH 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 ICH 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, ICH would be subject to a 4% excise tax on the
excess of such required distributions over the amounts actually distributed.
ICH intends to make timely distributions sufficient to satisfy these annual
distribution requirements.
ICH 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 ICH, 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 ICH. For instance, ICH may
realize income without a corresponding cash payment, as in the case of
original issue discount or accrued interest on defaulted Commercial Mortgages.
In the event that such timing differences occur, in order to meet the
distribution
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requirements, ICH 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. The terms of
ICH's DRP are expected to comply with this ruling. See "Dividend Reinvestment
Plan."
Under certain circumstances, ICH 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 ICH's deduction for
dividends paid for the earlier year. Thus, ICH may be able to avoid being
taxed on amounts distributed as deficiency dividends; however, ICH will be
required to pay interest based upon the amount of any deduction taken for
deficiency dividends.
RECORDKEEPING REQUIREMENTS
A REIT is required to maintain certain records, including records regarding
the actual and constructive ownership of its shares, and within 30 days after
the end of its taxable year, to demand statements from persons owning above a
specified level of the REIT's shares (e.g., if ICH has 2,000 or more
stockholders of record, from persons holding 5% or more of ICH's outstanding
shares of Common Stock; if ICH has over 200 but fewer than 2,000 stockholders
of record, from persons holding 1% or more of ICH's outstanding shares of
Common Stock; and if ICH has 200 or fewer shareholders of record, from persons
holding 1/2% or more of ICH's outstanding shares of Common Stock) regarding
their ownership of shares. In addition, ICH must maintain, as part of its
records, a list of those persons failing or refusing to comply with this
demand. Shareholders who fail or refuse to comply with the demand must submit
a statement with their tax returns setting forth their actual stock ownership
and other information. ICH will maintain the records and demand statements as
required by Treasury Regulations.
FAILURE TO QUALIFY
If ICH fails to qualify for taxation as a REIT in any taxable year, and the
relief provisions do not apply, ICH 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 ICH fails to qualify
will not be deductible by ICH nor will they be required to be made. As a
result, ICH's failure to qualify as a REIT would substantially reduce the cash
available for distribution by ICH to its stockholders. In addition, if ICH
fails to qualify as a REIT, all distributions to stockholders will be taxable
as ordinary income, to the extent of ICH's current or 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, ICH 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 ICH would be entitled to such statutory relief. Failure
to qualify for even one year could result in the ICH's incurring substantial
indebtedness (to the extent borrowings are feasible) or liquidating
substantial investments in order to pay the resulting taxes.
TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) is an estate the income of
which is subject to United States federal income taxation regardless of its
source, or (iv) is a trust, if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust.
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As long as ICH qualifies as a REIT, distributions made by ICH 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 ICH that are properly designated by ICH as
capital gain dividends will be taxable to taxable U.S. Stockholders as long-
term capital gains (to the extent that they do not exceed ICH's actual net
capital gain for the taxable year) without regard to the period for which a
U.S. Stockholder has held his shares of Common Stock. 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 ICH 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 long-term capital gains (or short-term capital
gains if the shares have been held for one year or less), provided that the
shares have been held as a capital asset. ICH will notify stockholders at the
end of each year as to the portions of the distributions which constitute
ordinary income, net capital gain or return of capital. Dividends declared by
ICH 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 ICH and received by the stockholder on December 31 of such year, provided
that the dividend is actually paid by ICH 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 ICH.
Distributions made by ICH 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 ICH (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition
of Common Stock, 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 28% 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 will be long-term gain or loss if
such shares have been held for more than one year. 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 ICH which
were required to be treated as long-term capital gains.
WITHHOLDING
ICH 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 ICH with
his correct taxpayer identification number may also be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be
creditable against the stockholder's income tax liability. In addition, ICH
may be required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their non-foreign status to ICH.
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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 pension, profit-
sharing or stock bonus plan which is "qualified" under the Code, that holds
Common Stock as an investment will not be subject to tax on dividends paid by
ICH. 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 "qualified" plans but not including IRAs) that own
more than 10% (by value) of ICH'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 (see "Description of Capital Stock--
Repurchase of Shares and Restrictions on Transfer"), however, should prevent
this result. Tax-exempt investors may also be subject to tax on distributions
from ICH to the extent ICH has excess inclusion income. See "--Special
Considerations."
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 ICH 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 ICH
in order to claim such treatment. In addition, non-U.S. Stockholders are
subject to special treatment with respect to distributions from ICH to the
extent ICH has excess inclusion income. See "--Special Considerations". Non-
U.S. Stockholders should consult their own tax advisors concerning the federal
income tax consequences to them of a purchase of shares of ICH's Common Stock
including the federal income tax treatment of dispositions of interests in,
and the receipt of distributions from, ICH.
SPECIAL CONSIDERATIONS
The Company may invest in or otherwise acquire residual interests in REMICs.
In general, a REMIC is a fixed pool of mortgage instruments in which investors
hold multiple classes of interests and for which a REMIC election has been
made. Part or all of any income derived by the Company from a REMIC residual
interest may be excess inclusion income. Excess inclusion income is generally
taxable income with respect to a residual interest in excess of a specified
return on investment in the residual interest. In some cases, substantially
all taxable income with respect to a residual interest may be considered
excess inclusion income. Pursuant to regulations not yet published, if the
Company pays any dividends to its stockholders that are attributable to such
excess inclusion income, the stockholders who receive such dividends would be
subject to certain special rules including (i) the characterization of excess
inclusion income as UBTI for tax-exempt stockholders (including employee
benefit plans and individual retirement accounts), (ii) the application of
federal income tax withholding at the maximum rate (without reduction for any
otherwise applicable income tax treaty) on any excess inclusion income
allocable to foreign stockholders, (iii) the inability of a stockholder
generally to offset excess inclusion income with net operating losses, and
(iv) the taxation (at the highest corporate tax rate) of a REIT, rather than
its stockholders, on the amount of excess inclusion income for the taxable
year allocable to shares of stock held by disqualified organizations
(generally, tax-exempt entities not subject to tax on unrelated business
taxable income, including governmental organizations). Until regulations or
other guidance are issued, the Company will use methods it believes are
appropriate for calculating the amount of any excess inclusion income it
recognizes from REMICs, and allocating any excess inclusion income to its
stockholders.
The Company 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 the Company's mortgage assets), CMOs or other
secured lending transactions. If the Service were to successfully take the
position that such
95
<PAGE>
transactions result in the Company having issued debt instruments (i.e.,
reverse repurchase agreements, CMOs or other secured loans) with differing
maturity dates secured by a pool of Commercial Mortgages, the Company could be
treated, in whole or in part, as a taxable mortgage pool. In this case, a
portion of the Company's income could be characterized as excess inclusion
income which would subject stockholders (or the Company, to the extent Common
Stock is held by disqualified organizations) to the tax treatment described
above with respect to residual interests in REMICs. The Company intends to
take the position that its existing financing arrangements do not create a
taxable mortgage pool or excess inclusion income. However, the Company may
enter into arrangements creating such excess inclusion income in the future.
In the absence of any definitive authority on this issue, there can be no
assurance regarding whether the Company's reverse repurchase agreements, CMOs
or other secured loans will cause the Company to realize excess inclusion
income.
OTHER TAX CONSEQUENCES
ICCC will 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, ICCC is
able to distribute only its net after-tax earnings to its shareholders,
including ICH, as dividend distributions, thereby reducing the cash available
for distribution by ICH to its stockholders.
ICH 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 ICH 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
ICH.
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 of Common Stock 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, Baltimore, Maryland. Certain legal
matters will be passed on for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom (Illinois). Thomas J. Poletti, a Director of ICH, is a partner
in the law firm Freshman, Marantz, Orlanski, Cooper & Klein, counsel to the
Company and IMH. See "Certain Transactions--The Organizational Transactions"
and "--Other Transactions."
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EXPERTS
The financial statements of Imperial Credit Commercial Holdings, Inc. and
Imperial Commercial Capital Corporation as of March 31, 1997, and for the
period from January 15, 1997 (commencement of operations) through March 31,
1997, have been included herein in reliance upon the reports of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
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GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"Affiliated Person" means of any entity: (1) any person directly or
indirectly owning, controlling, or holding with the power to vote, five
percent (5%) or more of the outstanding voting securities of such entity;
(2) any person five percent (5%) or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or held with power to
vote, by such entity; (3) any person directly or indirectly controlling,
controlled by, or under common control with, such entity or (4) any officer,
director or employee of such entity or any person set forth in (1), (2) or (3)
above. Any person who owns beneficially, either directly or through one or
more controlled companies, more than twenty-five percent (25%) of the voting
securities of any entity shall be presumed to control such entity. Any person
who does not so own more than twenty-five percent (25%) of the voting
securities of any entity shall be presumed not to control such entity. A
natural person shall be presumed not to be a controlled entity.
"Affiliated REIT" means a REIT which may have been or will be an Affiliated
Person with respect to the Company, IMH, or their respective conduit
operations.
"Agency Certificates" means Pass-Through Certificates guaranteed by the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Corporation or the Government National Mortgage Association.
"AMEX" means American Stock Exchange, Inc.
"ARM" means a mortgage loan or any mortgage loan underlying a Mortgage
Security that features adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an established index. An ARM
is usually subject to periodic interest rate and/or payment caps and a
lifetime interest rate cap.
"Average Net Worth" means the arithmetic average of the sum of the gross
proceeds from any sale of equity securities by the Company, before deducting
any underwriting discounts and commissions and other expenses and costs
relating to the offering, plus the Company's retained earnings less dividends
declared (without taking into account any losses incurred in prior periods)
computed by taking the daily average of such values during such period.
"Bankruptcy Code" means Title 11, United States Code, as amended.
"Charter" means the Articles of Incorporation of ICH and amendments thereto.
"CMO" means an adjustable or fixed-rate debt obligation (bond) that is
collateralized by mortgage loans or mortgage certificates and issued by
private institutions.
"CMSRs" means Commercial Mortgage Servicing Rights.
"CMT Index" means the one year constant maturity Treasury index.
"CMBSs" means (1) pass-through certificates and (2) REMICs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commercial Mortgages" mean commercial mortgage assets including condo-
conversion, multi-family property and cooperative apartment mortgage loans on
commercial real property such as industrial and warehouse properties, office
buildings, retail space and shopping malls, hotels and motels, nursing homes,
hospitals, congregate care facilities and senior living centers.
"Commission" means the Securities and Exchange Commission.
"Company" means ICH and ICCC, as a combined entity unless the context
requires otherwise.
"Conduit Operations" means ICCC.
"Contribution" means the contribution by IMH to ICH of 100% of the
outstanding shares of the non-voting preferred stock of ICCC in exchange for
95,000 shares of ICH Class A Stock.
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"Conversion Rate" means the rate in which the $15.0 million promissory note
to ICH from IMH converts into one share of ICH Preferred Stock for each $5.00
principal amount of said note.
"DSCRs" means Debt Service Coverage Ratios.
"11th District Cost of Funds" means the index made available monthly by the
Federal Home Loan Bank Board of the cost of funds to members of the Federal
Home Loan Bank 11th District.
"ERISA" means the Employee Retirement Income Security Act of 1974.
"ERISA Plan" or "Plan" means a pension, profit-sharing, retirement or other
employee benefit plan which is subject to ERISA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles.
"ICCC" means Imperial Commercial Capital Corporation, a California
corporation that conducts the Conduit Operations.
"ICH" means IMH Commercial Holdings, Inc., a Maryland corporation, the
entity to which IMH will contribute the preferred stock of ICCC.
"ICH Class A Stock" means the non-voting Class A Common Stock, $.01 par
value per share, of ICH.
"ICH Preferred Stock" means the non-voting Class A Convertible Preferred
Stock, $.01 par value per share, of ICH.
"ICH Shares" means up to 5,000,000 shares of Common Stock offered hereby.
"ICIFC" means ICI Funding Corporation, a California corporation and the
conduit operations of IMH.
"ICII" means Imperial Credit Industries, Inc.
"IMH" means Imperial Credit Mortgage Holdings, Inc., a Maryland corporation.
"Initial Primary Business" means the primary business as described in the
Principal Party's initial public offering documentation.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"Investment Opportunity" means any mortgage loan or mortgage-backed security
investment opportunity offered to RAI , IMH, ICH or an Affiliated REIT, as the
case may be.
"ISOs" means qualified incentive stock options granted under the Stock
Option Plan, which meet the requirements of Section 422 of the Code.
"IWLG" means Imperial Warehouse Lending Group, Inc., a subsidiary of IMH.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means the London interbank offered rate.
"Long-Term Investment Operations" means ICH.
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"LTV" or "loan-to-value ratio" means the percentage obtained by dividing the
principal amount of a loan by the lower of the sales price or appraised value
of the mortgaged property when the loan is originated.
"Manager" means RAI Advisors, LLC.
"Master Commitments" means commitments issued by the Company which will
obligate the Company to purchase Mortgage Assets from the holders of the
commitment for a specified period of time, in a specified aggregate principal
amount and at a specified price.
"MGCL" means the Maryland General Corporation Law, as amended from time to
time.
"MSRs" means mortgage servicing rights.
"NASD" means the National Association of Securities Dealers, Inc.
"Net Income" means the net income of the Company as determined by the Code
before the Manager's compensation, the deduction for dividends paid, and any
net operating loss deductions arising from losses in prior periods. The
Company's interest expenses for borrowed money shall be deducted in
calculating Net Income.
"Ownership Limit" means 9.8% (in value or in number of shares, whichever is
more restrictive) of the aggregate of the outstanding shares of Common Stock,
as may be increased or, subject to limitations, reduced by the Board of
Directors of ICH.
"Pass-Through Certificates" means securities (or interests therein) which
are Qualified REIT Assets evidencing undivided ownership interests in a pool
of mortgage loans, the holders of which receive a "pass-through" of the
principal and interest paid in connection with the underlying mortgage loans
in accordance with the holders' respective, undivided interests in the pool.
Pass-Through Certificates evidence interests in loans secured by multi-family
or commercial real estate properties.
"Principal Party" means the entity whose Initial Primary Business most
closely aligns with an Investment Opportunity and the entity which will first
be offered an Investment Opportunity pursuant to the Right of First Refusal
Agreement.
"Privately-Issued Certificates" means privately-issued Pass-Through
Certificates issued by the Company or an affiliate of the Company or other
non-Agency third party issuer.
"Qualified Hedge" means a bona fide interest rate swap or cap agreement
entered into by ICH to hedge variable rate indebtedness only, that ICH
incurred or expects to incur to acquire or carry Qualified REIT Assets.
"QRS" means a qualified REIT subsidiary that is a corporation whose stock is
entirely owned by the REIT at all times during such corporation's existence.
"Qualified REIT Assets" means (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 ICH (other than amounts received pursuant to a dividend reinvestment
plan) or (b) a public offering of debt obligations of ICH which have
maturities of at least 5 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).
"Qualifying Interests" means "mortgages and other liens on and interests in
real estate," as defined in Section 3(c)(5)(C) under the Investment Company
Act.
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"RAI" means RAI Advisors, LLC, the Manager of the Company.
"Real Estate Asset" means interests in real property, interests in mortgages
on real property, and regular interests in REMICS.
"REIT" means a real estate investment trust as defined under Section 856 of
the Code.
"REMIC" means serially maturing debt securities secured by a pool of
mortgage loans, the payments on which bear a relationship to the debt
securities and the issuer of which qualifies as a Real Estate Mortgage
Investment Conduit as defined under Section 860D of the Code.
"Return on Equity" means return calculated for any quarter by dividing the
Company's Net Income for the quarter by its Average Net Worth for the quarter.
"Reverse Repurchase Agreement" means a borrowing device by an agreement to
sell securities or other assets to a third party and a simultaneous agreement
to repurchase them at a specified future date and price, the price difference
constituting the interest on the borrowing.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the United States Internal Revenue Service.
"Servicing Agreements" means agreements entered into with correspondents in
which the correspondents retain the right to service the Commercial Mortgages.
"Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plan, Keogh Plan, bank commingled trust fund for
such plans, an IRA or other similar entity intended to be exempt from federal
income taxation.
"Ten Year U.S. Treasury Rate" means the average of the weekly average yield
to maturity for U.S. Treasury securities (adjusted to a constant maturity of
10 years) as published weekly by the Federal Reserve Board during a quarter.
"25% entity" means any entity of which IMH owns 25% or more of the voting
securities.
"25% Payment" means incentive compensation for each fiscal quarter, in an
amount equal to 25% of the Net Income of the Company, before deduction of such
incentive compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten Year U.S. Treasury Rate plus 2%.
"UBTI" means "unrelated trade or business taxable income" as defined in
Section 512 of the Code.
"Unaffiliated Director" means a Director who is independent of the Company,
except for being a Director of the Company, any manager of the Company
(including RAI) and IMH and its Affiliated Persons.
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INDEX TO FINANCIAL STATEMENTS
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-2
Balance Sheet ............................................................. F-3
Statement of Operations.................................................... F-4
Statement of Changes in Stockholders' Equity............................... F-5
Statement of Cash Flows.................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-24
Balance Sheet ............................................................. F-25
Statement of Operations.................................................... F-26
Statement of Changes in Shareholders' Equity............................... F-27
Statement of Cash Flows.................................................... F-28
Notes to Financial Statements.............................................. F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
IMH Commercial Holdings, Inc.:
We have audited the accompanying balance sheet of IMH Commercial Holdings,
Inc. (formerly Imperial Credit Commercial Holdings, Inc.) as of March 31,
1997, and the related statements of operations, changes in stockholders'
equity and cash flows for the period from January 15, 1997 (commencement of
operations) through March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IMH Commercial Holdings,
Inc. as of March 31, 1997, and the results of its operations and its cash
flows for the period from January 15, 1997 (commencement of operations)
through March 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Orange County, California
April 16, 1997, except as to
Note 1 to the financial statements,
which is as of June 30, 1997
F-2
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31,
1997 MARCH 31,
(NOTE 11) 1997
----------- ---------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents................................ $ 4,400 $ 4,400
Commercial Mortgages held for investment, net............ 17,522 17,522
Residual interest in securitization...................... 10,025 10,025
Investment in ICCC....................................... 323 --
Accrued interest receivable.............................. 128 128
Due from affiliates...................................... 134 134
Prepaid and other assets................................. 41 41
------- -------
$32,573 $32,250
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Borrowings from IWLG..................................... $16,563 $16,563
Other affiliated borrowings.............................. 520 520
Accrued interest expense................................. 150 150
------- -------
Total liabilities.................................... 17,233 17,233
------- -------
Stockholders' equity:
Preferred stock, $.01 par value;
10,000,000 shares authorized; 3,000,000 shares issued
and outstanding pro forma (unaudited) and at March 31,
1997 (liquidation preference of $15,000).............. 30 30
Common stock, $.01 par value;
46,000,000 shares authorized; 300,000 shares issued and
outstanding pro forma (unaudited) and 599,000 shares
issued and outstanding at March 31, 1997.............. 3 6
Class A Common Stock, $.01 par value;
4,000,000 shares authorized; 394,000 shares issued and
outstanding pro forma (unaudited)..................... 4 --
Additional paid-in capital.............................. 14,970 14,970
Contributed capital..................................... 3,019 2,697
Accumulated deficit..................................... (2,686) (2,686)
------- -------
Total stockholders' equity........................... 15,340 15,017
------- -------
Commitments and contingencies
$32,573 $32,250
======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE PERIOD
FROM JANUARY 15, 1997 FOR THE PERIOD
(COMMENCEMENT OF FROM JANUARY 15, 1997
OPERATIONS) THROUGH (COMMENCEMENT OF
MARCH 31, 1997 OPERATIONS) THROUGH
(NOTE 11) MARCH 31, 1997
--------------------- ---------------------
(UNAUDITED)
<S> <C> <C>
Interest income:
Commercial Mortgages held for
investment...................... $ 219 $ 219
Residual interest in
securitization.................. 131 131
Other............................ 16 16
--------- -------
Total interest income.......... 366 366
--------- -------
Interest expense:
Borrowings from IWLG............. 150 150
Other affiliated borrowings...... 129 129
--------- -------
Total interest expense......... 279 279
--------- -------
Net interest income before
provision for Commercial
Mortgage losses............... 87 87
Provision for Commercial Mortgage
losses............................ 13 13
--------- -------
Net interest income............ 74 74
--------- -------
Stock compensation expense......... 2,697 2,697
Equity in net loss of ICCC......... 177 --
Professional expense............... 102 60
Data processing.................... 3 3
--------- -------
2,979 2,760
--------- -------
Net income (loss).............. $ (2,905) $(2,686)
========= =======
Pro forma net income (loss) per
share............................. $ (1.71)
=========
Pro forma weighted average number
of shares outstanding............. 1,694,000
=========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH
31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED
STOCK COMMON STOCK ADDITIONAL TOTAL
------------- ------------- PAID-IN CONTRIBUTED ACCUMULATED STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 15,
1997 (commencement of
operations)............ -- $-- -- $-- $ -- $ -- $ -- $ --
Sale of common stock.... -- -- 599 6 -- 2,697 -- 2,703
Sale of preferred stock. 3,000 30 -- -- 14,970 -- -- 15,000
Net income (loss) from
January 15, 1997
(commencement of
operations) through
March 31, 1997......... -- -- -- -- -- -- (2,686) (2,686)
----- --- --- --- ------- ------ ------- -------
Balance, March 31, 1997. 3,000 $30 599 $ 6 $14,970 $2,697 $(2,686) $15,017
===== === === === ======= ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH
31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income (loss)................................................... $ (2,686)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for Commercial Mortgage losses........................... 13
Stock compensation expense......................................... 2,697
Purchase of residual interest in securitization.................... (10,098)
Paydowns on residual interest in securitization.................... 73
Net change in accrued interest receivable.......................... (128)
Net change in prepaids and other assets............................ (41)
Net change in accrued interest expense............................. 150
--------
Net cash provided by operating activities........................ (10,020)
--------
Cash flows from investing activities:
Purchase of Commercial Mortgages held for investment................ (17,539)
Principal paydowns on Commercial Mortgages held for investment...... 4
--------
Net cash used in investing activities............................ (17,535)
--------
Cash flows provided by financing activities:
Issuance of common stock............................................ 6
Issuance of promissory note to IMH.................................. 15,000
Net borrowings from IWLG............................................ 16,563
Net change in other affiliated borrowings........................... 386
--------
Net cash provided by financing activities........................ 31,955
--------
Net increase in cash and cash at end of the period............... $ 4,400
========
Non-cash transactions:
Conversion of promissory note held by IMH to preferred stock....... $ 15,000
Increase in contributed capital from stock compensation expense.... $ 2,697
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
1. THE COMPANY
THE COMPANY'S ORGANIZATION
Imperial Credit Commercial Holdings, Inc. (the "Company" or "ICH"), a
newly formed Maryland corporation, commenced operations in January 1997 as
a separate division of Imperial Credit Mortgage Holdings, Inc. ("IMH"). On
June 30, 1997, the Company changed its name to IMH Commercial Holdings,
Inc. The Company operates as a specialty commercial property finance
company which will elect to be taxed as a real estate investment trust
("REIT") for Federal income tax purposes, which generally will allow the
Company to pass through income to stockholders without payment of corporate
level Federal income tax. The Company and Imperial Commercial Credit
Corporation ("ICCC"), the Company's unconsolidated conduit operations
vehicle, were formed for the purpose of originating, purchasing and
securitizing or selling commercial mortgages and investing in commercial
mortgages and commercial mortgage-backed securities ("CMBSs"). Commercial
mortgage assets include mortgage loans on condo-conversions, multi-family
and cooperative apartment properties and mortgage loans on commercial
property, such as industrial and warehouse properties, office buildings,
retail space and shopping malls, hotels and motels, nursing homes,
hospitals, congregate care facilities and senior living centers
(collectively, "Commercial Mortgages").
The following is a summary of transactions entered into or to be entered
into in connection with the organization of the Company ("Organizational
Transaction"):
. On February 3, 1997, the officers and directors of the Company as a group
and IMH purchased 300,000 and 299,000 shares of the common stock of ICH
("ICH Common Stock"), respectively.
. In February 1997, IMH purchased all of the non-voting preferred stock of
ICCC, which has a coupon which represents 95% of the GAAP based economic
interest in ICCC entitling the holder to receive 95% of any dividend or
distribution made by ICCC, for $500,000 and certain of the Company's
officers purchased all of the outstanding shares of common stock of ICCC,
which represents 5% of the GAAP based economic interest in ICCC entitling
the holder to receive 5% of any dividend or distribution of ICCC.
. In February 1997, ICCC brokered the Company's purchase of $7.3 million
and $10.2 million of condominium conversion loans which were financed
with $16.6 million in borrowings from Imperial Warehouse Lending Group
("IWLG") (IMH's warehouse lending operations) and $900,000 in other
borrowings from IMH. All of such condominium conversion loans were
purchased from ICI Funding Corporation ("ICIFC"), the conduit operations
of IMH, and $7.3 million of such mortgage loans were originated by a
company with which William D. Endresen, an officer of the Company and
ICCC, was an affiliate.
. In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note
bearing interest at the rate of 8% per annum which was convertible into
shares of the non-voting convertible preferred stock of ICH (the "ICH
Preferred Stock") at the rate of one share of ICH Preferred Stock for
each $5.00 principal amount of said note (the "Conversion Rate").
. In March 1997, IMH converted the aforementioned $15.0 million principal
amount promissory note into an aggregate of 3,000,000 shares of ICH
Preferred Stock. All ICH Preferred Stock is automatically convertible
upon the closing of ICH's initial public offering ("the Offering") into
shares of ICH Common Stock determined by multiplying the number of shares
of ICH Preferred Stock to be converted
F-7
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
by a fraction, the numerator of which is $5.00 and the denominator of
which is the price of the shares to be issued pursuant to the Offering
(the "IPO Price"). Notwithstanding the foregoing, consistent with IMH's
classification as a REIT, IMH shall not be entitled to have converted into
ICH Common Stock more than that number of shares of ICH Preferred Stock
whereby IMH would own, immediately after such conversion, greater than
9.8% of the outstanding ICH Common Stock. Any shares of ICH Preferred
Stock not converted into ICH Common Stock upon the closing of the Offering
shall on such date automatically convert into shares of ICH non-voting
Class A Common Stock (the "ICH Class A Stock") at the same rate as the ICH
Preferred Stock converted into ICH Common Stock on said date. Shares of
ICH Class A Stock convert into shares of ICH Common Stock on a one-for-one
basis and each such class of ICH Common Stock is entitled to cash
dividends on a pro rata basis. Upon any subsequent issuances of ICH Common
Stock, shares of ICH Class A Stock shall automatically convert into
additional shares of ICH Common Stock, subject to said 9.8% limitation.
. In March 1997, the Company purchased a $10.1 million residual interest in
securitization from ICIFC which was financed by a promissory note. In
March 1997 the promissory note was repaid with cash from IMH's above-
referenced $15.0 million investment. Concurrently therewith, the Company
repaid the $900,000 owed to IMH in connection with its purchase of
condominium conversion loans.
. In April 1997, IMH exchanged 299,000 shares of ICH Common Stock held by
it for an equal number of shares of ICH Class A Stock.
. On the closing of this Offering (unaudited), IMH will contribute to ICH
(the "Contribution") 100% of the non-voting preferred stock of ICCC for
95,000 shares of ICH Class A Stock. Upon the closing of this Offering
(unaudited), IMH will own 575,831 shares of ICH Common Stock and 818,169
shares of ICH Class A Stock.
BASIS OF PRESENTATION OF THE COMPANY'S OPERATIONS
The operations of ICH, currently a subsidiary of IMH, subject to the
completion of the Contribution, have been presented in the financial
statements as a stand-alone Company. Interest has been charged on all
affiliated borrowings at the rate of 8% per annum unless at a rate otherwise
noted. Also, costs and expenses of IMH have been allocated to ICH in
proportion to the services provided, plus a 15% service charge. See note 4 to
notes to the financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
THE COMPANY'S OPERATIONS
The Company currently operates the Long-Term Investment Operations which
invests primarily in Commercial Mortgages and CMBSs and, as of the effective
date of the Offering, will engage in the Conduit Operations, which will
originate, purchase and sell or securitize Commercial Mortgages. The Conduit
Operations will operate through three divisions: the Condominium Division, the
Retail Division and the Correspondent and Bulk Purchase Division.
F-8
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
Long-Term Investment Operations
The Long-Term Investment Operations invests primarily in adjustable rate
Commercial Mortgages and CMBSs for long-term investment. Income is earned
principally from the net interest income received by the Company on the
Commercial Mortgages and CMBSs purchased and held in its portfolio.
Conduit Operations
The Conduit Operations will operate through three divisions: the Condominium
Division, the Retail Division, the Correspondent and Bulk Purchase Division.
Condominium Division. This division will offer on a retail basis adjustable
rate financing to developers and project owners who have completed the
development of a condominium complex or the conversion of an apartment complex
to a condominium complex on property with a typical loan amount of $3.0
million to $10 million. All originations, underwriting, processing and funding
will be performed at ICCC's executive offices. The Company anticipates that
the Condominium Division's Commercial Mortgages will be offered on a
nationwide basis and that Commercial Mortgages originated through the
Condominium Division will be financed through the utilization of
collateralized mortgage obligation ("CMO") borrowings by the Long-Term
Investment Operations.
Retail Division. This division, which is expected to become operational by
the closing of the Offering, will originate Commercial Mortgages for
properties including general purpose apartment complexes, general retail
property such as shopping centers, super markets and department stores, light
industrial property, and office buildings. The Retail Division will offer
smaller balance ($500,000 to $1.5 million) fixed and adjustable rate
Commercial Mortgage products to developers and project owners for smaller
properties and projects than those funded by the Correspondent and Bulk
Purchase Division. Although processing and funding operations relating to
these Commercial Mortgage will be performed centrally at ICCC's executive
offices, the Company has targeted major metropolitan areas for the opening of
satellite offices for regional originations. A portion of the adjustable rate
Commercial Mortgages that will be originated by the Retail Division may be
held in portfolio by the Long-Term Investment Operations, while the balance
thereof and a substantial portion of the fixed rate Commercial Mortgages
originated will be resold by the Conduit Operations through REMIC
securitizations.
Correspondent and Bulk Purchase Division. This division will both originate
Commercial Mortgages on a retail basis and purchases Commercial Mortgages on a
bulk and flow basis. The Correspondent and Bulk Purchase Division will offer
larger principal balance ($1.5 million to $10.0 million) Commercial Mortgages
for commercial projects than those funded by the Retail Division. The
Correspondent and Bulk Purchase Division will offer adjustable rate and fixed
rate programs offered through specified correspondents who may be provided
with Company-sponsored warehouse facilities. In addition, the Correspondent
and Bulk Purchase Division will purchase Commercial Mortgages in bulk and on a
flow basis from selected financial institutions and mortgage bankers. A
portion of the adjustable rate Commercial Mortgages originated or purchased by
this Division may be held in portfolio by the Long-Term Investment Operations,
while the balance thereof and a substantial portion of the fixed rate
Commercial Mortgages originated or purchased will be resold through REMIC
securitizations.
F-9
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents
consist of cash and money market mutual funds. The Company considers
investments with maturities of three months or less at date of purchase to be
cash equivalents.
INVESTMENT IN IMPERIAL COMMERCIAL CREDIT CORPORATION
The Company will record its preferred stock investment in ICCC on the equity
method at 95%, which is the economic interest the Company is entitled to as
owner of 100% of the non-voting preferred stock of ICCC. See note 1 to notes
to financial statements.
COMMERCIAL MORTGAGES HELD FOR INVESTMENT
The Company purchases Commercial Mortgages to be held as long-term
investments. Commercial Mortgages held for investment are recorded at cost at
the date of purchase. Commercial Mortgages held for investment include
adjustable-rate loans to developers secured by first liens on converted
condominium complexes. All of the Commercial Mortgages held for investment at
March 31, 1997 were collateralized by properties located in California and
Arizona. Premiums and discounts related to these Commercial Mortgages are
amortized over their estimated lives using the interest method. Commercial
Mortgages are continually evaluated for collectibility and, if appropriate,
the Commercial Mortgages may be placed on nonaccrual status, generally 90 days
past due, and previously accrued interest reversed from income. Other than
temporary impairment in the carrying value of Commercial Mortgages held for
investment, if any, will be recognized as a reduction to current earnings.
The Company maintains an allowance for losses on Commercial Mortgages held
for investment at an amount which it believes is sufficient to provide
adequate protection against future losses in the Commercial Mortgages
portfolio. The allowance for losses is determined primarily on the basis of
management's judgment of net loss potential, including specific allowances for
known impaired Commercial Mortgages and other factors such as changes in the
nature and volume of the portfolio, value of the collateral and current
economic conditions that may affect the borrowers ability to pay. A provision
is recorded for all Commercial Mortgages or portions thereof deemed to be
uncollectible thereby increasing the allowance for Commercial Mortgages
losses.
RESIDUAL INTEREST IN SECURITIZATION
The accompanying 1997 balance sheet includes one residual interest in
securitization ("residual") of real estate mortgage investment conduits
("REMICs") which was recorded as a result of a 1995 securitization by Imperial
Credit Industries, Inc. (ICII) of commercial loans through a special purpose
trust vehicle. ICII has one director who also serves on the Board of ICH. ICH
purchased the residual in March 1997 from ICIFC for $10.1 million. ICIFC and
ICH have estimated future cash flows from the residual utilizing assumptions
that they believe are commensurate with the risk inherent in the investment
and consistent with those that they believe would be utilized by an
unaffiliated third-party purchaser and discounted at a rate commensurate with
the risk involved. The Company has classified this residual as a held-for-
trading security. Unrealized gains and losses net of related income taxes will
be recognized as a reduction to current earnings. To the Company's knowledge,
there is currently no active market for the purchase or sale of this residual.
F-10
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
The fair value of the residual is determined by computing the present value
of the excess of the weighted-average coupon on the Commercial Mortgages sold
(10.6%) over the sum of: (1) the coupon on the senior interest (5.9%), (2) a
base servicing fee paid to servicer of the Commercial Mortgages (0.50%) and
other fees, (3) expected estimated losses (0.40%) to be incurred on the
portfolio of Commercial Mortgages sold over the estimated lives of the
Commercial Mortgages and using an estimated future prepayment assumption
(10%). The prepayment assumptions used in estimating the cash flows is based
on recent evaluations of the actual prepayments of the related portfolio and
on market prepayment rates on new portfolios of similar Commercial Mortgages,
taking into consideration the current interest rate environment and its
expected impact on the estimated future prepayment rate. The estimated cash
flows expected to be received by the Company are discounted at an interest
rate that the Company believes an unaffiliated third-party purchaser would
require as a rate of return commensurate with the risk of holding such a
financial instrument. The rate used to discount the cash flows was
approximately 24%. To the extent that actual future excess cash flows are
different from estimated excess cash flows, the fair value of the Company's
residual could decline.
Under the terms of the securitization, the residual is required to build
overcollateralization to specified levels using the excess cash flows
described above until set percentages of the securitized portfolio are
attained. Future cash flows to the residual holder are all held by the REMIC
trust until a specific percentage of either the original or current
certificate balance is attained which percentage can be raised if certain
charge-offs and delinquency ratios are exceeded. The certificate holders'
recourse for credit losses is limited to the amount of overcollateralization
held by the residual in the REMIC trust. Upon maturity of the certificates or
upon exercise of an option ("clean up call") to repurchase all the remaining
Commercial Mortgages once the balance of the Commercial Mortgages in the trust
are reduced to 10% of a specified balance of the original Commercial Mortgages
in the trust, any remaining amounts in the trust are distributed. The current
amount of any overcollateralization balance held by the trust are recorded as
part of the residual.
INCOME TAXES
In any year in which the Company qualifies as a REIT, it generally will not
be subject to Federal income tax on that portion of its taxable income or net
capital gain which is distributed to its stockholders. The Company will,
however, be subject to tax at normal corporate rates upon any net income or
net capital gain not distributed. The Company intends to distribute
substantially all of its taxable income to its stockholders on a pro rata
basis in each year.
3. COMMERCIAL MORTGAGES HELD FOR INVESTMENT, NET
Commercial Mortgages held for investment consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
(IN THOUSANDS)
<S> <C>
Commercial Mortgages held for investment................... $ 17,535
Allowance for Commercial Mortgage losses................... (13)
--------
$ 17,522
========
</TABLE>
As of March 31, 1997, the weighted-average interest rate on the Commercial
Mortgages held for investment is 8.7% and the weighted-average contractual
maturity is 359 months.
F-11
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
All of the Commercial Mortgages purchased by ICH are adjustable-rate
Commercial Mortgages to developers secured by first liens on converted
condominium complexes. Because of the concentration of the Company's
Commercial Mortgages located in California and Arizona, a significant decline
in regional economic conditions, or some other regional catastrophe, could
result in a decline in interest income and fee income. Moreover, such an event
or events could affect the ability of borrowers to payoff their Commercial
Mortgages with the Company.
Activity in the allowance for Commercial Mortgage losses for the period from
January 15, 1997 (commencement of operations) through March 31, 1997 was as
follows (in thousands):
<TABLE>
<S> <C>
Balance, beginning of period........................................ $--
Provision for Commercial Mortgage losses............................ 13
Charge-offs......................................................... --
Recoveries.......................................................... --
----
Balance, end of period.............................................. $ 13
====
</TABLE>
As of March 31, 1997, the Company had no Commercial Mortgages considered
impaired and no Commercial Mortgages over 30 days past due.
4. RELATED PARTY TRANSACTIONS
FINANCING OF COMMERCIAL MORTGAGES HELD FOR INVESTMENT AND OTHER AFFILIATED
BORROWINGS
The $17.5 million in Commercial Mortgages held for investment were purchased
in February 1997 through ICCC from ICIFC at the unpaid principal balance of
the Commercial Mortgages, with the servicing rights retained by ICCC. The
Company financed the purchase of the $17.5 million of Commercial Mortgages
with $16.6 million in borrowings from IWLG and $900,000 in other borrowings
from IMH. The Company has recorded interest expense on the amounts borrowed
from IWLG and the other borrowings from IMH at 6.3% and 8% per annum,
respectively, which totaled $150,000 and $25,000, respectively, for the period
from January 15, 1997 (commencement of operations) through March 31, 1997. In
March 1997, the Company repaid the $900,000 in other borrowings from IMH. In
April 1997, the Company secured its own warehouse lending facility from an
unaffiliated third party for $200 million guaranteed by IMH, which guarantee
expires at such time as the Company has $50 million in stockholders' equity.
The new warehouse line of credit is uncommited and accrues interest at a
spread over LIBOR.
All other borrowings between ICH, and IMH and its affiliates, and ICCC have
been allocated interest at the rate of 8% per annum, except for borrowings
from ICIFC related to the purchase of the residual interest in securitization
prior to ICH receiving its $15 million preferred stock investment, which was
allocated at 12% and totaled $44,000.
RELATED PARTY EXPENSE ALLOCATIONS
The Company was charged various expenses from IMH for certain services and
costs which primarily include human resources, data processing, occupancy
usage and professional services. These expenses were primarily charged based
on a pro rata allocation of certain IMH employees time spent working on ICH
related business, which management believes is reasonable, and included a 15%
service charge which will be included in the terms of the management agreement
effective with the Offering. See note 6 to notes to the financial statements.
The related party allocations for the period January 15, 1997 (commencement of
operations) through
F-12
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
March 31, 1997 totaled $63,000. Management believes the related party expenses
allocated to ICH and included in its results of operations for the period from
January 15, 1997 (commencement of operations) through March 31, 1997
approximate what the expenses would have been if ICH had operated as an
unaffiliated entity of IMH and its affiliates.
STOCK COMPENSATION EXPENSE
Stock compensation expense of $2,697,000 represents the difference between
the price at which the Company issued 300,000 shares of common stock on
February 3, 1997 ($.01 per share) and the estimated fair value for financial
reporting purposes of such shares as determined by the Company's management,
as of February 3, 1997 ($9.00 per share). Fair value was based primarily on
management's projection of the Company's future cash flow and net earnings, as
well as the lack of liquidity of the shares at the date of issuance and the
uncertainty of certain future events regarding the development of the
Company's business and organization structure including, but not limited to,
obtaining independent financing for the organization and purchase of
Commercial Mortgages, funding and closing Commercial Loans, developing a
pipeline of future Commercial Loan originations and successfully concluding
the Offering.
5. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company has authorized 50,000,000 shares of $.01 par value Common Stock
("ICH Common Stock") of which 4,000,000 shares were reclassified and
designated as Class A non-voting Common Stock ("ICH Class A Stock"). On
February 3, 1997 the Company issued 300,000 shares of ICH Common Stock to
certain officers and directors of the Company and 299,000 shares of ICH Common
Stock to IMH.
Each share of ICH 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 ICH upon liquidation. Each share of ICH Common Stock
is entitled to one vote, subject to the provisions of its Articles of
Incorporation and amendments thereto ("Charter") regarding restrictions on
transfer of stock, and will be fully paid and nonassessable by ICH upon
issuance. Shares of ICH Common Stock have no preference, conversion, exchange,
preemptive or cumulative voting rights. The authorized stock of ICH 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 ICH
Common Stock in one or more classes or series of stock.
CLASS A NON-VOTING COMMON STOCK
Designation and Amount. Of the 50,000,000 shares of ICH Common Stock, which
were previously authorized, 4,000,000 shares were reclassified and designated
as ICH Class A Stock.
Rights, Preferences and Privileges and Voting Rights. The ICH Class A Stock
has the identical preferences, conversion or other rights, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption as the ICH Common Stock except that the holders of
shares of ICH Class A Stock are not entitled to any voting rights. If ICH
issues additional shares of its Common Stock as a dividend on its outstanding
Common Stock, ICH shall simultaneously issue as a dividend on its outstanding
ICH Class A Stock, pro rata among the holders thereof, that number of shares
of Class A Common Stock equal to the number of shares of ICH Common Stock
issued as a dividend multiplied by a fraction, the numerator of which is the
number of shares of ICH Class A Stock outstanding immediately before the
record date for the payment of the ICH Class A Stock dividend and the
denominator of which is the number of shares of ICH Common Stock outstanding
immediately before the record date for the payment of the ICH Common Stock
dividend.
Conversion rights. On any date on which shares of ICH Common Stock are
issued by ICH increasing the number of shares of ICH Common Stock issued and
outstanding (the "Conversion Date"), the shares of ICH Class A Stock held by
each person will automatically convert into that number of shares of ICH
Common Stock
F-13
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
as calculated below, except that those shares of ICH Class A Stock
(collectively, "Excess Shares") which would cause the holder thereof to own
shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of
any stock ownership limitation set forth in the ICH's Charter shall not be
converted and shall remain outstanding shares of ICH Class A Stock. "Limit"
shall mean not greater than 9.8% (in value or in number of shares, whichever
is more restrictive) of the aggregate of the outstanding shares of Common
Stock of ICH. The number and value of outstanding shares of Common Stock shall
be determined by the Board of Directors of ICH in good faith, which
determination shall be conclusive for all purposes hereof.
If, subsequent to the Conversion Date, the conversion of Excess Shares into
shares of ICH Common Stock would no longer cause the holder thereof to own
shares of ICH Common Stock (i) in excess of the Limit or (ii) in violation of
any stock ownership limitation set forth in the Charter, such shares shall
automatically convert into that number of shares of ICH Common Stock as
calculated below, except that those Excess Shares which, if converted pursuant
to this provision, would cause the holder thereof to own shares of ICH Common
Stock (i) in excess of the Limit or (ii) in violation of any stock ownership
limitation set forth in the Charter shall not be converted and shall remain
outstanding shares of ICH Class A Stock.
The shares of ICH Class A Stock are convertible at the principal office of
ICH, and at such other office or offices, if any, as the Board of Directors
may designate, into fully paid and non-assessable shares of ICH Common Stock,
calculated as to each conversion to the nearest whole share. The number of
shares of ICH Common Stock to be issued upon conversion will be determined by
multiplying the number shares of ICH Class A Stock to be converted by one,
subject to certain adjustments. No fractional shares of ICH Common Stock will
be issued upon conversion of shares of ICH Class A Stock, and the number of
shares of ICH Common Stock to be issued will be rounded to the nearest whole
share.
PREFERRED STOCK
The Company had authorized 10,000,000 shares of $.01 par value Preferred
Stock ("Preferred Stock"), of which 4,000,000 shares were reclassified and
designated Class A Convertible Preferred Stock ("ICH Preferred Stock").
The Company's 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. The Preferred Stock may be issued
from time to time with such designations, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption as shall be
determined by the Board of Directors subject to the provisions of the Charter
regarding restrictions on transfer of stock. Preferred Stock is available for
possible future financing of, or acquisitions by, ICH and for general
corporate purposes without further stockholder authorization. The Preferred
Stock, if issued, may have a preference on dividend payments which could
reduce the assets available to ICH to make distributions to the common
stockholders.
CLASS A CONVERTIBLE PREFERRED STOCK.
Designation and Amount. Of the 10,000,000 shares of Preferred Stock
authorized, 4,000,000 shares are reclassified and designated ICH Preferred
Stock. In March 1997, IMH converted $15.0 million principal amount of
promissory notes into an aggregate of 3,000,000 shares of ICH Preferred Stock.
Dividends. Commencing on December 31, 1997, each holder of ICH Preferred
Stock will be entitled to receive, out of any funds legally available
therefor, when and if declared, dividends at the quarterly rate of $.10 per
share and no more, and thereafter quarterly on the last day of March, June,
September and December of each
F-14
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
year that any ICH Preferred Stock is outstanding. Such dividends will not be
cumulative, and no rights will accrue to holders of ICH Preferred Stock by
reason of the fact that dividends on such shares are not declared or paid in
any prior quarter.
In determining whether a distribution (other than upon liquidation), by
dividend, redemption or other acquisition of shares or otherwise, is permitted
under Maryland law, amounts that would be needed, if the Company were to be
dissolved at the time of the distribution, to satisfy the preferential rights
upon dissolution of holders of shares of any class or series of stock whose
preferential rights upon dissolution are superior to those receiving the
distribution will not be added to the Company's total liabilities.
Distributions Upon Liquidation, Dissolution or Winding Up. Subject to
conversion as set forth below, upon any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company, subject to the prior
preferences and other rights of any class or series of stock ranking senior to
the ICH Preferred Stock as to the distribution of assets upon liquidation,
dissolution or winding up of the affairs of the Company, but before any
distribution or payment will be made to the holders of any class or series of
stock ranking junior to the ICH Preferred Stock as to the distribution of
assets upon any liquidation, dissolution or winding up of the affairs of the
Company, the holders of ICH Preferred Stock will be entitled to receive out of
the assets of the Company legally available for distribution to its
stockholders liquidating distributions in cash or property at its fair market
value as determined by the Board of Directors of the Company in the amount per
share equal to the Liquidation Preference, which is $5.00 per share. After
payment of the full amount of the liquidating distributions to which they are
entitled, the holders of ICH Preferred Stock will have no right or claim to
any of the remaining assets of the Company and will not be entitled to any
other distribution in the event of liquidation, dissolution or winding up of
the affairs of the Company.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the legally available assets of the Company are
insufficient to pay the amount of the Liquidation Preference per share plus
the corresponding amounts payable on each class or series of other stock
ranking on a parity with the ICH Preferred Stock as to the distribution of
assets upon liquidation, dissolution or winding up of the affairs of the
Company, then the holders of the ICH Preferred Stock and all such other stock
will share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they otherwise would be respectively
entitled. Neither the consolidation or merger of the Company into or with
another corporation or corporations or trust or trusts nor the sale, lease,
transfer or conveyance of all or substantially all of the assets of the
Company to another corporation or any other entity shall be deemed a
liquidation, dissolution or winding up of affairs of the Company.
Voting Rights. The holders of shares of ICH Preferred Stock are not entitled
to any voting rights.
Conversion Rights. Upon any "Initial Public Offering", the shares of ICH
Preferred Stock held by each person will automatically convert into that
number of shares of Common Stock as calculated below, except that those shares
of ICH Preferred Stock which, if converted pursuant to this provision, would
cause the holder thereof to own shares of Common Stock (i) in excess of the
Limit or (ii) in violation of any stock ownership limitation set forth in the
Charter shall not be converted into shares of Common Stock. Any shares of ICH
Preferred Stock not converted into shares of Common Stock as a result of the
foregoing limitations shall on such date automatically convert into shares of
ICH Class A Stock at the same rate as shares of ICH Preferred Stock convert
into shares of Common Stock. If the aforementioned event does not occur, the
shares of ICH Preferred Stock shall remain outstanding. All ICH Preferred
Stock is automatically convertible upon the closing of this Offering into
shares of ICH Common Stock determined by multiplying the number of shares of
ICH Preferred
F-15
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
Stock to be converted by a fraction, the numerator of which is $5.00 and the
denominator of which is the Subscription Price. "Initial Public Offering"
means the sale of Common Stock pursuant to the Company's first effective
registration statement covering the sale of such shares filed under the 1933
Act provided such offering meets the following requirements: (i) said offering
raises gross proceeds of at least $10.0 million to the Company at a per share
offering price of no less than $5.00 per share and (ii) said offering is
completed on or before December 31, 1998.
The shares of ICH Preferred Stock also will be convertible at the principal
office of the Company, and at such other office or offices, if any, as the
Board of Directors may designate, into fully paid and non-assessable shares of
ICH Common Stock or ICH Class A Stock, as the case may be, of the Company. The
number of shares of ICH Common Stock or ICH Class A Stock, as the case may be,
to be issued upon conversion will be determined by multiplying the number of
shares of ICH Preferred Stock to be converted by the Conversion Rate.
"Conversion Rate" is determined by a fraction, the numerator of which will be
the liquidation preference and the denominator of which will be the IPO Price.
No fractional shares of ICH Common Stock or ICH Class A Stock, as the case
may be, will be issued upon conversion of shares of ICH Preferred Stock and
the number of shares of ICH Common Stock or ICH Class A Stock, as the case may
be, to be issued will be rounded to the nearest whole share.
6. AFFILIATED AGREEMENTS
MANAGEMENT AGREEMENT
RAI Advisors, LLC ("RAI" or the "Manager") will oversee the day-to-day
operations of the Company, subject to the supervision of the Company's Board
of Directors, pursuant to a management agreement (the "Management Agreement")
which will become effective on the closing of the Offering. The Company has
selected an outside advisor in order to efficiently and economically
coordinate, assist and manage the duties and responsibilities of the Company.
The Company believes that RAI will be more adequately suited to provide the
following services relating to the operations of the Company due to the
expertise of RAI's senior officers: securitization oversight, contract
negotiation, market information, implementation of cost controls,
asset/liability modeling and management, and servicing systems. In order to
utilize the IMH infrastructure, RAI intends to enter into a submanagement
agreement with ICIFC, the conduit operations of IMH, upon the closing of this
Offering to provide substantially all of the administrative services required
by the Company including facilities and costs associated therewith,
technology, human resources, management information systems, general ledger
accounts, check processing and accounts payable as RAI deems necessary. In
addition, RAI intends to enter into a submanagement agreement with Imperial
Credit Industries, Inc. to perform such human resource services for the
Company as RAI deems necessary. IMH owns all of the outstanding shares of non-
voting preferred stock of ICIFC, representing 99% of the economic interest in
ICIFC, and Messrs. Tomkinson, Johnson and Ashmore own 100% of the Common Stock
of ICIFC, representing 1% of the economic interest.
The Manager will be involved in three primary activities: (1) capital
management--primarily the oversight of the Company's structuring, analysis,
capital raising and investor relations activities; (2) asset management--
primarily the analysis and oversight of the acquisition, management,
securitization and disposition of Company assets; and (3) operations
management--primarily the oversight of ICH's operating subsidiaries. The
Management Agreement will have an initial term of five years, renewable
annually by agreement between the Company and the Manager, subject to the
approval of a majority of the unaffiliated directors of the Company.
F-16
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
The Management Agreement may be terminated by the Company at any time upon 60
days' written notice. In the event that the Management Agreement is terminated
or not renewed by the Company without cause, the Company will be obligated to
pay the Manager a termination or non-renewal fee determined by an independent
appraisal.
RAI is owned by those persons who will become executive officers and
directors of RAI upon the closing of this Offering. Each of the RAI executive
officers and directors also serve as executive officers or directors of ICH
and ICCC.
All of the persons designated to become executive officers of the Manager
upon the closing of the Offering are also officers of IMH and ICIFC. Each of
these officers have modified their employment agreements with ICIFC to become
officers of the Manager and of ICH and ICCC upon the closing of this Offering.
The Manager will agree to cause each of its officers to devote as much of his
or her time to the operations of the Company as is reasonably necessary. ICH
and ICCC will reimburse the Manager, who will reimburse ICIFC on a dollar for
dollar basis (including the service charge referenced below), for the actual
cost of providing the services of its officers to the Company based upon the
compensation payable to them by ICIFC, plus a 15% service charge. ICH will
reimburse the Manager for expenses incurred by the Manager, plus a service
charge of 15% on all expenses owed by the Manager to ICIFC for costs and
services under any submanagement agreement between ICIFC and the Manager. The
Manager will pay all such third parties on a dollar for dollar basis for the
aformentioned amounts received by it from the Company; no such 15% service
charge will be paid to third party service providers other than ICIFC. For the
first three years of the Management Agreement, there will be a minimum annual
amount of $500,000 (including the 15% service charge) payable by the Company
in connection with services provided and expenses incurred by the Manager and
payable by RAI to ICIFC. After the third year, the Company will only be
responsible for reimbursing expenses and services provided, without the 15%
service charge for amounts due to ICIFC. In addition, the Company will pay the
Manager, as compensation for each fiscal quarter, an amount equal to 25% of
the taxable net income of the Company, before the deduction of such
compensation, the deduction of dividends paid and any net operating loss
deductions, from losses in prior period, in excess of the amount that would
produce an annualized Return on Equity equal to the daily average Ten Year
U.S. Treasury Rate plus 2% (the "25% Payment"). "Return on Equity" is computed
on Average Net Worth and has no necessary correlation with the actual
distributions received by stockholders. The 25% Payment to the Manager will be
calculated quarterly in arrears before any income distributions are made to
stockholders for the corresponding period.
NON-COMPETE AGREEMENT AND RIGHT OF FIRST REFUSAL AGREEMENT
The Company's operations may be affected by the activities of IMH and ICIFC.
Pursuant to a non-compete agreement (the "Non-Compete Agreement") between IMH,
ICIFC, ICH and ICCC which will become effective upon the closing of the
Offering, for a period of the earlier of nine months from the closing of this
Offering or the date upon which the Company accumulates (for investment or
sale) $300.0 million of Commercial Mortgages and/or CMBSs, neither IMH nor
ICIFC will originate or acquire any Commercial Mortgages; however, this
Agreement shall not preclude IMH (either directly or through ICIFC) from
purchasing any Commercial Mortgages or CMBSs under the Right of First Refusal
Agreement discussed below. After the termination of the Non-Compete Agreement
and subject to the Right of First Refusal Agreement, as defined below, IMH, as
a mortgage REIT, may compete with the operations of the Company.
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 or IMH, and their
respective conduit operations (an "Affiliated REIT"). In such an
F-17
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
event, any Affiliated REIT utilizing RAI as its Manager may be in competition
with the Company. Upon the closing of the Offering, RAI, ICH, ICCC, IMH and
ICIFC will enter 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 (other than IMH) will
actually become parties to the Right of First Refusal Agreement. Pursuant to
this Agreement, RAI will agree that any mortgage loan or mortgage-backed
security investment opportunity (an "Investment Opportunity") which is offered
to it on behalf of either the Company, IMH 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 closely aligns with such Investment
Opportunity. In addition, both IMH and ICIFC on the one hand, and ICH and ICCC
on the other, will agree that any Investment Opportunity offered to either of
them which falls outside the scope of its Initial Primary Business should 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 Affiliated REIT's business is more greatly
enhanced by such Investment Opportunity. Should the Principal Party decline to
take advantage of an Investment Opportunity offered to an Affiliated REIT
which is a party to the Right of First Refusal Agreement, such REIT shall then
be free to pursue the Investment Opportunity. Should all of said Affiliated
REITs decline such Investment Opportunity, RAI may offer the Investment
Opportunity to any third party. 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 IMH, ICIFC 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.
7. STOCK OPTION PLAN
In April 1997, the Company adopted a 1997 Stock Option and Awards Plan (the
"Stock Option and Awards Plan") which provides for the grant of qualified
incentive stock options ("ISOs") which meet the requirements of Section 422 of
the Code, stock options not so qualified ("NQSOs"), deferred stock, restricted
stock, performance shares, stock appreciation and limited stock appreciation
rights awards ("Awards") and dividend equivalent rights ("DERs"). No shares
have been granted as of March 31, 1997.
The purpose of the Stock Option and Awards Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to others whose job performance affects
the Company. The Stock Option and Awards Plan is administered by the Board of
Directors or a Committee, appointed by the Board of Directors (the
"Administrator"). ISOs may be granted to the officers and key employees of the
Company. NQSOs and Awards may be granted to the directors, officers, key
employees and agents and consultants of the Company, any of its subsidiaries
of RAI or to RAI itself, and to the directors, officers and key employees of
ICCC.
The Stock Option and Awards Plan provides for granting of DERs in tandem
with all options granted under the Stock Option and Awards Plan. Such DERs
accrue for the account of the optionee shares of common stock upon the payment
of cash dividends on outstanding shares of common stock. The number of shares
accrued is determined by a formula and such shares are currently transferred
to the optionee only upon exercise of the related option. The Stock Option and
Awards Plan permits DERs to be granted under the Stock Option and Awards Plan
with certain characteristics. First, DERs can be issued in "current-pay" form
so that payments can be made to the optionee at the same time as dividends are
paid to holders of outstanding common stock. Second, DERs can be made eligible
to participate not only in cash distributions but also distributions of stock
or other
F-18
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
property made to holders of outstanding common stock. Shares of common stock
accrued for the account of the optionee pursuant to a DER grant may also be
made eligible to receive dividends and distributions. Finally, DERs can be
made "performance based" by conditioning the right of the holder of the DER to
receive any dividend equivalent payment or accrual upon the satisfaction of
specified performance objectives.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option and Awards Plan currently authorizes the
grant of options to purchase, and Awards of, an aggregate of an estimated
700,000 shares. The shares reserved for issuance pursuant to the Company's
Stock Option and Awards Plan will be increased or decreased to an amount equal
to 10% of the shares sold in the Offering, subject to a minimum of 400,000
shares. If an option granted under the Stock Option and Awards Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance
of further options or Awards under the Stock Option and Awards Plan.
Unless previously terminated by the Board of Directors, the Stock Option and
Awards Plan will terminate in April 2007, and no options or Awards may be
granted under the Stock Option and Awards Plan thereafter.
Options granted under the Stock Option and Awards Plan will become
exercisable in accordance with the terms of the grant made by the
Administrator. Awards will be subject to the terms and restrictions of the
Award made by the Administrator. The Administrator has discretionary authority
to select participants from among eligible persons and to determine at the
time an option or Award is granted when and in what increments shares covered
by the option may be purchased and, in the case of options, whether it is
intended to be an ISO or a NQSO provided, however, that certain restrictions
applicable to ISOs are mandatory, including a requirement that ISOs not be
issued for less than 100% of the then fair market value of the common stock
(110% in the case of a grantee who holds more than 10% of the outstanding
common stock) and a maximum term of ten years (five years in the case of a
grantee who holds more than 10% of the outstanding common stock).
Under current law, ISOs may not be granted to any director of the Company
who is not also an employee, or to directors, officers and other employees of
entities unrelated to the Company. No options or Awards may be granted under
the Stock Option and Awards Plan to any person who, assuming exercise of all
options held by such person, would own or be deemed to own more than 9.8% of
the outstanding shares of equity stock of the Company.
Each option must terminate no more than ten years from the date it is
granted (or five years in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of the combined voting power of the Company's
outstanding equity stock). Options may be granted on terms providing for
exercise either in who or in part at any time or times during their respective
terms, or only in specified percentages at stated time periods or intervals
during the term of the option.
The exercise price of any option granted under the Stock Option and Awards
Plan is payable in full in cash or its equivalent as determined by the
Administrator. The Company may make loans available to option holders to
exercise options evidenced by a promissory note executed by the option holder
and secured by a pledge of the common stock with fair market value at least
equal to the principal of the promissory note unless otherwise determined by
the Administrator.
The Board of Directors may from time to time revise or amend the Stock
Option and Awards Plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may impair the rights of any
participant under any outstanding Award without his consent or may, without
stockholder approval, increase
F-19
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
the number of shares subject to the Stock Option and Awards Plan or decrease
the exercise price of a stock option to less than 100% of fair market value on
the date of grant (with the exception of adjustments resulting from changes in
capitalization), materially modify the class of participants eligible to
receive options or Awards under the Stock Option and Awards Plan, materially
increase the benefits accruing to participants under the Stock Option and
Awards Plan or extend the maximum option term under the Stock Option and
Awards Plan.
8. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of December 31, 1996 and 1995 is made in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by ICH using available market information
and appropriate valuation methodologies; however, considerable judgment is
necessarily required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts ICH could realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents............................... $ 4,400 $ 4,400
Commercial Mortgages held for investment................ 17,522 17,985
Residual interest in securitization..................... 10,025 10,025
Liabilities--borrowings................................. 17,083 17,083
</TABLE>
The fair value estimates as of March 31, 1997 are based on pertinent
information available to management as of that date. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
The following describes the methods and assumptions used by ICH in
estimating fair values.
CASH AND CASH EQUIVALENTS
The carrying amount for cash and cash equivalents approximates fair value
because these instruments are demand deposits and money market mutual funds
and do not present unanticipated interest rate or credit concerns.
COMMERCIAL MORTGAGES HELD FOR INVESTMENT
The fair value of Commercial Mortgages held for investment is determined
based upon the Company's estimate of the proceeds which would be realized in a
securitized sale of the loans.
F-20
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
RESIDUAL INTEREST IN SECURITIZATION
The carrying amounts for residual interests in securitizations approximates
fair value. The fair value was estimated by discounting future cash flows
using rates that the Company believes are commensurate with the risk inherent
in these investments and consistent with those that the Company believes would
be utilized by an unaffiliated third party for financial instruments with
similar terms and remaining maturities.
BORROWINGS FROM IWLG
Fair values approximate the carrying amounts because of the short-term
maturity of the liabilities.
9. EMPLOYEE BENEFIT PLANS
The Company does not have its own 401(k) or profit sharing plan. As such,
employees of the Company participate in Imperial Credit Industries, Inc.'s
(ICII's) 401(k) plan. The Company's matching and discretionary contributions
were not significant for any period presented.
Under ICII's 401(k) plan, employees of the Company may contribute up to 14%
of their salaries. The Company will match 50% of the first 4% of employee
contributions. An additional Company contribution may be made at the
discretion of the Company.
10. IMPERIAL COMMERCIAL CAPITAL CORPORATION
The following financial statement data summarizes the financial position and
operations of ICCC as of March 31, 1997 and for the period from January 15,
1997 (commencement of operations) through March 31, 1997 (in thousands):
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
ASSETS
Due from affiliates................................................... $ 411
Premises and equipment, net........................................... 130
Other assets.......................................................... 13
-----
$ 554
=====
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred revenue...................................................... $ 52
Other liabilities..................................................... 101
Due to affiliates..................................................... 61
-----
214
-----
Shareholders' equity:
Preferred stock..................................................... 500
Common stock........................................................ 1
Contributed capital................................................. 25
Accumulated deficit................................................. (186)
-----
340
-----
$ 554
=====
</TABLE>
F-21
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
STATEMENT OF OPERATIONS
<TABLE>
<S> <C>
Revenues:
Interest income........................................................ $ 6
Loan servicing income.................................................. 2
-----
8
-----
Expenses:
Interest on affiliated borrowings...................................... 5
Stock compensation expense............................................. 25
Personnel expense...................................................... 57
Professional services.................................................. 63
General and administrative............................................. 44
-----
194
-----
Net income (loss)........................................................ $(186)
=====
</TABLE>
11. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma balance sheet gives effect to the Contribution (note 1) as if
it had occurred on March 31, 1997 represented by an increase to ICH's
Investment in ICCC of $323,000 and a corresponding increase to contributed
capital and ICH Class A Stock, representing the 95% economic interest in
ICCC's net book value at March 31, 1997. Additionally, the pro forma balance
sheet gives effect to the exchange by IMH of 299,000 shares of ICH Common
Stock for an equivalent number of ICH Class A Stock as if it had occurred on
March 31, 1997.
The pro forma statement of operations gives effect to the Contribution (note
1) as if it had occurred on January 15, 1997 (commencement of operations)
represented by an increase in ICH's Equity in net loss of ICCC of $177,000 and
a corresponding increase in ICH's total net loss of $177,000, representing the
95% economic interest in ICCC's results of operations for the period form
January 15, 1997 (commencement of operations) through March 31, 1997.
Additionally, the pro forma statement of operations reflects the effect of the
management agreement as if it were effective January 15, 1997.
Pro forma loss per share for the period from January 15, 1997 (commencement
of operations) through March 31, 1997 has been computed by dividing pro forma
net loss by the pro forma weighted average number of shares outstanding.
Historical earnings per share is not presented because it is not indicative of
the ongoing entity.
F-22
<PAGE>
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH
31, 1997
12. MORTGAGE LOANS ON REAL ESTATE
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH MARCH 31, 1997
-------------------------------------------------
PRIN. AMT.
(NOTE 1) SUBJECT TO
NUMBER INTEREST MATURITY CARRYING DELINQUENT
DESCRIPTION OF LOANS RATE DATE AMOUNT PRIN. OR INT.
----------- -------- -------- -------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Portfolio of first trust deed
conventional mortgages on
condominium conversions:
Original loan amounts between
$300,000-$400,000;
properties located in
Arizona; principal and
interest payable at level
amounts over life to
maturity with no balloon
payments due at maturity.... 20 9.00% 10/1/26 $ 7,295 $--
Original loan amounts under
$100,000; properties located
in California; principal and
interest payable at level
amounts over life to
maturity with no balloon 10,240
payments due at maturity.... 152 8.63% 4/1/27 ------- --
$17,535
Allowance for Commercial 13
Mortgage losses.............. -------
Total Commercial Mortgages $17,522
held for investment, net... =======
</TABLE>
<TABLE>
<CAPTION>
NOTE 1
------
<S> <C> <C>
Balance at January 15, 1997 (commencement of operations) $ --
Addition during period:
New mortgage loans.......................................... 17,539
Deductions during period:
Collections of principal.................................... $ (4)
Provision for Commercial Mortgage losses.................... (13) (17)
---- -------
Balance at March 31, 1997..................................... $17,522
=======
</TABLE>
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Commercial Capital Corporation:
We have audited the accompanying balance sheet of Imperial Commercial
Capital Corporation as of March 31, 1997, and the related statements of
operations, changes in shareholders' equity and cash flows for the period from
January 15, 1997 (commencement of operations) through March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Imperial Commercial
Capital Corporation as of March 31, 1997, and the results of its operations
and its cash flows for the period from January 15, 1997 (commencement of
operations) through March 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Orange County, California
April 16, 1997, except as to
Note 1 to the financial statements,
which is as of June 30, 1997
F-24
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Due from affiliates..................................................... $ 411
Premises and equipment, net............................................. 130
Other assets............................................................ 13
-----
$ 554
=====
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred revenue........................................................ $ 52
Other liabilities....................................................... 101
Due to affiliates....................................................... 61
-----
Total liabilities..................................................... 214
-----
Shareholders' equity:
Preferred stock, no par value; 50,000 shares authorized; 9,500 shares
issued and
outstanding (liquidation preference $323)............................ 500
Common stock, no par value; 50,000 shares authorized; 500 shares
issued and outstanding .............................................. 1
Contributed capital................................................... 25
Accumulated deficit................................................... (186)
-----
Total shareholders' equity.......................................... 340
-----
Commitments and contingencies
$ 554
=====
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH
31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Interest income....................................................... $ 6
Loan servicing income................................................. 2
-----
8
-----
Expenses:
Interest on affiliated borrowings..................................... 5
Stock compensation expense............................................ 25
Personnel expense..................................................... 57
General and administrative and other.................................. 19
Professional services................................................. 63
Data processing expense............................................... 10
Occupancy expense..................................................... 15
-----
194
-----
Net income (loss)....................................................... $(186)
=====
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH
31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- ---------------- TOTAL
NUMBER OF PREFERRED NUMBER OF COMMON CONTRIBUTED ACCUMULATED SHAREHOLDERS'
SHARES STOCK SHARES STOCK CAPITAL DEFICIT EQUITY
--------- --------- --------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 15,
1997 (commencement of
operations)............ -- $-- -- $-- $-- $ -- $ --
Issuance of common
stock.................. -- -- 500 1 25 -- 26
Issuance of preferred
stock.................. 9,500 500 -- -- -- -- 500
Net income (loss) for
the period from January
15, 1997 (commencement
of operations) through
March 31, 1997......... -- -- -- -- -- (186) (186)
----- ---- --- ---- ---- ----- -----
Balance, March 31, 1997
....................... 9,500 $500 500 $ 1 $ 25 $(186) $ 340
===== ==== === ==== ==== ===== =====
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH
31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $(186)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation......................................................... 4
Stock compensation expense........................................... 25
Net change in other assets and liabilities............................ 88
Net change in due to and due from affiliates.......................... (350)
Net change in deferred revenue........................................ 52
-----
Net cash used in operating activities................................. (367)
-----
Cash flows from investing activities--purchases of premises and
equipment.............................................................. (134)
-----
Net cash used in investing activities................................ (134)
-----
Cash flows from financing activities:
Issuance of common stock.............................................. 1
Issuance of preferred stock........................................... 500
-----
Net cash provided by financing activities............................ 501
-----
Net change in cash and cash at end of period............................ $ --
=====
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
1. THE COMPANY
The Company's Organization
Imperial Commercial Capital Corporation ("ICCC" or "the Company") is a newly
formed California corporation which commenced operations on January 15, 1997
as a separate division of Imperial Credit Mortgage Holdings, Inc. ("IMH"). On
February 10, 1997, IMH purchased all of the Company's outstanding non-voting
preferred stock, which has a coupon which represents 95% of the GAAP based
economic interest in ICCC, entitling the holder to receive 95% of any dividend
or distribution made by ICCC, for $500,000 and certain of the Company's
officers purchased all of the Company's outstanding common stock, which
represents 5% of the GAAP based economic interest in ICCC entitling the holder
to receive 5% of any dividend or distribution made by ICCC.
At the effective date of IMH Commercial Holdings, Inc.'s ("ICH's") (formerly
Imperial Credit Commercial Holdings, Inc.) initial public offering (the
Offering), IMH will contribute all of the outstanding non-voting preferred
stock of ICCC to ICH in exchange for a number of shares of ICH convertible
non-voting common stock to be determined as of the Offering ("the
Contribution").
The Company's Operations
The Company is a Commercial Mortgage conduit organization which purchases
and originates Commercial Mortgages and subsequently intends to securitize or
sell such Commercial Mortgages to permanent investors, including ICH. ICCC
will continue to service such Commercial Mortgages for the investors.
Conduit Operations
The Conduit Operations will operate through three divisions: the Condominium
Division, the Retail Division, the Correspondent and Bulk Purchase Division.
All Long-Term Investment Operations will be operated by ICH.
Condominium Division. This division will offer on a retail basis adjustable
rate financing to developers and project owners who have completed the
development of a condominium complex or the conversion of an apartment complex
to a condominium complex on property with a typical loan amount of $3.0
million to $10 million. All originations, underwriting, processing and funding
will be performed at ICCC's executive offices. The Company anticipates that
the Condominium Division's Commercial Mortgages will be offered on a
nationwide basis and that Commercial Mortgages originated through the
Condominium Division will be sold to ICH and then financed through the
utilization of collateralized mortgage obligation ("CMO") borrowings by the
Long-Term Investment Operations.
Retail Division. This division, which is expected to become operational by
the closing of the Offering, will originate Commercial Mortgages for
properties including general purpose apartment complexes, general retail
property such as shopping centers, super markets and department stores, light
industrial property, and office buildings. The Retail Division will offer
smaller balance ($500,000 to $1.5 million) fixed and adjustable rate
Commercial Mortgage products to developers and project owners for smaller
properties and projects than those funded by the Correspondent and Bulk
Purchase Division. Although processing and funding operations relating to
these Commercial Mortgage will be performed centrally at ICCC's executive
offices, the Company has targeted major metropolitan areas for the opening of
satellite offices for regional originations. A portion of the adjustable rate
Commercial Mortgages that will be originated by the Retail Division may be
held in portfolio by the Long-Term Investment Operations, while the balance
thereof and a substantial portion of the fixed rate Commercial Mortgages
originated will be resold by the Conduit Operations through REMIC
securitizations.
F-29
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
Correspondent and Bulk Purchase Division. This division will both originate
Commercial Mortgages on a retail basis and purchase Commercial Mortgages on a
bulk and flow basis. The Correspondent and Bulk Purchase Division will offer
larger principal balance ($1.5 million to $10.0 million) Commercial Mortgages
for commercial projects than those funded by the Retail Division. The
Correspondent and Bulk Purchase Division will offer adjustable rate and fixed
rate programs offered through specified correspondents who may be provided
with Company-sponsored warehouse facilities. In addition, the Correspondent
and Bulk Purchase Division will purchase Commercial Mortgages in bulk and on a
flow basis from selected financial institutions and mortgage bankers. A
portion of the adjustable rate Commercial Mortgages originated or purchased by
this Division may be held in portfolio by the Long-Term Investment Operations,
while the balance thereof and a substantial portion of the fixed rate
Commercial Mortgages originated or purchased will be resold through REMIC
securitizations.
2. BASIS OF PRESENTATION
The operations of ICCC, currently a subsidiary of IMH, subject to the
completion of the Contribution, are presented in the financial statements as a
stand-alone company. Interest has been charged on all affiliated borrowings at
the rate of 8% per annum. Also, costs and expenses of IMH have been allocated
to ICCC in proportion to the services provided. See note 5 to the financial
statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SERVICING INCOME
Servicing income is reported as earned, principally on a cash basis when the
majority of the service process is completed.
COMMERCIAL MORTGAGES HELD FOR SALE
Commercial Mortgages held for sale are stated at the lower of cost or market
in the aggregate as determined by outstanding commitments from investors or
current investor yield requirements.
Interest is recognized as revenue when earned according to the terms of the
Commercial Mortgages and when, in the opinion of management, it is
collectible. Nonrefundable fees and direct costs associated with the
origination or purchase of loans are deferred and recognized when the loans
are sold as gain or loss on sale of mortgage loans, except related to loans
sold to ICH, which nonrefundable fees and costs fees are deferred and
recognized over the life of the loans using the interest method.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets
(three to seven years).
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
base.
F-30
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
ICCC had no significant deferred tax assets or liabilities as of March 31,
1997 other than the NOL created from its operations since inception, and did
not recognize any benefit related to the net loss from operations through
March 31, 1997, as management did not believe it was more likely than not that
such deferred tax asset would be recognized due to the Company's limited
history of operations.
4. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following at March 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Premises and equipment................................................. $134
Less accumulated depreciation.......................................... (4)
----
$130
====
</TABLE>
5. RELATED PARTY TRANSACTIONS
COMMERCIAL MORTGAGE PURCHASES
In February 1997, ICCC brokered for ICH, the purchase of $17.5 million in
condominium conversion loans from ICIFC at the unpaid principal balance of the
loans. In conjunction with these purchases, ICCC recorded nonrefundable
brokerage fees which have been deferred, net of certain direct costs, and are
being amortized over the estimated life of the loans. The net deferred fees at
March 31, 1997 included in deferred revenue were $52,000.
BORROWINGS
All affiliated borrowings between ICCC and IMH and its affiliates and ICH
have been allocated interest at the rate of 8% per annum.
DUE TO/FROM AFFILIATES
As of March 31, 1997 due from affiliates represents cash transferred to and
invested by ICH and due to affiliates represents cash due to IMH and its
affiliates for certain related party expense allocations.
RELATED PARTY EXPENSE ALLOCATIONS
The Company was charged various expenses from IMH for certain services which
primarily include human resources, data processing and professional services.
These expenses were charged based on a pro rata allocation of certain IMH
employees time spent working on ICH related business, which management
believes is reasonable. The related party allocations for the period January
15, 1997 (commencement of operations) through March 31, 1997 totaled $66,000.
Management believes the related party expenses allocated to ICCC and included
in its results of operations for the period from January 15, 1997
(commencement of operations) through March 31, 1997 approximate what the
expenses would have been if ICCC had operated as an unaffiliated entity of IMH
and its affiliates.
F-31
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
STOCK COMPENSATION EXPENSE
Stock compensation expense of $25,000 represents the difference between the
price at which the Company issued 500 shares of Common Stock on February 10,
1997, and the net book value, which the Company's management believes
approximated the fair value of the 5% economic interest in ICCC purchased by
the common shareholders.
6. EMPLOYEE BENEFIT PLANS
PROFIT SHARING AND 401(k) PLAN
ICCC does not have its own 401(k) or profit sharing plan. As such, employees
of ICCC participate in ICII's 401(k) plan. There were no significant
contributions for the period presented.
Under Imperial Credit Industries, Inc. 401(k) plan, employees of the Company
may contribute up to 14% of their salaries. The Company will match 50% of the
first 4% of employee contributions. An additional Company contribution may be
made at the discretion of ICCC.
7. COMMITMENTS AND CONTINGENCIES
COMMERCIAL MORTGAGE SERVICING
As of March 31, 1997, ICCC was servicing Commercial Mortgages for others
totaling approximately $17.5 million. Properties securing the Commercial
Mortgages in ICCC's servicing portfolio are located in California and Arizona.
Related fiduciary funds are held in trust for investors in non-interest
bearing accounts. These funds are segregated in special bank accounts and are
not included in the Company's financial statements.
ICCC subcontracts all of its servicing obligations under such Commercial
Mortgages pursuant to sub-servicing agreements (the "Sub-Servicing
Agreements") with terms that are in accordance with ICCC's guidelines, the
Commercial Mortgage documents, customary and usual standards for servicers of
Commercial Mortgages. Loan servicing fees paid to these servicers generally
range from 0.08% to 0.30% per annum on the declining principal balances of the
loans serviced. Each servicer is required to pay all expenses related to the
performance of its duties under the Sub-Servicing Agreement. Each Sub-
Servicing Agreement is cancelable by either party upon giving notice. The
Company believes that the terms of the Sub-Servicing Agreements are comparable
to industry standards.
SALES OF COMMERCIAL MORTGAGES
In the ordinary course of business, ICCC will be exposed to liability under
representations and warranties made to purchasers and insurers of Commercial
Mortgages. Under certain circumstances, ICCC will be required to repurchase
Commercial Mortgages if there has been a breach of representations or
warranties. In the opinion of management, the potential exposure related to
these representations and warranties will not have a material adverse effect
on the financial position and results of operations of the Company.
COMMERCIAL MORTGAGE COMMITMENTS
As of March 31, 1997, ICCC had an outstanding short term rate-lock
commitment to originate a $1.7 million Commercial Mortgage. The Company
collected $68,000 in fees and deposits related to this commitment which are
included in other liabilities at March 31, 1997. There is no exposure to
credit loss in this type of commitment until the loan is funded, and interest
rate risk associated with the short-term commitments has been mitigated by the
use of forward contracts to sell U.S. Treasury obligations which were
purchased in April 1997.
F-32
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
LEASE COMMITMENTS
Minimum rental commitments under a noncancelable premises operating lease
for the years ended December 31st were as follows (in thousands):
<TABLE>
<S> <C>
1997................................................................. $ 61
1998................................................................. 76
1999................................................................. 78
2000................................................................. 6
----
Total.............................................................. $221
====
</TABLE>
Rent expense for the period from January 15, 1997 (commencement of
operations) through March 31, 1997 was $13,000.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," requires that the Company disclose estimated fair
value for its financial instruments. The following methods and assumptions
were used in estimating the Company's fair value disclosures for financial
instruments.
Loan Commitments: The fair value of commitments is determined in the
aggregate based on current investor yield requirements and is estimated to be
$0 at March 31, 1997.
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY 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 AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION OF AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 32
Dividend Policy and Distributions......................................... 32
Dividend Reinvestment Plan................................................ 32
Dilution.................................................................. 34
Capitalization............................................................ 35
Selected Financial Data................................................... 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 39
Business.................................................................. 42
IMH Commercial Holdings, Inc. ............................................ 59
REIT Advisors, LLC ....................................................... 66
Relationships with Affiliates............................................. 71
Certain Transactions...................................................... 72
Shares Eligible for Future Sale........................................... 75
Principal Stockholders.................................................... 76
Description of Capital Stock.............................................. 77
Underwriting.............................................................. 83
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 84
Federal Income Tax Considerations......................................... 86
ERISA Investors........................................................... 96
Legal Matters............................................................. 96
Experts................................................................... 97
Glossary.................................................................. 98
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
IMH COMMERCIAL HOLDINGS, INC.
[LOGO OF IMH COMMERCIAL HOLDINGS, INC.]
COMMON STOCK
---------------
PROSPECTUS
---------------
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY
INCORPORATED
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
---------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................... $ 27,879
NASD filing fee................................................ 9,700
American Stock Exchange listing fee............................ 17,500
Printing and engraving expenses................................ 300,000
Legal fees and expenses........................................ 350,000
Accounting fees and expenses................................... 175,000
Blue Sky fees and expenses..................................... 50,000
Transfer agent and custodian fees.............................. 20,000
Miscellaneous.................................................. 99,921
----------
Total........................................................ $1,050,000
==========
</TABLE>
ITEM 31. SALES TO RELATED PARTIES
. In February 1997, Joseph R. Tomkinson, the Registrant's Chairman of the
Board and Chief Executive Officer, William S. Ashmore, the Registrant's
President and Chief Operating Officer, Richard J. Johnson, the
Registrant's Senior Vice President, Chief Financial Officer, Treasurer
and Secretary, William D. Endresen, the Registrant's Senior Vice
President, Mary C. Glass-Schannault, the Registrant's Senior Vice
President, and each of James Walsh, Frank P. Filipps, Stephan R. Peers
and Thomas J. Poletti, Directors of the Registrant, and H. Wayne
Snavely, purchased 76,800, 76,800, 62,400, 12,000, 12,000 and 12,000
shares of the Common Stock of ICH, respectively, at a per share price of
$.01. In addition, Imperial Credit Mortgage Holdings, Inc. ("IMH")
purchased 299,000 shares of the Common Stock of the Registrant, at a per
share price of $.01.
. In March 1997, IMH lent the Registrant $15.0 million evidenced by a
promissory note which was convertible into shares of the non-voting
convertible preferred stock of ICH (the "ICH Preferred Stock") at the
rate of one share of ICH Preferred Stock for each $5.00 principal amount
of said note (the "Conversion Rate").
. In March 1997, IMH converted the aforementioned $15.0 million principal
amount promissory note into an aggregate of 3,000,000 shares of ICH
Preferred Stock. All ICH Preferred Stock is automatically convertible
upon the closing of this Offering into shares of ICH Common Stock
determined by multiplying the number of shares of ICH Preferred Stock to
be converted by a fraction, the numerator of which is $5.00 and the
denominator of which is the IPO Price. Notwithstanding the foregoing,
consistent with IMH's classification as a REIT, IMH shall not be
entitled to have converted into ICH Common Stock more than that number
of shares of ICH Preferred Stock whereby IMH would own, immediately
after such conversion, greater than 9.8% of ICH's outstanding Common
Stock. Any shares of ICH Preferred Stock not converted into ICH Common
Stock upon the closing of this Offering shall on such date automatically
convert into shares of ICH Class A Stock at the same rate as the ICH
Preferred Stock converted into Common Stock on said date. Shares of ICH
Class A Stock convert into shares of the Common Stock on a one-for-one
basis and each such class of Common Stock is entitled to cash dividends
on a pro rata basis. Upon any subsequent issuances of Common Stock by
ICH or
II-1
<PAGE>
sales of ICH Common Stock by IMH, shares of ICH Class A Stock shall
automatically continue to convert into additional shares of the Common
Stock of ICH, subject to said 9.8% limitation.
. In April 1997, IMH exchanged 299,000 shares of ICH Common Stock for an
equivalent number of shares of ICH Class A Stock.
. On the closing of this Offering, IMH will effectuate the Contribution
for 95,000 shares of ICH Class A Stock. Upon the closing of this
Offering, IMH would hold 575,831 shares of the Common Stock representing
9.8% of the outstanding Common Stock, and 818,169 shares of ICH Class A
Stock.
The securities issued above were issued in reliance on the exemption from
registration contained in Section 4(2) of the Securities Act.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits a Maryland corporation to include in its charter a provision
limiting the liability of its directors and officers to the corporation and its
stockholders for money damages except for liability resulting from (a) actual
receipt of an improper benefit or profit in money, property or services or (b)
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. The Charter of the Company contains such a
provision which eliminates such liability to the maximum extent permitted by
Maryland law.
The Charter of the Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (1) any
present or former Director or officer or (2) any individual who, while a
Director of the Company and at the request of the Company, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan
or any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as a
present or former Director or officer 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 (1) any present or former Director or officer who is made a party
to the proceeding by reason of his service in that capacity or (2) any
individual who, while a Director of the Company and at the request of the
Company, serves or has served another corporation, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Charter and Bylaws
also permit the Company to indemnify and advance expenses to any person who
served a predecessor of the Company in any of the capacities described above
and to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise, which
the Company's Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (1) the act or 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, (2) the director or officer actually received an
improper personal benefit in money, property or services or (3) 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
requires the Company, as a condition to advancing expenses, to obtain (1) a
written affirmation by
II-2
<PAGE>
the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the Company and (2) a written
statement by or on his behalf to repay the amount paid or reimbursed by the
Company if it shall ultimately be determined that the standard of conduct was
not met.
In addition, the Registrant has entered into an Indemnity Agreement (Exhibit
10.4 hereto) with its officers and Directors. The Underwriting Agreement
(Exhibit 1.1) also provides for indemnification by the Underwriters of the
Company, its Directors and officers and persons who control the Company within
the meaning of Section 15 of the Securities Act with respect to certain
liabilities, including liabilities arising under the Securities Act.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements included in the Prospectus are:
IMH COMMERCIAL HOLDINGS, INC.
(FORMERLY IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.)
Balance sheet at March 31, 1997
Statement of Operations for the period from January 15, 1997 (commencement
of operations) through March 31, 1997
Statement of Changes in Stockholders' Equity for the period from January 15,
1997 (commencement of operations) through March 31, 1997
Statement of Cash Flows for the period from January 15, 1997 (commencement
of operations) through March 31, 1997
Notes to financial statements
IMPERIAL COMMERCIAL CAPITAL CORPORATION
Balance sheet at March 31, 1997
Statement of Operations for the period from January 15, 1997 (commencement
of operations) through March 31, 1997
Statement of Changes in Shareholders' Equity for the period from January 15,
1997 (commencement of operations) through March 31, 1997
Statement of Cash Flows for the period from January 15, 1997 (commencement
of operations) through March 31, 1997
Notes to financial statements
All other schedules have been omitted because they are either not
applicable, not required or the information required has been disclosed in the
financial statements and related notes or otherwise in the Prospectus.
II-3
<PAGE>
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Charter of the Registrant.
3.1(a) Articles of Amendment of Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Common Stock Certificate of Registrant.
5.1+ Opinion of Freshman, Marantz, Orlanski, Cooper & Klein.
5.2+ Opinion of Ballard Spahr Andrews & Ingersoll.
8.1+ Opinion of Latham & Watkins.
10.1+ Form of Management Agreement between the Registrant and RAI
Advisors, LLC.
10.2+ Form of Submanagement Agreement among RAI Advisors, LLC, Imperial
Credit Mortgage Holdings, Inc. and ICI Funding Corporation.
10.3+ 1997 Stock Option and Awards Plan.
10.4+ Assignment of Lease between Imperial Commercial Capital
Corporation and ICI Funding Corporation, Lease dated January 23,
1997 between ICI Funding Corporation and The Irvine Company
regarding Irvine facility and Consent to Assignment executed by
The Irvine Company.
10.5+ Form of Contribution Agreement between the Registrant, Imperial
Mortgage Holdings, Inc., and Imperial Commercial Capital
Corporation.
10.6+ Form of Non-Competition Agreement among the Registrant, Imperial
Credit Mortgage Holdings, Inc., Imperial Commercial Capital
Corporation and ICI Funding Corporation.
10.7+ Form of Right of First Refusal Agreement between the Registrant,
RAI Advisors, LLC, Imperial Credit Mortgage Holdings, Inc.,
Imperial Commercial Capital Corporation, and ICI Funding
Corporation.
10.8+ Servicing Agreement between the Registrant and Imperial Commercial
Capital Corporation.
11+ Statement Regarding Computation of Pro Forma Earnings Per Share.
23.1+ Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained
in Exhibit 5.1).
23.2+ Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit
5.2).
23.3+ Consent of Latham & Watkins (contained in Exhibit 8.1).
23.4 Consent of KPMG Peat Marwick LLP regarding Registrant.
23.5 Consent of KPMG Peat Marwick LLP regarding Imperial Commercial
Capital Corporation.
24.1+ Power of Attorney (Included on Signature Page).
</TABLE>
- --------
+ Previously filed
II-4
<PAGE>
ITEM 36. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriters certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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 Securities Act, and is,
therefore, 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 hereunder, 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 Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act,
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,
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-5
<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-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California, on the 25th day of
July, 1997.
IMH COMMERCIAL HOLDINGS, INC.
By: /s/ Richard J. Johnson
______________________________________
Richard J. Johnson
Senior Vice President, Chief
Financial Officer, Treasurer 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 July 25, 1997
____________________________________ Chief Executive Officer
Joseph R. Tomkinson (Principal Executive
Officer)
/s/ Richard J. Johnson Chief Financial Officer July 25, 1997
____________________________________ (Principal Financial and
Richard J. Johnson Accounting Officer)
* Director July 25, 1997
____________________________________
James Walsh
* Director July 25, 1997
____________________________________
Frank P. Filipps
* Director July 25, 1997
____________________________________
Stephan R. Peers
* Director July 25, 1997
____________________________________
Thomas J. Poletti
* Director July 25, 1997
____________________________________
Timothy R. Busch
</TABLE>
/s/ Richard J. Johnson
*By: _______________________________
Richard J. Johnson
Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1+ Charter of the Registrant.
3.1(a) Articles of Amendment of Registrant
3.2+ Bylaws of the Registrant.
4.1+ Form of Common Stock Certificate of Registrant.
5.1+ Opinion of Freshman, Marantz, Orlanski, Cooper & Klein.
5.2+ Opinion of Ballard Spahr Andrews & Ingersoll.
8.1+ Opinion of Latham & Watkins.
10.1+ Form of Management Agreement between the Registrant and RAI Advisors,
LLC.
10.2+ Form of Submanagement Agreement among RAI Advisors, LLC, Imperial
Credit Mortgage Holdings, Inc. and ICI Funding Corporation.
10.3+ 1997 Stock Option and Awards Plan.
10.4+ Assignment of Lease between Imperial Commercial Capital Corporation
and ICI Funding Corporation, Lease dated January 23, 1997 between ICI
Funding Corporation and The Irvine Company regarding Irvine facility,
and Consent to Assignment executed by The Irvine Company.
10.5+ Form of Contribution Agreement between the Registrant, Imperial
Mortgage Holdings, Inc., and Imperial Commercial Capital Corporation.
10.6+ Form of Non-Competition Agreement among the Registrant, Imperial
Credit Mortgage Holdings, Inc., Imperial Commercial Capital
Corporation and ICI Funding Corporation.
10.7+ Form of Right of First Refusal Agreement between the Registrant, RAI
Advisors, LLC, Imperial Credit Mortgage Holdings, Inc., Imperial
Commercial Capital Corporation, and ICI Funding Corporation.
10.8+ Servicing Agreement between the Registrant and Imperial Commercial
Capital Corporation.
11+ Statement Regarding Computation of Pro Forma Earnings Per Share.
23.1+ Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in
Exhibit 5.1).
23.2+ Consent of Ballard Spahr Andrews & Ingersoll (contained in Exhibit
5.2).
23.3+ Consent of Latham & Watkins (contained in Exhibit 8.1).
23.4 Consent of KPMG Peat Marwick LLP regarding Registrant.
23.5 Consent of KPMG Peat Marwick LLP regarding Imperial Commercial Capital
Corporation.
24.1+ Power of Attorney (Included on Signature Page).
</TABLE>
- --------
+ Previously filed
<PAGE>
EXHIBIT 1.1
5,000,000 SHARES
IMH COMMERCIAL HOLDINGS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
August ___, 1997
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY INCORPORATED
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
c/o PaineWebber Incorporated
1235 Avenue of the Americas
New York, New York 10019
Dear Sirs:
IMH Commercial Holdings, Inc., a Maryland corporation (the "Company"),
proposes to sell an aggregate of 5,000,000 shares (the "Firm Shares") of the
Company's Common Stock, $.01 par value per share (the "Common Stock"), to you,
as representatives (the "Representatives") of the several underwriters set
forth on Schedule I hereto (collectively, the "Underwriters"). The Company has
also agreed to grant to you an option (the "Option") to purchase up to an
additional 750,000 shares of Common Stock (the "Option Shares") on the terms and
for the purposes set forth in Section 1(b). The Firm Shares and the Option
Shares are hereinafter collectively referred to as the "Shares."
The initial public offering price per share for the Shares and the
purchase price per share for the Shares to be paid by the several Underwriters
shall be agreed upon by the Company and the Representatives, and such agreement
shall be set forth in a separate written instrument substantially in the form of
Exhibit A hereto (the "Price Determination Agreement"). The Price Determination
Agreement may take the form of an exchange of any standard form of written
telecommunication among the Company and the Representatives and shall specify
such applicable information as is indicated in Exhibit A hereto. The offering of
the Shares will be governed by
1
<PAGE>
this Agreement, as supplemented by the Price Determination Agreement. From and
after the date of the execution and delivery of the Price Determination
Agreement, this Agreement shall be deemed to incorporate, and, unless the
context otherwise indicates, all references contained herein to "this Agreement"
and to the phrase "herein" shall be deemed to include the Price Determination
Agreement.
In connection with the organization of the Company and of Imperial
Commercial Capital Corporation, a [California] corporation ("ICCC"), the
following organi zational transactions (the "Contribution Transactions") took
place among the Company, Imperial Credit Mortgage Holdings, Inc., a Maryland
corporation ("IMH") and ICCC: (i) in February 1997, IMH purchased, for
$500,000, all of the non-voting preferred stock of ICCC (the "ICCC Preferred
Stock"), which represents 95% of the economic interest in ICCC, and certain of
the Company's officers purchased all of the outstanding common stock of ICCC,
which represents 5% of the economic interest in ICCC; (ii) in February 1997,
certain officers and directors of the Company, as a group, purchased 300,000
shares of the Company's Common Stock and IMH purchased 299,000 shares of the
Company's Common Stock (collectively, the "Company's Restricted Shares"); (iii)
in March 1997, IMH lent the Company $15.0 million evidenced by a promissory note
convertible into shares of the non-voting Class A Convertible Preferred Stock of
the Company (the "ICH Preferred Stock") at the rate of one share of ICH
Preferred Stock for each $5.00 principal amount of said note (the "Conversion
Rate"); (iv) in March 1997, IMH convert ed the aforementioned $15.0 million
principal amount promissory note into an aggregate of 3,000,000 shares of ICH
Preferred Stock; all ICH Preferred Stock is automati cally convertible upon the
closing of the public offering into that number of shares of the Company's
Common Stock determined by multiplying the number of shares of ICH Preferred
Stock to be converted by a fraction, the numer ator of which is $5.00 and the
denominator of which is the initial public offering price; notwithstanding the
foregoing, consistent with the Company's classification as a real estate
investment trust for federal income tax purposes (a "REIT"), IMH shall not be
entitled to have converted into the Company's Common Stock more than that number
of shares of ICH Preferred Stock whereby IMH would own, immediately after such
conversion, greater than 9.8%
2
<PAGE>
of the Company's outstanding Common Stock; any shares of ICH Preferred Stock not
converted into the Company's Common Stock upon the Closing Date (as defined in
Section 2 hereof) shall on such date automatically convert into shares of the
Company's non-voting Class A Common Stock (the "ICH Class A Stock") at the same
rate as the ICH Preferred Stock converted into Common Stock on the Clos ing
Date; and (v) in April 1997, IMH exchanged the 299,000 shares of the Company's
Restricted Shares held by it for an equivalent number of shares of ICH Class A
Stock.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-11 (File No. 333-25423)
including a preliminary prospectus relating to the Company for the registration
of the Shares under the Securities Act of 1933, as amended (the "Securities
Act"), and the rules and regulations of the Commission under the Securities Act
(the "Rules and Regulations"), and has filed such amendments to such
registration statement on Form S-11 and such amended prospectuses as may have
been required to the date hereof. The term "preliminary prospectus" means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of
the Rules and Regula tions included at any time as part of the registration
statement. The term "Registration Statement" means the registration statement
declared effective by the Commis sion on July [__], 1997 (the "Effective Date"),
including financial statements and all exhibits and any information deemed to be
included therein by Rule 430A or Rule 424, and all documents, if any,
incorporated therein by refer ence and including any post-effective amendments
that become effective prior to the Closing Date. The term "Prospectus" means
the prospectus of the Company in the form filed with the Commission pursuant to
Rule 424 of the Rules and Regulations as from time to time amended or
supplemented, or, if no such filing is required, the form of final prospectus
included in the Registration State ment at the Effective Date including any
information deemed to be included therein by Rule 430A. The Prospec tus,
brochures, wrappers and other materials, if any, preceded or accompanied by the
Prospectus, any letters and other informational material sent to securities
dealers, commercial banks and other nominees and other offering materials and
information that the Company may use specifically in connection with the
solicitation
3
<PAGE>
contemplated by this Agreement, approve, prepare or authorize for use in
connection with the public offering, are collectively referred to hereinafter as
the "Offering Materials."
The Company confirms as follows its agreements with the Underwriters.
1. Agreement to Sell and Purchase.
------------------------------
(a) On the basis of the representations, warranties and
agreements of the Company, ICCC, IMH and others herein contained and subject to
all the terms and condition of this Agreement, the Company agrees to sell to
each Underwriter named below, and each Underwriter, severally and not jointly,
agrees to purchase from the Company at the purchase price per share for the Firm
Shares to be agreed upon by the Underwriters and the Company, in accordance with
Section l(c) or l(d) of this Agreement and set forth in the Price Determination
Agree ment, the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I, plus such addi tional number of Firm Shares which
such Underwriter may become obligated to purchase pursuant to Section 8 here of.
If the Company elects to rely on Rule 430A (as hereinafter defined), Schedule I
may be attached to the Price Determination Agreement.
(b) Subject to all the terms and condi tions of this Agreement,
the Company grants the Option to the several Underwriters to purchase, severally
and not jointly, up to 750,000 Option Shares from the Company at the same price
per share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time or from time
to time on or before the 45th day after the date of this Agreement (or, if the
Company has elected to rely on Rule 430A, on or before the 45th day after the
date of the Price Determination Agreement), upon written or telegraphic notice
(the "Option Shares Notice") by the Underwriters to the Company no later than
12:00 noon, New York City time, at least two and no more than five business days
before the date specified for closing in the Option Shares Notice (the "Option
Closing Date") setting forth the aggregate number of Option
4
<PAGE>
Shares to be purchased and the time and date for such purchase. On the Option
Closing Date, the Company will issue and sell to the Underwriters the number of
Option Shares set forth in the Option Shares Notice, and each Underwriter will
purchase such percentage of the Option Shares as is equal to the percentage of
Firm Shares that such Underwriter is purchasing, as adjusted by the Under
writers in such manner as they deem advisable to avoid fractional shares.
(c) If the Company has elected not to rely on Rule 430A, the
initial public offering price per share for the Firm Shares and the purchase
price per share for the Firm Shares to be paid by the several Underwriters shall
be agreed upon and set forth in the Price Determination Agreement, which shall
be dated the date hereof, and an amendment to the Registration State ment (as
hereinafter defined) containing such per share price information shall be filed
before the Registration Statement becomes effective.
(d) If the Company has elected to rely on Rule 430A, the
initial public offering price per share for the Firm Shares and the purchase
price per share for the Firm Shares to be paid by the several Underwriters shall
be agreed upon and set forth in the Price Determi nation Agreement. In the event
such price has not been agreed upon and the Price Determination Agreement has
not been executed by the close of business on the fourteenth business day
following the date on which the Registration Statement becomes effective, this
Agreement shall termi nate forthwith, without liability of any party to any
other party except that Sections 5 and 7 shall remain in effect.
2. Delivery and Payment.
--------------------
Delivery of the Firm Shares shall be made to the Underwriters against
payment of the purchase price by credit to the account of the Company with the
Depository Trust Company. Such payments shall be made at 10:00 a.m., New York
City time, on August __, 1997 at the offices of PaineWebber Incorporated, New
York, New York, or at such time on such other date as may be agreed upon by the
Company and the Underwriters, but in no event later than 10 days after such date
(such date is herein after referred to as the "Closing Date").
5
<PAGE>
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice. The cost
of original issue tax stamps, if any, in connection with the issuance and
delivery of the Firm Shares and Option Shares by the Company to the respective
Underwriters shall be borne by the Company. The Company will pay and save each
Under writer and any subsequent holder of the Shares harmless from any and all
liabilities with respect to or resulting from any failure or delay in paying
Federal and state stamp and other transfer taxes, if any, which may be payable
or determined to be payable in connection with the original issuance or sale to
such Underwriter of the Firm Shares and Option Shares.
3. Representations and Warranties.
------------------------------
(a) Each of the Company, ICCC, REIT Advisors, Inc., a
__________ corporation (the "Manager"), and IMH represents and warrants to, and
agrees with, the Underwriters that:
(i) The Company meets the re quirements for use of Form
S-11 under the Secu rities Act and the Rules and Regulations. If the
registration statement relating to the registration of the Shares under the
Securities Act has not become effective, a further amend ment to such
registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed
promptly by the Company with the Commission. If such registration statement
has become effective, a final prospectus containing information permitted
to be omitted at the time of effectiveness by Rule 430A will be filed by
the Company with the Commission in accordance with Rule 424(b) of the Rules
and Regulations promptly after the execution and delivery of the Price
Determination Agreement. On the Ef fective Date, the date the Prospectus is
first filed with the Commission pursuant to Rule 424(b) (if required), at
all times subsequent to and including the Closing Date and, if lat-
6
<PAGE>
er, the Option Closing Date, and when any post-effective amendment to the
Registration State ment becomes effective or any amendment or supplement to
the Prospectus is filed with the Commission, the Registration Statement
contains or will contain all statements required to be stated therein in
accordance with, and complies or will comply in all material respects with,
the requirements of the Securities Act and the Rules and Regulations and
does not or will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the state ments therein not misleading. At the Effective Date, the
date the Prospectus or any amendment or supplement to the Prospectus is
filed with the Commission and at the Closing Date, and, if later, the
Option Closing Date, the Prospectus did not or will not contain any untrue
state ment of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading.
The foregoing representations and warranties in this Section 3(a)(i) do not
apply to any state ments or omissions made in reliance on and in conformity
with information relating to any Underwriter (as set forth in Section 7(f)
fur nished in writing to the Company by the Under writers specifically for
inclusion in the Reg istration Statement or Prospectus or any amend ment or
supplement thereto. For all purposes of this Agreement, the legend, if
any, regard ing stabilization set forth on the inside front cover page of
the Prospectus, the names of the Underwriters and the amounts of the
selling concession and reallowance set forth in the Prospectus under the
caption "Underwriting" and the identification of counsel to the Underwrit
ers in the Prospectus under the caption "Legal Matters" constitute the only
information relat ing to any Underwriter furnished in writing to the
Company by the Underwriters specifically for inclusion in the Registration
Statement, the preliminary prospectus or the Prospectus.
7
<PAGE>
(ii) The only subsidiaries (as defined in the Rules and
Regulations) of the Company are ICCC and the other subsidiaries, if any,
listed on Exhibit 21.1 to the Registration Statement (the "Subsidiaries").
Each of the Company and the Subsidiaries is, and at the Closing Date or, if
later, at the Option Clos ing Date, will be, a corporation duly orga nized,
validly existing and in good standing under the laws of the jurisdiction of
incorpo ration; each of the Company and the Subsidiar ies has, and at the
Closing Date or, if later, at the Option Closing Date, will have, full
power and authority to conduct all the respec tive activities conducted by
them, to own or lease the assets owned or leased respectively by them and
to conduct their respective business as described in the Registration
Statement and the Prospectus; each of the Company and the Subsidiaries is,
and at the Closing Date or, if later, at the Option Closing Date, will be,
duly qualified to do business in each juris diction wherein they own or
lease real property or in which the conduct of their business re quires
such qualification, except where the failure to be so qualified would not
result in a material adverse effect upon the Company or any of its
Subsidiaries or their respective business, properties, business prospects,
con dition (financial or otherwise) or results of operations (a "Material
Adverse Effect").
(iii) All of the outstanding shares of the capital stock
of the Subsidiar ies, including but not limited to the ICCC Preferred
Stock, have been duly authorized and validly issued and are fully paid and
non-as sessable and are owned by the Company to the extent as is described
in the Prospectus, free and clear of all liens, encumbrances and claims
whatsoever. Except for the stock of the Sub sidiaries and as disclosed in
the Registration Statement, the Company does not own, and at the Closing
Date and, if later, at the Option Clos ing Date, will not own, directly or
indirectly, any shares of stock of any other equity or long-term debt
securities of any corporation or
8
<PAGE>
have any equity interest in any firm, partner ship, joint venture,
association or other enti ty. Complete and correct copies of the charter
and of the by-laws of the Company and its Sub sidiaries and all amendments
thereto have been filed as Exhibits to the Registration Statement or
delivered to the Underwriters or their coun sel, and no changes therein
will be made subse quent to the date hereof and prior to the Clos ing Date
or, if later, the Option Closing Date, except such as the Underwriters
shall approve or as may be necessary for the Company to qual ify as a REIT
under the Code (as such term is hereinafter defined).
(iv) All of the outstanding shares of the capital stock
of the Company, including but not limited to the Company's Restricted
Shares, the ICH Class A Stock and the ICH Preferred Stock, have been duly
autho rized, validly issued, fully paid and non-as sessable and will not be
subject to any preemp tive or similar right. The Shares have been duly
authorized by all requisite action on the part of the Company for issuance
and sale pur suant to the terms of this Agreement and, when issued and
delivered by the Company pursuant to the terms of this Agreement against
payment of the consideration set forth in the Prospectus, will be validly
issued, fully paid and non-assessable; the Shares conform in all material
respects to all statements relating thereto contained in the Registration
Statement and the Prospectus; and the issuance of the Shares is not subject
to any preemptive rights. Except as set forth in the Prospectus, there are
no, and at the Closing Date or, if later, at the Option Closing Date, there
will not be, any op tions to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts, commit ments, plans or arrangements to issue or sell, any shares
of capital stock of the Company, any shares of capital stock of any
Subsidiary or any such warrants, convertible securities or obligations. The
description of the Company's dividend reinvestment plan, stock option and
9
<PAGE>
other stock plans or arrangements, and the options or other rights granted
and exercised thereunder, set forth in the Prospectus accu rately presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
(v) The financial statements and schedules included in
the Registration Statement or the Prospectus present the consol idated
financial condition of the Company as of the respective dates thereof and
the consoli dated results of operations and cash flows of the Company for
the respective periods covered thereby, all in conformity with generally
accepted accounting principles applied on a con sistent basis throughout
the entire period involved, except as otherwise disclosed in the
Prospectus. The pro forma financial statements and other pro forma
financial information in cluded in the Registration Statement or the
Prospectus (A) present in all material respects the information shown
therein, (B) have been prepared in accordance with the Commission's rules
and guidelines with respect to pro forma financial statements, and (C) have
been proper ly computed on the basis described therein. No other financial
statements or schedules of the Company are required by the Securities Act
or the Rules and Regulations to be included in the Registration Statement
or the Prospectus. KPMG Peat Marwick (the "Accountants"), who have reported
on such financial statements and schedules, are independent accountants
with respect to the Company as required by the Secu rities Act and the
Rules and Regulations. The statements included in the Registration State
ments with respect to the Accountants pursuant to Item 509 of Regulation S-
K of the Rules and Regulations are true and correct in all materi al
respects. The selected financial data set forth in the Prospectus under the
captions "Capitalization" and "Selected Financial Data" fairly present the
information set forth there in on the basis stated in the Registration
Statement.
10
<PAGE>
(vi) Each the Company and the Subsidiaries maintains a
system of internal ac counting controls sufficient to provide rea sonable
assurance that (A) transactions are executed in accordance with
management's gener al or specific authorization, and (B) transac tions are
recorded as necessary to permit prep aration of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets.
(vii) Subsequent to the respec tive dates as of which
information is given in the Registration Statement and the Prospectus and
prior to the Closing Date and, if later, at the Option Closing Date, except
as set forth in or contemplated by the Registration Statement and the
Prospectus, (A) there has not been any change in the capitalization of the
Company, or in the business, properties, business pros pects, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries, arising for any reason whatsoev er, (B) neither the Company
nor any of its Subsidiaries has incurred any material liabili ties or
obligations, direct or contingent, nor has it entered into any material
transactions other than pursuant to this Agreement and the transactions
referred to herein, and (C) the Company has not paid or declared any
dividends or other distributions of any kind on any class of its capital
stock.
(viii) Neither the Company nor any of its Subsidiaries is,
and if operated in the manner described in the Prospectus under the caption
"Business" will not be, an "investment company," an entity "controlled" by
an "invest ment company" or an "affiliated person" of, or "promotor" or
"principal underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended (the "Investment
Company Act").
(ix) Except as set forth in the Registration Statement
and the Prospectus, there are no actions, suits or proceedings
11
<PAGE>
pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respec
tive officers in their capacity as such, before or by any Federal or state
court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling,
decision or finding might result in a Material Adverse Effect.
(x) Each of the Company and its Subsidiaries has, and
at the Closing Date or, if later, at the Option Closing Date, will have,
(A) all governmental licenses, permits, consents, orders, approvals and
other authori zations necessary to carry on its business as contemplated in
the Prospectus, (B) complied in all respects with all laws, regulations and
orders applicable to it or its business and (C) performed all its
obligations required to be performed by it, and is not in default, under
any indenture, mortgage, deed of trust, voting trust agreement, loan
agreement, bond, debenture, note agreement, lease, contract or other
agreement or instrument (collectively, a "contract or other agreement") to
which it is a party or by which its property is bound or affected, the
effect of any of which, individu ally or in the aggregate, might result in
a Material Adverse Effect. To the knowledge of the Company and each of its
Subsidiaries, no other party under any contract or other agree ment to
which it is a party is in default in any respect thereunder. Neither the
Company nor any of its Subsidiaries is, nor at the Closing Date or, if
later, at the Option Clos ing Date, will any of them be, in violation of
any provision of its charter or by-laws.
(xi) The Company has full corporate power and authority
to enter into this Agreement; the Management Agreement (the "Man agement
Agreement"), effective as of the Clos ing Date, between the Company and the
Manager; the Servicing Agreement, dated February 5, 1997, (the "Servicing
Agreement"), between the Company and ICCC; the Assignment of Lease (the
12
<PAGE>
"Lease Assignment"), dated August [__], 1997 among ICCC, ICI Funding
Corporation and the Company; the Non-Competition Agreement (the "Non-
Competition Agreement"), among the Compa ny, ICCC, ICI Funding Corporation
and IMH; the Right of First Refusal Agreement, effective as of the Closing
Date (the "Right of First Refus al Agreement") among the Company, the
Manager, ICCC, ICI Funding Corporation and IMH; and the Contribution
Agreement among the Company, IMH and ICCC. The Management Agreement, the
Ser vicing Agreement, the Lease Assignment, the Contribution Agreement, the
Right of First Refusal Agreement and the Non-Competition Agreement are
collectively referred to as the "Company Agreements." Each of this
Agreement and the Company Agreements has been duly autho rized, executed
and delivered by the Company and constitutes a valid and binding agreement
of the Company and is enforceable against the Company in accordance with
its terms, except as the enforceability hereof and thereof may be limited
by applicable bankruptcy, insolvency, reorganization and similar laws
affecting creditors' rights generally and moratorium laws in effect from
time to time and by equitable principles restricting the availability of
equitable remedies. The execution and delivery by the Company of, and the
performance by the Company of its obligations under, each of this Agreement
and the Company Agreements, the con summation of the transactions
contemplated hereby and thereby and the application of the net proceeds
from the offering and sale of the Shares to be sold by the Company in the
manner set forth in the Prospectus under the caption "Use of Proceeds" will
not result in the cre ation or imposition of any lien, charge or
encumbrance upon any of the assets of the Com pany or any of its
Subsidiaries pursuant to the terms or provisions of, or result in a breach
or violation of any of the terms or provisions of, or constitute a default
under, or give any other party a right to terminate any of its obligations
under, or result in the accelera tion of any obligation under, the charter
or by-laws of the Company or any of its Subsidiar-
13
<PAGE>
ies, any contract or other agreement to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries
or any of its properties is bound or affected, or violate or conflict with
any judgment, ruling, decree, order, statute, rule or regulation of any
court or other governmen tal agency or body applicable to the business or
properties of the Company or any of its Subsidiaries the effect of any of
which, indi vidually or in the aggregate, would be to have a Material
Adverse Effect.
(xii) No consent, approval, au thorization or order of,
or any filing or dec laration with, any court or governmental agency or
body is required in connection with the authorization, issuance, transfer,
sale or delivery of the Shares by the Company, in con nection with the
execution, delivery and per formance of this Agreement or the Company
Agreements by the Company or in connection with the taking by the Company
of any other action contemplated hereby or thereby, except such as have
been obtained under the Securities Act or the Rules and Regulations and
such as may be required under state securities or Blue Sky laws or the by-
laws and rules of the National Association of Securities Dealers, Inc. (the
"NASD").
(xiii) Each of the Company and its Subsidiaries has good
and marketable title to all properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges,
encumbrances, mortgages, security interests, claims or restrictions, except
such as are described in, or contemplat ed by, the Prospectus. Each of the
Company and its Subsidiaries has valid, subsisting and enforceable leases
for the properties described in the Prospectus as leased by it, with such
exceptions as are not material and do not mate rially interfere with the
use made and proposed to be made of such properties by the Company and the
Subsidiaries.
14
<PAGE>
(xiv) There is no document or contract of a character
required to be de scribed in the Registration Statement or the Prospectus
or to be filed as an exhibit to the Registration Statement which is not
described or filed as required. All such contracts to which the Company or
any Subsidiary is a party have been duly authorized, executed and deliv
ered by the Company or such Subsidiary, consti tute valid and binding
agreements of the Compa ny or such Subsidiaries and are enforceable against
the Company or such Subsidiary in ac cordance with the terms thereof.
(xv) No statement, representa tion, warranty or covenant
made by the Company in this Agreement or made in any certificate or
document required by this Agreement to be de livered to the Underwriters
was or will be, when made, inaccurate, untrue or incorrect.
(xvi) Neither the Company nor, to the knowledge of the
Company, any of its di rectors, officers or controlling persons has taken,
directly or indirectly, any action in tended, or which might reasonably be
expected, to cause or result, under the Securities Act or otherwise, in, or
which has constituted, stabi lization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(xvii) No holder of securities of the Company has rights
to the registration of any securities of the Company because of the filing
of the Registration Statement.
(xviii) The Shares have been duly authorized for listing by
the American Stock Exchange upon official notice of issuance.
(xix) Neither the Company nor any of its Subsidiaries is
involved in any material labor dispute nor, to the knowledge of the
Company, is any such dispute threatened.
15
<PAGE>
(xx) The Company and its Sub sidiaries own, or are
licensed or otherwise have the full exclusive right to use, all material
trademarks and trade names which are used in or necessary for the conduct
of their re spective businesses as described in the Pro spectus. No claims
have been asserted by any person to the use of any such trademarks or trade
names or challenging or questioning the validity or effectiveness of any
such trademark or trade name. The use, in connection with the business and
operations of the Company and its Subsidiaries of such trademarks and trade
names does not, to the Company's knowledge, infringe on the rights of any
person.
(xxi) Neither the Company nor, to the knowledge of the
Company, any officers, directors, employees or agents acting on behalf of
the Company has at any time (A) made any contributions to any candidate for
political office in violation of law, or failed to dis close fully any
contributions to any candidate for political office in accordance with any
applicable statute, rule, regulation or ordi nance requiring such
disclosure, (B) made any payment to any local, state, Federal or foreign
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or allowed
under applicable law, (C) made any payment outside the ordinary course of
business to any purchasing or selling agent or person charged with similar
duties of any entity to which the Company sells or from which the Company
buys products for the purpose of influ encing such agent or person to buy
products from or sell products to the Company, or (D), except as described
in the Prospectus, engaged in any transaction, maintained any bank account
or used any corporate funds except for transac tions, bank accounts and
funds which have been and are reflected in the normally maintained books
and records of the Company.
(xxii) As of the Closing Date and, if later, as of the
Option Closing Date, the
16
<PAGE>
Company and its Subsidiaries will be insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts
as are prudent and customary in the business in which it proposes to engage
as described in the Prospectus; neither the Compa ny nor any Subsidiary has
been refused any in surance coverage sought or applied for; and the Company
has no reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insur ers as may be necessary to continue its pro
posed business at a cost that would not result in a Material Adverse
Effect.
(xxiii) As of the Closing Date or, if later, as of the
Option Closing Date, the Company has conducted its operations in a manner
so as to enable it to elect to be qualified as a real estate investment
trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended (the "Code"), and intends to operate in a manner so as
to continue to remain to be able to be so qualified.
(xxiv) The Company has complied with all of the provisions
of (including, without limitation, filing all forms required by) Section
517.075 of the Florida Securities and Investor Protection Act and
Regulation 3E900.001 issued thereunder with respect to the offering and
sale of the Shares.
(xxv) Neither the Company nor any of its Subsidiaries is,
and if operated in the manner described in the Prospectus under the caption
"Business" will not be, a "broker" within the meaning of Section 3(a)(4) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or a
"dealer" within the meaning of Section 3(a)(5) of the Exchange Act or
required to be registered pursuant to Section 15(a) of the Exchange Act.
17
<PAGE>
(b) Each of the Company, ICCC, the Manager and IMH
represents and warrants to, and agrees with, the Underwriters as of the Closing
Date and, if later, as of the Option Closing Date, that:
(i) ICCC has full corporate power and authority to
enter into this Agreement, the Servicing Agreement, the Lease As signment,
the Right of First Refusal Agreement, the Non-Competition Agreement and the
Contri bution Agreement. The Servicing Agreement, the Lease Assignment, the
Contribution Agreement, and any other Company Agreements to which ICCC,
ICIFC and the Irvine Company is a party are collectively referred to as the
"ICCC Agreements." Each of this Agreement and the ICCC Agreements has been
duly authorized, executed and delivered by ICCC and constitutes a valid and
binding agreement of ICCC and is enforce able against ICCC in accordance
with its terms, except as the enforceability hereof and thereof may be
limited by applicable bankruptcy, insolvency, reorganization and similar
laws affecting creditors' rights generally and moratorium laws in effect
from time to time and by equitable principles restricting the availability
of equitable remedies. The execution and delivery by ICCC of, and the
performance by ICCC of its obligations under, each of this Agreement and
the ICCC Agreements, the consummation of the transactions contemplated
hereby and thereby and the application of the net proceeds from the
offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under the caption "Use of Proceeds" will not result
in the creation or imposition of any lien, charge or encumbrance upon any
of the assets of ICCC pursuant to the terms or provisions of, or result in
a breach or violation of any of the terms or provisions of, or constitute
a default under, or give any other party a right to terminate any of its
obligations under, or result in the acceleration of any obligation under,
the articles or by-laws of ICCC, any contract or other agreement to which
ICCC is a party or by which ICCC or any of its properties is bound or
affected, or
18
<PAGE>
violate or conflict with any judgment, ruling, decree, order, statute, rule
or regulation of any court or other governmental agency or body applicable
to the business or properties of ICCC the effect of any of which,
individually or in the aggregate, would be to have a Material Adverse
Effect.
(ii) No consent, approval, authorization or order of,
or any filing or declaration with, any court or governmental agency or
body is required in connection with the execution, delivery and performance
of this Agreement or the ICCC Agreements by ICCC or in connection with the
taking by ICCC of any other action contemplated hereby or thereby, except
such as have been obtained.
(iii) Except as set forth in the Registration Statement
and the Prospectus, there are no actions, suits or proceedings pending or,
to the knowledge of ICCC, threat ened against or affecting ICCC or any of
its officers in their capacity as such, before or by any Federal or state
court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling,
decision or finding might result in a Material Adverse Effect.
(iv) No statement, representa tion, warranty or
covenant made by ICCC in this Agreement or made in any certificate or
document required by this Agreement to be delivered to the Underwriters was
or will be, when made, inaccurate, untrue or incorrect.
(v) Neither ICCC nor, to the knowledge of ICCC, any of
its directors, officers or controlling persons has taken, directly or
indirectly, any action intended, or which might reasonably be expected, to
cause or result, under the Securities Act or otherwise, in, or which has
constituted, stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares.
19
<PAGE>
(vi) No holder of securities of ICCC has rights to the
registration of any securities of the Company or ICCC because of the filing
of the Registration Statement.
(vii) Neither ICCC nor, to the knowledge of ICCC, any
officers, directors, employees or agents acting on behalf of ICCC has at
any time (A) made any contributions to any candidate for political office
in violation of law, or failed to disclose fully any contributions to any
candidate for political office in accordance with any applicable statute,
rule, regulation or ordinance requiring such disclosure, (B) made any
payment to any local, state, Federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or allowed under applicable law, (C)
made any payment outside the ordinary course of business to any purchasing
or selling agent or person charged with similar duties of any entity to
which ICCC sells or from which ICCC buys products for the purpose of
influencing such agent or person to buy products from or sell products to
ICCC, or (D), except as described in the Prospectus, engaged in any
transaction, maintained any bank account or used any corporate funds except
for transac tions, bank accounts and funds which have been and are
reflected in the normally maintained books and records of ICCC.
(c) The Manager represents and warrants to, and agrees with,
the Underwriters as of the Closing Date and, if later, as of the Option Closing
Date, that:
(i) The Manager has been duly organized, is validly
existing and is in good standing under the laws of the jurisdiction of
incorporation, has full power and authority to conduct all the activities
conducted by it, to own or lease the assets owned or leased by it and to
conduct its business as described in the Registration Statement and the
Prospectus and is duly qualified to do business in each jurisdiction
wherein it owns or leases real property
20
<PAGE>
or in which the conduct of its business re quires such qualification,
except where the failure to be so qualified would not result in a Material
Adverse Effect.
(ii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and
prior to the Closing Date and, if later, the Option Closing Date, except as
set forth in or contemplated by the Registration Statement and the
Prospectus, (A) there has not been any change in the business, properties,
business prospects, condition (financial or otherwise) or results of
operations of the Manager, arising for any reason whatsoever and (B) the
Man ager has not incurred any material liabilities or obligations, direct
or contingent, nor has it entered into any material transactions other than
pursuant to this Agreement and the transactions referred to herein.
(iii) The Manager, if operated in the manner described
in the Prospectus under the caption "Business" and "REIT Advisors, Inc.,"
will not be an "investment adviser," as such term is defined in the
Investment Advisers Act of 1940.
(iv) Except as set forth in the Registration Statement
and the Prospectus, there are no actions, suits or proceedings pending or,
to the knowledge of the Manager, threatened against or affecting the
Manager or any of its officers in their capacity as such, before or by any
Federal or state court, com mission, regulatory body, administrative agency
or other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding might result in a Material Adverse Effect.
(v) The Manager has (A) all governmental licenses,
permits, consents, or ders, approvals and other authorizations neces sary
to carry on its business as contemplated in the Prospectus, (B) complied in
all respects
21
<PAGE>
with all laws, regulations and orders applicable to it or its business and
(C) performed all its obligations required to be performed by it, and is
not in default, under any indenture, mortgage, deed of trust, voting trust
agree ment, loan agreement, bond, debenture, note agreement, lease,
contract or other agreement or instrument (collectively, a "contract or
other agreement") to which it is a party or by which its property is bound
or affected, the effect of any of which, individually or in the aggregate,
might result in a Material Adverse Effect. To the knowledge of the
Manager, no other party under any contract or other agree ment to which it
is a party is in default in any respect thereunder. The Manager is not in
violation of any provision of its charter or by-laws.
(vi) The Manager has full corporate power and authority
to enter into this Agreement, the Management Agreement, the Right of First
Refusal Agreement and the Submanagement Agreement, dated as of August
[___], 1997, among the Manager, ICH and ICCC (the "Submanagement
Agreement"). The Management Agreement, the Right of First Refusal
Agreement, the Submanagement Agreement and each other Company Agreement to
which the Manager is a party are collectively referred to as the "Manager
Agreements." Each of this Agreement and the Manager Agreements has been
duly autho rized, executed and delivered by the Manager and constitutes a
valid and binding agreement of the Manager and is enforceable against the
Manager in accordance with its terms, except as the enforceability hereof
and thereof may be limited by applicable bankruptcy, insolvency,
reorganization and similar laws affecting creditors' rights generally and
moratorium laws in effect from time to time and by equitable principles
restricting the availability of equitable remedies. The execution and
delivery by the Manager of, and the performance by the Manager of its
obligations under, each of this Agreement and the Manager Agreements, the
con summation of the transactions contemplated
22
<PAGE>
hereby and thereby will not result in the creation or imposition of any
lien, charge or encumbrance upon any of the assets of the Manager pursuant
to the terms or provisions of, or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, or give any
other party a right to terminate any of its obligations under, or result
in the acceleration of any obligation under, the articles of organization
or operating agreement of the Manager, any contract or other agreement to
which the Manager is a party or by which the Manager or any of its
properties is bound or affected, or violate or conflict with any judgment,
ruling, decree, order, statute, rule or regulation of any court or other
gov ernmental agency or body applicable to the business or properties of
the Manager the ef fect of any of which, individually or in the aggregate,
would be to have a Material Adverse Effect.
(vii) No consent, approval, au thorization or order of,
or any filing or declaration with, any court or governmental agency or
body is required in connection with the execution, delivery and performance
of this Agreement or the Manager Agreements by the Manager or in connection
with the taking by the Manager of any other action contemplated hereby or
thereby, except such as have been obtained.
(viii) No statement, representation, warranty or covenant
made by the Manager in this Agreement or made in any certificate or
document required by this Agreement to be de livered to the Underwriters
was or will be, when made, inaccurate, untrue or incorrect.
(ix) Neither the Manager nor, to the knowledge of the
Manager, any of its directors, officers or controlling persons has tak en,
directly or indirectly, any action intended, or which might reasonably be
expected, to cause or result, under the Securities Act or otherwise, in, or
which has constituted, stabi lization or manipulation of the price of any
23
<PAGE>
security of the Manager to facilitate the sale or resale of the Shares.
(d) IMH represents and warrants to, and agrees with, the
Underwriters as of the Closing Date and, if later, as of the Option Closing
Date, that:
(i) IMH has been duly organized, is validly existing
and is in good standing under the laws of the jurisdiction of
incorporation, has full power and authority to conduct all the activities
conducted by it, to own or lease the assets owned or leased by it and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly qualified to do business in each jurisdiction
wherein it owns or leases real property or in which the conduct of its
business requires such qualification, except where the failure to be so
qualified would not result in a Material Adverse Effect.
(ii) IMH has full corporate power and authority to enter
into this Agreement, the Non-Competition Agreement, the Right of First
Refusal Agreement, the Contribution Agreement and the Submanagement
Agreement. The Contribution Agreement, the Right of First Refusal
Agreement, the Non-Competition Agree ment, the Submanagement Agreement and
any other Company Agreements to which IMH is a party are collectively
referred to as the "IMH Agreements." Each of this Agreement and the IMH
Agreements has been duly authorized, executed and delivered by IMH and
constitutes a valid and binding agreement of IMH and is enforceable against
IMH in accordance with its terms, ex cept as the enforceability hereof and
thereof may be limited by applicable bankruptcy, insolvency, reorganization
and similar laws affect ing creditors' rights generally and moratorium laws
in effect from time to time and by equita ble principles restricting the
availability of equitable remedies. The execution and delivery by IMH of,
and the performance by IMH of its obligations under, each of this Agreement
and IMH Agreements, the consummation of the trans-
24
<PAGE>
actions contemplated hereby and thereby and the application of the net
proceeds from the offering and sale of the Shares to be sold by the
Company in the manner set forth in the Prospectus under the caption "Use
of Proceeds" will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of IMH pursuant to the terms
or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any other party a
right to terminate any of its obligations under, or result in the
acceleration of any obli gation under, the charter or by-laws of IMH, any
contract or other agreement to which IMH is a party or by which IMH or any
of its proper ties is bound or affected, or violate or conflict with any
judgment, ruling, decree, order, statute, rule or regulation of any court
or other governmental agency or body applicable to the business or
properties of IMH the effect of any of which, individually or in the
aggregate, would be to have a Material Adverse Effect.
(iii) No consent, approval, authorization or order of,
or any filing or declaration with, any court or governmental agency or
body is required in connection with the execution, delivery and performance
of this Agreement or the IMH Agreements by or in connection with the
taking by IMH of any other action contemplated hereby or thereby, except
such as have been obtained.
(iv) No statement, representation, warranty or covenant
made by IMH in this Agreement or made in any certificate or document
required by this Agreement to be delivered to the Underwriters was or will
be, when made, inaccurate, untrue or incorrect.
(v) Neither IMH nor, to the knowledge of IMH, any of
its directors, officers or controlling persons has taken, directly or
indirectly, any action intended, or which might reasonably be expected, to
cause or result, under the Securities Act or otherwise,
25
<PAGE>
in, or which has constituted, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares.
(e) Any certificate required by this Agreement that is signed
by any officer of the Company, ICCC, the Manager or IMH and delivered to the
Underwriters or counsel for the Underwriters shall be deemed a representation
and warranty by the Company, ICCC, the Manager or IMH, as the case may be, to
the Underwriters, as to the matters covered thereby.
4. Other Agreements.
----------------
(a) The Company covenants with several Underwriters as
follows:
(i) The Company will use its best efforts to cause the
Registration Statement to become effective under the Securities Act and
will advise the Underwriters promptly as to the time at which any
amendments to the Registration Statement become effective. The Company
will comply with all the provisions of any undertakings contained in the
Registration Statement.
(ii) The Company will notify the Underwriters
immediately, and confirm the no tice in writing, (A) of the filing of any
amendments to the Registration Statement or any amendment or supplement to
the Prospectus and the effectiveness of any amendment to the Registration
Statement, (B) of the receipt of any comments from the Commission with
respect to the Registration Statement or the Prospectus, (C) of any request
by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information,
(D) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose and (E) of the suspension of the qualification
of the Shares for offering or sale in any jurisdiction. The Company will
make every
26
<PAGE>
reasonable effort to prevent the issuance of any stop order described in
subsection (D) hereunder and, if any such stop order is issued, to obtain
the lifting thereof at the earliest possible moment. If the Company has
omitted any information from the Registration Statement pursuant to Rule
430A, the Company will use its best efforts to comply with the provisions
of and make all requisite filings with the Commission pursuant to or in
connection with said Rule 430A and to notify the Underwriters promptly of
all such filings.
(iii) The Company will give the Underwriters notice of
its intention to file any amendment to the Registration Statement or any
amendment or supplement to the Prospectus each of the Underwriters, and
will furnish each of the Underwriters with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such amendment or supplement
to which the Underwriters or counsel for the Underwriters shall reasonably
object.
(iv) The Company will, without charge, deliver to the
Underwriters, as soon as practicable, the number of copies of the
Registration Statement in effect as of the Effective Date and of each
amendment thereto as it may reasonably request from time to time
thereafter, in each case with the exhibits filed therewith.
(v) The Company will, without charge, furnish to the
Underwriters, from time to time during the period when the Prospectus is
required to be delivered in connection with the public offering under the
Securities Act, such number of copies of the Prospectus (as amended or
supplemented) as the Underwriters may reasonably request for the purposes
contemplated by the Securities Act or the Rules and Regulations.
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<PAGE>
(vi) If any event shall occur as a result of which it is
necessary, in the reasonable opinion of counsel for the Underwriters, to
amend or supplement the Registration Statement or the Prospectus in order
to make the Prospectus not misleading in the light of the circumstances
existing at the time it was made, the Company will forthwith amend or
supplement the Prospectus by preparing and filing with the Commission (and
furnishing to the Underwriters a reasonable number of copies of) an
amendment or amendments of the Registration Statement or an amendment or
amendments of or a supplement or supplements to, the Prospectus (in form
and substance reasonably satisfactory to counsel for the Underwriters), at
the Company's expense, which will amend or supplement the Registration
Statement or the Prospectus so that the Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circum stances existing at the time it was
made, not misleading.
(vii) The Company will endeavor, in cooperation with the
Underwriters and their counsel, to assist such counsel to qualify the
Shares for offering and sale under the applicable securities laws of such
states and other jurisdictions of the United States as the Underwriters
may request; provided, however, that the Company will not be obligated to
-------- -------
file any general consent to service of process, or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which it is
not now so qualified. The Company will file such statements and reports as
may be required by the laws of each jurisdiction in which the Shares have
been qualified as above provided.
(viii) The Company will make generally available to
holders of its securities as soon as may be practicable, but in no event
later than the last day of the fifteenth full calendar month following the
calendar quarter
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in which the Effective Date falls, an earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months ended
commencing after the Effective Date, and satisfying the provisions of
Section 11(a) of the Securities Act (including Rule 158 of the Rules and
Regulations).
(ix) During the period of five years commencing on the
Effective Date, the Company will furnish to the Underwriters copies of such
financial statements and other periodic and special reports as the Company
may from time to time distribute generally to the holders of any class of
its capital stock, and will furnish to the Underwriters a copy of each
annual or other report it shall be required to file with the Commission.
(x) For a period of 180 days from the later of the
Closing Date and the Option Closing Date, the Company will not, without the
prior consent of Painewebber Incor porated, offer or sell, or enter into
any agreement to sell, any equity or equity-related securities of the
Company, other than Shares issued in reinvestment of dividends or
distributions and options issued pursuant to an option plan.
(xi) The Company will use the net proceeds from the sale
of the Shares as set forth under "Use of Proceeds" in the Prospectus and
shall file such reports with the Commission with respect to the sale of the
Shares and the application on the proceeds therefrom as may be required in
accordance with Rule 463 under the Securities Act.
(xii) The Company will use its best efforts to cause the
Shares to be duly authorized for listing by the American Stock Exchange
prior to the time the Shares are issued.
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<PAGE>
(xiii) The Company will use its best efforts to qualify as
a REIT under the Code.
(xiv) The Company will not use the proceeds of the sale
of the Shares in such a manner as to require the Company to be registered
under the Investment Company Act.
(xv) The Company will not at any time, directly or
indirectly, take any action intended, or which might reasonably be
expected, to cause or result in, or which shall constitute, stabilization
of the price of the shares of Common Stock to facilitate the sale or resale
of any of the Shares.
(xvi) During the period of 180 days commencing at the
Closing Date or, if later, at the Option Closing Date, the Company will
not, without the prior written consent of PaineWebber Incorporated, grant
options to purchase shares of Common Stock at a price less than the market
price of the Common Stock at the time such options are granted.
(xvii) The Company will not, and the Company will cause
each officer or director of the Company who is a beneficial owner of more
than 5% of the outstanding shares of Common Stock to enter into agreements
with the Company to the effect that they will not, for a period of 180 days
after the commencement of the public offering of the shares, without prior
written consent of PaineWebber Incorporated, sell, contract to sell, grant
any option to sell or otherwise dispose of, or require the Company to file
with the Commission a registration statement under the Securities Act to
register, any shares of Common Stock or securities convertible into or
exchangeable for Common Stock or warrants or other rights to acquire
shares of Common Stock of which they are, or may in the future become, the
"beneficial owner" (within the meaning of Rule 13d-3 under the Exchange
Act), other than pursuant to stock option plans or in connection with other
em-
30
<PAGE>
ployee incentive compensation arrangements or the Company's dividend
reinvestment plan.
(xviii) The Company will not invest in futures contracts,
options on futures contracts or options on commodities unless the Company
and the Manager are exempt from the registration requirements of the
Commodity Exchange Act, as amended (the "Commodity Act"), or otherwise
comply with the Commodity Act. Neither the Company nor the Manager will
engage in any activities bearing on the Commodity Act, unless such
activities are exempt from the Commodity Act or otherwise comply with the
Commodity Act.
(xix) Any servicing agreements entered into by the
Company after the Effective Date will contain terms consistent with those
described for "Servicing Agreements" (as such term is defined in the
Prospectus under the caption "Business -- Servicing").
(b) Each of the Company, ICCC, the Manager and IMH, as the
case may be, covenants with the Underwriters as follows:
(i) The Company, ICCC, the Manager and IMH will not
take, directly or indirectly, any action designed to cause or to result in,
or that has constituted or might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares; provided that any action in
connection with the Company's dividend reinvestment plan will not be
deemed to be within the meaning of this Section 4(b).
(ii) Each of ICCC, the Manager and IMH shall notify the
Underwriters and the Company of the occurrence of any material events
respecting the Manager, ICCC or IMH, as the case may be, and, if as the
result of any such event it is necessary, in the reasonable opinion of
counsel, to amend or supplement the Prospectus in order to make the
Prospectus not
31
<PAGE>
misleading in light of the circumstances existing at the time it is
delivered to a purchaser, ICCC, the Manager or IMH, as the case may be,
will forthwith supply such information to the Company as shall be necessary
for the Company to prepare an amendment or supplement to the Prospectus so
that, as so amended or supplemented, the Prospectus will not contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances existing at the time it is delivered to a purchaser, not
misleading.
(iii) IMH will not, for a period of 180 days commencing
at the Closing Date, or, if later, at the Option Closing Date, without the
prior written consent of PaineWebber Incorporated, sell, contract to sell,
grant any option to sell, or otherwise dispose of, or require the Company
to file with the Commission a registration statement under the Securities
Act to register, any shares of Common Stock or securities convertible into
or exchangeable for Common Stock or warrants or other rights to acquire
shares of Common Stock of which they are, or may in the future become, the
"beneficial owner" (within the meaning of Rule 13d-3 under the Exchange
Act), other than pursuant to employee stock option plans or in connection
with other employee incentive compensation arrangements.
(iv) On the Closing Date, IMH will contribute to the
Company all of the ICCC Preferred Stock in exchange for 95,000 shares of
ICH Class A Stock.
(v) The Manager will not engage in any activity which
would require the Manager to register as an investment adviser under the
Investment Advisers Act of 1940 or to register as a commodity trading
advisor under the Commodity Act.
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<PAGE>
5. Payment of Expenses.
-------------------
(a) The Company will pay all expenses incident to the performance
of its obligations under this Agreement, including, but not limited to, expenses
relating to (i) the printing and filing of the Registration Statement as
originally filed and of each amendment thereto, (ii) the preparation, issuance
and delivery of the certificates for the Shares, (iii) the fees and
disbursements of the Company's counsel (including the fees and disbursements of
local counsel, if any) and accoun tants, (iv) the qualification of the Shares
under securities laws in accordance with the provisions of Section 4(a)(vii) of
this Agreement, including filing fees and the fees relating to the preparation
of the Blue Sky Survey by counsel to the Underwriters, (v) the printing or other
production and delivery to the Underwriters of copies of the Registration
Statement as in effect on the Effective Date and of each amendment thereto and
of the Prospectus and any amendments or supplements thereto, (vi) the printing
and other production and delivery of copies of the Blue Sky Survey, (vii) the
fees and expenses incurred with respect to filing with the National Association
of Securities Dealers, Inc., (viii) the fees and expenses incurred in connection
with the listing of the Shares on the American Stock Exchange, (ix) the printing
or other production, mailing and delivery expenses incurred in connection with
the Offering Materials, the printing of this Agreement, the Agreement Among
Underwriters, any Dealer Agreements and any Underwriters' Questionnaire and (x)
the fees and expenses incurred with respect to the transfer agent for the
Shares.
(b) In addition to any fees that may be payable to the
Underwriters under this Agreement, the Company agrees to reimburse the
Underwriters upon request made from time to time for its reasonable expenses
incurred in connection with their activities under this Agreement, including the
reasonable fees and disbursements of their legal counsel (including Blue Sky
fees and expenses which are paid directly by the Company), in an amount up to
$200,000.
(c) If this Agreement is terminated by the Underwriters in
accordance with the provisions of Section 6, the Company agrees to reimburse the
Underwriters for their reasonable out-of-pocket expenses in-
33
<PAGE>
curred in connection with its performance hereunder, including the reasonable
fees and disbursements of counsel for the Underwriters. In the event the
transactions contemplated hereunder are not consummated, the Company agrees to
pay all of the costs and expenses set forth in paragraphs (a) and (b) of this
Section 5 which the Company would have paid if such transactions had been
consummated.
6. Conditions of the Underwriters' Obligations. The obligations of
--------------------------------------------
the Underwriters hereunder are subject to the accuracy of the respective
representations and warranties of the Company, ICCC, the Manager and IMH
contained herein, to the performance by such parties of their respective
obligations hereunder, and to the following further conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Underwriters not later than 5:00 p.m., New
York City time, on the date of this Agreement or at such later date and time as
shall be consented to in writing by the Underwriters and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and (iv) after the date hereof no amendment or supplement to
the Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Underwriters and the Underwriters did not
object thereto in good faith, and the Underwriters shall have received
certificates, dated the Closing Date and the Option Closing Date, and signed by
the Chief Executive
34
<PAGE>
Officer or the Chairman of the Board of Directors of the Company and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief, to the effect of clauses (i),
(ii) and (iii)).
(c) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, (i) there shall not have been
a material adverse change in the general affairs, capital stock, indebtedness,
business, business prospects, properties, management, condition (financial or
otherwise) or results of operations of the Company, and its Subsidiaries, taken
as a whole, whether or not arising from transactions in the ordinary course of
business, in each case other than as set forth in or contemplated by the
Registration Statement and the Prospectus and (ii) none of the Company or any of
its Subsidiaries shall have sustained any material loss or interference with its
business or properties from fire, explosion, flood or other casualty, whether or
not covered by insurance, or from any labor dispute or any court or legislative
or ot her governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus, if in the judgment of the
Underwriters any such development makes it impracticable or inadvisable to
consummate the sale and delivery of the Shares by the Underwriters at the
initial public offering price.
(d) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against IMH, the Manager or the
Company or any of the Subsidiaries or any of their respective officers or
directors in their capacities as such, before or by any Federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding, an unfavorable
ruling, decision or finding could materially and adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company and its subsidiaries, taken as a whole, or the ability
of the (i) Company, ICCC and IMH to consummate the transactions contemplated by
the Contribution Transactions, (ii) the Company to fulfill its obligation under
the Company Agreements, (iii) ICCC to fulfill its obliga-
35
<PAGE>
tions under the ICCC Agreements, (iv) the Manager to fulfill its obligations
under the Manager Agreements, or (v) IMH to fulfill its obligations under the
IMH Agreements.
(e) Each of the representations and warranties of the Company,
ICCC, the Manager and IMH contained herein shall be true and correct in all
material respects at the Closing Date and, with respect to the Option Shares, at
the Option Closing Date, as if made at the Closing Date and, with respect to the
Option Shares, at the Option Closing Date and all covenants and agreements
herein contained to be performed on the part of the Company, ICCC, the Manager
or IMH and all conditions herein contained to be fulfilled or complied with by
the Company, ICCC, the Manager or IMH at or prior to the Closing Date and, with
respect to the Option Shares, at or prior to the Option Closing Date, shall have
been duly performed, fulfilled or complied with.
(f) The Underwriters shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
satisfactory in form and substance to counsel for the Underwriters, from
Freshman, Marantz, Orlanski, Cooper & Klien, counsel to the Company, ICCC, the
Manager and IMH, to the effect set forth in Exhibit B.
(g) The Underwriters shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
from Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the
Underwriters, with respect to the Registration Statement, the Prospectus and
this Agreement, which opinion shall be satisfactory in all respects to the
Underwriters.
(h) On the date of the Prospectus, the Accountants shall have
furnished to the Underwriters a letter, dated the date of its delivery,
addressed to the Underwriters and in form and substance satisfactory to the
Underwriters, confirming that they are independent accountants with respect to
the Company as required by the Securities Act and the Rules and Regulations and
with respect to the financial and other statistical and numerical information
contained in the Registration Statement. At the Closing Date and, as to the
Option Shares, at the Option Closing Date, the Accountants shall have furnished
36
<PAGE>
to the Underwriters a letter, dated the date of delivery, which shall confirm,
on the basis of a review in accordance with the procedures set forth in the
letter from the Accountants, that nothing has come to their attention during the
period from the date of the letter referred to in the prior sentence to a date
(specified in the letter) not more than five days prior to the Closing Date and,
as to the Option Shares, the Option Closing Date, which would require any change
in their letter dated the date of the Prospectus.
(i) At the Closing Date and, as to the Option Shares, at the
Option Closing Date, there shall be furnished to the Underwriters an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to the Underwriters, to the effect that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the
date of such certificate, such documents are true and correct in all
material respects and do not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
untrue or misleading and (B) in the case of the certificates delivered at
the Closing Date, and, as to any Option Shares, at the Option Closing Date,
since the Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein not untrue or misleading in any material respect.
(ii) Each of the representations and warranties of the
Company contained in this Agreement were, when originally made, and are, at
the time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants re quired herein to be
performed by the Company on or prior to the delivery of such certificate
has been duly, timely and fully performed and each condition herein
required to be complied
37
<PAGE>
with by the Company on or prior to the date of such certificate has been
duly, timely and fully complied with.
(j) On the Closing Date and, as to any Option Shares, on the
Option Closing Date, there shall be furnished to the Underwriters an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and Chief Financial Officer of ICCC, in form and substance
satisfactory to the Underwriters to the effect that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the
date of such certificate, such documents are true and correct in all
material respects insofar as they relate to ICCC, and do not omit to state
a material fact relating to ICCC required to be stated therein or
necessary in order to make the statements therein relating to ICCC not
untrue or misleading and (B) in the case of the certificate delivered at
the Closing Date and, as to any Option Shares, at the Option Closing Date,
since the Effective Date no event has occurred as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein relating to ICCC not untrue or misleading in any
material respect.
(ii) Each of the representations and warranties of ICCC
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants required herein to be
performed by ICCC on or prior to the delivery of such certificate has been
duly, timely and fully performed and each condition herein required to be
complied with by ICCC on or prior to the date of such certificate has been
duly, timely and fully complied with.
38
<PAGE>
(k) On the Closing Date and, as to any Option Shares, on the
Option Closing Date, there shall be furnished to the Underwriters an accurate
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Manager, in form and
substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the
date of such certificate, such documents are true and correct in all
material respects insofar as they relate to the Manager and do not omit to
state a material fact relating to the Manager required to be stated therein
or necessary in order to make the statements therein relating to the
Manager not untrue or misleading and (B) in the case of the certificate
delivered at the Closing Date and, as to any Option Shares, at the Option
Closing Date, since the Effective Date no event has occurred as a result of
which it is necessary to amend or supplement the Prospectus in order to
make the statements therein relating to the Manager not untrue or
misleading in any material respect.
(ii) Each of the representations and warranties of the
Manager contained in this Agreement were, when originally made, and are, at
the time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants required herein to be
performed by the Manager on or prior to the delivery of such certificate
has been duly, timely and fully performed and each condition herein
required to be complied with by ICCC on or prior to the date of such
certificate has been duly, timely and fully complied with.
(l) On the Closing Date, and as to any Option Shares, on the
Option Closing Date, there shall be furnished to the Underwriters an accurate
certificate, dated the date of its delivery, signed by each of the
39
<PAGE>
Chief Executive Officer and the Chief Financial Officer of IMH, in form and
substance satisfactory to the Representatives, to the effect that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the
date of such certificate, such documents ar true and correct in all
material respects insofar as they relate to IMH and do not omit to state a
material fact relating to IMH required to be stated therein relating to IMH
not untrue or misleading and (B) in the case of the certificate delivered
at the Closing Date, and as to any Option Shares, at the Option Closing
Date, since the Effective Date no event has occurred as a result of which
it is necessary to amend or supplement the Prospectus in order to make the
statements therein relating to IMH not untrue or misleading on any material
respect.
(ii) Each of the representations and warranties of IMH
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants required herein to be
performed by IMH on or prior to the delivery of such certificate has been
duly, timely and fully performed and each condition herein required to be
complied with by IMH on or prior to the date of such certificate has been
duly, timely and fully complied with.
(m) The Shares shall be qualified for sale in such states as
the Underwriters may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
or the Option Closing Date.
(n) Prior to the Closing Date, the Shares shall have been duly
authorized for listing by the American Stock Exchange upon official notice of
issuance.
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<PAGE>
(o) The Company, ICCC, the Manager and IMH shall have executed
and delivered to each other party thereto the Company Agreements, the ICCC
Agreements, the Manager Agreements and the IMH Agreements, as the case may be.
(p) The Company, ICCC, the Manager and IMH shall have furnished
to the Underwriters such certificates, in addition to those specifically
mentioned herein, as the Underwriters may have reasonably requested as to the
accuracy and completeness at the Closing Date and the Option Closing Date of any
statement in the Registration Statement or the Prospectus, as to the accuracy
at the Closing Date and, as to any Option Shares, at the Option Closing Date, of
the representations and warranties of the Company, ICCC, the Manager and IMH
herein, as to the performance by the Company, ICCC, the Manager and IMH of their
respective obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to its obligations hereunder of the Underwriters.
7. Indemnification and Contribution.
--------------------------------
(a) Each of the Company and the Manager, jointly and severally
will indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person, if any, who controls
each Underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
liabilities, expenses and damages (including, but not limited to, any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any and all amounts paid in settlement of, any action, suit or proceeding
between any of the indemnified parties and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or any claim asserted),
as and when incurred, to which any Underwriter, or any such person, may become
subject under the Securities Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, liabilities, expenses or damages arise out of or are based on (i) any
untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus or in
any docu-
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<PAGE>
ments filed under the Exchange Act and deemed to be incorporated by reference
into the Prospectus, or in any application or other document executed by or on
behalf of the Company or based on written information furnished by or on behalf
of the Company filed in any jurisdiction in order to qualify the Shares under
the securities laws thereof or filed with the Commission, (ii) the omission or
alleged omission to state in such document a material fact required to be stated
in it or necessary to make the statements in it not misleading or (iii) any act
or failure to act by any Underwriter in connection with, or relating in any
manner to, the Shares or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, liability, expense or damage
arising out of or based upon matters covered by clause (i) or (ii) above
(provided that neither the Company nor the Manager shall be liable under this
clause (iii) to the extent it is finally judicially determined by a court of
competent jurisdiction that such loss, claim, liability, expense or damage
resulted directly from any such acts or failures to act undertaken or omitted to
be taken by such Underwriter through its gross negligence or willful
misconduct), provided that the Company will not be liable to the extent that
such loss, claim, liability, expense or damage arises from the sale of the
Shares in the public offering to any person by an Underwriter and is based on an
untrue statement or omission or alleged untrue statement or omission made in
reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Underwriters expressly for inclusion
in the Registration Statement, any preliminary prospectus or the Prospectus.
This indemnity agreement will be in addition to any liability that the Company
and the Manager might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, each
director of the Company and each officer of the Company who signs the
Registration Statement to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only insofar as losses, claims, liabilities,
expenses or damages arise out of or are based on any untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
42
<PAGE>
conformity with information relating to any Underwriter furnished in writing to
the Company by the Underwriters expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus. This indemnity will be in
addition to any liability that each Underwriter might otherwise have; provided,
however, that in no case shall any Underwriter be liable or responsible to any
amount in excess of the Underwriting discounts and commission received by such
Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section 7 will, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 7, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying
party will not relieve it from any liability that it may have to any indemnified
party under the foregoing provisions of this Section 7 unless, and only to the
extent that, such omission results in the forfeiture of substantive rights or
defenses by the indemnifying party. If any such action is brought against any
indemnified party and it notifies the indemnifying party of its commencement,
the indemnifying party will be entitled to participate in and, to the extent
that it elects by delivering written notice to the indemnified party promptly
after receiving notice of the commencement of the action from the indemnified
party, jointly with any other indemnifying party similarly notified, to assume
the defense of the action, with counsel satisfactory to the indemnified party,
and after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses except as provided below and
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (2) the indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it or
43
<PAGE>
other indemnified parties that are different from or in addition to those
available to the indemnifying party, (3) a conflict or potential conflict exists
(based on advice of counsel to the indemnified party) between the indemnified
party and the indemnifying party (in which case the indemnifying party will not
have the right to direct the defense of such action on behalf of the indemnified
party) or (4) the indemnifying party has not in fact employed counsel to assume
the defense of such action within a reasonable time after receiving notice of
the commencement of the action, in each of which cases the reasonable fees,
disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction (and of more than one separate firm admitted to practice in any
other relevant jurisdiction) at any one time for all such indemnified party or
parties. All such fees, disbursements and other charges will be reimbursed by
the indemnifying party promptly as they are incurred. An indemnifying party will
not be liable for any settlement of any action or claim effected without its
written consent (which consent will not be unreasonably withheld). No
indemnifying party shall, without the prior written consent of each indemnified
party, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding relating to the matters
contemplated by this Section 7 (whether or not any indemnified party is a party
thereto), unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising or
that may arise out of such claim, action or proceeding. Notwithstanding any
other provision of this Section 7(c), if at any time an indemnified party shall
have requested an indemnifying party to reimburse the indemnified party for fees
and expenses of counsel, such indemnifying party agrees that it shall be liable
for any settlement effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party
44
<PAGE>
shall not have reimbursed such indemnified party in accordance with such request
prior to the date of such settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company, the Manager or the
Underwriters, the Company, the Manager and the Underwriters will contribute to
the total losses, claims, liabilities, expenses and damages (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, but after deducting any contribution received by the Company and
the Manager from persons other than the Underwriters, such as persons who
control the Company or the Managers within the meaning of the Securities Act,
officers of the Company who signed the Registration Statement and directors of
the Company, who also may be liable for contribution) to which the Company, the
Manager and any one or more of the Underwriters may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
the Company and the Manager on the one hand and the Underwriters on the other.
The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the public offering (before deducting expenses) received
by the Company bear to the total fees received by the Underwriters in each case
as set forth in the table on the cover page of the Prospectus. If, but only if,
the allocation provided by the foregoing sentence is not permitted by applicable
law, the allocation of contribution shall be made in such proportion as is
appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company and the Manager,
on the one hand, and the Underwriters, on the other, with respect to the
statements or omissions which resulted in such loss, claim, liability, expense
or damage, or action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a
45
<PAGE>
material fact relates to information supplied by the Company and the Manager or
the Underwriters, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 7(d) were to be deter mined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to herein. The amount paid or payable by
an indemnified party as a result of the loss, claim, liability, expense or
damage, or action in respect thereof, referred to above in this Section 7(d)
shall be deemed to include, for purpose of this Section 7(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7(d), no Underwriter shall be required to contribute
any amount in excess of the fees received by it and no person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) will be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute as provided in this Section 7(d) are several and not joint. For
purposes of this Section 7(d), any person who controls a party to this Agreement
within the meaning of the Securities Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the Company,
subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against such party in respect of which a claim for contribution may be made
under this Section 7(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 7(d). Except for a settlement entered
into pursuant to the last sentence of Section 7(d) hereof, no party will be
liable for contribution with respect to any action or claim settled without its
written consent (which consent will not be unreasonably withheld).
46
<PAGE>
(e) The indemnity and contribution agreements contained in
this Section 7 and the representations and warranties of the Company contained
in this Agreement shall remain operative and in full force and effect regardless
of (i) any investigation made by or on behalf of the Underwriters, (ii)
acceptance of the Shares and payment therefor or (iii) any termination of this
Agreement.
(f) The Company and the Manager acknowledge for all purposes of
this Agreement, the legend, if any, regarding stabilization set forth on the
inside front cover page of the Prospectus, the names of the Underwriters and the
amounts of the selling concession and reallowance set forth in the Prospectus
under the caption "Underwriting" and the identification of counsel to the
Underwriters in the Prospectus under the caption "Legal Matters" constitute the
only information relating to any Underwriter furnished in writing to the Company
by the Underwriters specifically for inclusion in the Registration Statement,
the preliminary prospectus or the Prospectus.
(g) The Company and the Manager agree to indemnify each
Underwriter and controlling persons thereof to the same extent and subject to
the same conditions and to the same agreements, including with respect to
contribution, provided for in subsections (a), (b), (c), (d) and (e) of this
Section 7.
8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
The respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers, of ICCC, of the Manager, of IMH and
of the Underwriters set forth in or made pursuant to this Agreement shall
survive the Closing Date and, if later, the Option Closing Date, and will remain
in full force and effect, regardless of any investigation made by or on behalf
of Underwriters or the Company or any of the officers, directors or controlling
persons referred to in Section 7 hereof, and will survive delivery of and
payment for the Shares pursuant to the public offering. The provisions of
Sections 5 and 7 hereof shall survive the termination or cancellation of this
Agreement.
47
<PAGE>
9. Termination of Agreement. The obligations of the several
------------------------
Underwriters under this Agreement may be terminated at any time on or prior to
the Closing Date (or, with respect to the Option Shares, on or prior to the
Option Closing Date), by notice to the Company from the Underwriters, without
liability on the part of any Underwriter to the Company, if, prior to delivery
and payment for the Shares (or the Option Shares, as the case may be), in the
sole judgment of the Underwriters, (i) trading in any of the equity securities
of the Company shall have been suspended by the Commission, by an exchange that
lists the Shares or by the National Association of Securities Dealers Automated
Quotation National Market System, (ii) trading in securities generally on the
New York Stock Exchange or American Stock Exchange shall have been suspended or
limited or minimum or maximum prices shall have been generally established on
such exchange, or additional material governmental restrictions, not in force on
the date of this Agreement, shall have been imposed upon trading in securities
generally by such exchange or by order of the Commission or any court or other
governmental authority, (iii) a general banking moratorium shall have been
declared by either Federal or New York State authorities or (iv) any material
adverse change in the financial or securities markets in the United States or in
political, financial or economic conditions in the United States or any outbreak
or material escalation of hostilities or declaration by the United States of a
national emergency or war or other calamity or crisis shall have occurred the
effect of any of which is such as to make it, in the sole judgment of the
Underwriters, impracticable or inadvisable to market the Shares on the terms and
in the manner contemplated by the Prospectus.
10. Substitution of Underwriters. If any one or more of the
----------------------------
Underwriters shall fail or refuse to purchase any of the Firm Shares which it or
they have agreed to purchase hereunder, and the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Firm Shares,
the other Underwriters shall be obligated, severally, to purchase the Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase, in the proportions which the number of Firm Shares which
they have respectively agreed to purchase
48
<PAGE>
pursuant to Section 1 bears to the aggregate number of Firm Shares which all
such nondefaulting Underwriters have so agreed to purchase, or in such other
proportions as the Underwriters may specify; provided that in no event shall the
maximum number of Firm Shares which any Underwriter has become obligated to
purchase pursuant to Section 1 be increased pursuant to this Section 10 by more
than one-ninth of the number of Firm Shares agreed to be purchased by such
Underwriter without the prior written consent of such Underwriter. If any
Underwriter or Underwriters shall fail or refuse to purchase any Firm Shares and
the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase exceeds one-tenth of the
aggregate number of the Firm Shares and arrangements satisfactory to the
Underwriters and the Company for the purchase of such Firm Shares are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any nondefaulting Underwriter or the Company for the
purchase or sale of any Shares under this Agreement. In any such case either the
Underwriters or the Company shall have the right to postpone the Closing Date,
but in no event for longer than seven days, in order that the required changes,
if any, in the Registration Statement and in the Prospectus or in any other
documents or arrangements may be effected. Any action taken pursuant to this
Section 10 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
11. Notices. All communications hereunder will be in writing and
-------
effective only on receipt, and, if sent to the Underwriters, will be mailed,
delivered or telegraphed and confirmed to PaineWebber Incorporated, Attn: Halle
Benett, 1285 Avenue of the Americas, New York, New York 10019; or, if sent to
the Company or ICCC, will be mailed, delivered or telegraphed and confirmed to
them at: IMH Commercial Holdings, Inc., 20871 Irvine Avenue, Santa Ana Heights,
California 92707, Attn: Joseph R. Tomkinson, Chief Executive Officer; or, if
sent to the Manager, will be mailed, delivered or telegraphed and confirmed in
writing to: RAI Advisors, LLC, 20371 Irvine Avenue, Santa Ana Heights,
California 92707, Attn: Joseph R. Tomkinson, Chief Executive Officer, or, if
sent to IMH, will be mailed, delivered or telegraphed and confirmed in writing
to: Imperial Credit Mortgage Holdings, 20371 Irvine Avenue, Santa Ana Heights,
California
49
<PAGE>
92707, Attn: Joseph R. Tomkinson, Chief Executive Officer.
12. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto and their respective successors and will inure
to the benefit of the officers, trustees, directors and controlling persons
referred to in Section 7 hereof, and no other person will have any right or
obligation hereunder.
13. Applicable Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED
--------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO
CONFLICT OF LAW PRINCIPLES THEREOF.
14. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
15. Severability. In case any provision in this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
16. Amendments. This Agreement may not be amended or otherwise
----------
modified, nor may any provision hereof be waived, except by an instrument in
writing signed by the Underwriters, the Company, ICCC, the Manager and IMH.
50
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement among the Company,
ICCC, the Manager, IMH and the Underwriters.
Very truly yours,
IMH COMMERCIAL IMPERIAL COMMERCIAL
HOLDINGS, INC. CAPITAL CORPORATION
By: __________________________ By: ___________________________
Name: Name:
Title: Title:
RAI ADVISORS, LLC IMPERIAL CREDIT MORTGAGE
HOLDINGS, INC.
By: __________________________ By: ___________________________
Name: Name:
Title: Title:
The foregoing Agreement is hereby confirmed and accepted, on behalf of the
Underwriters, as of the date first above written.
PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY
INCORPORATED
By: __________________________ By: ___________________________
Name: Name:
Title: Title:
<PAGE>
EVEREN SECURITIES, INC. OPPENHEIMER & CO., INC.
By: __________________________ By: ___________________________
Name: Name:
Title: Title:
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of
Underwriter Firm Shares
----------- -----------
PaineWebber Incorporated
Stifel, Nicolaus & Company
Incorporated
EVEREN Securities, Inc.
Oppenheimer & Co., Inc.
5,000,000
=========
<PAGE>
EXHIBIT A
IMH COMMERCIAL HOLDINGS, INC.
PRICE DETERMINATION AGREEMENT
-----------------------------
[DATE]
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY INCORPORATED
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Reference is made to the Underwriting Agreement, dated August __,
1997 (the "Underwriting Agreement"), among IMH Commercial Holdings, Inc., a
Maryland corporation (the "Company") and PaineWebber Incorporated, Stifel,
Nicolaus & Company Incorporated and EVEREN Securities, Inc. and Oppenheimer &
Co., Inc. (as representatives of the several underwriters, collectively, the
"Underwriters"). The Underwriting Agreement provides for the purchase by the
Underwriters from the Company, subject to the terms and conditions set forth
therein, of an aggregate of 5,000,000 shares (the "Firm Shares") of the
Company's common stock, par value $.01 per share. This Agreement is the Price
Determination Agreement referred to in the Underwriting Agreement
Pursuant to Section 1 of the Underwriting Agreement, the Company
agrees with the Underwriters as follows:
1. The initial public offering price per share for the Firm Shares
shall be $________.
2. The purchase price per share for the Firm Shares to be paid by
the several Underwriters shall be $_______ representing an amount equal to the
initial public offering price set forth above, less $____ per share.
A-1
<PAGE>
3. Any Underwriter may allow, and any dealer may reallow, a
concession, not in excess of $____ per share, to any Underwriter or to certain
other dealers.
The Company represents and warrants to each of the Underwriters that
the representations and warranties of the Company set forth in Section 3 of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
As contemplated by the Underwriting Agreement, attached as Schedule I
is a completed list of the several Underwriters, which shall be a part of this
Agreement and the Underwriting Agreement.
This Agreement shall be governed by the laws of the State of New York
without regard to the conflict of laws principles of such state.
If the foregoing is in accordance with your understanding of the
agreement among the Underwriters and the Company, please sign and return to the
Company a counterpart hereof, whereupon this instrument along with all
counterparts and together with the Underwriting Agreement shall be a binding
agreement among the Underwriters and the Company in accordance with its terms
and the terms of the Underwriting Agreement.
Very truly yours,
IMH COMMERCIAL HOLDINGS, INC.
By: ___________________________
Name:
Title:
A-2
<PAGE>
Confirmed as of the date
first above mentioned:
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY INCORPORATED
EVEREN SECURITIES, INC.
OPPENHEIMER & CO., INC.
PAINEWEBBER INCORPORATED
By: __________________________
Name:
Title:
STIFEL, NICOLAUS & COMPANY INCORPORATED
By: __________________________
Name:
Title:
EVEREN SECURITIES, INC.
By: __________________________
Name:
Title:
OPPENHEIMER & CO., INC.
By: __________________________
Name:
Title:
A-3
<PAGE>
EXHIBIT B
OPINION OF
FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN
1. The Company meets the requirements for use of Form S-11 under the
Securities Act and the Rules and Regulations.
2. The Company and each Subsidiary (including ICCC) has been duly
organized, is validly existing and is in good standing under the laws of the
jurisdiction of incorporation; the Company and each Subsidiary (including ICCC)
has full power and authority to conduct all the respective activities conducted
by them, to own or lease the assets owned or leased respectively by them and to
conduct their respective business as described in the Registration Statement and
the Prospectus; the Company and each Subsidiary (including ICCC) and are duly
qualified to do business in each jurisdiction wherein they own or lease real
property or in which the conduct of their business requires such qualification,
except where the failure to be so qualified would not result in a Material
Adverse Effect upon the Company or any of its Subsidiaries.
3. All of the outstanding shares of the capital stock of the
Subsidiaries, including but not limited to the ICCC Preferred Stock, have been
duly authorized and validly issued and are fully paid and non-assessable. Except
for the stock of the Subsidiaries and as disclosed in the Registration
Statement, to our best knowledge after due inquiry, the Company does not own,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity.
4. All of the outstanding shares of the capital stock of the
Company, including but not limited to the Company's Restricted Shares, the ICH
Class A Stock and the ICH Preferred Stock, have been duly authorized, validly
issued, fully paid and non-assessable and are not subject to any preemptive or
similar right. The Shares have been duly authorized by all requisite action on
the part of the Company for issuance and sale pursuant to the terms of the
public offering and, when issued and delivered by the Company pursuant to the
terms of the public offering against payment of the consideration set forth
B-1
<PAGE>
in the Prospectus, will be validly issued, fully paid and non-assessable; the
Shares conform in all material respects to all statements relating thereto
contained in the Registration Statement and the Prospectus; and the issuance of
the Shares is not subject to any preemptive rights. Except as set forth in the
Prospectus, to our best knowledge after due inquiry, there are no options to
purchase, or any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts, commitments, plans or
arrangements to issue or sell, any shares of capital stock of the Company, any
shares of capital stock of any Subsidiary or any such warrants, convertible
securities or obligations. The description of the Company's dividend
reinvestment plan, stock option and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately presents the information required to be shown with respect
to such plans, arrangements, options and rights.
5. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date, and as to any Option Shares the Option Closing Date, to our best knowledge
after due inquiry (A) there has not been any change in the capitalization of the
Company, or in the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries, arising for any reason whatsoever, (B) neither the Company nor any
of its Sub sidiaries has incurred any material liabilities or obligations,
direct or contingent, nor has it entered into any material transactions other
than pursuant to the Underwriting Agreement and the transactions referred to
herein and (C) the Company has not paid or declared any dividends or other
distributions of any kind on any class of its capital stock.
6. Neither the Company nor any of its Subsidiaries is, and if
operated in the manner described in the Prospectus under the caption "Business"
will not be, an "investment company," an entity "controlled" by an "investment
company" or an "affiliated person" of, or "promotor" or "principal underwriter"
for, an "investment company," as such terms are defined in the Investment
Company Act.
7. Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits
B-2
<PAGE>
or proceedings pending or, to our knowledge after due inquiry, threatened
against or affecting the Company or any of its Subsidiaries or any of their
respective officers in their capacity as such, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding might result in a Material Adverse Effect.
8. The Company and each of its Subsidiaries has (A) all governmental
licenses, permits, consents, orders, approvals and other authorizations
necessary to carry on its business as contemplated in the Prospectus, (B)
complied in all respects with all laws, regulations and orders applicable to it
or its business and (C) performed all obligations required to be performed by
it, and is not in default, under any indenture, mortgage, deed of trust, voting
trust agreement, loan agreement, bond, debenture, note agreement, lease,
contract or other agreement or instrument (collectively, a "contract or other
agreement") to which it is a party or by which its property is bound or
affected, the effect of any of which, individually or in the aggregate, might
result in a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries is in violation of any provision of its charter or by-laws.
9. The Company has full corporate power and authority to enter into
the Underwriting Agreement, the Management Agreement, dated August__, 1997 (the
"Management Agreement"), between the Company and the Manager, the Servicing
Agreement, dated August __, 1997 (the "Servicing Agreement"), between the
Company and ICCC, the Non-Competition Agreement dated August __, 1997 (the "Non-
Competition Agreement") between the Company and IMH, the Right of First Refusal
Agreement, dated August __, 1997 (the "Right of First Refusal Agreement")
between the Company, the Manager and IMH and the Contribution Agreement. The
Management Agreement, the Servicing Agreement, the Contribution Agreement, the
Right of First Refusal Agreement and the Non-Competition Agreement are
collectively referred to as the "Company Agreements." Each of the Underwriting
Agreement and the Company Agreements has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company and is enforceable against the Company in accordance with its terms,
except as the enforceability hereof and thereof may be limited by applicable
bankruptcy, insolvency, reorganization and similar laws affecting
B-3
<PAGE>
creditors' rights generally and moratorium laws in effect from time to time and
by equitable principles restricting the availability of equitable remedies. The
execution and delivery by the Company of, and the performance by the Company of
its obligations under, each of the Underwriting Agreement and the Company
Agreements, the consummation of the transactions contemplated by the
Underwriting Agreement and the Company Agreements and the application of the net
proceeds from the offering and sale of the Shares to be sold by the Company in
the manner set forth in the Prospectus under the caption "Use of Proceeds" will
not result in the creation or imposition of any lien, charge or encumbrance upon
any of the assets of the Company or any of its Subsidiaries pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any other party a right
to terminate any of its obligations under, or result in the acceleration of any
obligation under, the charter or by-laws of the Company or any of its
Subsidiaries, any contract or other agreement to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
any of its properties is bound or affected, or violate or conflict with any
judgment, ruling, decree, order, statute, rule or regulation of any court or
other governmental agency or body applicable to the business or properties of
the Company or any of its Subsidiaries the effect of any of which, individually
or in the aggregate, would be to have a Material Adverse Effect.
10. No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the authorization, issuance, transfer, sale or delivery of the
Shares by the Company, in connection with the execution, delivery and
performance of the Underwriting Agreement or the Company Agreements by the
Company or in connection with the taking by the Company of any other action
contemplated by the Underwriting Agreement and the Company Agreements, except
such as have been obtained under the Securities Act or the Rules and Regulations
and such as may be required under state securities or Blue Sky laws or the by-
laws and rules of the NASD in connection with the purchase and distribution by
the Underwriters of the Shares. All references in this opinion to the
Underwriting Agreement shall include the Price Determination Agreement.
B-4
<PAGE>
11. The Company and each of its Subsidiaries has good and marketable
title to all properties and assets described in the Prospectus as owned by it
(including the assets contributed, sold or transferred to the Company pursuant
to the terms of the Contribution Agreement), free and clear of all liens,
charges, encumbrances, mortgages, security interests, claims or restrictions,
except such as are described in, or contemplated by, the Prospectus. The Company
and each of its Subsidiaries has valid, subsisting and enforceable leases for
the properties described in the Prospectus as leased by it, with such exceptions
as are not material and do not materially interfere with the use made and
proposed to be made of such properties by the Company and the Subsidiaries.
12. There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or any Subsidiary is a party
have been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or such
Subsidiaries and are enforceable against the Company or such Subsidiary in
accordance with the terms thereof.
13. The Shares have been duly authorized for listing by the American
Stock Exchange upon official notice of issuance.
14. To our knowledge after due inquiry, no claims have been asserted
by any person to the use of any such trademarks or trade names or challenging or
questioning the validity or effectiveness of any such trademark or trade name;
and the use, in connection with the business and operations of the Company and
its Subsidiaries of such trademarks and trade names does not, to the Company's
knowledge, infringe on the rights of any person.
[15. Based upon our knowledge of the operations of the Company, the
Company has conducted its operations in a manner so as to enable it to elect to
be qualified as a real estate investment trust ("REIT") under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code").]
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16. The Company has complied with all of the provisions of
(including, without limitation, filing all forms required by) Section 517.075 of
the Florida Securities and Investor Protection Act and Regulation 3E900.001
issued thereunder with respect to the offering and sale of the Shares.
17. Neither the Company nor any of its Subsid iaries, if operated in
the manner described in the Prospectus under the caption "Business," will be a
"broker" within the meaning of Section 3(a)(4) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or a "dealer" within the meaning of
Section 3(a)(5) of the Exchange Act or required to be registered pursuant to
Section 15(a) of the Exchange Act.
18. ICCC has full corporate power and authority to enter into the
Underwriting Agreement, the Servicing Agreement, the Lease Agreement dated as of
_____, 1997 between ICCC and ______ (the "Lease Agreement") and the Contribution
Agreement. The Servicing Agreement, the Lease Agreement, the Contribution
Agreement, and any other Company Agreements to which ICCC is a party are
collectively referred to as the "ICCC Agreements." Each of the Underwriting
Agreement and the ICCC Agreements has been duly authorized, executed and
delivered by ICCC and constitutes a valid and binding agreement of ICCC and is
enforceable against ICCC in accordance with its terms, except as the
enforceability hereof and thereof may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws affecting creditors' rights
generally and moratorium laws in effect from time to time and by equitable
principles restricting the availability of equitable remedies. The execution and
delivery by ICCC of, and the performance by ICCC of its obligations under, each
of the Underwriting Agreement and the ICCC Agreements, the consummation of the
transactions contemplated hereby and thereby and the application of the net
proceeds from the offering and sale of the Shares to be sold by the Company in
the manner set forth in the Prospectus under the caption "Use of Proceeds" will
not result in the creation or imposition of any lien, charge or encumbrance upon
any of the assets of ICCC pursuant to the terms or provisions of, or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, or give any other party a right to terminate any of its
obligations under, or result in the acceleration of any obligation under, the
charter or by-laws of ICCC, any contract or other agreement to which
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ICCC is a party or by which ICCC or any of its properties is bound or affected,
or violate or conflict with any judgment, ruling, decree, order, statute, rule
or regulation of any court or other governmental agency or body applicable to
the business or properties of ICCC the effect of any of which, individually or
in the aggregate, would be to have a Material Adverse Effect.
19. No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the execution, delivery and performance of the Underwriting
Agreement or the ICCC Agreements by ICCC or in connection with the taking by
ICCC of any other action contemplated hereby or thereby, except such as have
been obtained.
20. Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to our best
knowledge after due inquiry, threatened against or affecting ICCC or any of its
officers in their capacity as such, before or by any Federal or state court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign, wherein an unfavorable ruling, decision or finding might
result in a Material Adverse Effect.
21. The Manager has been duly organized, is validly existing and is
in good standing under the laws of the jurisdiction of incorporation, has full
power and authority to conduct all the activities conducted by it, to own or
lease the assets owned or leased by it and to conduct its business as described
in the Registration Statement and the Prospectus and is duly qualified to do
business in each jurisdiction wherein it own, or leases real property or in
which the conduct of its business requires such qualification, except where the
failure to be so qualified would not result in a Material Adverse Effect.
22. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date, and as to any Option Shares, the Option Closing Date, to our knowledge
after due inquiry, (A) there has not been any change in the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Manager, arising for any reason whatsoever and (B) the
Manager has not incurred any material lia-
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bilities or obligations, direct or contingent, nor has it entered into any
material transactions other than pursuant to the Underwriting Agreement and the
transactions referred to herein.
23. The Manager, if operated in the manner described in the
Prospectus under the caption "Business" and "REIT Advisors, Inc." will not be an
"investment adviser," as such term is defined in the Investment Advisers Act of
1940.
24. Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to our
knowledge after due inquiry, threatened against or affecting the Manager or any
of its officers in their capacity as such, before or by any Federal or state
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, wherein an unfavorable ruling, decision or finding
might result in a Material Adverse Effect.
25. The Manager has (A) all governmental licenses, permits,
consents, orders, approvals and other authorizations necessary to carry on its
business as contemplated in the Prospectus, (B) complied in all respects with
all laws, regulations and orders applicable to it or its business and (C)
performed all its obligations required to be performed by it, and is not in
default, under any indenture, mortgage, deed of trust, voting trust agreement,
loan agreement, bond, debenture, note agreement, lease, contract or other
agreement or instrument (collectively, a "contract or other agreement") to
which it is a party or by which its property is bound or affected, the effect of
any of which, individually or in the aggregate, might result in a Material
Adverse Effect. The Manager is not in violation of any provision of its charter
or by-laws.
26. The Manager has full corporate power and authority to enter into
the Underwriting Agreement, the Right of First Refusal Agreement, the
Submanagement Agreement dated as of August ___, 1997 between the Manager and
ICH and ICCC (collectively the "Submanagement Agreements"). The Management
Agreement, the Right of First Refusal Agreement, the Submanagement Agreement and
each other Company Agreement to which the Manager is a party are collectively
referred to as the "Manager Agreements." Each of the Underwriting Agreement and
the
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Manager Agreements has been duly authorized, executed and delivered by the
Manager and constitutes a valid and binding agreement of the Manager and is
enforceable against the Manager in accordance with its terms, except as the
enforceability hereof and thereof may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws affecting creditors' rights
generally and moratorium laws in effect from time to time and by equitable
principles restricting the availability of equitable remedies. The execution and
delivery by the Manager of, and the performance by the Manager of its
obligations under, each of the Underwriting Agreement and the Manager
Agreements, the consummation of the transactions contemplated hereby and thereby
and the application of the net proceeds from the offering and sale of the Shares
to be sold by the Manager in the manner set forth in the Prospectus under the
caption "Use of Proceeds" will not result in the creation or imposition of any
lien, charge or encumbrance upon any of the assets of the Manager pursuant to
the terms or provisions of, or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or give any other party a
right to terminate any of its obligations under, or result in the acceleration
of any obligation under, the Articles of Organization or operating agreement of
the Manager, any contract or other agreement to which the Manager is a party or
by which the Manager or any of its properties is bound or affected, or violate
or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
business or properties of the Manager the effect of any of which, individually
or in the aggregate, would be to have a Material Adverse Effect.
27. No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the execution, delivery and performance of the Underwriting
Agreement or the Manager Agreements by the Manager or in connection with the
taking by the Manager of any other action contemplated hereby or thereby, except
such as have been obtained.
28. IMH has been duly organized, is validly existing and is in good
standing under the laws of the jurisdiction of incorporation, has full power and
authority to conduct all the activities conducted by it, to own or lease the
assets owned or leased by it and to conduct
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its business as described in the Registration Statement and the Prospectus, and
is duly qualified to do business in each jurisdiction wherein it owns or leases
real property or in which the conduct of its business requires such
qualification, except where the failure to be so qualified would not result in a
Material Adverse Effect.
29. IMH has full corporate power and authority to enter into the
Underwriting Agreement, the Tax Agreement, Non-Competition Agreement, the Right
of First Refusal Agreement, the Contribution Agreement and the Submanagement
Agreement with the Manager. The Tax Agreement, the Contribution Agreement, the
Right of First Refusal Agreement, the Non-Competition Agreement, the
Submanagement Agreement and any other Company Agreements to which IMH is a party
are collectively referred to as the "IMH Agreements." Each of the Underwriting
Agreement and the IMH Agreements has been duly authorized, executed and
delivered by IMH and constitutes a valid and binding agreement of IMH and is
enforceable against IMH in accordance with its terms, except as the
enforceability hereof and thereof may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws affecting creditors' rights
generally and moratorium laws in effect from time to time and by equitable
principles restricting the availability of equitable remedies. The execution and
delivery by IMH of, and the performance by IMH of its obligations under, each of
the Underwriting Agreement and IMH Agreements, the consummation of the
transactions contemplated hereby and thereby and the application of the net
proceeds from the offering and sale of the Shares to be sold by the Company in
the manner set forth in the Prospectus under the caption "Use of Proceeds" will
not result in the creation or imposition of any lien, charge or encumbrance upon
any of the assets of IMH pursuant to the terms or provisions of, or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, or give any other party a right to terminate any of its
obligations under, or result in the acceleration of any obligation under, the
charter or by-laws of IMH, any contract or other agreement to which IMH is a
party or by which IMH or any of its properties is bound or affected, or violate
or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to the
business or properties of IMH the effect of any of which, individually or in the
aggregate, would be to have a Material Adverse Effect.
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30. No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required in
connection with the execution, delivery and performance of this Agreement or the
IMH Agreements by or in connection with the taking by IMH of any other action
contemplated hereby or thereby, except such as have been obtained.
In addition, while we have not ourselves checked the accuracy and
completeness of or otherwise verified, and are not passing upon and assume no
responsibility for the accuracy or completeness of, the statements contained
in the Registration Statement or the Prospectus, in the course of our review and
discussion of the contents of the Registration Statement and the Prospectus
with certain officers and employees of the Company, ICCC, the Manager and IMH
and their independent accountants, no facts have come to our attention which
cause us to believe that the Registration Statement, on the Closing Date, and as
to any Option Shares, on the Option Closing Date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements contained therein not misleading or
that the Prospectus, as of its date and on the Closing Date, and as to any
Option Shares, on the Option Closing Date, contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
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Exhibit 3.1(a)
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
----------------------------------------
ARTICLES OF AMENDMENT
THIS IS TO CERTIFY THAT:
FIRST: The charter of Imperial Credit Commercial Holdings, Inc., a
-----
Maryland corporation (the "Corporation"), is hereby amended by deleting existing
Article II in its entirety and substituting in lieu thereof a new article to
read as follows:
"ARTICLE II
NAME
The name of the corporation (the "Corporation") is:
IMH Commercial Holdings, Inc."
SECOND: The amendment to the charter of the Corporation as set forth
------
above has been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.
THIRD: The undersigned President acknowledges these Articles of
-----
Amendment to be the corporate act of the Corporation and as to all matters or
facts required to be verified under oath, the undersigned President acknowledges
that to the best of his knowledge, information and belief, these matters and
facts are true in all material respects and that this statement is made under
the penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles to be signed
in its name and on its behalf by its President and attested to by its Secretary
on this 28th day of June, 1997.
ATTEST: IMPERIAL CREDIT COMMERCIAL
HOLDINGS, INC.
/s/ Richard J. Johnson By: /s/ William S. Ashmore
- ------------------------- ------------------------
Richard J. Johnson William S. Ashmore
Secretary President
1
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EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
IMH Commercial Holdings, Inc.:
We consent to the use of our report dated April 16, 1997, except as to Note
1 to the financial statements which is as of June 30, 1997, included herein
and to the reference to our firm under the headings "Selected Financial Data"
and "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Orange County, California
July 28, 1997
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Imperial Commercial Capital Corporation:
We consent to the use of our report dated April 16, 1997, except as to Note
1 to the financial statements which is as of June 30, 1997, included herein
and to the reference to our firm under the headings "Selected Financial Data"
and "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Orange County, California
July 28, 1997
