<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11 REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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
IMPERIAL CREDIT 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)
---------------
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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<TABLE>
<CAPTION>
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.............. 8,000,000 shares $15.00 $120,000,000 $36,363.64
</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457.
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 APRIL 18, 1997
[LOGO OF IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.]
UP TO 7,000,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF SUBSCRIPTION RIGHTS FOR SUCH SHARES
----------
Imperial Credit Commercial Holdings, Inc. ("ICH" or the "Company") is
offering to Imperial Credit Mortgage Holdings, Inc.'s ("IMH") holders (the "IMH
Holders") of IMH shares (as defined herein) the right to subscribe (the
"Subscription Rights") for an aggregate of up to 7,000,000 shares (the "ICH
Shares") of the Company's common stock, $0.01 par value per share (the "Common
Stock"), at a rate of one ICH Share for each IMH Share held as of the close of
business on , 1997 (the "Record Date") at a price of $15.00 per ICH Share
(the "Subscription Price") (the "Subscription Offer"). IMH is not offering any
of its securities pursuant to this Prospectus or otherwise. The minimum
purchase in the Subscription Offer is 100 ICH Shares ($1,500). IMH Holders who
fully exercise their Subscription Rights may be entitled to subscribe for
additional ICH Shares pursuant to the Over-Subscription Privilege described
herein. The Subscription Rights are non-transferable and may not be purchased
or sold. The Board of Directors of the Company has determined to limit the
amount of ICH Shares that may be subscribed for pursuant to the Subscription
Offer to 7,000,000 (the "Maximum Subscription Offer Amount"). As of the Record
Date, there were IMH Shares outstanding. If all Subscription Rights with
respect to such IMH Shares were exercised, the number of ICH Shares would
exceed the Maximum Subscription Offer Amount. Accordingly, in the event of the
exercise of Subscription Rights in an amount greater than the Maximum
Subscription Offer Amount, the ICH Shares available pursuant to the
Subscription Offer are subject to allotment among IMH Holders on a pro rata
basis.
In addition to the Subscription Offer, the Company is offering (the "Standby
Offer") to certain persons that may or may not be IMH Holders (the "Standby
Purchasers"), pursuant to Standby Purchase Agreements (as defined herein), at
least shares of ICH Common Stock (the "Minimum Standby Offer Amount") but
no more than shares of ICH Common Stock (the "Maximum Standby Offer Amount")
(the shares of Common Stock being offered pursuant to the Standby Offer are
hereinafter referred to as the "Standby Shares"; the Standby Shares and the ICH
Shares are hereinafter collectively referred to as the "Shares"). The
Subscription Offer and the Standby Offer are referred to collectively as the
"Offering."
The Board of Directors of the Company has determined not to proceed with the
Offering unless an aggregate amount of at least 2,500,000 Shares (the "Minimum
Offering Amount") are subscribed for (inclusive of Standby Shares that may be
subscribed for pursuant to the Standby Purchase Agreements).
The Company has reserved up to 200,000 ICH Shares for sale at the
Subscription Price to certain employees of the Company and its affiliates.
THE SUBSCRIPTION OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON JUNE ,
1997
(THE "EXPIRATION DATE").
Prior to this Offering, there has been no public market for the Common Stock
of the Company. See "Distribution Arrangements" for information relating to the
determination of the initial public offering price.
The Company intends to apply to list its Common Stock on the American Stock
Exchange under the symbol "ICH."
SEE "RISK FACTORS" STARTING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY. THESE RISKS INCLUDE:
. Limited History of . Demand for Commercial Mortgages and the
Operations Company's Loan Products
. Recent and Planned . Changes in Interest Rates; Prepayment Risks
Expansion . Risks of Potential Net Interest and Operating
. Competition Losses in Connection with Borrowings and
. Risks Particular to Substantial Leverage; Liquidity
Multifamily Properties . Dependence on Securitizations
. Risks Particular to . Hedging Strategies
Retail, Office and . Conflicts of Interest
Industrial Properties . Consequences of Failure to Maintain REIT
. Geographic Status; ICH subject to Tax as a Regular
Concentration Corporation
. Environmental Risks
. Interest-only
Principal-only,
Residual Interest and
Subordinated Securities
----------
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>
Solicitation
Subscription and Dealer Proceeds to
Price Manager Fees (1) Company (2)(3)
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<S> <C> <C> <C>
Per Share........... $ $ $
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Total Minimum....... $ $ $
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Total Maximum(4) ... $ $ $
</TABLE>
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(1) In connection with the Offering, the Company has agreed to pay PaineWebber
Incorporated and Stifel, Nicolaus & Company, Incorporated (collectively,
the "Dealer Managers") a fee for their financial advisory, marketing and
soliciting services equal to 4.25% of the aggregate Subscription Price for
the Shares issued pursuant to the Offering and to reimburse the Dealer
Managers for out-of-pocket expenses. The Dealer Managers will reallow to
certain broker-dealers a concession of 2.50% of the Price to Public per ICH
Share issued pursuant to the Subscription Offer. The Company and REIT
Advisors, Inc. have agreed to indemnify the Dealer Managers and each
soliciting dealer against certain liabilities under the Securities Act of
1933, as amended. See "Distribution Arrangements."
(2) Before deducting expenses estimated at $1,050,000 payable by the Company,
including up to $200,000 to be paid to the Dealer Managers as partial
reimbursement of their expenses relating to the Offering.
(3) Funds received by check prior to the Expiration Date (as defined herein)
will be deposited in a segregated interest-bearing account.
(4) The Total Maximum Subscription Price, Solicitation and Dealer Manager Fees
and Proceeds to Company will be $ , $ and $ ,
respectively, assuming the Maximum Subscription Offer Amount and Maximum
Standby Offer Amount is sold.
----------
PAINEWEBBER INCORPORATED STIFEL, NICOLAUS & COMPANY
INCORPORATED
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.
<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) assumes the
Maximum Subscription Offer Amount, (ii) gives no effect to any issuance of
Standby Shares pursuant to the Standby Offer and (iii) 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 the ICH's Common
Stock not greater than 9.8% of the outstanding shares of Common Stock of ICH
upon the closing of this Offering. Unless the context otherwise requires,
references herein to the "Company" refer to Imperial Credit Commercial
Holdings, Inc. ("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
Imperial Credit 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. capitalized the Company with $15.0 million in cash in March
1997. IMH will own 9.8% of the Company's outstanding Common Stock upon the
closing of this Offering, assuming the Maximum Subscription Offer Amount is
sold and securities representing the right to receive additional shares of ICH
Common Stock as follows: upon the closing of this Offering, IMH will also own
505,874 shares of ICH Class A Stock (as defined herein), excluding an
additional number of shares of ICH Class A Stock issuable upon the Contribution
(as defined herein), convertible into an equivalent number of shares of ICH
Common Stock, subject to the limitation that IMH may not own in excess of 9.8%
of ICH's outstanding shares of 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. IMH, which became a
public company in November 1995, has an investment portfolio which has grown
from $18.0 million at September 30, 1995 to $924.1 million at December 31,
1996. A key aspect of the success of IMH has been the development of its
infrastructure by its management team. This infrastructure oversees the daily
capital, asset and operation management, investor relations and human resources
functions of IMH. The management team of IMH consists of Joseph R. Tomkinson,
William S. Ashmore, Richard J. Johnson and Mary C. Glass, who have over 60
years of combined experience in the mortgage industry. This management team
will oversee the day-to-day operations of the Company pursuant to a Management
Agreement (see "--The Manager").
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.
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 also purchases mortgage-backed securities
on commercial properties, such as pass-through certificates, and REMICs
3
<PAGE>
(collectively, "CMBSs"). IMH's management believes that the formation of ICH
will enable the Company to build a business focused on Commercial Mortgages
while allowing IMH to continue to concentrate its efforts on the residential
mortgage business. The Company has determined to utilize the structure of the
Subscription Offer and Standby Offer to give IMH Holders, and select Standby
Purchasers, an exclusive opportunity to participate early in the investment
represented by the ICH Shares.
COMMERCIAL MORTGAGE INDUSTRY
The Commercial Mortgage securitization market has experienced significant
growth in recent years. In 1996, $43.5 billion of Commercial 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
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 it will be able to benefit from the experience of
its senior officers and that of its Manager, as well as the infrastructure
developed at IMH. The Manager intends to enter into a submanagement agreement
with 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, the Company believes it will be able to operate with lower
costs than if it were to create a new administrative infrastructure and will be
able to efficiently and economically manage its operations.
The Company believes that ICH's tax and corporate structure as a REIT
provides 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 is not subject to the costs associated with the federal and state
regulations imposed upon insured financial institutions.
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. The Company has
secured a $200.0 million warehouse line agreement to finance the origination
and purchase of Commercial Mortgages. The Conduit Operations operates through
three divisions: the Condominium Division, the Retail Division, and the
Correspondent and Bulk Purchase Division.
4
<PAGE>
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 Conduit Operations operates through three divisions: the Condominium
Division, the Retail Division, and the Correspondent and Bulk Purchase
Division.
Condominium Division. This Division offers 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 are
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 both originates
Commercial Mortgages on a retail basis and purchases Commercial Mortgages on a
bulk and flow basis. This Division offers larger principal balance ($1.5
million to $10.0 million) Commercial Mortgages for commercial projects than
those funded by the Retail Division. The Correspondent Division offers
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 purchases Commercial Mortgages
in bulk and flow from selected financial institutions and mortgage bankers. For
the period from January 15, 1997 (commencement of operations) through March 31,
1997, the Division acquired $17.5 million of Commercial Mortgages. 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.
5
<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, 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,
respectively.
. In February 1997, IMH purchased all of the non-voting preferred stock of
ICCC, which represent 95% of the economic interest in ICCC, for $500,000,
and certain of the Company's officers purchased all of the outstanding
shares of common stock of ICCC, 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 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 was an affiliate.
. In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note
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 Subscription 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.
. 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 non-voting Preferred Stock of ICCC for that
number of shares of ICH Class A Stock equal to the product of 95% of the
estimated fair value of ICCC on the date of the Contribution divided by
the Subscription Price. Assuming the Maximum Subscription Offer Amount is
sold at a Subscription Price of $15.00 per ICH Share, upon the closing of
this Offering, IMH would hold 793,126 shares of the Common Stock of ICH,
representing 9.8% of the outstanding Common Stock, and 505,874 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.
6
<PAGE>
THE OFFERING
TERMS OF THE SUBSCRIPTION OFFER
SUBSCRIPTION RIGHTS
The Company is offering to the holders (the "IMH Holders") of shares of
common stock and options to purchase shares of common stock of IMH
(collectively, the "IMH Shares") as of the close of business on June , 1997,
the record date for the Subscription Offer (the "Record Date"), the right to
subscribe (the "Subscription Rights") for an aggregate of up to 7,000,000 ICH
Shares at a rate of one ICH Share for each IMH Share held on the Record Date at
a price of $15.00 per ICH Share (the "Subscription Price"), subject to
reduction as described in "--Maximum Subscription Offer Amount." The
Subscription Rights are evidenced by subscription notification certificates
(the "Subscription Notification Certificates"), which will be mailed to all IMH
Holders, except as described below under "Foreign Restrictions." An IMH
Holder's right to acquire during the Subscription Period (as defined below) at
the Subscription Price one ICH Share for every IMH Share held is hereinafter
referred to as the "Primary Subscription Privilege." An IMH Holder who fully
exercises all Subscription Rights pursuant to the Primary Subscription
Privilege may be entitled to subscribe for additional ICH Shares at the
Subscription Price (the "Over-Subscription Privilege").
Subscription Rights may be exercised at any time during the period (the
"Subscription Rights Period") commencing on June , 1997 and ending at 5:00
p.m., New York City time, on June , 1997 (the "Expiration Date"). See "--
Expiration of the Subscription Offer."
OVER-SUBSCRIPTION
PRIVILEGE
To the extent Record Date IMH Holders do not exercise all of their
Subscription Rights pursuant to the Primary Subscription Privilege, any ICH
Shares represented by such unexercised Subscription Rights will be offered to
those IMH Holders who exercise all of their Subscription Rights. Pursuant to
the Over-Subscription Privilege, IMH Holders who exercise all of their
Subscription Rights will be asked to indicate, on the Subscription Notification
Certificate, how many additional ICH Shares, if any, they would like to
purchase pursuant to the Subscription Offer. As discussed below, under "--
Maximum Subscription Offer Amount," if sufficient ICH Shares remain
unsubscribed for in the Primary Subscription Privilege, all over-subscription
requests may be honored in full.
If the Company believes, following the Expiration Date, that the issuance of
additional ICH Shares pursuant to the Over-Subscription Privilege will have an
adverse effect upon the operations of the Company or the market for the
Company's Common Stock, then the Company will have the right, subject to the
consent of the Dealer Managers, to reduce the number of ICH Shares issuable to
all Record Date IMH Holders pursuant to requests in the Over-Subscription
Privilege on a pro rata basis, to the extent necessary in the opinion of the
Company, upon consultation with the Dealer Managers, to avoid such adverse
effect. Such opinions and determinations of the Company shall be conclusive and
binding.
MAXIMUM SUBSCRIPTION OFFER AMOUNT
The Board of Directors of the Company has determined to limit the amount of
ICH Shares that may be subscribed for pursuant to the Subscription Offer to
7,000,000 (the "Maximum Subscription Offer Amount"). As of the Record Date,
there were IMH Shares outstanding. If all Subscription Rights were to
be exercised pursuant to the Primary Subscription Privilege, the amount of ICH
Shares to be issued pursuant to such exercise requests would exceed the Maximum
Subscription Offer Amount. Accordingly, if the amount of ICH Shares requested
to be purchased pursuant to the exercise of Subscription Privileges in the
Primary Subscription Privilege exceeds the Maximum Subscription Offer Amount,
the ICH Shares will be issued pro rata among the IMH Holders that exercised
their Subscription Rights based upon the number of IMH Shares
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held of record by such IMH Holders on the Record Date. If the Primary
Subscription Privilege is oversubscribed, the effect of the Maximum
Subscription Offer Amount would be that each IMH Holder would receive ICH
shares of Common Stock for each IMH share held. To the extent that money is
returned as excess payment, interest on such amounts will be paid to the IMH
Holder. See "The Offering--Terms of the Subscription Offer."
SUBSCRIPTION PRICE; MINIMUM PURCHASE
The Subscription Price for the ICH Shares to be issued pursuant to the
Subscription Offer is $15.00 per ICH Share. The minimum purchase pursuant to
the Subscription Offer is 100 ICH Shares ($1,500). Accordingly, holders of
fewer than 100 IMH Shares will be able to participate in the purchase of ICH
Shares pursuant to the Subscription Offer only if such IMH Holders fully
exercise their Subscription Rights pursuant to the Primary Subscription
Privilege and request sufficient additional ICH Shares in the Over-Subscription
Privilege such that the aggregate number of ICH Shares subscribed for is at
least 100.
NON-TRANSFERABILITY OF SUBSCRIPTION RIGHTS
The Subscription Rights are non-transferable and, therefore, may not be
purchased or sold. The Subscription Rights are offered to Record Date IMH
Holders, which term, for purposes of the Subscription Offer, includes any
account for which the IMH Holder is the owner, co-owner or beneficiary,
including Individual Retirement Plans and other qualified plan accounts.
Accordingly, pursuant to the terms of the Subscription Offer, any IMH Holder
may exercise Subscription Rights in any such accounts.
EXPIRATION OF THE SUBSCRIPTION OFFER
The Subscription Offer will expire at 5:00 p.m., New York City time, on June
, 1997. The Subscription Rights will expire on the Expiration Date and
thereafter may not be exercised.
METHOD OF EXERCISE OF SUBSCRIPTION RIGHTS
Subscription Rights are evidenced by Subscription Notification Certificates
which will be mailed to IMH Holders or, if an IMH Holder's IMH Shares are held
by Cede & Co., Inc. ("Cede") or any other depository or nominee on their
behalf, to Cede or such depository or nominee, except as discussed below under
"Foreign Restrictions." Subscription Rights may be exercised by completing the
Subscription Notification Certificate which accompanies this Prospectus and
mailing it in the envelope provided, or otherwise delivering the completed
Subscription Notification Certificate to the Subscription Agent, together with
payment in full for the ICH Shares at the Subscription Price. Subscription
Certificates may also be exercised by contacting your broker, banker or trust
company, which can arrange, on your behalf, to guarantee delivery of payment
and of a properly completed Subscription Notification Certificate (the "Notice
of Guaranteed Delivery"). A fee may be charged for this service. Completed
Subscription Notification Certificates must be received by the Subscription
Agent prior to 5:00 p.m., New York City time, on the Expiration Date (unless
the guaranteed delivery procedures are complied with as described herein at the
offices of the Subscription Agent.)
FOREIGN RESTRICTIONS
Subscription Notification Certificates will not be mailed to Record Date IMH
Holders whose record addresses are outside the United States (the term "United
States" includes the District of Columbia and the territories and possessions
of the United States) (the "Foreign Record Date IMH Holders"). Foreign Record
Date IMH Holders will receive written notice of the Subscription Offer. The
Subscription Rights to which such Subscription Notification Certificates relate
will be held by the Subscription Agent for such Foreign Record Date IMH
Holders' accounts until instructions are received to exercise the Subscription
Rights. If no instructions have been received by the Expiration Date, the
Subscription Rights of those Foreign Record Date IMH Holders will expire.
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FEDERAL INCOME TAX CONSEQUENCES
The delivery of the Subscription Rights to the IMH Holders will not result in
taxable income to an IMH Holder, nor will an IMH Holder realize taxable income
as a result of the exercise of the Subscription Rights. If a Subscription Right
is allowed to expire, there will be no loss realized.
TERMS OF THE STANDBY OFFER
In addition to the Subscription Offer, the Company is offering (the "Standby
Offer", and together with the Subscription Offer, the "Offering") to
institutions that may or may not be Record Date IMH Holders (the "Standby
Purchasers"), pursuant to standby purchase agreements (the "Standby Purchase
Agreements"), at least shares of Common Stock (the "Minimum Standby
Offer Amount") but no more than shares of Common Stock, (the "Maximum
Standby Offer Amount") (the shares of Common Stock being offered pursuant to
the Standby Offer are hereinafter referred to as the "Standby Shares"; the
Standby Shares and the ICH Shares offered in the Subscription Offer are
collectively referred to as the "Shares").
MINIMUM OFFERING AMOUNT
The Board of Directors of the Company has determined not to proceed with the
Offering unless an aggregate of at least 2,500,000 Shares (the "Minimum
Offering Amount") are subscribed for in the Offering (inclusive of Standby
Shares that may be subscribed for pursuant to Standby Purchase Agreements). In
the event the Minimum Offering Amount is not reached, amounts delivered to the
Subscription Agent in connection with the exercise of Subscription Rights or by
Standby Purchasers will be returned promptly after the Expiration Date to the
IMH Holders that exercised such Subscription Rights or to such Standby
Purchasers, as the case may be, in each case, together with any interest earned
thereon.
REGULATORY LIMITATION
The Company will not be required to issue Shares pursuant to the Primary
Subscription Privilege or the Over-Subscription Privilege, or pursuant to
Standby Purchase Agreements, to any person who, in the opinion of the Company,
would (i) be required to obtain prior clearance or approval from any state or
federal regulatory authority to own or control such Shares if, at the
Expiration Date, such clearance or approval has not been obtained or any
required waiting period has not expired; or (ii) acquire such Shares in
violation of the ownership restrictions set forth in the Company's Charter
which are intended to preserve the Company's tax status as a REIT.
USE OF PROCEEDS
To provide funding for the Company's Long-Term Investment Operations and its
Conduit Operations and for general corporate purposes.
LISTING
The Company intends to apply to list the Shares on the AMEX under the Symbol
"ICH."
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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--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.
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
REIT Advisors, Inc. ("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 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 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, 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. ("ICII") to perform such human resource
services for the Company as RAI deems necessary.
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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 "REIT Advisors, Inc.--Management Agreement."
RAI is owned by those persons who will become executive officers and
directors of RAI upon the closing of this Offering. 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 "REIT Advisors, Inc."
All of the persons designated to become officers of the Manager upon the
closing of this Offering are also officers of IMH. Each of these officers have
modified their employment agreements with IMH to become officers of the Manager
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
IMH 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 IMH, 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 IMH for
costs and services under any submanagement agreement between IMH 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
IMH. 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 IMH. 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 IMH. 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 incentive compensation for each
fiscal quarter, 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% (the "25% Incentive Payment"). "Return on Equity" is computed on
Average Net Worth and has no necessary correlation with the actual
distributions received by stockholders. The 25% Incentive Payment to the
Manager will be calculated quarterly in arrears before any income distributions
are made to stockholders for the corresponding period. See "REIT Advisors,
Inc.--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."
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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
Since the Company commenced operations in February 1997, the historical
performance of the Company may be of limited relevance in predicting future
performance. Also, the Commercial Mortgages purchased to date by the Company
have been outstanding for a relatively short period of time. Consequently, the
delinquency and loss experience of the Company'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.
Recent and 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 continued expansion or, if achieved, that the expansion will
result in profitable operations.
Competition
In purchasing Commercial Mortgages and issuing CMBSs, the Company competes
with established mortgage conduit programs, investment banking firms, savings
and loan associations, banks, thrift and loan associations, finance companies,
mortgage bankers, insurance companies, other lenders and other entities
purchasing mortgage assets. Continued consolidation in 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 face competition from
other investment opportunities available to prospective investors. See "--
Demand for Commercial Mortgages and the Company's Loan Products," "Business--
Competition" and "Business--Conduit Operations."
Other multifamily residences, self-storage facilities, retail shopping
facilities, office buildings and combination warehouse/industrial facilities
located in the areas of the mortgaged properties securing 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
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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.
CERTAIN ASPECTS OF COMMERCIAL MORTGAGES
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). 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. 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 successful
operation of the related property.
The successful operation of a real estate project 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. 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 at that time of the
property and other collateral securing the Commercial Mortgage may be 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.
Risks Particular to 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 its Commercial Mortgage.
Risks Particular to 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
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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.
Risks Particular to 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 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.
Risks Particular to 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
Although the Company anticipates geographic diversification of the
properties underlying the Company's Commercial Mortgages, it does not set
specific limitations on the aggregate percentage of its portfolio composed of
such properties located in any one area (whether by state, zip code or other
geographic measure). 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
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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
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.
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 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
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 IMH nor any of their
respective affiliates is under any obligation to refinance any Commercial
Mortgage.
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Environmental Risks
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 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.
CERTAIN ASPECTS 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
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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 CMBSs 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.
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 yield derived from certain classes of CMBSs created in connection with
securitizations by ICCC and subsequently retained by the Company, including,
but not limited to, "interest-only," "principal-only," residual interest and
subordinated securities, is particularly sensitive to interest rate,
prepayment and credit risks. The Company's investment portfolio is expected to
include each of these classes of securities, and may include "interest-only"
securities which value tends to decline as prepayment rates increase. See "--
Changes in Interest Rates; Prepayment Risks." Because subordinated securities,
in general, bear all credit losses prior to the related senior securities, the
amount of credit risk associated with any investment in such subordinated
securities is significantly greater than that associated with a comparable
investment in the related senior securities and, on a percentage basis, the
risk is greater than holding the underlying mortgage loans directly. See
"Business--Long-Term Investment Operations--Investments in Commercial Mortgage
Backed Securities."
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.
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Interest-only, Principal-only, Residual Interest and Subordinated Securities
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." ICH will
record its retained interest in ICCC's securitizations (including "interest-
only," "principal-only" and subordinated securities) as an investment.
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. The Company
will estimate future cash flows from these "interest-only," "principal-only,"
residual interest and subordinated securities and values such securities
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and will record them as
available for sale securities in accordance with SFAS No. 115. 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. 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.
RISKS RELATED TO OPERATIONS
Demand for Commercial Mortgages and the Company's Loan Products
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, including the level of interest rates, regional and
national economic conditions and inflation and deflation in commercial and
multi-family 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.
Changes in Interest Rates; Prepayment Risks
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
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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."
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
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 "--Risks of Potential Net Interest and Operating Losses in
Connection with Borrowing and Substantial Leverage; Liquidity."
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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 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.
Risks of Potential Net Interest and Operating Losses in Connection with
Borrowings and Substantial Leverage; 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.
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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 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
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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.
Dependence on Securitizations
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, 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.
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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.
Hedging Strategies
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 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. See
"Business--Hedging."
Commercial Mortgage Servicing Rights
When ICCC purchases Commercial Mortgages that include the associated
servicing rights or originates Commercial Mortgages, the allocated cost of the
servicing rights is 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
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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.
Risks of 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. This arrangement allows the Conduit Operations to increase the
volume of Commercial Mortgages it originates and purchases without incurring
the expenses associated with servicing operations. 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
provides 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 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.
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
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.
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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
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, 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
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.
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Experience of the Manager in Managing a Commercial Mortgage REIT
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. 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 "REIT Advisors, Inc." for further descriptions
of the business experience of key management personnel.
Conflicts of Interest
The Company is subject to conflicts of interest arising from its
relationship with RAI, and with RAI's affiliates and IMH. 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 this Offering are also officers or directors of IMH. Assuming
the Maximum Subscription Offer Amount, IMH will own approximately 9.8% of the
Company's outstanding Common Stock. Upon the closing of this Offering, IMH
will also own 505,874 shares of ICH Class A Stock, excluding shares of ICH
Class A Stock to be issued in connection with the Contribution, convertible
into an equivalent number of shares of ICH Common Stock, subject to the
limitation that IMH may never at one time own in excess of 9.8% of ICH's
outstanding shares of Common Stock. See "Imperial Credit Commercial Holdings,
Inc.--Directors and Executive Officers," "REIT Advisors, Inc.--Directors and
Executive Officers," and "Principal Stockholders." Each of these persons who
are officers of IMH have modified their employment agreements with IMH to
allow them to become officers of RAI 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 IMH on a dollar for dollar basis (including the
service charge referenced below), for the actual cost of providing the
services of the officers to the Company based upon the compensation payable to
them by IMH, plus a 15% service charge. In order to utilize the IMH
infrastructure, RAI intends to enter into a submanagement agreement with IMH
upon the closing of this Offering to provide substantially all of the
administrative services required by the Company and a submanagement agreement
with ICII to provide human resource services to the Company. 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 IMH for costs and
services under any submanagement agreement between IMH 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 IMH. 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 IMH. 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 IMH. However, such officers are expected to devote the majority
of their time and effort towards the management and operations of IMH. Should
the operations of IMH 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 IMH and ICII to perform its obligations under
their submanagement agreements with RAI) or any other agreements or
arrangements with the Company would have a material adverse effect on the
Company's business. In addition, certain of the officers of ICCC and RAI own
all of the outstanding voting stock of ICCC and therefore, 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.
The Company's operations may be affected by the activities of IMH. Pursuant
to a non-compete agreement (the "Non-Compete Agreement") between IMH and the
Company 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, IMH will not originate or
acquire any Commercial Mortgages; however, this Agreement shall not
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preclude IMH from purchasing any Commercial Mortgages or CMBSs that ICCC or
IMH chooses not to bid for or with respect to which ICCC's or IMH's bid is not
accepted. 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 likely 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 (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,
the Company and IMH 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 the Company 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 Opportunity. 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 advantage of any
such Investment Opportunity or that any competitive activity of IMH 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.
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 "Imperial Credit Commercial Holdings, Inc.,"
"REIT Advisors, Inc.," "Relationships with Affiliates" and "Certain
Transactions."
Consequences of Failure to Maintain REIT Status; ICH Subject to Tax 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 ended 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
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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.
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; Taxation of Tax-Exempt
Investors
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."
Taxable Mortgage Pool Risk; 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."
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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 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.
Investment Company Act Risk
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
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 on 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.
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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.
Market Considerations
There is currently no market for the ICH Common Stock, nor is one expected
to develop until after the Expiration Date of the Subscription Offer. There
can be no assurance that the market price of the ICH Common Stock will not
decline after the Subscription Period or that, following the sale of the ICH
Shares upon exercise of Subscription Rights or pursuant to the Standby
Purchase Agreement, a holder of ICH shares will be able to sell Shares
purchased in the Offering at a price equal to or greater than the Subscription
Price. The election to exercise Subscription Rights in the Offering is
irrevocable. Moreover, until certificates for ICH Shares are delivered,
purchasers of ICH Shares may not be able to sell the ICH Shares that they have
purchased in the Offering. Certificates representing ICH Shares purchased
pursuant to the Primary Subscription Privilege will be delivered as soon as
practicable after the Expiration Date. For ICH Shares purchased pursuant to
the Over-Subscription Privilege, delivery of certificates will occur as soon
as practicable after all prorations and adjustments contemplated by the terms
of the Subscription Offer have been effected. There can be no assurance that
the market price of the ICH Common Stock purchased pursuant to the
Subscription Offer will not decline below the Subscription Price before such
ICH shares are delivered.
THE BOARD OF DIRECTORS OF THE COMPANY DOES NOT MAKE ANY RECOMMENDATION TO
IMH HOLDERS REGARDING WHETHER THEY SHOULD EXERCISE THEIR SUBSCRIPTION RIGHTS.
Shares Eligible for Future Sale
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 Shares issuable upon exercise in full of
all Subscription Rights and the Standby Purchase Agreements will be
immediately eligible for sale in the public market without restriction. The
remaining 1,093,126 shares of Common Stock to be outstanding upon the closing
of this Offering will be restricted in nature; 300,000 and 793,126 of such
Shares will not be saleable pursuant to Rule 144 or otherwise until February
1998 and March 1998, respectively. In addition, assuming the Maximum
Subscription Offer Amount is sold and a Subscription Price of $15.00 per ICH
Share, upon the closing of this Offering, IMH would also hold 505,874 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. The Company, IMH and other stockholders of the
Company have agreed with the Dealer Managers 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 the Dealer Managers. See "Shares Eligible for Future
Sale." Stock options for 200,000 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 Subscription Price, none of which, except in
the event of a change of control of the Company, will be exercisable until
1998; an estimated additional 500,000 shares of Common Stock are reserved for
future issuance after the closing date of this Offering pursuant to the
Company's Stock Option Plan. The shares reserved for issuance pursuant to the
Company's Stock Option 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 "Imperial Credit Commercial Holdings, Inc.--Stock Options. "The
Company intends to register under the Securities Act shares reserved for
issuance pursuant to the DRP and the Stock Option Plan. See "Dividend
Reinvestment Plan," "Imperial Credit Commercial Holdings, Inc.--Stock Options"
and "Description of Capital Stock."
Preferred Stock; Restrictions on Ownership of Common Stock; Possible Anti-
takeover Effect
ICH's Articles of Incorporation and the amendments thereto (the "Charter")
authorize the Board of Directors to issue shares of Preferred Stock and to
classify or reclassify any unissued shares of Preferred Stock into one or more
classes or series of stock. Unissued shares of Preferred Stock may be issued
from time to time
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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 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 transaction or a change in control of ICH
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 Charter
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
capital 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. See "Certain
Provisions of Maryland Law and of the Company's Charter and Bylaws."
31
<PAGE>
THE OFFERING
TERMS OF THE SUBSCRIPTION OFFER
The Company is offering to the holders (the "IMH Holders") of shares of
common stock and options to purchase shares of common stock of IMH
(collectively, the IMH Shares") as of the close of business on June , 1997,
the record date for the Subscription Offer (the "Record Date"), the right to
subscribe (the "Subscription Rights") for an aggregate of up to 7,000,000
shares (the "ICH Shares") of the Company's Common Stock at a rate of one ICH
Share for each IMH Share held on the Record Date at a price of $15.00 per ICH
Share (the "Subscription Price"). The Subscription Rights are evidenced by
subscription notification certificates (the "Subscription Notification
Certificates"), which will be mailed to all IMH Holders, except as described
below under "Foreign Restrictions." An IMH Holder's right to acquire during
the Subscription Rights Period (as defined below) at the Subscription Price
one ICH Share for every IMH Share held is hereinafter referred to as the
"Primary Subscription Privilege." Any IMH Holder of who fully exercises all
Subscription Rights pursuant to the Primary Subscription Privilege may be
entitled to subscribe for additional ICH Shares at the Subscription Price (the
"Over-Subscription Privilege").
Subscription Rights may be exercised at any time during the period (the
"Subscription Rights Period") commencing on June , 1997 and ending at 5:00
p.m., New York City time, on June , 1997 (the "Expiration Date"). See "--
Expiration of the Subscription Offer."
Over-Subscription Privilege. To the extent Record Date IMH Holders do not
exercise all of their Subscription Rights pursuant to the Primary Subscription
Privilege, any ICH Shares represented by such unexercised Subscription Rights
will be offered to those IMH Holders who exercise all of their Subscription
Rights. Pursuant to the Over-Subscription Privilege, IMH Holders who exercise
all of their Subscription Rights will be asked to indicate, on the
Subscription Notification Certificate, how many additional ICH Shares they
would like to purchase pursuant to the Subscription Offer. As discussed below
under "--Maximum Subscription Offer Amount," assuming that sufficient ICH
Shares remain after exercise of the Primary Subscription Privilege and
assuming that the Company does not exercise its right to reduce the number of
ICH Shares issuable pursuant to the Over-Subscription Privilege, as discussed
below, all over-subscription requests will be honored in full; otherwise,
over-subscription requests will be honored pro rata.
If the Company believes, following the Expiration Date, that the issuance of
additional ICH Shares pursuant to the Over-Subscription Privilege will have an
adverse effect upon the operations of the Company or the market for the Common
Stock, then the Company will have the right, subject to the consent of the
Dealer Managers, to reduce the number of ICH Shares issuable to all Record
Date IMH Holders pursuant to requests in the Over-Subscription Privilege on a
pro rata basis, to the extent necessary, in the opinion of the Company, upon
consultation with the Dealer Managers, to avoid such adverse effect. Such
opinions and determinations of the Company shall be conclusive and binding.
Maximum Subscription Offer Amount. The Board of Directors of the Company has
determined to limit the amount of ICH Shares that may be subscribed for
pursuant to the Subscription Offer to 7,000,000 (the "Maximum Subscription
Offer Amount"). As of the Record Date, there were IMH Shares outstanding.
If all Subscription Rights were to be exercised pursuant to the Primary
Subscription Privilege, the amount of ICH Shares to be issued pursuant to such
exercise requests would exceed the Maximum Subscription Offer Amount.
Accordingly, if the amount of ICH Shares requested to be purchased pursuant to
the exercise of Subscription Rights in the Primary Subscription Privilege
exceeds the Maximum Subscription Offer Amount, the ICH Shares issued will be
pro rated among the IMH Holders that exercised their Subscription Rights based
upon the number of IMH Shares held of record by such IMH Holders on the Record
Date. If each IMH Holder were to exercise the Subscription Right in the
Primary Subscription Privilege to the fullest extent, the effect of the
Maximum Subscription Offer Amount would be that each IMH Holder would receive
ICH shares for each IMH Share held.
In the event that the number of ICH Shares requested to be purchased
pursuant to the exercise of Subscription Rights in the Primary Subscription
Privilege does not exceed the Maximum Subscription Offer
32
<PAGE>
Amount, such requests for purchase pursuant to the Primary Subscription
Privilege will be honored in full. After honoring the requests for purchase of
ICH Shares pursuant to the Primary Subscription Privilege, the Company will
determine the additional amount of ICH Shares requested to be purchased
pursuant to the Over-Subscription Privilege. If the number of such ICH Shares
requested to be purchased pursuant to the Over-Subscription Privilege, taken
together with the ICH Shares to be issued pursuant to the Primary Subscription
Privilege, would not exceed the Maximum Subscription Offer Amount, the
requests for purchase pursuant to the Over-Subscription Privilege will,
subject to the Company's determination as described above, be honored in full.
In the event that the number of ICH Shares requested to be purchased pursuant
to the Over-Subscription Privilege, after honoring in full all requests for
purchase pursuant to the Primary Subscription Privilege, would exceed the
Maximum Subscription Offer Amount, then the ICH Shares to be issued pursuant
to the Over-Subscription Privilege will be pro rated among the IMH Holders
that exercised their Over-Subscription Privileges based upon the number of IMH
Shares held of record by such IMH Holders on the Record Date. For purposes of
determining the maximum number of ICH Shares an IMH Holder may acquire
pursuant to the Subscription Offer, broker-dealers whose IMH Shares are held
of record by Cede or by any other depository or nominee will be deemed to be
the holders of the Subscription Rights delivered to Cede or such other
depository or nominee on their behalf.
Subscription Price. The Subscription Price for the ICH Shares to be issued
pursuant to the Subscription Offer will be equal to $15.00 per ICH Share. The
minimum purchase pursuant to the Subscription Offer is 100 ICH Shares
($1,500). Accordingly, holders of fewer than 100 IMH Shares will be able to
participate in the purchase of ICH Shares pursuant to the Subscription Offer
only if such IMH Holders fully exercise their Subscription Rights pursuant to
the Primary Subscription Privilege and request sufficient additional ICH
Shares in the Over-Subscription Privilege such that the aggregate number of
ICH Shares subscribed for is at least 100 ICH Shares and that the fulfillment
of such requests, after taking into account the provisions referred to above,
would result in at least 100 ICH Shares being issued in the Offering to such
IHM Holder.
Non-Transferability of Subscription Rights. The Subscription Rights are non-
transferable and, therefore, may not be purchased or sold. The Subscription
Rights are offered to Record Date IMH Holders, which term, for purposes of the
Subscription Offer, includes any account for which the IMH Holder is the
owner, co-owner or beneficiary, including Individual Retirement Plans and
other qualified plan accounts. Accordingly, pursuant to the terms of the
Subscription Offer, any IMH Holder may exercise Subscription Rights in any
such accounts.
Expiration of the Subscription Offer. The Subscription Offer will expire at
5:00 p.m., New York City time, on June , 1997. The Subscription Rights will
expire on the Expiration Date and thereafter may not be exercised.
Method of Exercise of Subscription Rights. Subscription Rights are evidenced
by Subscription Notification Certificates which will be mailed to IMH Holders
or, if an IMH Holder's IMH Shares are held by Cede, or any other depository or
nominee on their behalf, to Cede, or such depository or nominee, except as
discussed below under "--Foreign Restrictions." Subscription Rights may be
exercised by completing the Subscription Notification Certificate which
accompanies this Prospectus and mailing it in the envelope provided, or
otherwise delivering the completed Subscription Notification Certificate to
the Subscription Agent, together with payment in full for the ICH Shares at
the Subscription Price. Subscription Certificates may also be exercised by
contacting your broker, banker or trust company, which can arrange, on your
behalf, to guarantee delivery of payment and of a properly completed
Subscription Notification Certificate (the "Notice of Guaranteed Delivery"). A
fee may be charged for this service. Completed Subscription Notification
Certificates must be received by the Subscription Agent prior to 5:00 p.m.,
New York City time, on the Expiration Date (unless the guaranteed delivery
procedures are complied with as described below under "--Payment for ICH
Shares") at the offices of the Subscription Agent at the address set forth
below under "--Subscription Agent."
. IMH Holders Who Are Record Owners. IMH Holders who are record owners can
choose between either option set forth under "--Payment for ICH Shares"
below. If time is of the essence, option (2) will permit delivery of the
Subscription Notification Certificate and payment after the Expiration
Date.
33
<PAGE>
. IMH Holders Whose IMH Shares Are Held By A Nominee. IMH Holders whose
IMH Shares are held by a nominee, such as a broker or trustee, must
contact that nominee to exercise their Subscription Rights. In that
case, the nominee will complete the Subscription Notification
Certificate on behalf of the investor and arrange for proper payment by
one of the methods set forth under "--Payment for ICH Shares" below.
. Nominees. Nominees who hold IMH Shares for the account of others should
notify the beneficial owners of such IMH Shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions
with respect to the Subscription Privileges. If the beneficial owner so
instructs, the nominee should complete the Subscription Notification
Certificate and submit it to the Subscription Agent with the proper
payment described under "--Payment for ICH Shares" below.
Foreign Restrictions. Subscription Notification Certificates will not be
mailed to Record Date IMH Holders whose record addresses are outside the
United States (the term "United States" includes the District of Columbia and
the territories and possessions of the United States ("Foreign Record Date IMH
Holders")). Foreign Record Date IMH Holders will receive written notice of the
Subscription Offer. The Subscription Rights to which such Subscription
Notification Certificates relate will be held by the Subscription Agent for
such Foreign Record Date IMH Holders' accounts until instructions are received
to exercise the Subscription Rights. If no instructions have been received by
the Expiration Date, the Subscription Rights of those Foreign Record Date IMH
Holders will expire.
Subscription Agent. The Subscription Agent is Boston EquiServe L.P., which
will receive a fee estimated to be not greater than $25,000 for its
administrative, processing, invoicing and other services, inclusive of its
out-of-pocket expenses related to the Offer, which fee will be paid by the
Company. SIGNED SUBSCRIPTION NOTIFICATION CERTIFICATES TOGETHER WITH PAYMENT
OF THE SUBSCRIPTION PRICE MUST BE SENT TO Boston EquiServe by one of the
methods described below. The Company will accept only Subscription
Notification Certificates actually received on a timely basis at any of the
addresses listed.
(1) BY FIRST CLASS MAIL, OVERNIGHT COURIER OR BY HAND:
BY MAIL: BY OVERNIGHT COURIER:
To: State Street Bank and To: State Street Bank
Trust Company and Trust Company
Attention: Corporate Reorganization Attention: Corporate Reorganization
Department Department
P.O. Box 9061 c/o Boston EquiServe
Boston, MA 02205-8686 70 Campanelli Dr.
Braintree, MA 02184
BY HAND:
Securities Transfer & Reporting Services Inc.
c/o Boston EquiServe
55 Broadway 23rd Floor
New York, New York 10006
(2) BY FACSIMILE (TELECOPIER), with the original Subscription Notification
Certificate to be sent by one of the methods described above:
Facsimile number: (617) 794-6333
Confirm by telephone: (617) 794-6388
DELIVERY TO AN ADDRESS OTHER THAN THOSE LISTED ABOVE WILL NOT CONSTITUTE VALID
DELIVERY.
INFORMATION AGENT
Any question or requests for assistance may be directed to the information
agent (the "Information Agent") at its telephone number and address listed
below:
Shareholder Communications Corp.
1(800) 733-8481 ext. 353
IMH Holders may also contact their brokers or nominees for information with
respect to the Subscription Offer.
The Information Agent will receive a fee estimated to be $40,000 including
reimbursement for its out-of-pocket expenses related to the Subscription
Offer, which fee will be paid by the Company.
34
<PAGE>
Payment for ICH Shares. IMH Holders who acquire ICH Shares pursuant to the
Primary Subscription Privilege and pursuant to the Over-Subscription Privilege
may choose the following methods of payment:
(1) An IMH Holder can send the Subscription Notification
Certificate together with payment for the ICH Shares
subscribed for in the Primary Subscription Privilege and for
additional ICH Shares subscribed for pursuant to the Over-
Subscription Privilege to the Subscription Agent, calculating
the total payment on the basis of the Subscription Price of
$15.00 per ICH Share. To be accepted, such payment, together
with the completed Subscription Notification Certificate, must
be received by the Subscription Agent at the Subscription
Agent's office at the address set forth above prior to 5:00
p.m., New York City time, on the Expiration Date. The
Subscription Agent will deposit all checks and money orders
received by it prior to the final payment date into a
segregated interest-bearing account (which interest will,
except as described below, be paid to the Company) pending
proration and distribution of the ICH Shares. A PAYMENT
PURSUANT TO THIS METHOD MUST BE IN UNITED STATES DOLLARS BY
MONEY ORDER OR CHECK DRAWN ON A BANK LOCATED IN THE UNITED
STATES, MUST BE PAYABLE TO "IMPERIAL CREDIT COMMERCIAL
HOLDINGS, INC." AND MUST ACCOMPANY AN EXECUTED SUBSCRIPTION
NOTIFICATION CERTIFICATE TO BE ACCEPTED. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR,
YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER.
(2) Alternatively, a subscription will be accepted by the
Subscription Agent if, prior to 5:00 p.m., New York City time,
on the Expiration Date, the Subscription Agent has received a
Notice of Guaranteed Delivery by facsimile (telecopy) or
otherwise from a bank, a trust company,or a New York Stock
Exchange member guaranteeing delivery of (i) payment of the
Subscription Price of $15.00 per ICH Share subscribed for
pursuant to the Primary Subscription Privilege and for any
additional ICH Shares subscribed for pursuant to the Over-
Subscription Privilege and (ii) a properly completed
Subscription Notification Certificate. The Subscription Agent
will not honor a Notice of Guaranteed Delivery unless a
properly completed Subscription Notification Certificate and
full payment for the ICH Shares are received by the
Subscription Agent by the close of business on the third
business day after the Expiration Date (June , 1997).
The Subscription Agent will deposit all checks received by it prior to the
final date into a segregated interest bearing account pending distribution of
the ICH Shares. To the extent such amounts are delivered to the Company in
connection with the purchase of ICH Shares, interest on such amounts will
accrue to the benefit of the Company; to the extent that any such amounts are
returned to the IMH Holders as excess payment, as described above, or are
returned as a result of the failure to sell the Minimum Subscription Offering
Amount, interest on such excess amount will be paid to such IMH Holders.
Whichever of the two methods described above is used, issuance of the ICH
Shares is subject to collection of checks and actual payment pursuant to any
Notice of Guaranteed Delivery.
IMH HOLDERS WILL HAVE NO RIGHT TO RESCIND THEIR SUBSCRIPTION AFTER RECEIPT
OF THEIR PAYMENT FOR ICH SHARES BY THE SUBSCRIPTION AGENT.
THE METHOD OF DELIVERY OF SUBSCRIPTION NOTIFICATION CERTIFICATES AND PAYMENT
OF THE SUBSCRIPTION PRICE TO THE COMPANY WILL BE AT THE ELECTION AND RISK OF
THE HOLDERS OF THE SUBSCRIPTION RIGHTS, BUT IF SENT BY MAIL IT IS RECOMMENDED
THAT SUCH CERTIFICATES AND PAYMENT BE SENT BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER
35
<PAGE>
OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE COMPANY AND CLEARANCE OF PAYMENT
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE
UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU
ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR
CASHIER'S CHECK OR MONEY ORDER.
All questions concerning the timeliness, validity, form and eligibility of
any exercise of Subscription Rights will be determined by the Company, whose
determinations will be final and binding. The Company in its sole discretion
may waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine, or reject the purported
exercise of any Subscription Right. Subscriptions will not be deemed to have
been received or accepted until all irregularities have been waived or cured
within such time as the fund determines in its sole discretion. The Company
will not be under any duty to waive notification of any defect or irregularity
in connection with the submission of Subscription Notification Certificates or
incur any liability for failure to give such notification.
Delivery of Certificates. Certificates representing ICH Shares subscribed
for and issued pursuant to the Primary Subscription Privilege will be mailed
as soon as practicable after the Expiration Date of the Subscription Offer
once full payment for such ICH Shares has been received and cleared.
Certificates representing ICH Shares subscribed for and issued pursuant to the
Over-Subscription Privilege will be mailed as soon as practicable after all
prorations and adjustments contemplated by the terms of the Subscription Offer
have been effected. Holders of Subscription Rights whose IMH Shares are held
of record by Cede or by any other depository or nominee on their behalf or
their broker-dealer's behalf will have any ICH Shares acquired in the Primary
Subscription Privilege credited to the account of Cede or such other
depository or nominee. ICH Shares acquired pursuant to the Over-Subscription
Privilege will be certificated and certificates representing such ICH Shares
will be sent directly to Cede or such other depository or nominee.
Pending issuance of certificates representing ICH Shares, funds received for
the exercise of Subscription Rights in the Primary Subscription Privilege and,
if applicable, pursuant to the Over-Subscription Privilege will be held in a
segregated escrow account. If ICH Shares are not issued pursuant to the
Primary Subscription Privilege in connection with a failure to sell the
Minimum Subscription Offering Amount, or if a Record Date IMH Holder
requesting ICH Shares pursuant to the Over-Subscription Privilege is allocated
less than all of the ICH Shares so requested, then the funds held in escrow
paid by that Record Date IMH Holder as the Subscription Price for ICH Shares
not so issued or allocated shall be returned by mail with interest as soon as
practicable after the Expiration Date and after all prorations and adjustments
contemplated by the terms of the Subscription Offer have been effected.
Confirmation of Purchases. Subscription Rights may be exercised at any time
during the Subscription Period, which commences on the date of this Prospectus
and ends at 5:00 p.m., New York City time, on June , 1997 (the "Expiration
Date"). Subscription Rights will expire on the Expiration Date and thereafter
may not be exercised. The Subscription Agent or someone on its behalf will
send to each subscribing IMH Holder (or, if the IMH Shares are held by Cede or
any other depository or nominee, to Cede or such depository or nominee), an
initial confirmation statement within one business day following the
Expiration Date plus five days (the "Initial Confirmation Date"). The initial
confirmation statement will show (i) the number of ICH Shares acquired in the
Primary Subscription Privilege, (ii) the number, if any, of ICH Shares
acquired on the Initial Confirmation Date pursuant to the Over-Subscription
Privilege and (iii) the estimated number, if any, of ICH Shares that may be
acquired on the Supplemental Confirmation Date (as defined below), which
amount is subject to reduction, adjustment and proration. Within 15 days from
the Initial Confirmation Date (the "Supplemental Confirmation Date"), the
Subscription Agent or someone on its behalf will send to each subscribing IMH
Holder (or, if the IMH Shares are held by Cede or any other depository or
nominee, to Cede or such depository or nominee), a supplemental confirmation
statement showing (i) the number, if any, of ICH Shares acquired on the
Supplemental Confirmation Date pursuant to the Over-Subscription Privilege and
(ii) any excess payment to be refunded to such Record Date IMH Holder in
connection with a proration of ICH Shares. If applicable, the Subscription
Agent will mail any refund, with interest, due a Record Date IMH Holder as
promptly as possible.
36
<PAGE>
IMPORTANT DATES TO REMEMBER
<TABLE>
<CAPTION>
EVENT
-----
<S> <C>
Record Date............................................... June , 1997
Subscription Period....................................... June , 1997
to
June , 1997
Expiration Date........................................... June , 1997
Subscription Notification Certificates and Payment Due*... June , 1997
Notice of Guaranteed Delivery Due*........................ June , 1997
Payment of Guarantees of Delivery Due*.................... June , 1997
Initial Confirmation Date................................. June , 1997
Supplemental Confirmation Date............................ July , 1997
</TABLE>
- --------
*An IMH Holder exercising Subscription Rights must deliver either (i) a
Subscription Notification Certificate and payment for ICH Shares or (ii) a
Notice of Guaranteed Delivery by June , 1997.
TERMS OF THE STANDBY OFFER
In addition to the Subscription Offer, the Company is offering (the "Standby
Offer", and together with the Subscription Offer, the "Offering") to certain
persons that may or may not be Record Date IMH Holders (the "Standby
Purchasers"), pursuant to standby purchase agreements (the "Standby Purchase
Agreements"). Subscription Rights for at least shares of Common Stock (the
"Minimum Standby Offer Amount") but not more than shares of Common Stock
(the "Maximum Standby Offer Amount"). The purchase price per Standby Share is
equal to the Subscription Price of $15.00. The number of Standby Shares
subscribed for will be included for purposes of achieving the Minimum Offering
Amount, as described below.
It is anticipated that each Standby Purchase Agreement may be subject to an
individual minimum and maximum Standby purchase amount. In addition, the
obligation of the Standby Purchasers will be subject to the sale of the
Minimum Offering Amount in connection with the Offering.
The Company has agreed to pay the Dealer Managers a fee for their financial
advisory, marketing and soliciting services equal to 4.25% of the aggregate
Subscription Price for Standby Shares issued and sold to Standby Purchasers
pursuant to the Standby Purchase Agreements.
MINIMUM OFFERING AMOUNT
The Board of Directors of the Company has determined not to proceed with the
Offering unless an aggregate of at least 2,500,000 Shares (the "Minimum
Offering Amount") are subscribed for in the Offering (inclusive of Standby
Shares that may be subscribed for pursuant to Standby Purchase Agreements). In
the event the Minimum Offering Amount is not reached, amounts delivered to the
Subscription Agent in connection with the exercise of Subscription Rights or
by Standby Purchasers will be returned promptly after the Expiration Date to
the IMH Holders that exercised such Subscription Rights or to such Standby
Purchasers, as the case may be, in each case, together with any interest
earned thereon.
REGULATORY LIMITATION
The Company will not be required to issue Shares pursuant to the Primary
Subscription Privilege or the Over-Subscription Privilege, or pursuant to
Standby Purchase Agreements, to any person who, in the opinion of the Company,
would (i) be required to obtain prior clearance or approval from any state or
federal regulatory authority to own or control such Shares if, at the
Expiration Date, such clearance or approval has not been obtained or any
required waiting period has not expired; or (ii) acquire such Shares in
violation of the ownership restrictions set forth in the Charter which are
intended to preserve the Company's tax status as a REIT.
37
<PAGE>
USE OF PROCEEDS
Achievement of (i) the Minimum Offering Amount only, (ii) the Maximum
Subscription Offer Amount or (iii) the Maximum Subscription Offer Amount and
Maximum Standby Offer Amount would result in net proceeds to the Company of
approximately $34.9 million, $99.5 million or $ million, respectively, in
each case after deducting estimated offering expenses and Solicitation and
Dealer Manager fees. 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.
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. 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 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
38
<PAGE>
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. Boston EquiServe, L.P., 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
Placement Agent 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
Agent 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.
39
<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
assuming the Maximum Subscription Offer Amount and that all shares underlying
such Subscription Rights are purchased in full at the Subscription Price of
$15.00 per Share and the application of the estimated net proceeds therefrom.
See "Use of Proceeds."
<TABLE>
<CAPTION>
PRO AS
ACTUAL FORMA ADJUSTED(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 value10,000,000
shares authorized; 3,000,000 Convertible
Class A shares issued and outstanding
actual and pro forma(4); no shares
issued and outstanding as adjusted...... 30 30 --
Common Stock, $.01 par value 46,000,000
shares authorized; 599,000 shares issued
andoutstanding actual; 300,000 shares
issued and outstanding pro forma; and
8,093,126 issued and outstanding as
adjusted................................ 6 3 81
Class A Common Stock, $.01 par value
4,000,000 shares authorized; no shares
issued and outstanding actual; 299,000
shares issued and outstanding pro forma,
and 505,874 issued and outstanding as
adjusted(4)............................. -- 3 5
Additional paid-in capital............... 14,970 14,970 114,407
Contributed capital(5)................... 957 1,280 1,280
Accumulated deficit...................... (946) (946) (946)
------- ------- --------
Total stockholders' equity............. $15,017 $15,340 $114,827
------- ------- --------
Total capitalization................... $31,580 $31,903 $131,390
======= ======= ========
</TABLE>
- -------
(1) After deducting estimated solicitation and Dealer Manager fees, and
estimated offering expenses of $1,050,000 payable by the Company, and (i)
giving no effect to the issuance, if any, of any Standby Shares pursuant
to the Standby Offer and (ii) giving effect to the conversion of 2,379,378
shares of ICH Preferred Stock held by IMH into 793,126 shares of ICH
Common Stock upon the closing of this Offering. See "Distribution
Arrangements."
(2) Does not include a 700,000 shares of Common Stock reserved for issuance
pursuant to the Company's Stock Option Plan. Options to acquire 200,000
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 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 "Imperial Credit Commercial Holdings,
Inc.--Stock Options."
(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
Subscription 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. Assuming the Maximum Subscription Offer Amount is sold
and a Subscription Price of $15.00 per share, upon the closing of this
Offering, IMH would hold 793,126 shares of ICH Common Stock and 505,874
shares of ICH Class A Stock, excluding the ICH Class A Stock to be issued
in connection with the Contribution, which is convertible into an
equivalent number of shares of ICH Common Stock.
(4) Does not give effect to the number of 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 contributed capital, representing
the 95% economic interest in ICCC's net book value at March 31, 1997.
40
<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.
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
(IN THOUSANDS)
<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............................................... 957
Total stockholders' equity........................................ 15,017
STATEMENT OF OPERATIONS DATA:
Interest income................................................... $ 366
Interest expense.................................................. 279
Stock compensation expense(1)..................................... 957
Net income (loss)................................................. (946)
</TABLE>
- --------
(1) Stock compensation expense of $957,000 represents the difference between
the price at which IMH issued 300,000 shares of its Common Stock on
February 3, 1997 ($.01 per share) and the estimated fair value of such
shares as determined by the Company's management based on an independent
valuation, as of February 3, 1997 ($3.20 per share).
IMPERIAL COMMERCIAL CAPITAL CORPORATION
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE SHEET AND STATEMENT OF OPERATIONS DATA:
Total assets........................................................... $667
Total shareholders' equity............................................. 340
Stock compensation expense(1).......................................... 25
Net income (loss)...................................................... (186)
</TABLE>
- --------
(1) Stock compensation expense of $25,000 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.
41
<PAGE>
The unaudited pro forma financial data gives effect to the Contribution as
if it occurred on March 31, 1997 for the pro forma balance sheet data and on
January 15, 1997 (commencement of operations) for the pro forma statement of
operations data.
PRO FORMA FINANCIAL DATA (UNAUDITED)
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 contributed capital, representing the 95%
economic interest in ICCC's net book value at March 31, 1997.
The pro forma statement of operations effect of the Contribution if it had
occurred on January 15, 1997 (commencement of operations) would be 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 from January 15, 1997
(commencement of operations) through March 31, 1997.
42
<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.
GENERAL
On the closing of this Offering, ICH's principal sources of net income will
be from its Long-Term Investment Operations and dividends from the Conduit
Operations, which are fully subject to federal and state income taxes. The
principal source of income from its Long-Term Investment Operations is net
interest income, which is the net spread between interest earned on Commercial
Mortgages and CMBSs held for investment and the interest costs associated with
the borrowings used to finance such Commercial Mortgages and CMBSs. The
principal sources of income from ICCC are gains recognized on the sale of
Commercial Mortgages and CMBSs, net interest income earned on Commercial
Mortgages purchased by ICCC pending their securitization or resale, servicing
fees, commitment fees, origination fees and processing fee income.
THE ORGANIZATIONAL TRANSACTIONS
. In January and February 1997, ICCC and ICH were incorporated,
respectively.
. In February 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,
respectively.
. In February 1997, IMH purchased all of the non-voting preferred stock of
ICCC, which represent 95% of the economic interest in ICCC, for $500,000,
and certain of the Company's officers purchased all of the outstanding
shares of common stock of ICCC, 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 such
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.
. 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 Subscription 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 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.
43
<PAGE>
. In March 1997, ICH purchased a $10.1 CMBS from ICIFC which was financed
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 for
that number of shares of ICH Class A Stock equal to the product of 95% of
the estimated fair value of ICCC on the date of the Contribution divided
by the Subscription Price. Assuming the Maximum Subscription Offer Amount
is sold at a Subscription Price of $15.00 per ICH share, upon the closing
of this Offering, IMH would hold 793,126 shares of the Common Stock of
ICH, representing 9.8% of the outstanding Common Stock and 505,874 shares
of ICH Class A Stock, excluding the ICH Class A Stock to be issued in
connection with the Contribution, which is convertible into an equivalent
number of shares of ICH Common Stock.
The Company's operations may be affected by the activities of IMH. Pursuant
to a non-compete agreement (the "Non-Compete Agreement") between IMH and the
Company to be effective upon the closing of this Offering, for a period of the
earlier of nine months from the closing of this Offering and the date upon
which the Company accumulates (for investment or sale) $300.0 million of
Commercial Mortgages and/or CMBSs, IMH will not originate or acquire any
Commercial Mortgages; however, this Agreement shall not preclude IMH from
purchasing any Commercial Mortgages or CMBSs that ICCC or IMH chooses not to
bid for or with respect to which ICCC's or IMH's bid is not accepted. 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 likely 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 (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,
the Company and IMH 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 the Company 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
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
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 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.
44
<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. At March 31, 1997, ICCC had capitalized
$113,000 of CMSRs.
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.
RESULTS OF OPERATIONS; IMPERIAL CREDIT 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 $946,000, primarily
due to $957,000 in stock compensation expense relating to the issuance of
300,000 shares of ICH Common Stock.
45
<PAGE>
Expenses, excluding stock compensation expense, were $355,000, comprised
primarily of $279,000 of interest expense related to borrowings from 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 $11,000 comprised of $6,000 of interest income, $3,000 gain on
sale of loans, and $2,000 of loan servicing income. ICCC incurred a net loss
of $186,000.
Total expenses were $197,000 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. 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 $5,000 and was
affected by $957,000 in stock compensation expense related to the issuance of
300,000 shares of the Common Stock by ICH in February 1997.
For the period from January 15, 1997 (commencement of operations) through
March 31, 1997, net cash used in investing activities was $27.6 million,
affected by the purchase by ICH of $17.5 million in Commercial Mortgages and a
$10.1 million CMBS.
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, the Company 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.
46
<PAGE>
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.
47
<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.
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. The Company has
secured a $200.0 million warehouse line agreement to finance the origination
and purchase of Commercial Mortgages. The Conduit Operations operates 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 Conduit Operations operates through three divisions: the Condominium
Division, the Retail Division, and the Correspondent and Bulk Purchase
Division.
Condominium Division. This division offers 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 are
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.
Correspondent and Bulk Purchase Division. This Division both originates
Commercial Mortgages on a retail basis and purchases Commercial Mortgages on a
bulk and flow basis. This Division offers larger principal balance ($1.5
million to $10.0 million) Commercial Mortgages for commercial projects than
those funded by the Retail Division. The Correspondent Division offers
adjustable rate and fixed rate Commercial Mortgages offered through specified
correspondents who may in the future be provided with Company-sponsored
warehouse
48
<PAGE>
facilities. In addition, the Division purchases Commercial Mortgages in bulk
and flow from selected financial institutions and mortgage bankers. For the
period from January 15, 1997 (commencement of operations) through March 31,
1997, the Division acquired $17.5 million of Commercial Mortgages. 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 are 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 supports the
investment objectives of ICH by selling all Commercial Mortgages and CMBSs to
ICH at costs which the Company believes are comparable to those available
through investment bankers and other third parties.
COMMERCIAL MORTGAGES HELD IN THE PORTFOLIO
The Company will originate, and invest a substantial portion of its assets
in Commercial Mortgages. The Company also purchases Commercial Mortgages from
third parties for long-term investment and for resale.
INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES
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.
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 Investments 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.
49
<PAGE>
Warehouse Line Agreements. The Company 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 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. The Company'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 the Company'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 the Company'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.
50
<PAGE>
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 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 Conduit
Operations consists 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. ICCC also acts
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 Conduit
Operations primarily operates through three divisions: the Condominium
Division, the Retail Division and the Correspondent and Bulk Purchase
Division.
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.
51
<PAGE>
The Commercial Mortgage offered by the Condominium Division was designed for
complete or partial condominium complexes that will be marketed to the home
buying community in accordance with market 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 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 will originate, underwrite, process and fund 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 the Condominium Division.
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 Correspondent and Bulk Purchase Division originates Commercial Mortgages
on a retail basis and purchases such loan on a bulk or flow basis.
Correspondent Origination. The Correspondent and Bulk Purchase Division
offers 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 are similar to those offered by the Retail Division
except for the size of the principal balance. These Commercial Mortgages are
generally for projects more substantial than those funded by the Retail
Division. The
52
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Correspondent and Bulk Purchase Division's strategic focus is to be a low cost
national originator through its 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
national network of correspondent originators, which enables 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 are 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 are 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 purchases Commercial Mortgages in bulk
packages and on a flow basis. Bulk loan purchases are 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 are 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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<PAGE>
A summary of the Company's Commercial Mortgage originations and purchases by
division and 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>
Condominium Division:
Volume of Loans............................................. $ --
Percent of total volume..................................... -- %
Retail Division:
Volume of Loans............................................. $ --
Percent of total volume..................................... -- %
Correspondent and Bulk Purchase Division:
Volume of Loans............................................. $ 17.5
Percent of total volume..................................... 100.0%
--------
$ 17.5
========
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>
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>
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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<PAGE>
ICCC generally purchases 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.
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<PAGE>
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 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
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<PAGE>
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.
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
57
<PAGE>
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 correspondents of
Commercial Mortgages for any such breaches, but there are no assurance 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
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<PAGE>
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.
Conduit Operations. In conducting its Conduit Operations, ICCC is 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
ICCC 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.
ICCC 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.
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<PAGE>
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 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, the three were no delinquencies on those Commercial
Mortgages comprising the Company's servicing portfolio.
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<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--Risks Related to Operations--Changes
in Interest Rates; Prepayment Risks." 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 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 is reflected on its financial statements as 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 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 Comercial 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 competes
with established mortgage conduit programs, investment banking firms, savings
and loan associations, banks, thrift and loan associations, finance companies,
mortgage bankers, insurance companies, other lenders and other entities
purchasing mortgage assets. 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. The Company believes that
relations with its employees are good. The Company 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.
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<PAGE>
IMPERIAL CREDIT 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............ 43 Senior Vice President of ICH and Senior Vice
President, ICCC
H. Wayne Snavely......... 55 Director of ICH
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
0Member 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 its 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 Imperial
Warehouse Lending Group, Inc. ("IWLG") since August, 1995. Mr. Tomkinson
served as President of 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 its formation. Mr.
Ashmore has been President and Chief Operating Officer of IMH and Executive
Vice President of ICIFC and IWLG since August 1995. 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. 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 ICII. From February 1988 to October
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<PAGE>
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 has been Senior Vice President of ICH and Senior Vice
President, of ICCC since its formation. Ms. Glass 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 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 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 was
President of SCS Mortgage. From September 1984 through September 1988, Ms.
Glass was Senior Vice President of Concor Financial Services.
H. WAYNE SNAVELY has been a Director of ICH since its formation. He has been
Chairman of the Board and Chief Executive Officer of ICII since December 1991.
Mr. Snavely is also Chairman of the Board of Southern Pacific Funding
Corporation, a company of which ICII is the majority shareholder, and IMH. He
has been a Director of Imperial Bancorp and Imperial Bank since 1993, and was
also a Director of Imperial Bank from 1975 to 1983. From 1983 to February
1991, Mr. Snavely served as Executive Vice President of Imperial Bancorp and
Imperial Bank with direct management responsibility for the following bank
subsidiaries and divisions: Imperial Bank Mortgage, Southern Pacific Thrift
and Loan, Imperial Trust Company, Wm. Mason & Company, Imperial Ventures, Inc.
and The Lewis Horwitz Organization. From 1983 through 1986, Mr. Snavely was
employed as Chief Financial Officer of Imperial Bancorp and Imperial Bank.
JAMES WALSH has been a Director of ICH since February 1997 and IMH since
November 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. Mr. Walsh is a Director of IMH.
FRANK P. FILIPPS has been a Director of ICH since February 1997 and IMH
since November 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. Mr.
Filipps is a Director of IMH.
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<PAGE>
STEPHAN R. PEERS has been a Director of ICH since February 1997 and IMH
since November 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. Mr. Peers is a Director of IMH.
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
66
<PAGE>
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor
of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
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. 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 as
authorized by the Bylaws 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. The Company has
entered into indemnification agreements with all of its officers and directors
which provide for the indemnification of such officers and directors to the
fullest extent permitted under Maryland law. 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 the
indemnity agreements referenced herein 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.
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<PAGE>
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 Subscription Price. See "--Stock Options," "Certain
Transactions" and "Principal Stockholders."
Joseph R. Tomkinson, William S. Ashmore, Richard J. Johnson and Mary C.
Glass, who are executive officers of ICH are also officers of IMH and will
become officers of RAI upon the closing of the Offering. These officers have
modified their employment agreements with IMH to become officers of the
Manager 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 which
will reimburse IMH 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 IMH,
plus a 15% service charge. The following is the amount of compensation payable
by IMH to Mssers. Tomkinson, Ashmore, Johnson and Glass for the year ending
December 31, 1997.
<TABLE>
<CAPTION>
NAME OF INDIVIDUAL CASH COMPENSATION
------------------ ------------------
<S> <C>
Joseph R. Tomkinson....... $300,000 (1)(2)(3)
William S. Ashmore........ $225,000 (1)(2)(3)
Richard J. Johnson........ $112,500 (1)(3)
Mary C. Glass............. $ 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 received bonuses of $221,350, $116,500, $58,250 and $58,250,
respectively.
(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 Glass 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
Subscription Price. See "--Stock Options," "Certain Transactions" and
"Principal Stockholders."
STOCK OPTIONS
In April 1997, the Company adopted a 1997 Stock Option Plan (the "Stock
Option 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 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 Plan is administered by a Committee, appointed by the Board of
Directors (the
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<PAGE>
"Committee"). 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 Plan provides for granting of DERs in tandem with all
options granted under the Stock Option 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 Plan permits DERs to be
granted under the Stock Option 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 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 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 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 Plan.
Unless previously terminated by the Board of Directors, the Stock Option
Plan will terminate in April 2007, and no options or Awards may be granted
under the Stock Option Plan thereafter.
Options granted under the Stock Option Plan will become exercisable in
accordance with the terms of the grant made by the Committee. Awards will be
subject to the terms and restrictions of the Award made by the Committee. The
Committee 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 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 Plan is
payable in full in cash, or its equivalent as determined by the Committee. 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 Committee.
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<PAGE>
The Board of Directors may from time to time revise or amend the Stock
Option 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 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 Plan, materially increase the
benefits accruing to participants under the Stock Option Plan or extend the
maximum option term under the Stock Option Plan.
The following table sets forth the stock options to be granted to the
Company's current executive officers under the Stock Option 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 June 2007 411,941
Joseph R. Tomkinson..... 10,000 5.0 15.00 June 2007 82,388
William S. Ashmore...... 10,000 5.0 15.00 June 2007 82,388
Richard J. Johnson...... 10,000 5.0 15.00 June 2007 82,388
Mary C. Glass........... 10,000 5.0 15.00 June 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 equals the Subscription 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%.
Upon the effective date of this Offering, the Company will grant to each of
Messrs. Snavely, Walsh, Filipps, Peers, Poletti and Busch options to purchase
10,000 shares of Common Stock at a per share exercise price equal to the
Subscription Price, vesting 50% on the first anniversary of the date of grant
and 50% on the second anniversary date.
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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REIT ADVISORS, INC.
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; however,
they have not previously managed a Commercial Mortgage REIT. RAI is owned by
its officers. The officers of RAI have modified their employment agreements
with IMH to allow them to become officers of the Manager 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 IMH 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 IMH, 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 IMH for costs and
expenses owed by the Manager to IMH for costs and services under any
submanagement agreement between IMH 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 IMH. 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 IMH. After
the third year, ICH will only be responsible for reimbursing expenses and
services provided, with the 15% service charge for amounts due to IMH. See "--
Management Agreement--Expenses."
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 submanagmeent
agreement with 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, 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 ICII to perform such human resource services for the Company as
RAI deems necessary.
The address of the Manager is 20371 Irvine Avenue, Santa Ana Heights,
California 92707, telephone (714) 556-0122.
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, Chief Executive Officer
William S. Ashmore* President and Director
Richard J. Johnson* Executive Vice President, Chief Financial Officer and Director
Mary C. Glass* Senior Vice President
H. Wayne Snavely* Director
</TABLE>
- --------
*Each of these persons also serve as directors or executive officers of the
Company.
For biographical information on these persons, see "Imperial Credit
Commercial Holdings, Inc.--Directors and Executive Officers."
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<PAGE>
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;
(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, ICII 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 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;
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(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 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, 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 ICII to perform such human resource services for
the Company as RAI deems necessary. The Manager may also enter into additional
contracts with other parties, which may include IMH, ICII or their 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
incentive 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 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
income of the Company determined in accordance with the Code before the
Manager's incentive 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 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 (without taking into account any losses
incurred in prior periods) computed by taking the daily average of such values
during such period. The definition "Return on Equity" is only for purposes of
calculating the incentive compensation payable. The 25% Incentive 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 incentive 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 base 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 may include IMH,
ICII and its affiliates, to provide various services to the Company including
facilities and costs related therewith, technology, management information
systems, human resource administration,
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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 IMH for
costs and services under any subcontract between RAI and IMH. 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 IMH.
All of the persons designated to become officers of the Manager upon the
closing of this Offering are officers of IMH and ICCH. Each of these officers
have modified their employment agreements with IMH to allow them to become
officers of the Manager 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 Manager as is reasonably necessary. The Company will
reimburse the Manager, who will reimburse IMH 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 IMH, 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 IMH. 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
IMH.
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.
STOCK OPTION PLAN
The Company has adopted the Stock Option Plan and the Manager and the
directors, officers and employees of the Manager will be granted certain
options or rights under the Stock Option Plan upon the closing of this
Offering, and may in the future be granted additional options or rights under
the Stock Option Plan. See "Imperial Credit Commercial Holdings, Inc.--Stock
Options."
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, equityholder 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, shareholders 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--Conflicts of
Interest."
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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 793,126 shares of the Common Stock of ICH representing 9.8% of
the outstanding Common Stock, and 505,874 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 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, 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 ICII to
perform such human resource services for the Company as RAI deems necessary.
With a view toward protecting the interests of ICH's stockholders, the
Charter and 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.
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, 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,
respectively.
. In February 1997, IMH purchased all of the non-voting preferred stock of
ICCC, which represent 95% of the economic interest in ICCC, for $500,000,
and certain of the Company's officers purchased all of the outstanding
shares of common stock of ICCC, 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.
. In March 1997, IMH lent ICH $15.0 million evidenced by a promissory note
convertible into ICH Preferred Stock at the Conversion Rate.
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. 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 Subscription 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.
. 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 for
that number of shares of ICH Class A Stock equal to the product of 95% of
the estimated fair value of ICCC on the date of the Contribution divided
by the Subscription Price. Assuming the Maximum Subscription Offer Amount
is sold at a Subscription Price of $15.00 per ICH Share, upon the closing
of this Offering, IMH would hold 793,126 shares of the Common Stock
representing 9.8% of the outstanding Common Stock, and 505,874 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.
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. Pursuant
to a non-compete agreement (the "Non-Compete Agreement") between IMH and the
Company 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, IMH will not originate or
acquire any Commercial Mortgages; however, this Agreement shall not preclude
IMH from purchasing any Commercial Mortgages or CMBSs that ICCC or IMH chooses
not to bid for or with respect to which ICCC's or IMH's bid is not accepted.
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 likely 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 (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,
the
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Company and IMH 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 the Company 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 Opportunity. 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 advantage of any such Investment Opportunity or that any
competitive activity of IMH 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. In order to utilize the
IMH infrastructure, RAI intends to enter into a submanagement agreement with
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, 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 "REIT Advisors, Inc."
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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this Offering, the Company will have outstanding
8,093,126 shares of Common Stock, of which 1,093,126 shares will be
"restricted securities" as that term is defined in Rule 144. Of such shares,
300,000 and 793,126 shares eligible for future will become eligible for sale
under Rule 144 until February 1998, and March 1998, respectively, at the
earliest. In addition, assuming the Maximum Subscription Offer Amount is sold
at a Subscription Price of $15.00 per share, upon the closing of this
Offering, IMH would also hold 505,874 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. As
described below, amended Rule 144, which becomes effective on April 29, 1997,
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 8,093,l26 shares upon the closing of this Offering 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 amended Rule 144, which becomes effective on April 29,
1997, without regard to the volume limitation described above.
The Company and its stockholders including IMH, have agreed with the Dealer
Managers 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 of
shares of Common Stock or rights to acquire such shares (other than pursuant
to employee plans) without the prior written consent of the Dealer Managers.
Additionally, upon the closing of this Offering, there will be outstanding
stock options for 200,000 shares of Common Stock which will be granted at the
Subscription Price, to executive officers and Directors 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 June 1998.
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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 March 31,
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 assuming the Maximum Subscription Offer Amount is sold, 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).................................... 793,126 72.6% 9.8%
Joseph R. Tomkinson....................... 76,800 7.0% *
William S. Ashmore........................ 76,800 7.0% *
Richard J. Johnson........................ 62,400 5.7% *
William D. Endresen....................... 12,000 1.1% *
Mary C. Glass............................. 12,000 1.1% *
H. Wayne Snavely.......................... 12,000 1.1% *
James Walsh............................... 12,000 1.1% *
Frank P. Filipps.......................... 12,000 1.1% *
Stephan R. Peers.......................... 12,000 1.1% *
Thomas J. Poletti......................... 12,000 1.1% *
All directors and executive officers as a
group (10 persons)........................ 300,000 27.4% 3.7%
</TABLE>
- --------
*less than 1%
(1) Assumes persons listed below do not exercise Subscription Rights offered
to them as IMH Holders.
(2) Assumes 1,093,126 shares outstanding. Excludes 505,874 shares of ICH Class
A Stock owned by IMH and does not give effect to the Contribution.
(3) Assumes 8,093,126 shares outstanding. Gives effect to the conversion of
2,379,378 shares of ICH Preferred Stock into 793,126 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
Subscription 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. On the effective date of this Offering, IMH will effectuate the
Contribution for that number of shares of ICH Class A Stock equal to the
product of 95% of the estimated fair value of ICCC on the date of the
Contribution divided by the Subscription Price. Assuming the Maximum
Subscription Offer Amount is sold and a Subscription Price of $15.00 per
share, upon the closing of this Offering, IMH would hold 793,126 shares of
the Common Stock of ICH and 505,874 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;
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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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized stock of ICH consists of 50,000,000 shares of Common Stock,
$0.01 par value per share, and 10,000,000 shares of Preferred Stock, $0.01 par
value per share. It is expected that meetings of the stockholders of 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 25% 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 authorized,
4,000,000 shares are 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 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. 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
otherwise. 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 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 the distribution of assets upon liquidation,
dissolution or winding up of the affairs of the Company, but before
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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 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
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 Boston
EquiServe, L.P., North Quincy, Massachusetts.
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DISTRIBUTION ARRANGEMENTS
THE SUBSCRIPTION RIGHTS OFFER
PaineWebber Incorporated, 1285 Avenue of the Americas, New York, New York
and Stifel, Nicolaus & Company, Incorporated, 500 North Broadway, St. Louis,
Missouri, each of whom is a broker-dealer and member of the National
Association of Securities Dealers, Inc., will act as Dealer Managers for the
Subscription Offer. Under the terms and subject to the conditions contained in
the Dealer Manager Agreement dated the date hereof (the "Dealer Manager
Agreement"), the Dealer Managers will provide financial advisory and marketing
services in connection with the Offer and will solicit the exercise of
Subscription Rights and participation in the Over-Subscription Privilege by
Record Date IMH Holders. The Company has agreed to pay the Dealer Managers a
fee for financial advisory, marketing and soliciting services equal to 4.25%
of the aggregate Subscription Price for ICH Shares issued pursuant to exercise
of Subscription Rights and pursuant to the Over-Subscription Privilege. The
Dealer Managers will reallow to certain broker-dealers fees for solicitation
efforts (the "Solicitation Fees") of 2.50% of the Subscription Price per ICH
Share for each ICH Share issued pursuant to the exercise of the Subscription
Rights and pursuant to the Over-Subscription Privilege as a result of their
solicitation efforts. Solicitation Fees will be paid to the broker-dealer
designated on the applicable portion of the Subscription Notification
Certificate or, in the absence of such designation, to the Dealer Managers.
In addition, the Company has agreed to reimburse the Dealer Managers up to
an aggregate of $200,000 for their reasonable expenses incurred in connection
with the Subscription Offer. The Company and RAI have each agreed to indemnify
the Dealer Managers or contribute to losses arising out of certain liabilities
including liabilities under the Securities Act of 1933, as amended. The Dealer
Manager Agreement also provides that the Dealer Managers will not be subject
to any liability to the Company in rendering the services contemplated by such
Agreement except for any act of bad faith, willful misconduct or gross
negligence of the Dealer Managers or reckless disregard by the Dealer Managers
of their obligations and duties under such Agreement.
THE STANDBY OFFER
Pursuant to the Standby Offer, the Company is offering to institutions that
may or may not be IMH Holders as of the Record Date, pursuant to Standby
Purchase Agreements, at least shares of Common Stock (the "Minimum Standby
Offer Amount") but not more than shares of Common Stock (the "Maximum
Standby Offer Amount"). The purchase price per Standby Share is equal to the
Subscription Price of $15.00. The number of Standby Shares subscribed for will
be included for purposes of achieving the Minimum Offering Amount of 2,500,000
Shares.
It is anticipated that Standby Purchase Agreements may be subject to an
individual Minimum and Maximum Standby Purchase Amount. In addition, the
obligation of the Standby Purchasers will be subject to the achievement of the
Minimum Offering Amount in connection with the Offering.
The Company has agreed to pay the Dealer Managers a fee for their financial
advisory, marketing and soliciting services equal to 4.25% of the aggregate
Subscription Price for Standby Shares issued and sold to Standby Purchasers
pursuant to the Standby Purchase Agreements.
OTHER MATTERS
The Company has agreed not to offer or sell, or enter into any agreement to
sell, any equity or equity related securities of the Company or securities
convertible into such securities for a period of 180 days after the closing of
the Offering, except for the ICH Shares, the Standby Shares and shares of ICH
Common Stock issued in reinvestment of dividends or distributions.
It is anticipated that the ICH Shares and the Standby Shares will be
approved for listing, subject to notice of issuance, of the American Stock
Exchange, Inc. (the "AMEX") under the symbol "ICH." Prior to the Offering,
there has been no market for the ICH Common Stock. In connection with their
solicitation of exercises
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of Subscription Rights in the Primary Subscription Privilege and pursuant to
the Over-Subscription Privilege, and in acting as agent for the Company in
connection with the issuance of Standby Shares pursuant to the Standby
Purchase Agreements, the Dealer Managers have agreed to use their best efforts
to assure that, at the completion of the Offer, lots of 100 or more ICH Shares
will be held by a minimum of 400 beneficial owners in the United States.
The Dealer Managers may effect market-making transactions in the ICH Common
Stock which may include purchases, sales and short covering transactions, on
the AMEX, in the over-the-counter markets or otherwise after the completion of
the initial public offering. The Dealer Managers are not obligated to conduct
any such market-making activities any may discontinue such activities at any
time without notice, at its sole discretion. No assurance can be given as to
the liquidity of or the trading market for the ICH Common Stock as a result of
any market-making activities undertaken by the Dealer Managers.
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 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. However, pursuant to the statute, ICH has exempted
any business combinations involving ICII and, consequently, the five-year
prohibition and the super-majority vote requirements of the statute will not
in any event apply to business combinations between ICII and ICH. As a result,
ICII may be able to enter into business combinations with ICH, which may not
be in the best interest of the stockholders, without compliance by ICH with
the super-majority vote requirements and the other provisions of the statute.
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CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (1) one-fifth or more but less than one-third, (2) one-third or more
but less than a majority, or (3) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
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.
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.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(1) pursuant to 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 transaction or a
change in control of ICH 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. 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 ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE ACQUISITION, OWNERSHIP
AND SALE OR OTHER DISPOSITION OF THE SUBSCRIPTION RIGHTS AND 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.
THE RIGHTS OFFERING
For United States federal income tax purposes, IMH Holders will not
recognize taxable income upon the receipt of the Subscription Rights and the
basis of the Subscription Rights received by a IMH Holder will be zero. IMH
Holders who allow the Subscription Rights received by them on the date of
issuance to expire unexercised will not recognize any gain or loss, and no
adjustment will be made to the basis of their IMH Common Stock or IMH stock
options. IMH Stockholders will not recognize any gain or loss upon their
exercise of their Subscription Rights for New ICH Shares. An IMH Holder's
basis in the New ICH Shares acquired through exercise of the Subscription
Rights will be equal to the Subscription Price paid therefor.
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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.
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--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
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(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 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."
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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 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,
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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 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--Conduit Operations--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.
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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.
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 Commercial Mortgages 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 Commercial Mortgages were obligations secured by mortgages on
real property and interests in mortgages on real property, and therefore that
such Commercial Mortgages were Qualified REIT Assets. Based on such Revenue
Ruling, the Company believes that its hypothecation Commercial Mortgages are
Qualified REIT Assets. However, in the event that the Company's hypothecation
Commercial Mortgages 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
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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 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
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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 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.
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TAXATION OF TAXABLE U.S. STOCKHOLDERS
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any 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.
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.
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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.
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
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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 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.
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LEGAL MATTERS
The validity of the shares of Common Stock and Subscription Rights offered
hereby will be passed on for the Company by Freshman, Marantz, Orlanski,
Cooper & Klein, 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 Dealer Managers by Skadden, Arps, Slate,
Meagher & Flom (Illinois).
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.
"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 (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.
"CMT Index" means the one year constant maturity Treasury index.
"Code" means the Internal Revenue Code of 1986, as amended.
"CMBSs" means (1) pass-through certificates and (2) REMICs.
"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.
"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.
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"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.
"ICII" means Imperial Credit Industries, Inc., a California corporation.
"ICH" means Imperial Credit Commercial Holdings, Inc., a Maryland
corporation.
"ICH Class A Stock" means the Class A non-voting Common Stock of ICH.
"ICH Preferred Stock" means the non-voting Class A Convertible Preferred
Stock of ICH.
"ICH Shares" means up to 7,000,000 shares of Common Stock offered pursuant
to Subscription Rights.
"IMH" means Imperial Credit Mortgage Holdings, Inc., a Maryland corporation.
"IMH Holders" means holders of shares of common stock and/or stock options
of IMH.
"Investment Company Act" means the Investment Company Act of 1940, as
amended.
"ISOs" means qualified incentive stock options granted under the Stock
Option Plan, which meet the requirements of Section 422 of the Code.
"Keogh Plans" means H.R. 10 Plans.
"LIBOR" means the London interbank offered rate.
"Long-Term Investment Operations" means ICH.
"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.
"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.
"Maximum Offering Amount" The Maximum Subscription Offer Amount and the
Maximum Standby Offer Amount, collectively.
"Maximum Standby Offer Amount" means the maximum number of Standby
Shares being offered in Standby Offer.
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"Maximum Subscription Offer Amount" means the 7,000,000 maximum number of
ICH Shares being offered in Subscription Offer.
"Minimum Offering Amount" means 2,500,000 minimum number of Shares to be
issued in the Offering (including Standby Shares that may be issued pursuant
to Standby Purchase Agreements).
"Minimum Standby Offer Amount" means the minimum number of Standby
Shares being offered in the Standby Offer.
"MSRs" means mortgage servicing rights.
"Net Income" means the net income of the Company as determined by the Code
before the Manager's incentive 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.
"Offering" means the Subscription Offer and the Standby Offer, collectively.
"Over-Subscription Privilege" means the right of IMH Holders to request
additional ICH Shares in event of full exercise of primary Subscription
Privilege.
"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.
"Primary Subscription Privilege" means .
"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.
"Real Estate Asset" means interests in real property, interests in mortgages
on real property, and regular interests in REMICS.
"Record Date" means , 1997.
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"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.
"Shares" means the ICH Shares and the Standby Shares.
"Standby Offer" means an offer to institutions that may or may not be IMH
Holders as of Record Date.
"Standby Purchase Agreements" means commitments pursuant to which the
Standby Offer will be accomplished.
"Standby Shares" means Shares offered pursuant to the Standby Offer.
"Subscription Offer" means an offer to IMH Holders as of the Record Date.
"Subscription Rights" includes the Primary Subscription Privilege and the
Over-Subscription Privilege.
"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% Incentive 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,
any manager of the Company (including RAI) and IMH and its Affiliated Persons.
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INDEX TO FINANCIAL STATEMENTS
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-22
Balance Sheet ............................................................. F-23
Statement of Operations.................................................... F-24
Statement of Changes in Shareholders' Equity............................... F-25
Statement of Cash Flows.................................................... F-26
Notes to Financial Statements.............................................. F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Commercial Holdings, Inc.:
We have audited the accompanying balance sheet of Imperial Credit Commercial
Holdings, Inc. as of March 31, 1997, and the related statement 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 Imperial Credit 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
Orange County, California
April 16, 1997
F-2
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
------
Cash and cash equivalents............................................. $ 4,400
Commercial Mortgages held for investment, net......................... 17,522
Residual interest in securitization................................... 10,025
Accrued interest receivable........................................... 128
Due from affiliates................................................... 134
Prepaid and other assets.............................................. 41
-------
$32,250
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Borrowings from IWLG.................................................. $16,563
Other affiliated borrowings........................................... 520
Accrued interest expense.............................................. 150
-------
Total liabilities................................................. 17,233
-------
Stockholders' equity:
Preferred stock, $.01 par value;
10,000,000 shares authorized; 3,000,000 shares issued and
outstanding ....................................................... 30
Common stock, $.01 par value;
50,000,000 shares authorized; 599,000 shares issued and outstanding. 6
Additional paid-in capital........................................... 14,970
Contributed capital.................................................. 957
Accumulated deficit.................................................. (946)
-------
Total stockholders' equity........................................ 15,017
-------
Commitments and contingencies
$32,250
=======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH MARCH
31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Interest income:
Commercial Mortgages held for investment............................. $ 219
Residual interest in securitization.................................. 131
Other................................................................ 16
------
Total interest income.............................................. 366
------
Interest expense:
Borrowings from IWLG................................................. 150
Other affiliated borrowings.......................................... 129
------
Total interest expense............................................. 279
------
Net interest income before provision for Commercial Mortgage
losses............................................................ 87
Provision for Commercial Mortgage losses............................... 13
------
Net interest income................................................ 74
------
Stock compensation expense............................................. 957
Professional expense................................................... 60
Data processing........................................................ 3
------
1,020
------
Net income (loss).................................................. $ (946)
======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
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 -- 957 -- 963
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......... -- -- -- -- -- -- (946) (946)
----- --- --- --- ------- ---- ----- -------
Balance, March 31, 1997. 3,000 $30 599 $ 6 $14,970 $957 $(946) $15,017
===== === === === ======= ==== ===== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
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)................................................... $ (946)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for Commercial Mortgage losses........................... 13
Stock compensation expense......................................... 957
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........................ 5
--------
Cash flows from investing activities:
Purchase of Commercial Mortgages held for investment................ (17,539)
Principal paydowns on Commercial Mortgages held for investment...... 4
Purchase of residual interest in securitization..................... (10,098)
Paydowns on residual interest in securitization..................... 73
--------
Net cash used in investing activities............................ (27,560)
--------
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
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
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"). 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 represent 95% of the economic interest in
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 economic interest in 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 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 "Subscription 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
F-7
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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 the Offering, IMH will contribute to ICH (the
"Contribution") all of the non-voting Preferred Stock of ICCC for that
number of shares of ICH Class A Stock equal to the product of 95% of the
estimated fair value of ICCC on the date of the Contribution divided by
the Subscription Price.
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 originates,
purchases and sells or securitizes Commercial Mortgages. The Conduit
Operations operates 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 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 operates through three divisions: the Condominium
Division, the Retail Division, the Correspondent and Bulk Purchase Division.
F-8
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
Condominium Division. This division offers 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 are
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 both originates
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.
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
F-9
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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.
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. of commercial loans through a special purpose trust
vehicle. ICCH purchased the residual in March 1997 from ICIFC for $10.1
million. ICIFC and ICCH 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 an available-for-sale security. Unrealized gains and losses net of related
income taxes will be included as a separate component of stockholders' equity.
To the Company's knowledge, there is currently no active market for the
purchase or sale of this residual.
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
F-10
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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.
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.
F-11
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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 which
primarily include human resources, data processing 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 March 31, 1997 totaled $63,000.
STOCK COMPENSATION EXPENSE
Stock compensation expense of $957,000 represents the difference between the
price at which the Company issued 300,000 shares of common stock on February
3, 1997 ($.01 per share) and the estimated fair value of such shares as
determined by the Company's management based on an independent valuation, as
of February 3, 1997 ($3.20 per share).
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
F-12
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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
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 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 has 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").
F-13
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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 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
F-14
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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 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 Share
Price. "IPO Share Price" means the gross per share price of the Company's
Offering.
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
REIT Advisors, Inc. ("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
F-15
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
operational 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 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, 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.
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 of the Company. 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. 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.
All of the persons designated to become officers of the Manager upon the
closing of the Offering are also officers of IMH. Each of these officers have
modified their employment agreements with IMH to become officers of the
Manager 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 IMH 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 IMH,
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 IMH for costs and services under any submanagement agreement
between IMH 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 IMH. 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 IMH. 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 IMH. 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 incentive compensation for each fiscal quarter, an amount equal to 25% of
the taxable 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% (the "25% Incentive
Payment"). "Return on Equity" is computed on Average Net Worth and has no
necessary correlation with the actual distributions received by stockholders.
The 25% Incentive Payment to the Manager will be calculated quarterly in
arrears before any income distributions are made to stockholders for the
corresponding period.
F-16
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
NON-COMPETE AGREEMENT AND RIGHT OF FIRST REFUSAL AGREEMENT
The Company's operations may be affected by the activities of IMH. Pursuant
to a non-compete agreement (the "Non-Compete Agreement") between IMH and the
Company to become effective upon the closing of the Offering, for a period of
the earlier of nine months from the closing of this Offering and the date upon
which the Company accumulates (for investment or sale) $300.0 million of
Commercial Mortgages and/or CMBSs, IMH will not originate or acquire any
Commercial Mortgages; however, this Agreement shall not preclude IMH from
purchasing any Commercial Mortgages or CMBSs that ICCC chooses not to bid for
or with respect to which ICCC's bid is not accepted. 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 likely 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 (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 the Offering, RAI, the
Company and IMH 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 the Company 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. 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 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 Plan (the "Stock
Option 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 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 Plan is administered by a Committee, appointed by the Board of
Directors (the "Committee"). ISOs may be granted to the officers and key
employees of the Company. NQSOs and Awards
F-17
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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 Plan provides for granting of DERs in tandem with all
options granted under the Stock Option 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 Plan permits DERs to be granted under the Stock Option 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 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 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 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 Plan.
Unless previously terminated by the Board of Directors, the Stock Option
Plan will terminate in April 2007, and no options or Awards may be granted
under the Stock Option Plan thereafter.
Options granted under the Stock Option Plan will become exercisable in
accordance with the terms of the grant made by the Committee. Awards will be
subject to the terms and restrictions of the Award made by the Committee. The
Committee 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 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.
F-18
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
The exercise price of any option granted under the Stock Option Plan is
payable in full in cash or its equivalent as determined by the Committee. 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 Committee.
The Board of Directors may from time to time revise or amend the Stock
Option 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 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 Plan, materially increase the
benefits accruing to participants under the Stock Option Plan or extend the
maximum option term under the Stock Option 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 from IWLG....................... 16,563 16,563
</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.
F-19
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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.
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 ICII's 401(k) plan. The Company's
matching and discretionary contributions were not significant for any period
presented.
Under Imperial Credit Industries, Inc.'s (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.
F-20
<PAGE>
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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
Commercial mortgage servicing rights.................................. 113
Premises and equipment, net........................................... 130
Other assets.......................................................... 13
-----
$ 667
=====
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred revenue...................................................... $ 165
Other liabilities..................................................... 101
Due to affiliates..................................................... 61
-----
327
-----
Shareholders' equity:
Preferred stock..................................................... 500
Common stock........................................................ 1
Contributed capital................................................. 25
Accumulated deficit................................................. (186)
-----
340
-----
$ 667
=====
STATEMENT OF OPERATIONS
Revenues:
Gain on sale of loans............................................... $ 3
Interest income..................................................... 6
Loan servicing income............................................... 2
-----
11
-----
Expenses:
Interest on affiliated borrowings................................... 5
Stock compensation expense.......................................... 25
Personnel expense................................................... 57
Professional services............................................... 63
General and administrative.......................................... 47
-----
197
-----
Net income (loss)..................................................... $(186)
=====
</TABLE>
F-21
<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 statement 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 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
Orange County, California
April 16, 1997
F-22
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Due from affiliates..................................................... $ 411
Commercial mortgage servicing rights.................................... 113
Premises and equipment, net............................................. 130
Other assets............................................................ 13
-----
$ 667
=====
LIABILITIES AND SHAREHOLDERS' EQUITY
Deferred revenue........................................................ $ 165
Other liabilities....................................................... 101
Due to affiliates....................................................... 61
-----
Total liabilities..................................................... 327
-----
Shareholders' equity:
Preferred stock, no par value; 50,000 shares authorized; 9,500 shares
issued and outstanding............................................... 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
$ 667
=====
</TABLE>
See accompanying notes to financial statements.
F-23
<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
Gain of sale of loans................................................. 3
Loan servicing income................................................. 2
-----
11
-----
Expenses:
Interest on affiliated borrowings..................................... 5
Stock compensation expense............................................ 25
Personnel expense..................................................... 57
General and administrative and other.................................. 19
Amortization of commercial mortgage servicing rights.................. 3
Professional services................................................. 63
Data processing expense............................................... 10
Occupancy expense..................................................... 15
-----
197
-----
Net income (loss)....................................................... $(186)
=====
</TABLE>
See accompanying notes to financial statements.
F-24
<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-25
<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 and amortization........................................ 7
Stock compensation expense........................................... 25
Commercial mortgage servicing rights.................................. (116)
Net change in other assets and liabilities............................ 88
Net change in due to and due from affiliates.......................... (350)
Net change in deferred revenue........................................ 165
-----
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-26
<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 economic
interest in 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
economic interest in ICCC.
At the effective date of Imperial Credit Commercial Holdings, Inc.'s
("ICH's") 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 operates through three divisions: the Condominium
Division, the Retail Division, the Correspondent and Bulk Purchase Division.
Condominium Division. This division offers 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 are
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.
Correspondent and Bulk Purchase Division. This division both originates
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
F-27
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
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 6 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 MORTGAGE SERVICING RIGHTS
Commercial mortgage servicing rights ("CMSRs") represent the allocated cost
of acquiring the rights to service mortgage loans. ICCC amortizes CMSRs in
proportion to, and over the period of, expected future net servicing income.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities," which supersedes SFAS No. 122.
SFAS No. 125 requires that a portion of the commercial mortgage loan's cost
be allocated to the commercial mortgage loan servicing right 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 market participants would use in estimating future net
servicing income which includes estimates of the cost of servicing, a discount
rate, an inflation rate, ancillary income per loan, a prepayment rate, a
default rate and loss severity.
ICCC determines servicing value impairment by disaggregating ICCC's
servicing portfolio into its predominant risk characteristics. ICCC determines
those risk characteristics to be loan 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 a
valuation model that calculates the present value of future net servicing
revenues using current market assumptions at the end of the quarter.
F-28
<PAGE>
IMPERIAL COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
MARCH 31, 1997
ICCC will continuously evaluate its CMSRs to determine if fair value is
below the carrying values of its CMSRs. If the undiscounted projected net
future servicing income is less than the carrying amount of any individual
mortgage servicing portfolio, the portfolio may have to be reduced through a
provision recorded to increase the CMSR valuation allowance in the period the
fair value declined below the CMSR's carrying value. In preparing its
evaluation, ICCC uses constant prepayment rates relating to interest rates on
each portfolio, loan types, and maturity dates to determine the appropriate
amount of amortization of the CMSRs.
GAIN ON SALE OF LOANS
ICCC recognizes gain or loss on the sale of loans when the sales transaction
settles and the risks and rewards of ownership are determined to have passed
to the purchasing party.
Gain or loss on the sale of loans or securities to ICH are deferred and
amortized or accreted to gain or loss on sale over the estimated life of the
loans or securities using the interest method.
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. 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.
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
4. COMMERCIAL MORTGAGE SERVICING RIGHTS
Changes in CMSRs for the period from January 15, 1997 (commencement of
operations) through March 31, 1997 were as follows (in thousands):
<TABLE>
<S> <C>
Beginning Balance...................................................... $ --
Additions.............................................................. 116
Amortization........................................................... (3)
----
Ending balance......................................................... $113
====
</TABLE>
At March 31, 1997, all of the CMSRs relate to $17.5 million of Commercial
Mortgages sold, servicing retained by ICCC, to ICH in February 1997.
5. 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>
6. 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 CMSRs of $116,000
and a corresponding deferred gain of $116,000, which are being amortized over
the estimated life of the loans. Also, 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.
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.
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.
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
7. 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.
8. 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-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
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.
9. 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-32
<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 DEALER MANAGERS. 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........................................................ 3
Risk Factors.............................................................. 12
The Offering.............................................................. 32
Use of Proceeds........................................................... 38
Dividend Policy and Distributions......................................... 38
Dividend Reinvestment Plan................................................ 38
Capitalization............................................................ 40
Selected Financial Data................................................... 41
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 43
Business.................................................................. 48
Imperial Credit Commercial Holdings, Inc. ................................ 64
REIT Advisors, Inc. ...................................................... 71
Relationships with Affiliates............................................. 75
Certain Transactions...................................................... 75
Shares Eligible for Future Sale........................................... 78
Principal Stockholders.................................................... 79
Description of Capital Stock.............................................. 80
Distribution Arrangements................................................. 86
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 87
Federal Income Tax Considerations......................................... 89
ERISA Investors........................................................... 99
Legal Matters............................................................. 100
Experts................................................................... 100
Glossary.................................................................. 101
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UP TO 7,000,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUBSCRIPTION
RIGHTS FOR SUCH SHARES
IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC.
[LOGO OF IMPERIAL CREDIT COMMERCIAL HOLDINGS, INC]
---------------
PROSPECTUS
---------------
PAINEWEBBER INCORPORATED
STIFEL, NICOLAUS & COMPANY
INCORPORATED
---------------
, 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........................................... $ 36,364
NASD filing fee................................................ 12,500
American Stock Exchange listing fee............................ 17,500
Printing and engraving expenses................................ 200,000
Legal fees and expenses........................................ 300,000
Accounting fees and expenses................................... 150,000
Blue Sky fees and expenses..................................... 50,000
Transfer agent and custodian fees.............................. 20,000
Reimbursement for Dealer Managers.............................. 200,000
Miscellaneous.................................................. 63,636
----------
Total........................................................ $1,050,000
==========
</TABLE>
ITEM 31. SALES TO RELATED PARTIES
. In February 1997, certain officers and Directors of the Registrant and
Imperial Credit Mortgage Holdings, Inc. ("IMH") purchased 300,000 and
299,000 shares of the Common Stock of the Registrant, respectively, at a
per share purchase 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 Subscription 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 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 that number of shares of ICH Class A Stock equal to the product of
95% of the estimated fair value of ICCC on the date of the
II-1
<PAGE>
Contribution divided by the Subscription Price. Assuming the Maximum
Subscription Offer Amount is sold at a Subscription Price of $15.00 per
share, upon the closing of this Offering, IMH would hold 793,126 shares
of the Common Stock representing 9.8% of the outstanding Common Stock,
and 505,874 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.
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, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In addition, the MGCL requires the Company, as a
condition to advancing expenses, to obtain (1) 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 as authorized by the
Bylaws 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.
II-2
<PAGE>
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:
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
II-3
<PAGE>
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 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.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
1.1* Form of Dealer Manager Agreement.
3.1* Charter of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Common Stock Certificate of Registrant.
4.2* Form of Subscription Notification Certificate.
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 REIT
Advisors, Inc.
10.2* Form of Submanagement Agreement between REIT Advisors, Inc. and
Imperial Credit Mortgage Holdings, Inc.
10.3* Form of Submanagement Agreement between REIT Advisors, Inc. and
Imperial Credit Industries, Inc.
10.4* Form of Stock Option Plan and Agreement.
10.5* Lease dated , 1997 between Imperial Commercial Capital
Corporation and regarding Irvine facility.
10.6* Form of Contribution Agreement between the Registrant, Imperial
Mortgage Holdings, Inc., and Imperial Commercial Capital
Corporation.
10.7* Form of Non-Competition Agreement between the Registrant and
Imperial Credit Mortgage Holdings, Inc.
10.8* Form of Right of First Refusal Agreement between the Registrant,
REIT Advisors, Inc. and Imperial Credit Mortgage Holdings, Inc.
10.9* Servicing Agreement between the Registrant and Imperial Commercial
Capital Corporation.
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>
- --------
* To be filed by amendment.
II-4
<PAGE>
ITEM 36. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Placement
Agent at the closing specified in the Placement Agent certificates in such
denominations and registered in such names as required by the Placement Agent
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 16th day of
April, 1997.
IMPERIAL CREDIT COMMERCIAL HOLDINGS,
INC.
By: /s/ Joseph R. Tomkinson
______________________________________
Joseph R. Tomkinson
Chairman of the Board and Chief
Executive Officer
We, the undersigned directors and officers of Imperial Credit Commercial
Holdings, Inc., do hereby constitute and appoint Joseph R. Tomkinson and
Richard J. Johnson, or either of them, our true and lawful attorneys and
agents, to do any and all acts and things in our name and behalf in our
capacities as directors and officers and to execute any and all instruments
for us and in our names in the capacities indicated below, which said
attorneys and agents, or either of them, may deem necessary or advisable to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules, regulations, and requirements of the Securities and Exchange
Commission, in connection with this Registration Statement, including
specifically, but without limitation, power and authority to sign for us or
any of us in our names and in the capacities indicated below, any and all
amendments (including post-effective amendment) to this Registration
Statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended;
and we do hereby ratify and confirm all that the said attorneys and agents, or
either of them, shall do or cause to be done by virtue hereof.
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>
/s/ Joseph R. Tomkinson Chairman of the Board and April 16, 1997
____________________________________ Chief Executive Officer
Joseph R. Tomkinson (Principal Executive
Officer)
/s/ Richard J. Johnson Chief Financial Officer April 16, 1997
____________________________________ (Principal Financial and
Richard J. Johnson Accounting Officer)
/s/ H. Wayne Snavely Director April 16, 1997
____________________________________
H. Wayne Snavely
/s/ James Walsh Director April 16, 1997
____________________________________
James Walsh
/s/ Frank P. Filipps Director April 16, 1997
____________________________________
Frank P. Filipps
/s/ Stephan R. Peers Director April 16, 1997
____________________________________
Stephan R. Peers
/s/ Thomas J. Poletti Director April 16, 1997
____________________________________
Thomas J. Poletti
/s/ Timothy R. Busch Director April 16, 1997
____________________________________
Timothy R. Busch
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1* Form of Dealer Manager Agreement.
3.1* Charter of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Form of Common Stock Certificate of Registrant.
4.2* Form of Subscription Notification Certificate.
5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein.
5.2* Opinion of Ballard Spahr Andrews & Ingersoll.
8.1* Opinion of Latham & Watkins.
Form of Management Agreement between the Registrant and REIT
10.1* Advisors, Inc.
10.2* Form of Submanagement Agreement between REIT Advisors, Inc. and
Imperial Credit Mortgage Holdings, Inc.
10.3* Form of Submanagement Agreement between REIT Advisors, Inc. and
Imperial Credit Industries, Inc.
10.4* Form of Stock Option Plan and Agreement.
10.5* Lease dated , 1997 between Imperial Commercial
Capital Corporation and regarding Irvine
facility.
10.6* Form of Contribution Agreement between the Registrant, Imperial
Mortgage Holdings, Inc., and Imperial Commercial Capital
Corporation.
10.7* Form of Non-Competition Agreement between the Registrant and
Imperial Credit Mortgage Holdings, Inc.
10.8* Form of Right of First Refusal Agreement between the
Registrant, REIT Advisors, Inc. and Imperial Credit Mortgage
Holdings, Inc.
Servicing Agreement between the Registrant and Imperial
10.9* Commercial Capital Corporation.
Consent of Freshman, Marantz, Orlanski, Cooper & Klein
23.1* (contained in Exhibit 5.1).
Consent of Ballard Spahr Andrews & Ingersoll (contained in
23.2* Exhibit 5.2).
23.3* Consent of Latham & Watkins (contained in Exhibit 8.1).
23.4 Consent of KPMG Peat Marwick LLP regarding Registrant.
Consent of KPMG Peat Marwick LLP regarding Imperial Commercial
23.5 Capital Corporation.
24.1 Power of Attorney (Included on Signature Page).
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 23.4
The Board of Directors
Imperial Credit Commercial Holdings, Inc.:
We consent to the use of our report 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
Orange County, California
April 16, 1997
<PAGE>
EXHIBIT 23.5
The Board of Directors
Imperial Commercial Capital Corporation:
We consent to the use of our report 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
Orange County, California
April 16, 1997
