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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________TO _______________
COMMISSION FILE NUMBER: 0-13091
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IMPAC COMMERCIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 33-0745075
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20371 IRVINE AVENUE, SANTA ANA HEIGHTS, CALIFORNIA 92614
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(714) 556-0122
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK $0.01 PAR VALUE AMERICAN STOCK EXCHANGE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]
On March 24, 1998, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $113.4 million, based on
the closing sales price of the Common Stock on the American Stock Exchange.
For purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed
affiliates. The number of shares of Common Stock and Class A Common Stock
outstanding as of March 24, 1998, was 7,344,789 and 674,211, respectively.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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IMPAC COMMERCIAL HOLDINGS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
<C> <S> <C>
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 20
Item 3. Legal Proceedings.............................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............ 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 21
Item 6. Selected Consolidated Financial Data........................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 24
Item 8. Financial Statements and Supplementary Data.................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 65
PART III
Item 10. Directors and Executive Officers of the Registrant............. 66
Item 11. Executive Compensation......................................... 70
Item 12. Security Ownership of Certain Beneficial Owners and Management. 74
Item 13. Certain Relationships and Related Transactions................. 75
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K............................................................ 86
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PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, references herein to the "Company"
refer to Impac Commercial Holdings, Inc. ("ICH"), its subsidiary IMH/ICH Dove
Street, LLC ("Dove"), and Impac Commercial Capital Corporation ("ICCC"),
formerly Imperial Commercial Capital Corporation, collectively. References to
ICH refer to Impac Commercial Holdings, Inc. as a separate entity from Dove or
ICCC. ICH was incorporated in Maryland in February 1997 under the name
Imperial Credit Commercial Holdings, Inc. and changed its name to IMH
Commercial Holdings, Inc. in June 1997. Subsequently, by a vote of
stockholders on January 28, 1998, IMH Commercial Holdings, Inc. changed its
name to Impac Commercial Holdings, Inc.
GENERAL
Impac Commercial Holdings, Inc. is a recently formed specialty commercial
property finance company which has elected to be taxed at the corporate level
as a real estate investment trust ("REIT") for federal income tax purposes,
which generally allows the Company to pass through income to stockholders
without payment of federal income tax at the corporate level. ICH 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. Impac Mortgage Holdings,
Inc. ("IMH"), formerly Imperial Credit Mortgage Holdings, Inc., capitalized
ICH with $15.0 million in cash in March 1997. As of March 24, 1998, IMH owned
719,789 shares, or 9.8%, of ICH Common Stock and 674,211 shares, or 100%, of
ICH non-voting Class A Common Stock and contributed (the "Contribution") 100%
of the outstanding shares of non-voting preferred stock of ICCC in exchange
for 95,000 shares of ICH non-voting Class A Common Stock. See "Item 13.
Certain Relationships and Related Transactions--Relationships with IMH--
Organizational Transactions with IMH."
RAI Advisors, LLC ("RAI" or the "Manager") was formed as a vehicle through
which the IMH management team could effectively manage the operations of IMH,
the Company and future real estate investment trusts. This management team
oversees the day-to-day operations of the Company pursuant to a management
agreement among the Manager, ICH and ICCC. The Manager has also entered into a
submanagement agreement (the "Submanagement Agreement") with Impac Funding
Corporation, IMH's conduit operations ("IFC"), to provide substantially all of
the administrative services required by the Company.
ICH was formed to seek opportunities in the commercial mortgage market.
Commercial mortgage assets include mortgage loans on condominium-conversions,
mortgage loans on commercial properties, such as industrial and warehouse
space, office buildings, retail space and shopping malls, hotels and motels,
nursing homes, hospitals, multifamily, congregate care facilities and senior
living centers (collectively, "Commercial Mortgages"). The Company operates
the Long-Term Investment Operations, which invests primarily in Commercial
Mortgages and mortgage-backed securities on commercial properties ("CMBSs")
and, subsequent to ICH's initial public offering ("IPO"), the Company operates
the Conduit Operations, conducted by ICCC, which originates, purchases and
sells or securitizes Commercial Mortgages. The Company's Conduit Operations
operates 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 for long-term investment and CMBSs backed by such
Commercial Mortgages. Income is earned principally from the net interest
income received by the Company on Commercial Mortgages, CMBSs held in its
portfolio and finance receivables. Purchases of Commercial Mortgages and CMBSs
are financed with a portion of the Company's capital, as well as long-term
financing through Collateralized Mortgage Obligations ("CMOs") and borrowings
under warehouse line agreements and reverse repurchase agreements. ICCC
supports the investment objectives of ICH by selling Commercial Mortgages and
CMBSs to ICH at costs that are comparable to those available through
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investment bankers and other third parties. In December 1997, ICH participated
in the issuance of a CMO with IMH Assets Corp. (a wholly-owned, specialty
purpose subsidiary of IMH through which IMH conducts its CMO borrowings)
whereby ICH contributed $4.3 million of Commercial Mortgages as CMO
collateral. At December 31, 1997, the Company's Commercial Mortgage loan and
CMBSs portfolio consisted of $95.7 million in finance receivables, $62.8
million in Commercial Mortgages, $19.4 million in CMBSs, and $9.9 million of
residual interest in securitizations. For the year ended December 31, 1997,
the Long-Term Investment Operations acquired $58.5 million of adjustable rate
Commercial Mortgages from ICCC.
COMMERCIAL MORTGAGES HELD IN THE PORTFOLIO
The Company originates, through ICCC, and invests a substantial portion of
its assets in Commercial Mortgages. Although the Company acquired all
Commercial Mortgages from ICCC during 1997, the Company can and in the future
expects to purchase Commercial Mortgages from third party investors for long-
term investment and for resale.
FINANCE RECEIVABLES
The Company provides an aggregate of $900.0 million in warehouse line
agreements to ICCC to fund the origination and acquisition of Commercial
Mortgages during the time of the closing of the Commercial Mortgages to their
sale or other settlement with pre-approved investors. ICCC's outstanding
balances on warehouse lines appear on ICH's balance sheet as finance
receivables and are structured to qualify under REIT asset tests and to
generate income qualifying under the 75% gross income test. Terms of the
warehouse lines are based on Bank of America's prime rate with advance rates
to 90% of the fair value of the mortgage loans outstanding. As of December 31,
1997, ICCC's outstanding aggregate balances on warehouse line agreements with
ICH was $95.7 million.
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 real estate mortgage
investment conduits ("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 CMBSs 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.
CMBSs are securities that represent an interest in, or are secured by,
Commercial Mortgages. The CMBSs 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, although other structures are
possible. With a typical mortgage pass-through security, payment of principal
and interest on the underlying mortgages, following deduction of servicing
expenses, is passed through directly to holders of the securities. Mortgage
pass-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 pass-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
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principal and interest to the more senior class of CMBSs. Because of the
particular risks that accompany CMBSs, the amount of such credit support may
be substantial. Credit supports used in the CMBSs market has included issuer
guarantees, reserve funds, subordinated securities (which bear the risks of
default before more senior classes of securities of the same issuer), cross-
collateralization and over-collateralization.
In addition to credit support, CMBSs may be structured with liquidity
protections intended to provide assurance of timely payment of principal and
interest. Such protections may include surety bonds, letters of credit and
payment advance agreements.
FINANCING
The Long-Term Investment Operations are principally financed through the
issuance of CMOs, borrowings under warehouse line agreements and reverse
repurchase agreements.
Collateralized Mortgage Obligations. As Commercial Mortgages are
accumulated, the Company issues CMOs secured by such loans as a means of
financing its Long-Term Investment Operations. The decision to issue CMOs will
be based on the Company's current and future investment needs, market
conditions and other factors. For accounting and tax purposes, the Commercial
Mortgages financed through the issuance of CMOs will be treated as assets of
the Company, and the CMOs will be treated as debt of the Company when for
accounting purposes the CMO qualifies as a financing arrangement under
Statement of Financial Accounting Standard No. 125 ("FAS 125"). 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.
The Long-Term Investment Operations earns 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. As of December 31, 1997,
the Company had $4.2 million in CMOs outstanding.
The Company believes that under prevailing market conditions an issuance of
CMOs receiving other than an investment grade rating would require payment of
an excessive yield to attract 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 the CMOs. The CMOs are
guaranteed for the holders thereof by a mortgage loan insurer, giving the CMOs
the highest rating established by a nationally recognized rating agency.
Warehouse Line Agreements. The Company has committed financing facilities
with two investment banks, one of which expires in April 1998 and one of which
expires in February 1999 (unless terminated earlier), not to exceed an
aggregate of $400.0 million (or $200.0 million under each facility) 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 90% of
the fair market value of the pledged collateral. The Company's warehouse line
agreements require the Company to pledge the collateral to be held by a third-
party custodian. ICH's warehouse line agreements call for the Company to
pledge cash, additional Commercial Mortgages or additional securities in the
event the market value of the existing collateral declines. The term of ICH's
warehouse line agreements stipulate that no Commercial Mortgage may be on the
warehouse line agreement for more than 364 days. The interest rate is based
upon one-month London interbank offered rate ("LIBOR") plus a certain margin,
depending on the type of mortgage collateral provided by the Company, and is
repriced daily. In an event of default under ICH's warehouse line agreements,
the lender may force the liquidation of the pledged collateral subject to any
bankruptcy proceedings rights and remedies available to a creditor. See
"Item 7. 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. The Company has
currently entered into three reverse repurchase agreements. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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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/or 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 instruments 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.
Reverse repurchase agreements take the form of a sale of securities to the
lender at a discounted price in return for the lender's agreement to resell
the same securities to the borrower at a future date (the maturity of the
borrowing) at an agreed price. 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.
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 security holders in the event of a borrower
default resulting in a short-fall in a 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.
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INVESTMENT POLICIES
The following is a summary of some of the investment policies of the
Company, any of which may be changed by the Company's Board of Directors
without a vote of security holders. The executive officers of the Company are
empowered to make day-to-day investment decisions, including the issuance of
commitments on behalf of the Company to purchase Commercial Mortgages and
CMBSs meeting the investment criteria set from time to time by the Company's
Board of Directors. Other than statutory limitations imposed in order to have
ICH classified as a REIT, there is no current limitation set by the Board of
Directors on the percentage of assets which the Company may invest in any one
type of investment or the percentage of CMBSs of any one issue which the
Company may acquire.
The Company does not anticipate wide geographic diversification of the
properties underlying the Company's Commercial Mortgages and does not expect
to set specific limitations on the aggregate percentage of its portfolio
composed of such properties located in any one area (whether by state, zip
code or other geographic measure). Management estimates that a majority of the
Commercial Mortgages held by the Company for portfolio investment will be
secured by properties in California. It is the Company's policy to acquire
assets primarily for income and to finance its operations by warehouse lines
of credit, reverse repurchase agreements, issuance of CMOs and CMBSs and
proceeds from the issuance of capital stock.
CONDUIT OPERATIONS
ICCC began its mortgage conduit operations in January 1997. The Conduit
Operations consist of the origination or purchase and sale of Commercial
Mortgages primarily secured by first liens on commercial properties that are
originated in accordance with ICCC's underwriting guidelines. As the Conduit
Operations of the Company, ICCC 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. During the year ended December 31, 1997, ICCC
originated or acquired $233.5 million of Commercial Mortgages and sold $73.4
million of such loans to third party investors while the Long-Term Investment
Operations acquired $58.5 million of Commercial Mortgages from ICCC.
The Company's Conduit Operations operates 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 six-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
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become an important alternative for such first time buyers in certain
geographic regions. In many cases tenants or third party buyers can purchase a
condominium unit with a total debt service at or near their existing level of
rent. These results combined with tax benefits and potential future
appreciation provide a significant incentive for the first-time buyer who may
be unable to afford a detached single family residence. The Company believes
that these conditions provide a substantial financing opportunity for the
Company.
The Commercial Mortgages offered by the Condominium Division are designed
for complete or partial condominium complexes that will be marketed to the
home buying community in accordance with market demand. The final loan amount
is based on both the retail value of the individual condominium unit and the
current multi-family value. Each project must have a verified operating
history that will provide adequate net income to cover the debt service.
The Condominium Division offers Commercial Mortgages which require master
loan agreements that include provisions for cross-collaterization and cross-
default of units within a complex. In addition, Commercial Mortgages offered
by the Condominium Division are generally with full recourse to the
sponsor/developer. The units may be released at par or on an accelerated basis
depending on sales absorption, Debt Service Coverage Ratios ("DSCR") and
integrity of sales values. DSCRs of similar income producing properties will
be compared with those of the property to be financed at time of origination
of the Commercial Mortgage. The Condominium Division originates, underwrites,
processes and funds Commercial Mortgages on a retail basis from ICCC's
executive offices. For the year ended December 31, 1997, the Condominium
Division originated $23.6 million of Commercial Mortgages which were sold to
the Long-Term Investment Operations.
RETAIL DIVISION
The Retail Division markets Commercial Mortgages directly to property owners
who seek Commercial Mortgages to purchase a building or refinance an existing
mortgage. The Retail Division offers 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 are 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 utilizes short-term prepayment lock-outs
and prepayment penalties to reduce its exposure to prepayments. The Retail
Division also offers 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 maturity and with a maximum LTV generally not to exceed 75%.
The Division utilizes prepayment lock-out and prepayment penalties with these
Commercial Mortgages as well. The Commercial Mortgages offered by the Retail
Division generally utilizes non-negotiable loan documents and limited scope
third party reports which provide more efficient underwriting and closing.
Although processing and funding relating to these Commercial Mortgages are
performed centrally at ICCC's executive offices, the Company has targeted
major metropolitan areas for the opening of satellite offices for regional
originations in 1998. The Retail Division's marketing strategy is 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 allows the Retail Division to originate Commercial
Mortgages at a competitive cost. For the year ended December 31, 1997, the
Retail Division originated $50.7 million of Commercial Mortgages.
CORRESPONDENT AND BULK PURCHASE DIVISION
The Company's Correspondent and Bulk Purchase Division originates Commercial
Mortgages on a retail basis and purchases such loans on a bulk or flow basis.
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Correspondent Origination. The Company's 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 Correspondent and Bulk Purchase Division's strategic focus is to
be a low cost national originator through a national correspondent network of
Commercial Mortgages to be held for investment or sold in the secondary market
as whole loans or securitized as CMBSs. A key feature of this approach is the
use of a 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 Commercial Mortgages and securitize or sell
them in 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 in
1998.
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. All
Commercial Mortgages originated through correspondents will be underwritten by
ICCC.
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 bulk sale or REMIC securitizations. For the year ended December 31,
1997, the Correspondent Division originated $159.2 million of Commercial
Mortgages.
Bulk Purchases. In addition to originating Commercial Mortgages on a
correspondent basis, the Division expects in the future to purchase 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
the Company's underwriting guidelines. Depending on the size of the pool of
Commercial Mortgages purchased, the Company engages 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 are 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 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.
9
<PAGE>
The following table sets forth ICCC's Commercial Mortgage originations by
type of Commercial Mortgage for the period shown:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
(DOLLARS IN MILLIONS, EXCEPT
FOR AVERAGE LOAN SIZE)
<S> <C>
Fixed Rate Loans:
Volume of Loans............................ $ 180.3
Percent of total volume.................... 77.2%
Variable Rate Loans:
Volume of Loans............................ $ 53.2
Percent of total volume.................... 22.8%
--------
$ 233.5
========
Average Loan Size............................ $377,000
</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.
ICCC's Commercial Mortgage origination and purchase activities typically
focus on those regions of the country where higher volumes of Commercial
Mortgages are originated, including Arizona, Arkansas, California, Colorado,
Florida, Nevada, New Hampshire, Ohio, Oregon, Texas and Wisconsin. The highest
concentration of Commercial Mortgages originated or purchased by ICCC relate
to properties located in California because of the generally higher property
values and mortgage loan balances prevalent in California. The following table
sets forth the geographic distribution of ICCC's Commercial Mortgage
originations for the period shown:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
AGGREGATE % OF AGGREGATE
PRINCIPAL PRINCIPAL
BALANCE BALANCE
-------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
California............................ $ 121.3 52.0%
Ohio.................................. 27.9 11.9
Arkansas.............................. 21.0 9.0
Texas................................. 16.6 7.1
Arizona............................... 13.7 5.9
Nevada................................ 9.7 4.2
New Hampshire......................... 4.7 2.0
Colorado.............................. 4.3 1.8
Florida............................... 4.3 1.8
Wisconsin............................. 2.9 1.2
Oregon................................ 2.9 1.2
Others................................ 4.2 1.9
-------------- -------------
Total............................... $ 233.5 100.0%
============== =============
</TABLE>
ICCC generally originates Commercial Mortgages and retains servicing rights
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 Real Estate Services and Wendover Funding Corporation
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."
10
<PAGE>
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, see "--Securitization and Sale Process."
Following the issuance of a rate-lock, ICCC is subject to the risk of
interest rate fluctuations and enters into hedging transactions to diminish
such risk. Hedging transactions may include mandatory or optional forward
sales of Commercial Mortgages or CMBSs, interest rate caps, floors and swaps,
mandatory forward sales, mandatory or optional sales of futures and other
financial futures transactions including U.S. Treasury obligations. The nature
and quantity of hedging transactions are determined by the Company based on
various factors, including market conditions and the expected volume of
Commercial Mortgage purchases. Gains and losses on hedging transactions are
recorded as incurred.
UNDERWRITING AND QUALITY CONTROL
Origination and Purchase Guidelines. ICCC has developed comprehensive
purchase guidelines for the origination or purchase of Commercial Mortgages by
the Conduit Operations. Subject to certain exceptions, each Commercial
Mortgage originated or purchased must conform to program guidelines with
respect to, among other things, loan amount, type of property, loan-to-value
ratio, type and amount of insurance, credit history of the borrower, DSCRs,
sources of funds, appraisals and loan documentation. ICCC also performs a
legal documentation review prior to the origination or purchase of any
Commercial Mortgage. Additionally, for Commercial Mortgages that are
underwritten by contract underwriters, ICCC does not perform a full
underwriting review prior to origination or purchase, but instead relies on
the credit review and analysis performed by the contract underwriter, as well
as its own pre-purchase eligibility process to ensure that the loan meets the
program acceptance guidelines and a post-purchase quality control review.
Underwriting Methods. Commercial Mortgages have maximum loan amounts and
LTV's and minimum DSCRs which are determined from time to time by the
executive committee of ICCC. The DSCR for any Commercial Mortgage is the ratio
of net operating income produced by the related mortgaged property to the
monthly payment due from the borrower on such property, in most cases as
underwritten by the related originator and verified by the appraiser, to the
amounts of principal and interest due under such Commercial Mortgages.
Generally, net operating income for a mortgaged property equals the operating
revenues for such mortgaged property minus its operating expenses and
replacement reserves, but without giving effect to debt service, depreciation,
non-recurring capital expenditures, tenant improvements, leasing commissions
and similar items. Appraisals and field inspections (performed by outside and
certified inspectors) and title insurance are required for each Commercial
Mortgage.
ICCC's underwriting standards under its Commercial Mortgage lending programs
are primarily intended to assess the economic value of the mortgaged property
and the financial capabilities, credit standing and managerial ability of the
borrower. In determining whether a loan should be made, ICCC will consider,
among other things, the borrower's management experience, DSCRs, the
borrower's overall financial position and the 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,
11
<PAGE>
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 evidenced in environmental reports obtained by ICCC.
ICCC analyzes the financial statements of the borrower to determine the
borrower's equity in the mortgaged property and overall capitalization,
particularly as it relates to real estate mortgage demands on equity. If the
borrower's holdings are heavily encumbered so that the debt service
requirements consume a high percentage of the rental income from the mortgaged
property, or consist substantially of unimproved or underimproved properties
having little or no gross income, ICCC analyzes whether the borrower will be
able to meet all of the mortgaged property's loan obligations (expenses, debt
service and equity return). In addition to DSCRs, the borrower's income and
expense ratios may be calculated.
In addition to the income from the mortgaged property, ICCC also evaluates
the borrower's income as a possible secondary source of repayment for the
Commercial Mortgage. In analyzing such income, ICCC considers, among other
factors, employment or business history of borrower and the stability and
seasonality of the borrower's current employment or business. If the borrower
derives income from rental property, ICCC evaluates the experience of the
manager of the rental property, type of tenancy and the cash flow generated by
the borrower's real estate portfolio. ICCC also reviews the borrower's credit
history to determine the borrower's ability and willingness to repay debts. In
general, ICCC will not grant a Commercial Mortgage to a borrower who has a
history of slow payments or delinquencies, bankruptcies, collection actions,
foreclosures or judgments against the borrower without adequate explanations
for each exception.
SECURITIZATION AND SALE PROCESS
General. The Conduit Operations utilizes 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
12
<PAGE>
line agreements, see "Item 7. Management's Discussion and Analysis of
Financial Condition 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 $300 million,
ICCC will securitize them through the issuance of CMBSs in the form of REMICs
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 (pass-through certificates guaranteed by the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation or the
Governmental National Mortgage Association) 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' REMICs or the Long-Term Investment Operations' CMOs are based upon
the perceived credit risk by the applicable rating agency of the underlying
Commercial Mortgages, the structure of the securities, and the associated
level of credit enhancement. Credit enhancement is designed to provide
protection to the security holders in the event of borrower defaults and other
losses including those associated with fraud or reductions in the principal
balances or interest rates on Commercial Mortgages as required by law or a
bankruptcy court.
The Conduit Operations or the Long-Term Investment Operations may utilize
multiple forms of credit enhancement, including special hazard insurance,
letters of credit, surety bonds, over-collateralization and subordination or
any combination thereof. In determining whether to provide credit enhancement
through subordination or other credit enhancement methods, the Conduit
Operations and the Long-Term Investment Operations take into consideration the
costs associated with each method.
Each series of CMBSs is typically fully payable from the mortgage assets
underlying such series, and the recourse of investors is limited to such
assets and any associated credit enhancement features, such as
senior/subordinated structures. To the extent the Company holds subordinated
securities, a form of credit enhancement, the Company generally bears all
losses prior to the related senior security holders. Generally, any losses in
excess of the credit enhancement obtained are borne by the security holders.
Except in the case of a breach of the standard representations and warranties
made by the Company when Commercial Mortgages are securitized, such securities
are non-recourse to the Company. Typically, the Company has recourse to the
correspondents of Commercial Mortgages for any such breaches, but there are no
assurances of the correspondent's abilities to honor their respective
obligations.
13
<PAGE>
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 conducts certain hedging activities in connection with both its
Long-Term Investment Operations, only with respect to its liabilities, and its
Conduit Operations.
Long-Term Investment Operations. To the extent consistent with ICH's
election to qualify as a REIT, the Company follows a hedging program intended
to protect against interest rate changes and to enable the Company to earn net
interest income in periods of generally rising, as well as declining or
static, interest rates. Specifically, the Company's hedging program is
formulated with the intent to offset the potential adverse effects resulting
from (1) interest rate adjustment limitations on its Commercial Mortgages and
CMBSs and (2) the differences between the interest rate adjustment indices and
interest rate adjustment periods of its adjustable rate Commercial Mortgages
secured by such loans and related borrowings. As part of its hedging program,
the Company also monitors on an ongoing basis the prepayment risks that arise
in fluctuating interest rate environments.
The Company's hedging program encompasses a number of procedures. The
Company will structure its borrowing agreements to have a range of different
maturities (although substantially all will have maturities of less than one
year). As a result, the Company adjusts the average maturity of its borrowings
on an ongoing basis by changing the mix of maturities as borrowings come due
and are renewed. In this way, the Company minimizes any differences between
interest rate adjustment periods of Commercial Mortgages and related
borrowings that may occur due to prepayments of Commercial Mortgages or other
factors.
The Company may occasionally purchase interest rate caps to limit or
partially offset adverse changes in interest rates associated with its
borrowings. In a typical interest rate cap agreement, the cap purchaser makes
an initial lump sum cash payment to the cap seller in exchange for the
seller's promise to make cash payments to the purchaser on fixed dates during
the contract term if prevailing interest rates exceed the rate specified in
the contract. In this way, the Company generally hedges as much of the
interest rate risk arising from lifetime rate caps on Commercial Mortgages and
from periodic rate and/or payment caps as the Company determines is in the
best interests of the Company, given the cost of such hedging transactions and
the need to maintain ICH's status as a REIT. Such periodic caps on the
Company's Commercial Mortgages may also be hedged by the purchase of mortgage
derivative securities. Mortgage derivative securities can be effective hedging
instruments in certain situations as the value and yields of some of these
instruments tend to increase as interest rates rise and tend to decrease in
value and yields as interest rates decline, while the experience for others is
the converse. The Company intends to limit its purchases of mortgage
derivative securities to investments that qualify as qualified REIT assets or
qualified hedges so that income from such investments will constitute
qualifying income for purposes of the 95% and 75% gross income tests. To a
lesser extent, the Company, through its Conduit Operations, may enter into
interest rate swap agreements, buy and sell financial futures contracts and
options on financial futures contracts and trade forward contracts as a hedge
against future interest rate changes; however, the Company will not invest in
these instruments unless the Company and the Manager are exempt from the
registration requirements of the Commodity Exchange Act or otherwise comply
with the provisions of that Act. The REIT provisions of the Internal Revenue
Code (the "Code") may restrict the Company's ability to purchase certain
instruments and may severely restrict the Company's ability to employ other
strategies. 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 enters
into transactions designed to hedge interest rate risks, which may include
mandatory and optional forward selling of Commercial Mortgages
14
<PAGE>
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 are determined by the management of
ICCC or RAI, the Manager of the Company, based on various factors, including
market conditions and the expected volume of Commercial Mortgage purchases.
See "Item 13. Certain Relationships and Related Transactions--Relationships
with the Manager."
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.
In addition, hedging involves transaction and other costs, and such costs
increase dramatically as the period covered by the hedging protection
increases and also increase in periods of rising and fluctuating interest
rates. Therefore, the Company may be prevented from effectively hedging its
interest rate risks, without significantly reducing the Company's return on
equity.
SERVICING
The Company currently purchases all of its Commercial Mortgages on a
"servicing released" basis and thereby acquires the servicing rights.
Commercial Mortgages purchased on a servicing released basis are unencumbered
by any obligation on the part of the party purchasing the mortgages to pay a
fee to a third party to service the Commercial Mortgages. The rights of any
party to service Commercial Mortgages for a fee are commonly referred to as
"commercial mortgage servicing rights" or "CMSRs." The Company has established
guidelines for the servicing of Commercial Mortgages and for monitoring the
performance of other loan servicers which service Commercial Mortgages for the
Company. Servicing includes collecting and remitting loan payments, making
required advances, accounting for principal and interest, holding escrow or
impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent
borrowers and supervising foreclosures and property dispositions in the event
of unremedied defaults in accordance with the Company's guidelines.
The following table sets forth certain information regarding ICCC's
servicing portfolio of loans for the period shown:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
(DOLLARS IN MILLIONS, EXCEPT
FOR AVERAGE LOAN SIZE)
<S> <C>
Loans added to the servicing portfolio...... $ 251.1
Loans sold servicing released and principal
paydowns (1)............................... (81.9)
--------
Ending servicing portfolio.................. $ 169.2
========
Number of loans serviced.................... 559
Average loan size........................... $303,000
</TABLE>
- --------
(1) Includes normal principal amortization and prepayments.
The Company subcontracts all of its servicing obligations under Commercial
Mortgages purchased on a "servicing released basis" or originated pursuant to
sub-servicing agreements (the "Sub-Servicing Agreements")
15
<PAGE>
with terms that are in accordance with ICCC's guidelines, the Commercial
Mortgage documents, customary and usual standards for servicers of Commercial
Mortgages and applicable laws. Commercial Mortgage servicing fees paid to
these sub-servicers generally range from 0.08% to 0.30% per annum on the
declining principal balances of the loans sub-serviced. Each sub-servicer is
required to pay all expenses related to the performance of its duties under
the Sub-Servicing Agreement. Each Sub-Servicing Agreement is cancelable by
either party upon giving notice. The Company believes that the terms of the
Sub-Servicing Agreements are comparable to industry standards.
The Company may terminate a Sub-Servicing Agreement with any sub-servicer
upon the occurrence 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
comparable to termination fees generally found 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
16
<PAGE>
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 December 31, 1997, there were no delinquencies on Commercial Mortgages
comprising the Company's servicing portfolio. The Commercial Mortgages
originated by ICCC since its inception have not been outstanding for any
periods commencing earlier than January 15, 1997. Consequently, the Company's
delinquency and foreclosure experience to date may not be indicative of future
results.
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.
The following table sets forth certain information regarding the number of
and aggregate principal balance of the Commercial Mortgages serviced by ICCC,
including both fixed and adjustable rate Commercial Mortgages, at various
mortgage interest rates for the period shown:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
--------------------------------
AGGREGATE WEIGHTED
NUMBER PRINCIPAL AVERAGE
OF LOANS BALANCE INTEREST RATE
-------- --------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
7.00-7.49%............................... 4 $ 18.8 7.38%
7.50-7.99................................ 9 29.0 7.63
8.00-8.49................................ 24 38.8 8.32
8.50-8.99................................ 351 41.3 8.75
9.00-9.49................................ 152 33.8 9.21
9.50-9.99................................ 15 5.9 9.73
10.00-10.49.............................. 4 1.6 10.09
--- ------ -----
Total................................ 559 $169.2 8.45%
=== ====== =====
</TABLE>
The following table sets forth the geographic distribution of ICCC's
servicing portfolio for the period shown:
<TABLE>
<CAPTION>
PERIOD FROM JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
---------------------------------
AGGREGATE % OF AGGREGATE
NUMBER PRINCIPAL PRINCIPAL
OF LOANS BALANCE BALANCE
-------- --------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
California.............................. 54 $ 73.3 43.3%
Arizona................................. 411 30.7 18.1
Ohio.................................... 12 27.8 16.5
Texas................................... 6 15.0 8.8
Nevada.................................. 5 7.7 4.6
Florida................................. 2 4.3 2.5
Wisconsin............................... 21 2.8 1.6
Colorado................................ 41 2.1 1.3
Others(1)............................... 7 5.5 3.3
--- ------ -----
Total............................... 559 $169.2 100.0%
=== ====== =====
</TABLE>
- --------
(1) No other state accounted for greater than 1% of the Company's Commercial
Mortgage Servicing Portfolio.
17
<PAGE>
The Company issues 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 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 contracts with qualified Commercial Mortgage
master servicers to assume the master servicing role in these securitizations
and ICCC acts as special servicer. The Company believes that acting as special
servicer will allow it to monitor and manage those matters of significant risk
associated with the Commercial Mortgages. In this manner, the Company believes
it will be best positioned to protect any beneficial interest it may retain in
the trusts it creates. However, the Company reserves the right to act as
either the master servicer, the special servicer, both or neither in the
future. In addition, ICCC acts as the servicer for all loans purchased by the
Long-Term Investment Operations. With respect to its function as a servicer
for the Long-Term Investment Operations, ICCC and ICH entered into a Servicing
Agreement having terms substantially similar to those described above.
When ICCC purchases Commercial Mortgages that include the associated
servicing rights or originates Commercial Mortgages, the allocated cost of the
servicing rights will be reflected on its financial statements as CMSR. CMSR
will be amortized in proportion to, and over the period of, expected future
net servicing income.
SFAS No. 125 requires that a portion of the cost of originating or
purchasing a mortgage loan be allocated to the mortgage loan servicing rights
based on its fair value relative to the fair value of the components of the
loan. To determine the fair value of the servicing rights created, ICCC uses a
valuation model that calculates the present value of future net servicing
revenues to determine the fair value of the servicing rights. In using this
valuation method, ICCC incorporates assumptions that it believes market
participants would use in estimating future net servicing income which include
estimates of the cost of servicing or subservicing, an inflation rate,
ancillary income per Commercial Mortgage, a prepayment rate, loss severity, a
default rate and a discount rate commensurate with the risks involved.
CMSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the
time CMSRs are recorded could result in a decline in the fair value of the
CMSRs below their carrying value requiring a provision to increase the CMSRs
valuation allowance. The rate of prepayment of Commercial Mortgages is
affected by a variety of economic and other factors, including prevailing
interest rates and the availability of alternative financing. The effect of
those factors on Commercial Mortgage prepayment rates may vary depending on
the particular type of Commercial Mortgage. Estimates of prepayment rates are
made based on management's expectations of future prepayment rates, which are
based, in part, on the historical rate of prepayment of ICCC's Commercial
Mortgages, and other considerations. There can be no assurance of the accuracy
of the Company's prepayments estimates. If actual prepayments with respect to
Commercial Mortgages serviced occur more quickly than were projected at the
time such Commercial Mortgages were sold, the carrying value of the CMSRs may
have to be reduced through a provision recorded to increase the CMSRs
valuation allowance in the period the fair value declined below the CMSR
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.
18
<PAGE>
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 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 the 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 faces competition from other investment
opportunities available to prospective investors.
The Company faces 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 competes 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 Mortgage competes with all lessors and developers
of comparable types of real estate in the area in which the mortgaged property
is located. Such lessors or developers could have lower rentals, lower
operating costs, more favorable locations or better facilities. While a
borrower under a Commercial Mortgage may renovate, refurbish or expand the
mortgaged property to maintain it and remain competitive, such renovation,
refurbishment or expansion may itself entail significant risk. Increased
competition could adversely affect income from the market value of the
mortgaged properties. In addition, the business conducted at each mortgaged
property may face competition from other industries and industry segments.
EMPLOYEES
All employees and operating management of the Company are also employees of
ICCC. As of December 31, 1997, ICCC had 50 employees. The Company believes
that relations with its employees are good. The Company is not a party to any
collective bargaining agreement.
FORWARD-LOOKING STATEMENTS
In accordance with the Private Securities Litigation Reform Act of 1995, the
Company can obtain a "Safe Harbor" for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results
to differ from those in the forward-looking statements. Accordingly, the
following information contains or may contain forward-looking statements: (1)
information included in this Annual Report on Form 10-K, including, without
limitation, statements regarding investments in CMBSs, bulk purchases of
Commercial Mortgages, hedging, servicing and
19
<PAGE>
statements made under Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, (2) information included or
incorporated by reference in future filings by the Company with the Securities
and Exchange Commission including, without limitation, statements with respect
to growth, projected revenues, earnings, returns and yields on its portfolio
of Commercial Mortgages and CMBSs, the impact of interest rates, costs, and
business strategies and investment policies, and (3) information contained in
written material, releases and oral statements issued by or on behalf of, the
Company, including, without limitation, statements with respect to growth,
projected revenues, earnings, returns and yields on its portfolio of
Commercial Mortgages and CMBSs, the impact of interest rates, costs and
business strategies and investment policies. The Company's actual results may
differ materially from those contained in the forward-looking statements
identified above. Factors which may cause such a difference to occur include,
but are not limited to, (i) heightened competition, including specifically
increased competition for Commercial Mortgage purchase opportunities with
financial institutions, including 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 which have investment objectives similar to those of the
Company and some of which may have investment objectives similar to those of
the Company and some of which may have greater financial resources than the
Company, (ii) the availability of suitable opportunities for the acquisition,
ownership and disposition of mortgage assets, and yields available from time
to time on such mortgage assets, (which, in turn, depend to a large extent on
the type of mortgage asset involved, prevailing interest rates, the nature and
geographical location of the property, competition, prepayments, environmental
risks, defaults, and other factors, none of which can be predicted with
certainty), (iii) regulatory and litigation matters, (iv) interest rates and
their effect on Commercial Mortgages and CMBSs, (v) imbalances in cash
available for distribution caused by an unanticipated level of defaults and/or
prepayments on the Company's portfolio of mortgage assets and (vi) trends in
the economy which affect confidence and demand for the Company's portfolio of
mortgage assets, particularly trends affecting the Company's assets.
ITEM 2. PROPERTIES
Pursuant to the Management Agreement, RAI contracts 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 currently
occupies, and is fully utilizing, approximately 18,000 square feet of office
space in Irvine, California under a premises operating lease expiring in
November 2000.
In August 1997, ICH and IMH each purchased for cash a 50% interest in the
commercial office building in Newport Beach, California. As of December 31,
1997, ICH and IMH financed the commercial property with a $5.2 million loan
from ICCC. See "Item 13. Certain Relationships and Related Transactions--
Relationships with Affiliates--Credit Arrangements." The Company expects ICCC
to begin relocating employees to the building in 1998 with relocation
scheduled for completion in 1999. Management believes that these facilities
will adequately provide for the Company's growth needs for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders to be voted on during the
fourth quarter of 1997.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the American Stock Exchange under
the symbol ICH. The following table sets forth for the high, low and closing
sale prices for ICH's Common Stock as reported by the American Stock Exchange
during 1997.
<TABLE>
<CAPTION>
HIGH LOW CLOSE
------ ------ ------
<S> <C> <C> <C>
Third Quarter (1).................................... $20.75 $16.56 $18.63
Fourth Quarter....................................... 19.31 15.25 17.63
</TABLE>
- --------
(1) IMH became a public entity on August 4, 1997.
On March 24, 1998, the last reported sale price of the Common Stock on the
AMEX was $18.00 per share. As of March 24, 1998, there were 90 holders of
record (including holders who are nominees for an undetermined number of
beneficial owners) of the Company's Common Stock.
To maintain its qualification as a REIT, ICH intends to make annual
distributions to stockholders of at least 95% of its taxable income (which may
not necessarily equal net income as calculated in accordance with Generally
Accepted Accounting Principles ("GAAP"), determined without regard to the
deduction for dividends paid and excluding any net capital gains. ICH declares
regular quarterly dividend distributions. Any taxable income remaining after
the distribution of the regular quarterly or other dividends will be
distributed annually on 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 ICH to maintain REIT status will
be made by ICH at the discretion of the Board of Directors and will depend on
the taxable earnings of ICH, 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 following table sets forth
the dividends paid or declared by ICH:
<TABLE>
<CAPTION>
PER SHARE
STOCKHOLDER DIVIDEND
PERIOD COVERED RECORD DATE AMOUNT
-------------- ----------------- ---------
<S> <C> <C>
Quarter ended September 30, 1997 (1).......... October 21, 1997 $0.15
Quarter ended December 31, 1997 (2)........... December 31, 1997 $0.38
</TABLE>
- --------
(1) IMH became a public entity on August 4, 1997.
(2) The Board of Directors of ICH declared a $0.38 per share cash dividend
paid on January 15, 1998 to stockholders of record on December 31, 1997.
Distributions to stockholders will generally be taxable as ordinary income,
although a portion of such distributions may be designated by ICH as capital
gain or may constitute a tax-free return of capital. ICH will annually furnish
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. Of the dividends paid during 1997,
approximately $504,000 represented a tax-free return of capital.
21
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated statements of operations data for the
period from January 15, 1997 (commencement of operations) through December 31,
1997, and the consolidated balance sheet data as of December 31, 1997 were
derived from the Company's and ICCC's financial statements audited by KPMG
Peat Marwick LLP ("KPMG"), independent auditors, whose reports with respect
thereto appear elsewhere herein.
References to financial information of the Company reflect financial results
of ICH for the period from January 15, 1997 (commencement of operations)
through December 31, 1997, the financial results of ICH's equity interest in
net earnings in ICCC as a stand-alone entity, subsequent to the Contribution,
and the financial results of Dove for the period from August 25, 1997 through
December 31, 1997.
The results of operations of ICCC, of which 95% of the economic interest is
owned by ICH, are included in the results of operations of the Company as
"Equity in net income of Impac Commercial Capital Corporation."
IMPAC COMMERCIAL HOLDINGS, INC.
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
-----------------------------
Revenues:
Interest income.............................. $ 7,459
Equity in net income of Impac Commercial
Capital Corporation......................... 1,694
Rental and other income...................... 174
--------
9,327
--------
Expenses:
Stock compensation expense................... 2,697
Interest on borrowings....................... 2,350
General and administrative and other......... 905
Provision for loan losses.................... 564
--------
6,516
--------
Net income.................................. $ 2,811
========
Net income per share--basic................. $ 0.61
========
Net income per share--diluted............... $ 0.61
========
Dividends declared per share................ $ 0.53
========
<CAPTION>
AT DECEMBER 31,
1997
---------------
<S> <C>
BALANCE SHEET DATA:
-------------------
Total assets................................... $218,839
Finance receivables............................ 95,711
Commercial Mortgages held-for-investment and
CMO collateral................................ 67,045
Investment securities available-for-sale....... 19,353
Residual interest in securitizations, held-for-
trading....................................... 9,936
Total borrowings............................... 104,391
Total stockholders' equity..................... 103,242
</TABLE>
22
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
STATEMENT OF OPERATIONS DATA:
-----------------------------
<S> <C>
Revenues:
Interest income............................... $ 2,804
Gain on sale of loans......................... 3,657
Loan servicing and other income............... 62
--------
6,523
--------
Expenses:
Interest on borrowings........................ 2,747
General and administrative and other.......... 1,176
Provision for repurchases..................... 201
--------
4,124
--------
Income before income taxes.................. 2,399
Income taxes.................................. 1,022
--------
Net income.................................. $ 1,377
========
OPERATING DATA (IN MILLIONS):
-----------------------------
Commercial Mortgage acquisitions (volume)....... $ 233.5
Servicing portfolio at period-end............... 169.2
<CAPTION>
AT DECEMBER 31,
1997
---------------
BALANCE SHEET DATA:
-------------------
<S> <C>
Total assets.................................... $112,635
Commercial Mortgage loans held-for-sale......... 106,654
Warehouse line agreements....................... 104,219
Total shareholders' equity...................... 4,403
</TABLE>
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
ICH was incorporated in the state of Maryland in on February 3, 1997. ICH
was formed to seek opportunities in the commercial mortgage market. Commercial
mortgage assets include mortgage loans on condominium-conversions, mortgage
loans on commercial properties, such as industrial and warehouse space, office
buildings, retail space and shopping malls, hotels and motels, nursing homes,
hospitals, multifamily, congregate care facilities and senior living centers
(collectively, "Commercial Mortgages"). The Company operates the Long-Term
Investment Operations, which invests primarily in Commercial Mortgages and
CMBSs and subsequent to ICH's IPO in August 1997 engages in the Conduit
Operations, ICCC, which originates, purchases and sells or securitizes
Commercial Mortgages. ICCC operates three divisions: the Condominium Division,
the Retail Division, and the Correspondent and Bulk Purchase Division.
Significant Transactions
In February 1997, certain officers and directors, as a group, of the
Company, as a group, and IMH purchased 300,000 and 299,000 shares of the
Common Stock of ICH, respectively. In addition, IMH purchased all of the non-
voting preferred stock of ICCC, which represents 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 addition, 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.
In March 1997, IMH loaned ICH $15.0 million evidenced by a promissory note
convertible into shares of non-voting preferred stock of ICH at the rate of
one share of ICH Preferred Stock for each $5.00 principal amount of said note.
IMH converted the aforementioned $15.0 million principal amount promissory
note into an aggregate of 3,000,000 shares of ICH Preferred Stock. All shares
of ICH Preferred Stock were automatically converted upon the closing of the
IPO 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 was $5.00 and the denominator of which was $15.00. Notwithstanding the
foregoing, consistent with IMH's classification as a REIT, IMH was not
entitled to convert 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 the
IPO were automatically converted into shares of ICH non-voting Class A Common
Stock at the same rate as the ICH Preferred Stock converted into ICH Common
Stock. Shares of ICH Class A Common Stock convert into shares of ICH 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 sale of ICH Common Stock held by IMH, shares of ICH Class A
Common Stock will automatically convert into additional shares of the Common
Stock of ICH, subject to a 9.8% limitation. In addition, ICH purchased
$10.1 million in CMBSs from IFC which was financed with a promissory note. The
promissory note was repaid to IFC with cash from IMH's above-referenced $15.0
million investment. Concurrently, ICH repaid the $900,000 owed to IMH in
connection with its purchase of condominium conversion loans. ICH entered into
a borrowing agreement with Imperial Credit Industries Inc. ("ICII") for $7.9
million secured by $10.1 million in CMBSs. The loan was repaid upon ICH's IPO.
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 Common Stock.
In August 1997, the Company raised $88.2 million, net of underwriting
expenses, from its IPO as stockholders purchased 6,325,000 shares of common
stock at a price of $15.00 per share. Upon the closing of the IPO, IMH
contributed to ICH 100% of the outstanding shares of non-voting preferred
stock of ICCC in exchange for 95,000 shares of ICH Class A Stock. As of March
24, 1998, IMH owned 719,789 shares, or 9.8%, of ICH Common Stock in addition
to 674,211 shares, or 100%, of ICH Class A Stock.
24
<PAGE>
In August 1997, IMH/ICH Dove Street, LLC, a California limited liability
company, of which each of IMH and ICH own a 50% interest, purchased for cash
an office building located in Newport Beach, California. The commercial
property was subsequently financed with a $5.2 million loan from ICCC. See
"Item 13. Certain Relationships and Related Transactions--Relationships with
Affiliates--Credit Arrangements."
RESULTS OF OPERATIONS; IMPAC COMMERCIAL HOLDINGS, INC.
For the period from January 15, 1997 (commencement of operations) through
December 31, 1997
Net Income
Net income for the period from January 15, 1997 (commencement of operations)
through December 31, 1997 (the "Period") was $2.8 million, or $0.61 per
diluted share. Contributions to net income for the Period were primarily the
result of net interest income earned on Commercial Mortgages, investment and
residual securities, and finance receivables which was partially offset by
stock compensation expense, professional services and provision for loan
losses.
Revenues
Revenues for the Period were $9.3 million which was primarily comprised of
interest income earned on Commercial Mortgages held-for-investment, investment
securities available-for-sale, residual interests in securitizations, and
finance receivables (collectively, "Commercial Mortgage Assets"). Revenues
were also positively affected by equity in net income of Impac Commercial
Capital Corporation.
Interest income earned for the Period on Commercial Mortgage Assets was $6.7
million as average outstanding Commercial Mortgage Assets was $63.0 million.
Interest income of $2.1 million was earned for the Period on Commercial
Mortgages held-for-investment and CMO collateral as ICH acquired $58.5 million
of adjustable rate Commercial Mortgages from ICCC for the Period and ICH
contributed $4.3 million of adjustable rate condominium conversion loans as
CMO collateral in December 1997. Average outstanding Commercial Mortgages and
CMO collateral was $22.0 million and $233,000, respectively, for the Period.
Interest income of $2.4 million was earned for the Period on finance
receivables as average outstanding finance receivables to ICCC was $28.0
million. ICCC acquired $233.5 million in Commercial Mortgages during the
Period which were financed by ICH. ICH earns interest at prime on finance
receivables outstanding to ICCC.
Interest income of $1.7 million and $514,000 was earned for the Period from
a residual interest in securitization and investment securities available-for-
sale, respectively. The residual interest in securitization was purchased from
IFC in February 1997 for $10.1 million. The average outstanding balance on
total residual and investment securities for the Period was $12.8 million.
Equity in net income of Impac Commercial Capital Corporation was $1.7
million. ICH has a 95% economic interest in ICCC through its ownership of 100%
of the preferred stock of ICCC which was acquired in August 1997. See "--
Significant Transactions." For additional information on the financial results
of ICCC, see "-- Results of Operations; Impac Commercial Capital Corporation."
Expenses
Expenses for the Period were $6.5 million which was primarily comprised of
interest expense on reverse repurchase agreements, borrowings from Impac
Warehouse Lending Group, Inc. ("IWLG"), formerly Imperial Warehouse Lending
Group, Inc., a subsidiary of IMH, and other borrowings and stock compensation
expense related to the issuance of founder's stock.
Interest expense for the Period on total borrowings was $2.4 million as
total average outstanding borrowings was $31.0 million.
25
<PAGE>
Interest expense for the Period on warehouse line and reverse repurchase
agreements was $1.4 million on average outstanding borrowings of $20.4
million. These borrowings were used to finance the acquisition of
$58.5 million of Commercial Mortgages and $20.2 million of CMBSs during the
Period.
Interest expense for the Period on borrowings from IWLG was $453,000 on
average outstanding borrowings of $5.0 million. These borrowings were used to
finance the acquisition of $17.5 million in principal balance of condominium
conversion loans acquired from IFC until ICH obtained warehouse financing
facilities from third party lenders.
Interest expense for the Period on borrowings from others was $503,000 as
average outstanding borrowings was $5.5 million. These borrowings were used to
finance the acquisition of $10.1 million in residual interest in
securitization which was paid off in September 1997 with proceeds from ICH's
IPO.
Stock compensation expense was related to the issuance of founder's stock to
directors and officers of the Company. ICH issued 300,000 shares of common
stock to directors and officers of ICH on February 3, 1997 at $0.01 per share.
The estimated fair value of the shares was $9.00 (a difference of $8.99 per
share) or $2.7 million.
Professional services was primarily the result of intercompany allocations.
ICH is charged for various services provided by IMH and IFC, including
facilities and costs associated therewith, technology, human resources,
management information systems, general ledger accounts, check processing and
accounts payable, plus a 15% service charge, under the Company's Management
Agreement with RAI. Of the $617,000 of professional services incurred during
the Period, $525,000 in professional services were allocated to ICH.
The provision for loan losses during the Period was $564,000 as a result of
the combined increase in Commercial Mortgages held-for-investment, CMO
collateral, and finance receivables ("Gross Loan Receivables") outstanding at
December 31, 1997 of $162.8 million. The Company did not experience any loan
charge-offs during the Period. While the Company believes that it has
adequately provided for any future credit losses, the Company may have to add
to its loan loss allowance based upon actual loan loss experience or an
increase in the Company's investments.
RESULTS OF OPERATIONS; IMPAC COMMERCIAL CAPITAL CORPORATION
For the period from January 15, 1997 (commencement of operations) through
December 31, 1997
Net Income
Net income for the Period was $1.4 million. Contributions to net income for
the Period were primarily the result of net interest income earned on
Commercial Mortgages held-for-sale and gain on sale of Commercial Mortgages
which was partially offset by professional services and provision for
repurchases.
Revenues
Revenues for the Period were $6.5 million which was primarily comprised of
interest income earned on Commercial Mortgages held-for-sale and gain on sale
of loans. Interest income earned for the Period on Commercial Mortgages was
$2.8 million as average outstanding Commercial Mortgages was $32.3 million as
ICCC acquired $233.5 million of Commercial Mortgages during the Period. Gain
on sale of loans for the Period was $3.7 million as ICCC sold $73.4 million of
Commercial Mortgages to third parties.
Expenses
Expenses for the Period were $4.1 million which was primarily comprised of
interest expense on borrowings from ICH under warehouse line agreements and
other affiliated borrowings, general and administrative expenses, and
professional services.
26
<PAGE>
Interest expense for the Period on total borrowings was $2.7 million as
total average outstanding borrowings was $31.1 million. Interest expense for
the Period on borrowings from ICH under warehouse line agreements and on
borrowings with other affiliates was $2.4 million and $375,000, respectively,
on average outstanding borrowings of $28.0 million and $3.1 million,
respectively. These borrowings were used to finance the acquisition of $233.5
million of Commercial Mortgages during the Period.
Professional services was primarily the result of intercompany allocations.
ICCC is charged for various services provided by IMH and IFC, including
facilities and costs associated therewith, technology, human resources,
management information systems, general ledger accounts, check processing and
accounts payable, plus a 15% service charge, under the Company's Management
Agreement with RAI. Of the $540,000 of professional services incurred during
the Period, $456,000 in professional services were allocated to ICCC.
Provision for repurchases during the Period was $201,000. Management expects
to increase ICCC's allowance for repurchases, both in terms of amount and
expressed as a percentage of the last twelve months of loan sales, in future
periods as ICCC's loan sales activity increases.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements result from funding needs
arising from the acquisition of Commercial Mortgages and CMBSs by the Long-
Term Investment Operations, ICH, and the origination or purchase of Commercial
Mortgages held-for-sale by the Conduit Operations, ICCC.
Prior to the ICH IPO, the Long-Term Investment Operations was funded by
$15.0 million in investments and $900,000 in borrowings from IMH and a
warehouse line agreement from a third party lender. ICCC was funded by
affiliated borrowings and by $500,000 from the issuance of preferred stock.
Subsequent to the Company's IPO, the Long-Term Investment Operations and the
Conduit Operations were funded through borrowings from warehouse line
agreements and reverse repurchase agreements, borrowings from affiliated
companies, sale of Commercial Mortgages and proceeds from the issuance of
capital stock.
ICH, as a stand-alone entity, entered into committed warehouse line
agreements with two investment banks, one of which expires in April 1998 and
one of which expires in February 1999 (unless terminated earlier), which
provide up to an aggregate of $400.0 million (or $200.0 million under each
facility) to finance ICH's operations as needed. Terms of the warehouse line
agreements 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, plus a certain margin depending on the type of collateral provided by
the Company. The margins on the warehouse line agreements are based on the
type of mortgage collateral used and the loan amounts generally range from 85%
to 90% of the fair market value of the collateral. Management believes that
the warehouse line agreements will be sufficient to handle the Company's
liquidity needs. As of December 31, 1997, $90.4 million was outstanding on
warehouse line agreements.
ICH has entered into reverse repurchase agreements whereby ICH pledges
specific CMBSs as collateral to secure short-term loans. The interest rates on
the loans are based on one-month LIBOR plus a margin depending on the type of
collateral. As of December 31, 1997, amounts outstanding on the reverse
repurchase agreements were $9.8 million.
In August 1997, the Company raised $88.2 million from its IPO as
stockholders purchased 6,325,000 shares of common stock at a price of $15.00
per share. Underwriting discount and commissions were $6.6 million and the
total expenses were approximately $1.2 million, which the Company believes is
a reasonable estimate of such expenses. The net offering proceeds to the
Company, after deducting the above expenses, were $87.0 million of which $36.8
million was used to reduce borrowings under warehouse facilities, $18.7
million and $12.4 million was used to purchase Commercial Mortgages and CMBSs,
respectively, $3.9 million was used to purchase a 50% interest in a commercial
office building, Dove, and $15.2 million was used for general working capital
needs.
27
<PAGE>
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby ICH agreed to advance to IMH up to maximum amount of $15.0 million.
The agreement expires on August 8, 1998. Advances under the revolving credit
arrangement are at an interest rate and maturity to be determined at the time
of each advance with interest and principal paid monthly. As of December 31,
1997, there were no amounts outstanding under the credit arrangement. Interest
income recorded by ICH related to such advances to IMH was approximately
$68,000.
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby IMH agreed to advance to ICH up to maximum amount of $15.0 million.
The agreement expires on August 8, 1998. Advances under the revolving credit
arrangement are at an interest rate and maturity to be determined at the time
of each advance with interest and principal paid monthly. As of December 31,
1997, ICH's outstanding borrowings under the credit arrangement was $9.1
million. Interest expense recorded by ICH related to such borrowings from IMH
was approximately $55,000.
In October 1997, ICH agreed to provide to IFC a $15.0 million revolving line
of credit expiring on December 31, 1997 at an interest rate of Prime plus 1%
with interest and principal paid monthly. As of December 31, 1997, the line of
credit expired and there was no balance outstanding.
ICCC has entered into warehouse line agreements with ICH which provide up to
an aggregate of $900.0 million to finance the ICCC's operations as needed.
Terms of the warehouse line agreements 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 on the warehouse line
agreements are at prime which was 8.50% at December 31, 1997. The margins on
the warehouse line agreements are up to 90% of the fair market value of the
collateral. Management believes that the warehouse line agreements will be
sufficient to handle the Company's liquidity needs. As of December 31, 1997,
amounts outstanding on ICCC's warehouse line agreements with ICH were $95.7
million.
ICCC has entered into an uncommitted warehouse line agreement with IMH to
provide financing as needed. The margins on the warehouse line agreement are
at 8% of the fair market value of the collateral. The interest rates on the
borrowings are indexed to the prime rate. As of December 31, 1997, outstanding
amounts on the warehouse line agreement was $8.5 million.
The Company's ability to meet its long-term liquidity requirements is
subject to the renewal of its credit and repurchase facilities and/or
obtaining other sources of financing, including additional debt or equity from
time to time. Any decision by the Company's lenders and/or investors to make
additional funds available to the Company in the future will depend upon a
number of factors, such as the Company's compliance with the terms of its
existing credit arrangements, the Company's financial performance, industry
and market trends in the Company's various business, the general availability
of and rates applicable to financing and investments, such lenders' and/or
investors' own resources and policies concerning loans and investments, and
the relative attractiveness of alternative investment or lending
opportunities.
During the Period, ICCC sold $73.4 million and $58.4 million in principal
balance of Commercial Mortgages to third party investors and ICH,
respectively.
For the Period, net cash provided by operating activities was $9.2 million.
Net cash provided by operating activities was positively affected by a net
increase of $6.5 million in due from and due to affiliates and by $2.7 million
in stock compensation expense related to the issuance of 300,000 shares of the
Common Stock of ICH.
28
<PAGE>
For the Period, net cash used in investing activities was $198.5 million.
Net cash used in investing activities was negatively affected by net increases
of $62.8 million in Commercial Mortgages held for investment, $95.7 million in
finance receivables to ICCC, $30.3 million in acquisition of CMBSs, and
$3.9 million from the acquisition of premises and equipment.
For the Period, net cash provided by financing activities was $205.2
million. Net cash provided by financing activities was positively affected by
an increase of $100.2 million from warehouse line and reverse repurchase
agreements and $102.0 million from the issuance of common stock.
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.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IMPAC COMMERCIAL HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... 31
Consolidated Balance Sheet................................................. 32
Consolidated Statement of Operations....................................... 33
Consolidated Statement of Changes in Stockholders' Equity.................. 34
Consolidated Statement of Cash Flows....................................... 35
Notes to Consolidated Financial Statements................................. 36
IMPAC COMMERCIAL CAPITAL CORPORATION
Independent Auditors' Report............................................... 53
Balance Sheet.............................................................. 54
Statement of Operations.................................................... 55
Statement of Changes in Shareholders' Equity............................... 56
Statement of Cash Flows.................................................... 57
Notes to Financial Statements.............................................. 58
</TABLE>
30
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Commercial Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Impac
Commercial Holdings, Inc. and subsidiary as of December 31, 1997 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the period from January 15, 1997 (commencement of
operations) through December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Impac Commercial Holdings, Inc. and subsidiary as of December 31, 1997 and
the results of their operations and their cash flows for the period from
January 15, 1997 (commencement of operations) through December 31, 1997 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Orange County, California
February 9, 1998
31
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
------
Cash and cash equivalents......................................... $ 15,908
Investment securities available-for-sale.......................... 19,353
Residual interest in securitizations, held-for-trading............ 9,936
Loan receivables:
Finance receivables............................................. 95,711
Commercial Mortgages held-for-investment........................ 62,790
CMO collateral.................................................. 4,255
Allowance for loan losses....................................... (564)
--------
Net loan receivables.......................................... 162,192
Investment in Impac Commercial Capital Corporation................ 4,182
Premises and equipment, net....................................... 3,857
Due from affiliates............................................... 1,592
Accrued interest receivable....................................... 1,361
Other assets...................................................... 458
--------
$218,839
========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Warehouse line agreements......................................... $ 90,374
Reverse repurchase agreements..................................... 9,841
CMO borrowings.................................................... 4,176
Due to affiliates................................................. 8,067
Other liabilities................................................. 3,139
--------
Total liabilities............................................. 115,597
Stockholders' Equity:
Preferred Stock; $.01 par value; 6,000,000 shares authorized; no
shares outstanding at December 31, 1997........................ --
Convertible Class A Preferred Stock; $.01 par value; 4,000,000
shares authorized; no shares outstanding at December 31, 1997.. --
Common Stock; $.01 par value; 46,000,000 shares authorized;
7,344,789 shares issued and outstanding at December 31, 1997... 73
Class A Common Stock; $.01 par value; 4,000,000 shares
authorized; 674,211 shares issued and outstanding at December
31, 1997....................................................... 7
Additional paid-in-capital...................................... 104,761
Investment securities valuation allowance....................... (160)
Cumulative dividends declared................................... (4,250)
Retained earnings............................................... 2,811
--------
Total stockholders' equity.................................... 103,242
--------
Commitments and contingencies
Subsequent events
$218,839
========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
<S> <C>
Revenues:
Interest income................................. $ 7,459
Equity in net income of Impac Commercial Capital
Corporation.................................... 1,694
Rental and other income......................... 174
-------
9,327
-------
Expenses:
Interest expense on warehouse line and reverse
repurchase agreements.......................... 1,394
Interest expense on other borrowings............ 503
Interest expense on borrowings from Impac
Warehouse Lending Group........................ 453
Professional services........................... 617
Provision for loan losses....................... 564
General and administrative and other............ 288
Stock compensation expense...................... 2,697
-------
6,516
-------
Net income........................................ $ 2,811
=======
Net income per share--basic....................... $ 0.61
=======
Net income per share--diluted..................... $ 0.61
=======
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED CLASS A INVESTMENT
STOCK COMMON STOCK COMMON STOCK ADDITIONAL SECURITIES CUMULATIVE TOTAL
-------------- -------------- ------------- PAID-IN VALUATION DIVIDENDS RETAINED STOCKHOLDERS'
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR CAPITAL ALLOWANCE DECLARED EARNINGS EQUITY
------ ------ ------ ------ ------ ------ ---------- ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 15, 1997
(commencement of
operations)....... -- $-- -- $-- -- $-- $ -- $ -- $ -- $ -- $ --
Sale of Common
Stock to IMH and
certain officers
and directors of
the Company....... 599 6 -- -- 2,697 -- -- -- 2,703
Conversion of
promissory notes
to Preferred
Stock............. 3,000 30 -- -- -- -- 14,970 -- -- -- 15,000
Cumulative
dividends
declared.......... -- -- -- -- -- -- -- -- (4,250) -- (4,250)
Net proceeds from
public stock
offering.......... -- -- 6,325 63 -- -- 86,961 -- -- -- 87,024
Class A Common
Stock issued to
IMH for ICCC
Preferred Stock... -- -- -- -- 95 1 113 -- -- -- 114
Conversion of ICH
Preferred Stock to
Class A Common
Stock............. (3,000) (30) 720 7 280 3 20 -- -- -- --
Conversion of ICH
Common Stock to
Class A Common
Stock............. -- -- (299) (3) 299 3 -- -- -- -- --
Securities
valuation
allowance, net.... -- -- -- -- -- -- -- (160) -- -- (160)
Net income from
January 15, 1997
(commencement of
operations)
through
December 31, 1997. -- -- -- -- -- -- -- -- -- 2,811 2,811
------ ---- ----- ---- --- ---- -------- ----- ------- ------ --------
Balance,
December 31, 1997. -- $-- 7,345 $ 73 674 $ 7 $104,761 $(160) $(4,250) $2,811 $103,242
====== ==== ===== ==== === ==== ======== ===== ======= ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
<S> <C>
Cash flows from operating activities:
Net income....................................... $ 2,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of Impac Commercial Capital
Corporation..................................... (1,694)
Stock compensation expense....................... 2,697
Provision for loan losses........................ 564
Depreciation..................................... 65
Increase in accrued interest on receivables...... (1,361)
Net change in other assets and liabilities....... (366)
Net change in due from affiliates and due to
affiliates..................................... 6,475
---------
Net cash provided by operating activities...... 9,191
---------
Cash flows from investing activities:
Increase in Commercial Mortgages held-for-
investment...................................... (62,790)
Increase in finance receivables.................. (95,711)
Increase in CMO collateral....................... (4,255)
Purchase of investment securities available-for-
sale............................................ (20,202)
Principal reductions on investment securities
available-for-sale.............................. 689
Purchase of residual interest in securitizations. (10,098)
Principal reductions on residual interest in
securitizations................................. 162
Purchase of premises and equipment............... (3,922)
Contribution to Impac Commercial Capital
Corporation..................................... (2,375)
---------
Net cash used in investing activities........... (198,502)
---------
Cash flows from financing activities:
Increase in warehouse line and reverse repurchase
agreements...................................... 100,215
Issuance of CMO borrowings....................... 4,176
Issuance of Common Stock through initial public
offering........................................ 87,024
Issuance of promissory notes..................... 15,000
Issuance of Class A Common Stock................. 7
Dividends paid................................... (1,203)
---------
Net cash provided by financing activities....... 205,219
---------
Net change in cash and cash equivalents........... 15,908
Cash and cash equivalents at beginning of period.. --
---------
Cash and cash equivalents at end of period........ $ 15,908
=========
Supplementary information:
Interest paid.................................... $ 1,974
Non-cash transactions:
Increase in investment securities valuation
allowance....................................... $ 160
Class A Common Stock issued to IMH for ICCC
Preferred Stock................................. 114
Conversion of promissory notes to ICH Preferred
Stock........................................... 15,000
Conversion of ICH Preferred Stock to Class A
Common Stock.................................... 15,000
Conversion of ICH Common Stock to Class A Common
Stock........................................... 3
Dividends declared and unpaid.................... 3,047
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Impac Commercial Holdings, Inc. (ICH or the Company), a newly formed
Maryland corporation, commenced operations in January 1997 as a separate
division of Impac Mortgage Holdings, Inc. (IMH). ICH changed its name to IMH
Commercial Holdings, Inc. on June 30, 1997 and on January 28, 1998 the Company
changed its name to Impac Commercial Holdings, Inc. The Company operates as a
specialty commercial property finance company which elects to be taxed as a
real estate investment trust (REIT) for Federal income tax purposes, which
generally allows the Company to pass through income to stockholders without
payment of corporate level Federal income tax.
The Company and Impac Commercial Capital 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, mortgage loans on commercial property, such as industrial and
warehouse properties, office buildings, retail space and shopping malls,
hotels and motels, nursing homes, hospitals, multifamily, congregate care
facilities and senior living centers (collectively, Commercial Mortgages).
Organizational Transactions and Contribution Transaction
On February 3, 1997, certain officers and directors of the Company, as a
group, and IMH purchased 300,000 and 299,000 shares of common stock of ICH
("ICH Common Stock"), respectively. In addition, IMH purchased all of the non-
voting preferred stock of ICCC, which has a coupon which represents 95% of
generally accepted accounting principles (GAAP) based economic interest in
ICCC entitling the holder to receive 95% of any dividend or distribution made
by ICCC, for $500,000. Certain of the Company's officers purchased all of the
outstanding shares of common stock of ICCC, which represents 5% of GAAP based
economic interest in ICCC entitling the holder to receive 5% of any dividend
or distribution of ICCC. In addition, 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 Impac Warehouse Lending Group,
Inc. (IWLG), formerly Imperial Warehouse Lending Group, Inc., a subsidiary of
IMH, under a warehouse lending facility and $900,000 in other borrowings from
IMH. All of such condominium conversion loans were purchased from Impac
Funding Corporation (IFC), formerly ICI Funding Corporation, 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 loaned ICH $15.0 million evidenced by a promissory note
bearing interest at the rate of 8% per annum which was convertible into shares
of 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"). 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 was automatically
converted upon the closing of ICH's initial public offering (IPO) 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 was $15.00. Notwithstanding the foregoing,
consistent with IMH's classification as a REIT, IMH is not 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. 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 or sales of ICH
Common Stock held by IMH, shares of ICH Class A Stock shall automatically
convert into additional shares of ICH Common Stock, subject to said 9.8%
limitation.
36
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held by
it for an equal number of shares of ICH Class A Common Stock.
Upon the closing of the IPO in August 1997, IMH contributed to ICH (the
Contribution) 100% of the outstanding shares of non-voting preferred stock of
ICCC in exchange for 95,000 shares of ICH Class A Stock. As of March 24, 1998,
IMH owned 719,789 shares of ICH Common Stock and 674,211 shares of ICH Class A
Common Stock.
Basis of Financial Statement Presentation
The operations of ICH have been presented in the consolidated financial
statements for the period from January 15, 1997 (commencement of operations)
through December 31, 1997 and include the financial results of ICH for the
period from January 15, 1997 (commencement of operations) through December 31,
1997, the financial results of ICH's equity interest in net earnings in ICCC
as a stand-alone entity, subsequent to the Contribution, and the financial
results of Dove for the period from August 25, 1997 through December 31, 1997.
The Company is entitled to 95% of the earnings or losses of ICCC through its
ownership of all of the non-voting preferred stock of ICCC. As such, the
Company records its investment in ICCC using the equity method. Under this
method, original investments are recorded at cost and adjusted by the
Company's share of earnings or losses. Gain or loss on the sale of loans or
securities by ICCC to ICH are deferred and amortized or accreted for gain or
loss on sale over the estimated life of the loans or securities using the
interest method.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, the 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 to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
All significant intercompany balances and transactions with ICH's
consolidated subsidiary (Dove) have been eliminated in consolidation.
Income Taxes
ICH operates so as to qualify as a real estate investment trust (REIT) under
the requirements of the Internal Revenue Code (the Code). Requirements for
qualification as a REIT include various restrictions on ownership of ICH's
stock, requirements concerning distribution of taxable income and certain
restrictions on the nature of assets and sources of income. A REIT must
distribute at least 95% of its taxable income to its stockholders, the
distribution of which 85% must be distributed within the taxable year in order
to avoid the imposition of an excise tax and the remaining balance may extend
until timely filing of its tax return in its subsequent taxable year.
Qualifying distributions of its taxable income are deductible by a REIT in
computing its taxable income. If in any tax year ICH should not qualify as a
REIT, it would be taxed as a corporation and distributions to the stockholders
would not be deductible in computing taxable income. If ICH were to fail to
qualify as a REIT in any tax year, it would not be permitted to qualify for
that year and the succeeding four years. 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 that 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.
Net Income per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). This
statement replaces the previously reported primary and fully diluted
37
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any diluted effects of
stock options. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share.
Net income per share is computed on the basis of the weighted average number
of shares and common equivalent shares outstanding for the period. Basic and
dilutive earnings per share are approximately the same for the period
presented. Of the dividends paid during 1997, approximately $504,000
represented a tax-free return of capital.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
NUMERATOR:
Numerator for basic earnings per share--
Net income ................................... $ 2,811
=======
DENOMINATOR:
Denominator for basic earnings per share--
Weighted average number of common shares
outstanding during the period................ 4,631
Net effect of dilutive stock options.......... 14
-------
Denominator for diluted earnings per share...... 4,645
=======
Net income per share--basic..................... $ 0.61
=======
Net income per share--diluted................... $ 0.61
=======
</TABLE>
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" (SFAS No. 130) and "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), respectively (collectively, the
Statements). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
No. 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS
No. 130 and SFAS No. 131, respectively. Application of the Statements'
requirements is not expected to have a material impact on the Company's
disclosures.
2. 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.
3. INVESTMENT IN IMPERIAL COMMERCIAL CREDIT CORPORATION
The Company records its investment in ICCC on the equity method. Certain
officers and directors of the Company and ICCC own all of the common stock of
ICCC and are entitled to 5% of the earnings or loss of
38
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ICCC. The Company is entitled to 95% of the earnings or losses of ICCC through
its ownership of all of the non-voting preferred stock in ICCC. ICCC is a
commercial loan conduit organization, which purchases mortgage loans and
subsequently securitizes or sells such loans to permanent investors, including
ICH. Gain or loss on the sale of loans or securities by ICCC to ICH are
deferred and amortized or accreted for gain or loss on sale over the estimated
life of the loans or securities using the interest method.
4. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company classifies CMBSs as held-to-maturity, available-for-sale, and/or
trading securities. Held-to-maturity securities are reported at amortized
cost, available-for-sale securities are reported at fair value with unrealized
gains and losses as a separate component of stockholders' equity, and trading
securities are reported at fair value with unrealized gains and losses
reported in income. The Company's investment securities are held as available-
for-sale, reported at fair value with unrealized gains and losses reported as
a separate component of stockholders' equity. As the Company qualifies as a
REIT and no income taxes are paid, the unrealized gains and losses are
reported gross in stockholders' equity. Premiums or discounts obtained on
investment securities are accreted or amortized to interest income over the
estimated life of the investment securities using the interest method. At
December 31, 1997, the Company's investment securities available-for-sale
included $6.4 million of CMBSs and $13.0 million of "interest only" securities
collateralized by Commercial Mortgages. Such investments may subject the
Company to credit, interest rate and/or prepayment risk.
The amortized cost and estimated fair value of investment securities
available-for-sale are summarized as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
At December 31, 1997:
Commercial mortgage-backed
securities................... $ 6,363 $ -- $ -- $ 6,363
Interest only securities...... 13,150 -- 160 12,990
-------- ---- ----- --------
$ 19,513 $ -- $ 160 $ 19,353
======== ==== ===== ========
</TABLE>
5. RESIDUAL INTEREST IN SECURITIZATION, HELD-FOR-TRADING
The accompanying 1997 balance sheet includes one residual interest in
securitization (residual) of real estate mortgage investment conduit (REMIC)
which was recorded as a result of a 1995 securitization by Imperial Credit
Industries, Inc. (ICII) of commercial loans through a special purpose trust
vehicle. ICII has one director who also serves on the Board of ICH. ICH
purchased the residual in March 1997 from IFC for $10.1 million. As of
December 31, 1997, the carrying amount of the residual was $9.9 million.
IFC and ICH have estimated future cash flows from the residual utilizing
assumptions that they believe are commensurate with the risk inherent in the
investment and consistent with those that they believe would be utilized by an
unaffiliated third-party purchaser and discounted at a rate commensurate with
the risk involved. The Company has classified this residual as a held-for-
trading security. Unrealized gains and losses net of related income taxes will
be recognized as a reduction to current operations. 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
39
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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
coming out of the trust was approximately 16.6%. To the extent that actual
future excess cash flows are different from estimated excess cash flows, the
fair value of the Company's residual could decline.
Under the terms of the securitization, the residual is required to build
overcollateralization to specified levels using the excess cash flows
described above until set percentages of the securitized portfolio are
attained. Future cash flows to the residual holder are all held by the REMIC
trust until a specific percentage of either the original or current
certificate balance is attained which percentage can be raised if certain
charge-offs and delinquency ratios are exceeded. The certificate holders'
recourse for credit losses is limited to the amount of overcollateralization
held by the residual in the REMIC trust. Upon maturity of the certificates or
upon exercise of an option ("clean up call") to repurchase all the remaining
Commercial Mortgages once the balance of the Commercial Mortgages in the trust
are reduced to 10% of a specified balance of the original Commercial Mortgages
in the trust, any remaining amounts in the trust are distributed. The current
amount of any overcollateralization balance held by the trust are recorded as
part of the residual.
6. COMMERCIAL MORTGAGES HELD FOR INVESTMENT AND COLLATERALIZED MORTGAGE
OBLIGATIONS (CMO) COLLATERAL
The Company purchases Commercial Mortgages to be held as long-term
investments or as CMO collateral. Commercial Mortgages held for investment and
CMO collateral are recorded at cost at the date of purchase. Commercial
Mortgages held for investment and CMO collateral include various types of
adjustable-rate loans secured by commercial mortgages on real property and
adjustable rate loans to developers secured by first liens on converted
condominium complexes. As of December 31, 1997, Commercial Mortgages held as
long-term investments were $62.8 million which include premiums of $110,686.
During the year ended December 31, 1997, $4.2 million of CMOs were issued and
collateralized by $4.3 million of Commercial Mortgages. 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 when the mortgage is 90 days past due, and
previously accrued interest reversed from income. Other than temporary
impairment in the carrying value of Commercial Mortgages held for investment,
if any, will be recognized as a reduction to current operations.
7. FINANCE RECEIVABLES
Finance receivables represent transactions with ICCC involving commercial
real estate lending. The Company earns interest at prime (8.50% at December
31, 1997) on the warehouse line agreements. The maximum available on ICCC's
warehouse line agreements as of December 31, 1997 was $900.0 million of which
$95.7 million was outstanding thereunder. As a warehouse lender, the Company
is a secured creditor and is subject to the risks inherent in that status
including, the risk of borrower default and bankruptcy. Any claim of the
Company as a secured lender in a bankruptcy proceeding may be subject to
adjustment and delay. The Company's finance receivables represent warehouse
lines of credit with ICCC collateralized by Commercial Mortgages on commercial
real property. Finance receivables are stated at the principal balance
outstanding. Interest income is recorded on the accrual basis in accordance
with the terms of the loans. Finance receivables are continually evaluated for
collectibility and, if appropriate, the receivable is placed on non-accrual
status, generally when the receivable is 90 days past due. Future
40
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
collections of interest income are included in interest income or applied to
the loan balance based on an assessment of the likelihood that the loans will
be repaid.
8. ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for losses on Commercial Mortgages held
for investment, collateral for CMOs and finance receivables at an amount which
it believes is sufficient to provide adequate protection against future losses
in the Commercial Mortgage 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 loans 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 loans or portions thereof deemed to be
uncollectible thereby increasing the allowance for loan losses. Subsequent
recoveries on Commercial Mortgages previously charged off are credited back to
the allowance.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
(IN THOUSANDS)
<S> <C>
Balance, beginning of period................... $ --
Provision for loan losses...................... 564
Charge-offs.................................... --
-----
Balance, end of period......................... $ 564
=====
</TABLE>
9. PREMISES AND EQUIPMENT, NET
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).
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
AT
DECEMBER 31,
1997
------------
(IN THOUSANDS)
<S> <C>
Premises and equipment....................................... $ 3,922
Less accumulated depreciation................................ (65)
-------
$ 3,857
=======
</TABLE>
10. CMO BORROWINGS
The Company issues CMOs, which are secured by Commercial Mortgages as a
means of financing its Long-Term Investment Operations. For accounting and tax
purposes, Commercial Mortgages financed through the issuance of CMOs are
treated as assets of the Company and the CMOs are treated as debt of the
Company. Each issue of CMOs are fully payable from the principal and interest
payments on the underlying mortgage loans collateralizing such debt and any
investment income on such collateral. The maturity of each class of CMO is
directly affected by the rate of principal prepayments on the related CMO
collateral. Each CMO series is also subject to redemption according to
specific terms of the respective indentures. As a result, the actual maturity
of any class of a CMO series is likely to occur earlier than the stated
maturities of the underlying mortgage loans.
41
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth CMOs issued by the Company, CMOs outstanding
as of December 31, 1997, and certain interest rate information:
<TABLE>
<CAPTION>
INTEREST INTEREST
RATE INTEREST RATE
MARGIN RATE MARGIN
OVER MARGIN AFTER
ISSUE ISSUANCE CMOS ONE-MONTH ADJUSTMENT ADJUSTMENT
DATE ISSUANCE NAME AMOUNT OUTSTANDING LIBOR DATE DATE
-------- ------------------------ ------------- ----------- ---------- ---------- ----------
(IN
(IN MILLIONS) MILLIONS)
<C> <S> <C> <C> <C> <C> <C>
12/10/97 Imperial CMB
Trust Series 1997-2..... $4.2 $4.2 0.26-1.30% 1/2005 0.52-2.60%
</TABLE>
11. WAREHOUSE LINE AGREEMENTS
ICH entered into committed warehouse line agreements, one of which expires
in April 1998 and one of which expires in February 1999 (unless terminated
earlier), with two investment banking firms to provide an aggregate maximum of
$400.0 million to fund the purchase of Commercial Mortgages and CMBSs.
Commercial Mortgages underlying certain of the agreements are delivered to the
dealers that arrange the transactions. The warehouse line agreements with
major investment banks are committed lines that provide financing as needed by
the Company.
The following table sets forth information regarding warehouse line
agreements:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------
(IN THOUSANDS)
WAREHOUSE
TYPE OF LINE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Lender 1............................. Mortgages $81,845 $ 98,750 2/1/99
Lender 2............................. Mortgages 8,529 9,458 4/15/98
------- --------
Total............................... $90,374 $108,208
======= ========
</TABLE>
At December 31, 1997, warehouse line agreements include accrued interest
payable of $309,000.
The following table presents certain information on warehouse line
agreements, excluding accrued interest payable:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Maximum Month-End Outstanding Balance........... $90,374
Average Balance Outstanding..................... 20,447
Weighted Average Rate........................... 6.82%
</TABLE>
12. REVERSE REPURCHASE AGREEMENTS
ICH entered into reverse repurchase agreements whereby ICH pledged specific
CMBSs as collateral to secure short-term loans. Interest is payable upon the
maturity of the loans in January 1998. The interest rates on the loans are
based on one-month LIBOR plus a margin depending on the type of collateral
provided by the Company.
42
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the amounts outstanding on the reverse
repurchase agreements at December 31, 1997:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
(IN THOUSANDS)
-----------------------------------------
REVERSE
TYPE OF REPURCHASE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Lender 1............................ Securities $ 6,185 $ 7,137 1/21/98
Lender 2............................ Securities 831 1,037 1/2/98
Lender 3............................ Securities 2,825 4,708 1/30/98
------- -------
$ 9,841 $12,882
======= =======
</TABLE>
At December 31, 1997, reverse repurchase agreements included accrued
interest payable of $48,000.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments 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>
AT DECEMBER 31,
1997
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents................................ $15,908 $15,908
Investment securities available-for-sale................. 19,353 19,353
Residual interest in securitization, held for trading.... 9,936 9,936
Commercial Mortgages held for investment................. 62,790 62,867
Finance receivables...................................... 95,711 95,711
CMO collateral........................................... 4,255 4,298
Due from affiliates...................................... 1,592 1,592
LIABILITIES
-----------
Warehouse line agreements................................ 90,374 90,374
Reverse repurchase agreements............................ 9,841 9,841
CMO borrowings........................................... 4,176 4,176
Due to affiliates........................................ 8,067 8,067
Short-term commitments to extend credit.................. -- --
</TABLE>
The fair value estimates as of December 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 consolidated financial statements since those dates and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
The following describes the methods and assumptions used by ICH in
estimating fair values.
Cash and Cash Equivalents
Fair value approximates carrying amount as these instruments are demand
deposits and money market mutual funds and do not present unanticipated
interest rate or credit concerns.
43
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investment Securities Available-for-Sale
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of mortgage-backed securities.
Residual Interest in Securitization, Held-for-Trading
Fair value approximates carrying amount as 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.
Commercial Mortgages Held-for-Investment
Fair value is determined based upon the Company's estimate of the proceeds
which would be realized in a securitized sale of the loans.
Finance Receivables
Fair value is determined based upon current market conditions and estimated
interest rates associated with similar financial instruments.
CMO Collateral
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of mortgage loans.
Due From / To Affiliates
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and do not present unanticipated interest rate or credit
concerns.
Warehouse Line Agreements
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and do not present unanticipated interest rate or credit
concerns.
Reverse Repurchase Agreements
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and do not present unanticipated interest rate or credit
concerns.
CMO Borrowings
Fair values approximate carrying amount because of the variable interest
rate nature of the borrowings.
Short-term Commitments to Extend Credit
The Company does not collect fees associated with its warehouse lines of
credit. Accordingly, these commitments do not have an estimated fair value.
14. RELATED PARTY TRANSACTIONS
Credit Arrangements
During 1997, ICH maintained a warehouse financing facility with IWLG until
ICH obtained warehouse financing facilities with third-party lenders. Interest
expense recorded by ICH related to finance receivables due to IWLG for the
period from January 15, 1997 (commencement of operations) through December 31,
1997 was $453,000. As of December 31, 1997, ICH did not maintain a warehouse
facility with IWLG.
44
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In February 1997, IMH financed ICH's purchase of $17.5 million of Commercial
Mortgages from IFC with $16.6 million in borrowings from IWLG and $900,000 in
other borrowings ("Due To Affiliates") from IMH. ICH recorded interest expense
on the amounts borrowed from IMH at 8.0% per annum, which totaled $150,000. In
March 1997, ICH repaid the $900,000 in other borrowings from IMH. Interest
expense recorded by ICH related to other borrowings with IMH was $53,000 for
the year ended December 31, 1997.
In March 1997, ICH purchased a residual interest in securitization for $10.1
million from IFC which was financed by a promissory note with ICII. In March
1997, the promissory note was repaid with cash from IMH's $15.0 million
investment.
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby ICH agreed to advance to IMH up to maximum amount of $15.0 million.
The agreement expires on August 8, 1998. Advances under the revolving credit
arrangement are at an interest rate and maturity to be determined at the time
of each advance with interest and principal paid monthly. As of December 31,
1997, there were no amounts outstanding under the credit arrangement. Interest
income recorded by ICH related to such advances to IMH was approximately
$68,000.
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby IMH agreed to advance to ICH up to maximum amount of $15.0 million.
The agreement expires on August 8, 1998. Advances under the revolving credit
arrangement are at an interest rate and maturity to be determined at the time
of each advance with interest and principal paid monthly. As of December 31,
1997, ICH's outstanding borrowings under the credit arrangement was $9.1
million. Interest expense recorded by ICH related to such borrowings from IMH
was approximately $55,000.
In October 1997, ICH entered into a revolving credit arrangement with IFC
whereby ICH would advance to IFC up to a maximum amount of $15.0 million.
Advances under the revolving credit arrangement are at an interest rate and
maturity to be determined at the time of each advance with interest and
principal paid monthly. The revolving credit arrangement expired in December
1997 and as of December 31, 1997 there were no amounts outstanding.
ICCC maintains a warehouse financing facility with ICH up to a maximum
aggregate amount of $900.0 million. Advances under such warehouse facilities
bear interest at rates indexed to prime, which was 8.50% at December 31, 1997.
As of December 31, 1997, amounts outstanding on ICCC's warehouse line
agreements with ICH were $95.7 million. Interest income recorded by ICH
related to warehouse line agreements to ICCC for the year ended December 31,
1997 was $2.4 million.
During the normal course of business, ICH may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are
reflected as "Due From Affiliates" while borrowings are reflected as "Due To
Affiliates" on the Company's balance sheet. These short-term advances and
borrowings bear interest at a fixed rate of 8.00% per annum. Interest income
recorded by ICH related to short-term advances due from affiliates was
$268,000 for the year ended December 31, 1997. Interest expense recorded by
ICH related to short-term advances due to affiliates was $45,000 for the year
ended December 31, 1997.
On December 31, 1997, the Company financed its 50% interest in a commercial
office building located in Newport Beach, California with a loan for $5.2
million from ICCC. Terms of the loan are for 25 years at an adjustable rate of
9.0% with current monthly principal and interest payments of $44,000. ICCC
received loan fees of $71,000 on the loan.
45
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Organizational Transactions with IMH and IFC
On February 3, 1997, certain officers and directors of the Company, as a
group, and IMH purchased 300,000 and 299,000 shares of common stock of ICH,
respectively. In addition, IMH purchased all of the non-voting preferred stock
of ICCC, which has a coupon which represents 95% of GAAP based economic
interest in ICCC entitling the holder to receive 95% of any dividend or
distribution made by ICCC, for $500,000. Certain of the Company's officers
purchased all of the outstanding shares of common stock of ICCC, which
represents 5% of GAAP based economic interest in ICCC entitling the holder to
receive 5% of any dividend or distribution of ICCC.
In March 1997, IMH loaned ICH $15.0 million evidenced by a promissory note
bearing interest at the rate of 8% per annum which was convertible into shares
of non-voting convertible preferred stock of ICH at the rate of one share of
ICH Preferred Stock for each $5.00 principal amount of said note. In addition,
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 was automatically converted upon the closing of ICH's IPO 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 which was $15.00. Notwithstanding the foregoing,
consistent with IMH's classification as a REIT, IMH is not entitled to have
converted into ICH Common Stock more than that number of shares of ICH
Preferred Stock whereby IMH would own, immediately after such conversion,
greater than 9.8% of the outstanding ICH Common Stock. Any shares of ICH
Preferred Stock not converted into ICH Common Stock upon the closing of the
IPO automatically converted into shares of ICH non-voting Class A Common Stock
at the same rate as the ICH Preferred Stock converted into ICH Common Stock on
said date. Shares of ICH Class A Common Stock converted 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 or sales of ICH Common Stock held by IMH, shares of ICH
Class A Common Stock shall automatically convert into additional shares of ICH
Common Stock, subject to said 9.8% limitation.
In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held by
it for an equal number of shares of ICH Class A Common Stock.
Upon the closing of the IPO in August 1997, IMH contributed to ICH 100% of
the outstanding shares of non-voting preferred stock of ICCC in exchange for
95,000 shares of ICH Class A Stock. As of March 24, 1998, IMH owned 719,789
shares of ICH Common Stock and 674,211 shares of ICH Class A Stock.
Cash and Cash Equivalents
As of December 31, 1997, IMH had $12.5 million of cash and cash equivalents
on deposit with Southern Pacific Bank ("SPB"), formerly Southern Pacific
Thrift and Loan Association, a subsidiary of ICII.
Purchase of Commercial Mortgages
During 1997, ICH purchased $58.5 million of adjustable rate Commercial
Mortgages from ICCC at a net premium of $111,000.
Stock Compensation Expense
Stock compensation expense of $2,697,000 represents the difference between
the price at which ICH issued 300,000 shares of common stock to directors and
officers of IMH and ICH on February 3, 1997 ($.01 per share) and the estimated
fair value for financial reporting purposes of such shares as determined by
the Company's management, as of February 3, 1997 ($9.00 per share). Fair value
was based primarily on management's projection of the Company's future cash
flow and net income, as well as the lack of liquidity of the shares at the
date of issuance and the uncertainty of certain future events regarding the
development of the Company's business and organization structure including,
but not limited to, obtaining independent financing for the
46
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
organization and purchase of Commercial Mortgages, funding and closing
Commercial Loans, and developing a pipeline of future Commercial Loan
originations.
Submanagement Agreement
IFC entered into a submanagement agreement with RAI under which, IMH and IFC
provides various services to ICH as RAI deems necessary, including facilities
and costs associated therewith, technology, human resources, management
information systems, general ledger accounts, check processing and accounts
payable, plus a 15% service charge. RAI charges ICH for these services based
upon usage which management believes is reasonable. Total cost allocations RAI
charged to ICH for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 were $525,000.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH IPO,
IMH will not acquire any commercial mortgages for a period of the earlier of
nine months from the closing of the ICH IPO or the date upon which ICH and/or
ICCC accumulates (for investment or sale) $300.0 million of Commercial
Mortgages or CMBSs.
Pursuant to the Right of First Refusal Agreement by and among ICH, IMH, IFC,
ICCC and RAI, pursuant to which, in part, RAI will agree that any mortgage
loan or mortgage-backed security investment opportunity which is offered to it
on behalf of either ICH, IMH any affiliated REIT will first be offered to that
entity whose initial primary business as described in its initial public
offering documentation most closely aligns with such investment opportunity.
15. COMMITMENTS AND CONTINGENCIES
ICH is a party to financial instruments with off-balance-sheet risk in the
normal course of business. Such instruments include short-term commitments to
extend credit to borrowers under warehouse lines of credit which involve
elements of credit risk. In addition, ICH is exposed to credit loss in the
event of nonperformance by the counterparties to the various agreements
associated with loan purchases. However, ICH does not anticipate
nonperformance by such borrowers or counterparties. Unless noted otherwise,
ICH does not require collateral or other security to support such commitments.
The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The
contract or notional amounts of forward contracts do not represent exposure to
credit loss. The Company controls the credit risk of its forward contracts
through credit approvals, limits and monitoring procedures.
In the ordinary course of business, ICCC is exposed to liability under
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances,
ICCC is required to repurchase mortgage loans if there had been a breach of
representations or warranties. ICH has guaranteed the performance obligation
of ICCC under such representation and warranties related to loans included in
securitizations.
Lease Commitments
ICH and ICCC, as tenants in common, lease approximately 18,000 square feet
of office space in Irvine, California, under a non-cancelable premises
operating lease for a term of 36 months expiring in November 2000. Minimum
premises rental commitments are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
1998.......................................................... $ 511
1999.......................................................... 511
2000.......................................................... 468
------
Total....................................................... $1,490
======
</TABLE>
47
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
All rent expense associated with the lease is charged to ICCC as ICCC
employees occupy 100% of office space.
Loan Commitments
ICH provides secured short-term non-recourse revolving financing to ICCC to
a maximum of $900.0 million to finance the acquisition of Commercial Mortgages
from the closing of the loans until sold to permanent investors. As of
December 31, 1997, ICH's outstanding balances on warehouse lines to ICCC was
$95.7 million.
16. MANAGEMENT CONTRACT
As Manager of the Company, RAI, is entitled to receive for each fiscal
quarter, an amount equal to 25% of the Net Income of the Company, before
deduction of such compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the daily average Ten Year U.S. Treasury
Rate plus 2% (the 25% Payment). The term "Return on Equity" is calculated for
any quarter by dividing the Company's Net Income for the quarter by its
Average Net Worth for the quarter. For such calculations, the "Net Income" of
the Company means the net income of the Company determined in accordance with
the Code before the Manager's compensation, the deduction for dividends paid
and any net operating loss deductions arising from losses in prior periods. A
deduction for all of the Company's interest expenses for borrowed money is
also taken in calculating Net Income. "Average Net Worth" for any period means
the arithmetic average of the sum of the gross proceeds from any offering of
its equity securities by the Company, before deducting any underwriting
discounts and commissions and other expenses and costs relating to the
offering, plus the Company's retained earnings less dividends declared
(without taking into account any losses incurred in prior periods) computed by
taking the daily average of such values during such period. The 25% Payment to
the Manager will be calculated quarterly in arrears before any income
distributions are made to stockholders for the corresponding period.
The Manager's fees will be calculated by the Manager within 60 days after
the end of each calendar quarter, with the exception of the fourth quarter for
which compensation will be computed within 30 days, and such calculation shall
be promptly delivered to the Company. The Company will be obligated to pay the
fee within 90 days after the end of each calendar quarter. There were no
management fees paid to RAI during 1997.
In order to utilize the IMH infrastructure, RAI entered into a submanagement
agreement with IFC, the conduit operations of IMH, to provide substantially
all of the administrative services required by the Company including
facilities and costs associated therewith, technology, human resources,
management information systems, general ledger accounts, check processing and
accounts payable as RAI deems necessary. The Manager may also enter into
additional contracts with other parties, which may include IMH or its
affiliates, to provide any such services for the Manager, which third party
shall be approved by the Company's Board of Directors. RAI currently has a
total of four officers and three managers who participate in the oversight of
the Company's operations.
17. STOCK OPTION PLAN
The Company adopted a Stock Option and Awards Plan (the Stock Option and
Awards Plan) which provides for the grant of qualified incentive stock options
(ISOs), options not qualified (NQSOs) and deferred stock, restricted stock,
stock appreciation, and limited stock appreciation rights awards (Awards) and
dividend equivalent rights. The Stock Option Plan is administered by the Board
of Directors or a committee of directors appointed by the Board of Directors.
ISOs may be granted to the officers and key employees of the Company. NQSOs
and Awards may be granted to the directors, officers and key employees of the
Company or its subsidiary, and to the directors, officers and key employees of
ICCC.
The exercise price for any NQSO or ISO granted under the Stock Option and
Awards Plan may not be less than 100% (or 110% in the case of ISOs granted to
an employee who is deemed to own in excess of 10% of the
48
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
outstanding Common Stock) of the fair market value of the shares of Common
Stock at the time the NQSO or ISO is granted.
Under the Stock Option and Awards Plan, the Company may make loans available
to stock option holders in connection with the exercise of stock options
granted under the Stock Option and Awards Plan. If shares of Common Stock are
pledged as collateral for such indebtedness, the shares may be returned to the
Company in satisfaction of the indebtedness. If returned, the shares become
available for issuance in connection with future stock options and Awards
under the Stock Option and Awards Plan.
Unless previously terminated by the Board of Directors, the Stock Option and
Awards Plan will terminate in April of 2007. Options granted under the Stock
Option and Awards Plan will become exercisable as directed by the
administrator.
As of December 31, 1997, there were no options to purchase shares that had
been exercised and 420,250 shares were reserved for future grants under the
Stock Option and Awards Plan. Option transactions for the period shown are
summarized as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------
WEIGHTED-
NUMBER AVERAGE RANGE OF
OF EXERCISE EXERCISE
SHARES PRICE PRICES
------- --------- ----------
<S> <C> <C> <C>
Options outstanding at beginning of year....... -- -- --
Option granted................................. 222,250 $15.41 $15.0-18.8
Options exercised.............................. -- -- --
Options forfeited/cancelled.................... 10,000 15.41 15.0-18.8
-------
Options outstanding at end of year............. 212,250 15.41 15.0-18.8
=======
</TABLE>
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation."
SFAS 123 permits the Company to either recognize as expense over the vesting
period, the fair market value of all stock based compensation awards on the
date of grant, or continue to apply the provisions of APB Opinion No. 25 and
provide pro forma disclosures of net income (loss) computed as if the fair
value based method as defined in SFAS 123 had been applied.
The Company elected to continue to apply the APB Opinion 25 in accounting
for its Plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options exercisable under SFAS No. 123, the Company's net income and income
per share would have decreased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
(IN THOUSANDS)
<S> <C>
Net income as reported.......................... $2,811
Pro forma net income............................ 2,280
Basic income per share as reported.............. 0.61
Diluted income per share as reported............ 0.61
Basic pro forma income per share................ 0.49
Diluted pro forma income per share.............. 0.49
</TABLE>
The derived fair value of the options granted during 1997 was approximately
$2.39 per share using the Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 5.84%, dividend yield of
8.7%, expected lives of three and ten years and expected volatility of 37.2%.
49
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
18. STOCKHOLDERS' EQUITY
Common Stock and Class A Common Stock. The Company has authorized 46,000,000
shares of $.01 par value Common Stock (ICH Common Stock) and 4,000,000 shares
of $.01 par value Class A non-voting Common Stock (ICH Class A Stock). Each
share of ICH Common Stock is entitled to participate equally in dividends when
and as authorized by the Board of Directors and in the distribution of assets
of ICH upon liquidation. Each share of ICH Common Stock is entitled to one
vote, subject to the provisions of its Articles of Incorporation and
amendments thereto (Charter) regarding restrictions on transfer of stock, and
will be fully paid and nonassessable by ICH upon issuance. Shares of ICH
Common Stock have no preference, conversion, exchange, preemptive or
cumulative voting rights. The authorized stock of ICH may be increased and
altered from time to time in the manner prescribed by Maryland law upon the
affirmative vote of stockholders entitled to cast at least a majority of all
the votes entitled to be cast on the matter. The Charter authorizes the Board
of Directors to reclassify any unissued shares of ICH Common Stock in one or
more classes or series of stock. 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.
Preferred Stock and Class A Convertible Preferred Stock. The Company
authorized 10,000,000 shares of $.01 par value Preferred Stock (Preferred
Stock), of which 4,000,000 shares were reclassified and designated Class A
Convertible Preferred Stock (ICH Preferred Stock). The Company's Charter
authorizes the Board of Directors to issue shares of Preferred Stock and to
classify or reclassify any unissued shares of Preferred Stock into one or more
classes or series. The Preferred Stock may be issued from time to time with
such designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption as shall be determined by
the Board of Directors subject to the provisions of the Charter regarding
restrictions on transfer of stock. Preferred Stock is available for possible
future financing of, or acquisitions by, ICH and for general corporate
purposes without further stockholder authorization. The Preferred Stock, if
issued, may have a preference on dividend payments which could reduce the
assets available to ICH to make distributions to the common stockholders. Of
the 10,000,000 shares of Preferred Stock authorized, 4,000,000 shares are
reclassified and designated ICH Convertible Class A Preferred Stock.
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 $0.10 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.
50
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
19. SUBSEQUENT EVENTS
At a special meeting of stockholders on January 27, 1998, stockholders
approved the Company's name change from "IMH Commercial Holdings, Inc." to
"Impac Commercial Holdings, Inc."
On January 15, 1998, a $0.38 cash dividend, previously declared by the Board
of Directors on December 17, 1997, was paid to stockholders of record on
December 31, 1997.
51
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
19. IMPAC COMMERCIAL CAPITAL CORPORATION
The following condensed financial information summarizes the financial
position and results of operations of Impac Commercial Capital Corporation (in
thousands):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AT
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
------
Cash............................................................... $ 2,273
Commercial Mortgages held for sale................................. 106,654
Due from affiliates................................................ 1,538
Premises and equipment, net........................................ 381
Other assets....................................................... 1,789
---------
$ 112,635
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Warehouse line agreements.......................................... $ 104,219
Other liabilities.................................................. 3,255
Due to affiliates.................................................. 758
---------
Total liabilities.............................................. 108,232
---------
Shareholders' Equity:
Preferred Stock.................................................. 2,875
Common Stock..................................................... 1
Contributed capital.............................................. 150
Retained earnings................................................ 1,377
---------
Total shareholders' equity..................................... 4,403
---------
$ 112,635
=========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
<S> <C>
Revenues:
Interest income.................................. $ 2,804
Gain on sale of loans............................ 3,657
Loan servicing and other income.................. 62
-------
6,523
-------
Expenses:
Interest on borrowings........................... 2,747
General and administrative and other............. 1,176
Provision for repurchases........................ 201
-------
4,124
-------
Income before income taxes..................... 2,399
Income taxes....................................... 1,022
-------
Net income..................................... $ 1,377
=======
</TABLE>
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Commercial Capital Corporation:
We have audited the accompanying balance sheet of Impac Commercial Capital
Corporation as of December 31, 1997, the related statements of operations,
changes in shareholders' equity and cash flows for the period from January 15,
1997 (commencement of operations) through December 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 Impac Commercial Capital
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the period from January 15, 1997 (commencement of operations)
through December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Orange County, California
February 9, 1998
53
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
BALANCE SHEET
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
---------------
ASSETS
------
<S> <C>
Cash............................................................ $ 2,273
Commercial Mortgages held-for-sale.............................. 106,654
Due from affiliates............................................. 1,538
Premises and equipment, net..................................... 381
Accrued interest receivable..................................... 337
Deferred tax asset.............................................. 924
Other assets.................................................... 528
--------
$112,635
========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Warehouse line agreements....................................... $104,219
Other liabilities............................................... 3,255
Due to affiliates............................................... 758
--------
Total liabilities............................................. 108,232
--------
SHAREHOLDERS' EQUITY:
Preferred stock; no par value; 50,000 shares authorized;
9,500 shares issued and outstanding at December 31, 1997...... 2,875
Common stock; no par value; 50,000 shares authorized;
500 shares issued and outstanding at December 31, 1997........ 1
Contributed capital............................................ 150
Retained earnings.............................................. 1,377
--------
Total shareholders' equity.................................... 4,403
--------
Commitments and contingencies
$112,635
========
</TABLE>
See accompanying notes to financial statements.
54
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
<S> <C>
Revenues:
Interest income.................................. $ 2,804
Gain on sale of loans............................ 3,657
Loan servicing and other income.................. 62
-------
6,523
-------
Expenses:
Interest on borrowings from ICH.................. 2,372
Interest on other affiliated borrowings.......... 375
General and administrative and other............. 448
Professional services............................ 540
Provision for repurchase obligations............. 201
Stock compensation expense....................... 150
Personnel expense................................ 38
-------
4,124
-------
Income before income taxes....................... 2,399
Income taxes....................................... 1,022
-------
Net income....................................... $ 1,377
=======
</TABLE>
See accompanying notes to financial statements.
55
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- ---------------- TOTAL
NUMBER OF PREFERRED NUMBER OF COMMON CONTRIBUTED RETAINED SHAREHOLDERS'
SHARES STOCK SHARES STOCK CAPITAL EARNINGS 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
Captial contribution.... -- 2,375 -- -- 125 -- 2,500
Net income for the
period from January 15,
1997 (commencement of
operations) through
December 31, 1997...... -- -- -- -- -- 1,377 1,377
----- ------ --- ---- ---- ------ ------
Balance, December 31,
1997 .................. 9,500 $2,875 500 $ 1 $150 $1,377 $4,403
===== ====== === ==== ==== ====== ======
</TABLE>
See accompanying notes to financial statements.
56
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
<S> <C>
Cash flows from operating activities:
Net income ..................................... $ 1,377
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation.................................. 50
Benefit for deferred taxes.................... (924)
Stock compensation expense.................... 150
Increase in accrued interest receivable....... (337)
Net change in due from affiliates and due to
affiliates................................... (780)
Net change in other assets and liabilities.... 2,727
---------
Net cash provided by operating activities... 2,263
---------
Cash flows from investing activities:
Increase in Commercial Mortgages held-for-
sale......................................... (106,654)
Purchases of premises and equipment........... (431)
---------
Net cash used in investing activities....... (107,085)
---------
Cash flows from financing activities:
Increase in warehouse line agreements......... 104,219
Issuance of preferred stock................... 500
Issuance of common stock...................... 1
Contributions from ICH........................ 2,375
---------
Net cash provided by financing activities... 107,095
---------
Net change in cash and cash equivalents........... 2,273
Cash and cash equivalents at beginning of period.. --
---------
Cash and cash equivalents at end of period........ $ 2,273
=========
Supplementary information:
Interest paid................................... $ 2,276
Taxes paid...................................... 422
</TABLE>
See accompanying notes to financial statements.
57
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 15, 1997 (COMMENCEMENT OF OPERATIONS) THROUGH
DECEMBER 31, 1997
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Business
Impac Commercial Capital Corporation (ICCC) is a newly formed California
corporation that commenced operations on January 15, 1997 as a separate
division of Impac Mortgage Holdings, Inc. (IMH). On the date of the
contribution in August 1997, ICCC became a subsidiary of ICH as ownership of
ICCC Preferred Stock was contributed by IMH to ICH. ICCC is a Commercial
Mortgage conduit organization which purchases and originates Commercial
Mortgages and subsequently securitizes or sells such Commercial Mortgages to
permanent investors, including ICH. ICCC services such Commercial Mortgages
for investors. The Conduit Operations operates 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
$10.0 million. All originations, underwriting, processing and funding are
performed at ICCC's executive offices. The Condominium Division's Commercial
Mortgages are offered on a nationwide basis and sells Commercial Mortgages to
ICH.
Retail Division. This division originates 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 (collectively, Commercial
Mortgages). The Retail Division offers 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 Commercial Mortgages are performed centrally at ICCC's
executive offices, the Company has targeted major metropolitan areas for the
opening of satellite offices for regional originations in 1998. A portion of
the adjustable rate Commercial Mortgages that are 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 originates
Commercial Mortgages on a retail basis and expects in the future to purchase
Commercial Mortgages on a bulk and flow basis. The Correspondent and Bulk
Purchase 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 and Bulk Purchase Division offers
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
purchases 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.
Organizational Transactions and Contribution Transaction
On February 10, 1997, IMH purchased 9,500 shares of ICCC's outstanding non-
voting preferred stock, which has a coupon which represents 95% of GAAP based
economic interest in ICCC, entitling the holder to
58
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
receive 95% of any dividend or distribution made by ICCC, for $500,000.
Certain of IMH's directors and officers purchased all of the Company's
outstanding common stock, which represents 5% of GAAP based economic interest
in ICCC entitling the holder to receive 5% of any dividend or distribution
made by ICCC for $26,000.
Upon the closing date of ICH's IPO in August 1997, IMH contributed (the
Contribution) all of the outstanding non-voting preferred stock of ICCC to ICH
in exchange for 95,000 shares of ICH Class A Common Stock.
Basis of Financial Statement Presentation
The operations of ICCC are presented in the financial statements as a stand-
alone company. Interest has been charged on affiliated short-term advances at
the rate of 8% per annum and on warehouse line agreements at prime rate. Costs
and expenses of IMH have been allocated to ICCC in proportion to the services
provided.
Management of ICCC has made a number of estimates and assumptions relating
to the reporting of assets and liabilities, the 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 to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
Gain on Sale of Loans
ICCC recognizes gains or losses on sale of loans when the sales transaction
settles and the risks and rewards of ownership are determined to have passed
to the purchasing party. Gains or losses on sale of loans or securities to ICH
are deferred and amortized or accreted over the estimated life of the loans or
securities using the interest method.
Income Taxes
Income taxes are accounted for under the asset and liability method of
accounting for 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 basis. 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.
Commercial Mortgage Servicing Income
Servicing income is reported as earned, principally on a cash basis when the
majority of the service process is completed.
2. 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.
3. 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
59
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Substantially all Commercial Mortgages purchased by ICCC are fixed-rate or
adjustable-rate commercial mortgage loans secured by first liens on commercial
properties. During the year ended December 31, 1997, ICCC acquired $251.1
million of Commercial Mortgages and sold $73.4 million of such loans to third
party investors and $58.4 million to ICH. As of December 31, 1997, Commercial
Mortgages held-for-sale were $106.7 million which included $307,757 in
deferred loan fees.
At December 31, 1997, other liabilities included an allowance for
repurchases of $201,000.
4. PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation on premises and equipment is recorded using the straight-line
method over the estimated useful lives of individual assets (three to seven
years).
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
---------------
(IN THOUSANDS)
<S> <C>
Premises and equipment...................................... $431
Less accumulated depreciation............................... (50)
----
$381
====
</TABLE>
5. WAREHOUSE LINE AGREEMENTS
ICCC enters into warehouse line agreements with ICH and IMH to fund the
purchase of mortgage loans. Mortgage loans underlying warehouse line
agreements are delivered to dealers that arrange the transactions.
ICCC has entered into uncommitted warehouse line agreements with ICH to
obtain financing up to an aggregate of $900.0 million. The margins on the
warehouse line agreement are at 90% of the fair market value of the
collateral. The interest rates on the borrowings are indexed to the prime
rate.
ICCC has entered into an uncommitted warehouse line agreement with IMH to
provide financing as needed. The margins on the warehouse line agreement are
at 8% of the fair market value of the collateral. The interest rates on the
borrowings are indexed to the prime rate.
The following table sets forth information regarding warehouse line
agreements:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------
WAREHOUSE
TYPE OF LINE UNDERLYING MATURITY
COLLATERAL LIABILITY COLLATERAL DATE
---------- --------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ICH................................. Mortgages $ 95,711 $103,280 Uncommitted
IMH................................. Mortgages 8,508 9,181 Uncommitted
-------- --------
Total............................. $104,219 $112,461
======== ========
</TABLE>
60
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The components of income taxes consist of the following:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JANUARY 15, 1997
(COMMENCEMENT OF OPERATIONS)
THROUGH DECEMBER 31, 1997
----------------------------
(IN THOUSANDS)
<S> <C>
Current income taxes:
Federal....................................... $ 1,483
State......................................... 463
-------
Total current income taxes...................... 1,946
-------
Deferred income taxes:
Federal....................................... (723)
State......................................... (201)
-------
Total deferred income taxes..................... (924)
-------
Total income taxes.............................. $ 1,022
=======
</TABLE>
The Company's effective income taxes differ from the amount computed by
applying the federal income tax rate of 34% to income before income taxes as a
result of the following:
<TABLE>
<CAPTION>
1997
--------------
(IN THOUSANDS)
<S> <C>
Computed "expected" income taxes.............................. $ 816
State taxes, net of federal................................... 173
Other......................................................... 33
-------
$ 1,022
=======
</TABLE>
The tax effects that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 1997 are presented below:
<TABLE>
<CAPTION>
1997
--------------
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Deferred revenue.............................................. $ 551
Allowance for repurchases..................................... 90
Mark to market adjustment on loans held for sale.............. 844
Deferred state liability...................................... 89
------
Total deferred tax assets..................................... 1,574
Deferred tax liability:
Mortgage servicing assets..................................... (650)
------
Net deferred tax asset...................................... $ 924
======
</TABLE>
The Company believes that the deferred tax asset will more likely than not be
realized due to the reversal of the deferred tax liability and expected future
taxable income. The current tax payable of $1.5 million is included in other
liabilities.
61
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments have been determined by
ICCC 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 ICCC
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>
AT DECEMBER 31,
1997
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents............................. $ 2,273 $ 2,273
Commercial Mortgages held-for-sale.................... 106,654 112,461
Due from affiliates................................... 1,538 1,538
Liabilities:
Warehouse line agreements............................. 104,219 104,219
Due to affiliates..................................... 758 758
Future contracts...................................... -- 510
Off balance-sheet loan commitments.................... -- --
</TABLE>
The fair value estimates as of December 31, 1997 are based on pertinent
information available to management as of that date. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for
purposes of these financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
The following describes the methods and assumptions used by ICCC in
estimating fair values.
Cash and Cash Equivalents
Fair value approximates carrying amount as these instruments are demand
deposits and do not present unanticipated interest rate or credit concerns.
Commercial Mortgages Held-for-Sale
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of mortgage loans.
Due From / To Affiliates
Fair value approximates carrying amount because of the short-term maturity
of the liabilities and do not present unanticipated interest rate or credit
concerns.
Warehouse Line Agreements
Fair value approximates carrying amount because of the short-term maturity
of the liabilities.
Futures Contracts
Fair value is estimated based on quoted market prices from dealers and
brokers for similar types of instruments.
62
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Off Balance-Sheet Loan Commitments
Fair value of commitments, including hedging position, is determined in the
aggregate counsel on current investor yield requirements.
8. 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. 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. The Company contributed matching and
discretionary amounts to the plan for the period from January 15, 1997
(commencement of operations) through December 31, 1997 of $16,814.
9. RELATED PARTY TRANSACTIONS
Credit Arrangements
ICCC maintains a warehouse financing facility with ICH up to a maximum
aggregate amount of $900.0 million. Advances under such warehouse facilities
bear interest at rates indexed to prime, which was 8.50% at December 31, 1997.
As of December 31, 1997, amounts outstanding on ICCC's warehouse lines with
ICH were $95.7 million. Interest expense recorded by ICCC related to warehouse
lines with ICH for the years ended December 31, 1997 was $2.4 million.
ICCC maintains a warehouse financing facility with IMH of which $8.5 million
was outstanding on the warehouse line at December 31, 1997. Interest expense
recorded by ICCC related to warehouse financing due to IMH for the year ended
December 31, 1997 was $262,000.
During the normal course of business, ICCC may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are
reflected as "Due From Affiliates" while borrowings are reflected as "Due To
Affiliates" on ICCC's balance sheet. These short-term advances and borrowings
bear interest at a fixed rate of 8.00% per annum. Interest income recorded by
ICCC related to short-term advances due from affiliates was $16,000 for the
year ended December 31, 1997. Interest expense recorded by ICCC related to
short-term advances due to affiliates was $113,000 for the year ended December
31, 1997.
Organizational Transactions with IMH
On February 10, 1997, IMH purchased all of ICCC's outstanding non-voting
preferred stock, which has a coupon which represents 95% of GAAP based
economic interest in ICCC, entitling the holder to receive 95% of
63
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
any dividend or distribution made by ICCC, for $500,000. Certain of IMH's
directors and officers purchased all of the Company's outstanding common
stock, which represents 5% of GAAP based economic interest in ICCC entitling
the holder to receive 5% of any dividend or distribution made by ICCC.
Upon the closing of the ICH IPO, IMH contributed (the Contribution) all of
the outstanding non-voting preferred stock of ICCC to ICH in exchange for
95,000 shares of ICH Class A Common Stock.
Commercial Mortgage Purchases
In February 1997, ICCC brokered for ICH, the purchase of $17.5 million in
condominium conversion loans from IFC at the unpaid principal balance of the
loans. In conjunction with these purchases, ICCC recorded nonrefundable
brokerage fees that have been deferred, net of certain direct costs, and are
being amortized over the estimated life of the loans.
During 1997, ICCC sold $58.4 million in principal balance of adjustable rate
Commercial Mortgages to ICH at a net premium of $111,000.
Stock Compensation Expense
Stock compensation expense of $25,000 represents the difference between the
price at which ICCC issued 500 shares of Common Stock to directors and
officers of IMH and ICH on February 10, 1997, and the net book value, which
the Company's management believes approximated the difference between fair
value and the amount of the 5% economic interest in ICCC purchased by the
common shareholders.
Submanagement Agreement
IFC entered into a submanagement agreement with RAI under which, IMH and IFC
provide various services to ICCC as RAI deems necessary, including facilities
and costs associated therewith, technology, human resources, management
information systems, general ledger accounts, check processing and accounts
payable, plus a 15% service charge. RAI charges ICCC for these services based
upon usage which management believes is reasonable. Total cost allocations IFC
charged to ICCC for the year ended December 31, 1997 were $456,000.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH IPO,
IFC will not acquire any commercial mortgages for a period of the earlier of
nine months from the closing of the ICH IPO or the date upon which ICH and/or
ICCC accumulates (for investment or sale) $300.0 million of Commercial
Mortgages or CMBSs.
Pursuant to the Right of First Refusal Agreement by and among ICH, IMH, IFC,
ICCC and RAI, pursuant to which, in part, RAI will agree that any mortgage
loan or mortgage-backed security investment opportunity which is offered to it
on behalf of either ICH, IMH any affiliated REIT will first be offered to that
entity whose initial primary business as described in its initial public
offering documentation most closely aligns with such investment opportunity.
10. COMMITMENTS AND CONTINGENCIES
Future Contracts
To remain competitive and control risk, ICCC uses futures, and options on
futures. The use of these instruments provides for increased liquidity, lower
transaction costs and more effective short term coverage than
64
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
cash and mortgage-backed securities. However, ICCC is vulnerable to the basis
risk that is inherent in cross-hedging. ICCC uses the buying and selling of
futures contracts on T-Bonds and Treasury Notes when the market is vulnerable
to day to day corrections. Executing hedges with these instruments allows ICCC
to more effectively hedge the risks of corrections or reverses in the market
without committing mandatory sales on mortgage-backed securities or cash. ICCC
utilizes these instruments on a short-term basis to fine tune its overall
hedge position at a lower cost. The unrealized gains and losses on the hedging
transactions are recorded as an adjustment to the basis of the loans. Gains
and losses are recognized upon the sale of loans.
The Company sells future contracts against five and ten year treasury notes
with major dealers in such securities. At December 31, 1997, the Company had
$105.1 million in outstanding commitments to sell treasury notes.
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. A
provision has been made for this--to date, no dollars have been paid related
to repurchase provision.
Lease Commitments
ICH and ICCC, as tenants in common, lease approximately 18,000 square feet
of office space in Irvine, California, under a non-cancelable premises
operating lease for a term of 36 months expiring in November 2000. Minimum
premises rental commitments are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
------------
<S> <C>
1998.......................................................... $ 511
1999.......................................................... 511
2000.......................................................... 468
------
Total....................................................... $1,490
======
</TABLE>
All rent expense associated with the lease is charged to ICCC as ICCC
employees occupy 100% of office space.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
65
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company was incorporated in the State of Maryland on February 3, 1997.
The following table sets forth certain information with respect to directors
and executive officers of ICH and ICCC:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph R. Tomkinson (S). 50 Chairman of the Board and Chief Executive Officer of ICH
and Chairman of the Board and Chief Executive Officer of ICCC
William S. Ashmore...... 48 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..... 43 Senior Vice President of ICH and President and Director of ICCC
Mary C. Glass-
Schannault............. 44 Senior Vice President of ICH and Senior Vice President of ICCC
James Walsh............. 48 Director of ICH
Frank P. Filipps 0...... 50 Director of ICH
Stephan R. Peers 0...... 45 Director of ICH
Thomas J. Poletti+, (S). 40 Director of ICH
Timothy R. Busch+, 0,
(S).................... 44 Director of ICH
</TABLE>
- --------
+ Unaffiliated Director
0 Member of Audit Committee
(S)Member of Compensation Committee
JOSEPH R. TOMKINSON has been Chairman of the Board and Chief Executive
Officer of ICH and Chairman of the Board and Chief Executive Officer of ICCC
since their formation. Mr. Tomkinson has been the Vice Chairman of the Board
and Chief Executive Officer of IMH (AMEX-IMH) and Chairman of the Board and
Chief Executive Officer of IFC and IWLG since August 1995. In October 1997,
Mr. Tomkinson became a director of BNC Mortgage, Inc. (Nasdaq-BNCM), a
specialty finance company that originates and sells non-conforming residential
mortgage loans. Mr. Tomkinson served as President and Chief Operating Officer
of ICII (Nasdaq-ICII) from January 1992 to February 1996 and, from 1986 to
January 1992, he was President of Imperial Bank Mortgage, a subsidiary of
Imperial Bank, one of the companies that combined to become ICII in 1992. Mr.
Tomkinson has been a Director of ICII since December 1991. From 1984 to 1986,
he was employed as Executive Vice President of Loan Production for American
Mortgage Network, a privately owned mortgage banker. Mr. Tomkinson brings
22 years of combined experience in real estate, real estate financing and
mortgage banking to the Company.
WILLIAM S. ASHMORE has been President and Chief Operating Officer of ICH and
Executive Vice President and a Director of ICCC since their formation. Mr.
Ashmore has been President and Chief Operating Officer of IMH, Executive Vice
President and a Director of IFC and President and a Director of IWLG since
August 1995. In March 1997, Mr. Ashmore became President of IFC and in July
1997 he became a Director of IMH. 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 (and
66
<PAGE>
was recently promoted to Executive Vice President in January 1998), Chief
Financial Officer, Treasurer and Secretary of IMH and IFC since August 1995,
and a Director of IFC since March 1996. From September 1992 to March 1995, Mr.
Johnson was Senior Vice President and Chief Financial Officer of ICII. From
November 1989 to September 1992, Mr. Johnson was Vice President and Controller
of ICII. From February 1988 to October 1989, he was Vice President and Chief
Financial Officer of Bayhill Service Corporation, a mortgage banking company,
and Vice President of Capital Savings and Loan, the parent of Bayhill Service
Corporation. From January 1987 to February 1988, Mr. Johnson was Vice
President of Finance for Merrill Lynch Huntoon Paige, Inc., a mortgage banking
subsidiary of Merrill Lynch Capital Markets. Mr. Johnson is a Certified Public
Accountant.
WILLIAM D. ENDRESEN has been Senior Vice President of ICH and President and
Director of ICCC since their formation. From 1995 through February 1997, Mr.
Endresen was the Chairman and a Director of American Capital Resource, Inc., a
commercial mortgage banking company which originated and closed bulk
condominium and multi-family transactions in the Western United States. Mr.
Endresen was President of Butterfield Mortgage Corporation from May 1993
through 1995 and developed, originated and closed numerous bulk condominium
and multi-family transactions. From 1987 to 1992, Mr. Endresen was Director of
Acquisitions and Project Finance for Monnig Development, Inc., a Southern
California based real estate development company. In July 1995, Mr. Endresen
filed a petition for Chapter 7 bankruptcy in federal court, Santa Ana. The
bankruptcy was discharged in November 1995. Mr. Endresen has more than 24
years of combined experience in real estate, real estate financing and
commercial mortgage banking.
MARY C. GLASS-SCHANNAULT has been Senior Vice President of each of ICH and
ICCC since their formation. Ms. Glass-Schannault has been Vice President of
IMH and Senior Vice President, Operations of IFC and IWLG since August 1995.
From April 1995 through November 1996, Ms. Glass-Schannault was the Senior
Vice President and Managing Director of Impac Capital Markets Group, a
division of ICII, and from February 1993 to April 1995, she was Senior Vice
President of IFC, as a division of ICII. From 1991 through 1993,
Ms. Glass-Schannault acted as a mortgage banking consultant. From 1990 through
1991, she was an Executive Vice President at PriMerit Mortgage Corporation.
From 1988 to 1990, Ms. Glass-Schannault was President of SCS Mortgage. From
September 1984 through September 1988, Ms. Glass-Schannault was Senior Vice
President of Concor Financial Services.
JAMES WALSH has been a Director of ICH since February 1997 and a Director of
IMH since August 1995. Mr. Walsh is an Executive Vice President of Walsh
Securities, Inc. where he directs mortgage loan production, sales and
securitization. Mr. Walsh was an executive of Donaldson, Lufkin and Jenrette
Securities Corporation from January 1989 through March 1996 where he oversaw
residential mortgage securitization, servicing brokerage and mortgage banking
services. From February 1987 to December 1988, Mr. Walsh was an executive in
the mortgage banking department at Bear Stearns & Company. From December 1985
to February 1987, Mr. Walsh was a senior banking officer at Carteret Savings
Bank.
FRANK P. FILIPPS has been a Director of ICH since February 1997 and a
Director of IMH since August 1995. Mr. Filipps was elected President of CMAC
Investment Corporation and Chairman, President and Chief Executive Officer of
Commonwealth Mortgage Assurance Company ("CMAC") in January 1995. Mr. Filipps
joined CMAC in 1992 as Senior Vice President and Chief Financial Officer,
where he was responsible for the company's financial, investment and data
processing operations, as well as the legal and human resources functions. In
1994, Mr. Filipps was promoted to Executive Vice President and Chief Operating
Officer for both CMAC Investment Corporation and CMAC, where his additional
responsibilities included the company's sales, marketing, underwriting and
risk management operations. In 1975, Mr. Filipps joined American International
Group and, from 1989 to 1992, he was Vice President and Treasurer. Prior to
that, he was a Second Vice President for Chase Manhattan Bank, N.A., in New
York.
STEPHAN R. PEERS has been a Director of ICH since February 1997 and a
Director of IMH since October 1995. Since January 1998, Mr. Peers has been an
executive at Aames Financial Corporation, a mortgage
67
<PAGE>
loan Company. Mr. Peers served as a Managing Director of Resource Bancshares
Corporation from August 1995 to December 1997. From April 1993 to December
1997, Mr. Peers was 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.
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.
TIMOTHY R. BUSCH has been a director of ICH since March 1997. Mr. Busch is a
director of Advanced Materials Group (Nasdaq-ADMG). Since October 1985, Mr.
Busch has been the President of T. R. Busch Realty Corporation, a licensed
real estate corporation, which was a general partner of European Hotel
Investors, II, a California limited partnership that filed a voluntary
petition pursuant to Chapter 11 of the Bankruptcy Code on February 22, 1994; a
confirmation order was issued on or about December 23, 1994. Since 1985, Mr.
Busch has been President of TRB Management, Inc., a California corporation,
which was 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 10, 1993 and converted to a Chapter 7 bankruptcy in
1995. The assets of the entity were liquidated and the partnership was
dissolved. Since 1984, Mr. Busch has been President of The Busch Firm, a
professional corporation law firm.
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 Maryland General Corporation Law, as amended from time to time ("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,
68
<PAGE>
trust, employee benefit plan or other enterprise and who is made a party to
the proceeding by reason of his service in that capacity. The Charter and
Bylaws also permit the Company to indemnify and advance expenses to any person
who served a predecessor of the Company in any of the capacities described
above and to any employee or agent of the Company or a predecessor of the
Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (1) was committed in bad faith or (2) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, under the
MGCL, a Maryland corporation may not indemnify for an adverse judgment in a
suit by or in the right of the corporation or for a judgment of liability on
the basis that personal benefit was improperly received, unless in either case
a court orders indemnification and then only for expenses. In addition, the
MGCL requires the Company, as a condition to advancing expenses to a director
or officer upon the corporation's receipt of (a) a written affirmation by the
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification by the 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. Insofar as indemnification by the
Company for liabilities arising under the Securities Act may be permitted to
directors, officers and controlling persons of the Company pursuant to
indemnity agreements or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act of 1934, as amended, requires ICH's
Directors and executive officers, and persons who own more than ten percent of
a registered class of ICH's securities, to file with the Commission initial
reports of ownership and reports of changes in ownership of the Common Stock
and other equity securities of the Company. Officers, Directors and greater
than ten percent stockholders are required by the Commission's regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To ICH's knowledge, based solely on a review of the copies of such reports
furnished to ICH during the fiscal year ended December 31, 1997, all Section
16(a) filing requirements applicable to its officers, Directors and greater
than ten percent beneficial owners were satisfied by such persons.
69
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Joseph R. Tomkinson, William S. Ashmore, Richard J. Johnson and Mary C.
Glass-Schannault, who are executive officers of ICH are also officers of IMH
and IFC and are officers of RAI, the Manager. See "Item 13. Certain
Relationships and Related Transactions." These officers have modified their
employment agreements with IFC to also become officers of the Manager (and of
ICH and ICCC). The Manager has agreed to cause each of its officers to devote
as much of his or her time to the operations of the Company as is reasonably
necessary. The Company will reimburse the Manager which will reimburse IFC 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 IFC, plus a 15% service charge.
Salary, other annual compensation and all other compensation are allocated to
the Company at a rate of one-third and to IMH at a rate of two-thirds for
services performed by executive officers (except Mr. Endresen) as part of the
Submanagement Agreement among IMH, IFC and RAI. The following is the amount of
compensation allocated to the Company for services performed by Messrs.
Tomkinson, Ashmore, and Johnson and Ms. Glass-Schannault and cash compensation
paid to William D. Endresen for the period from January 15, 1997 (commencement
of operations) through December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- --------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY (1) BONUS COMPENSATION (4) OPTIONS (#)(5) COMPENSATION (6)
------------------ ---- ---------- ------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Joseph R. Tomkinson..... 1997 $100,000 $ 5,300(2) $252,992 10,000 $480
Chairman of the Board
and CEO of ICH and
ICCC
William S. Ashmore...... 1997 $ 75,000 $ 5,300(2) $250,192 10,000 $290
President and COO of
ICH, Executive Vice
President and Director
of ICCC
Richard J. Johnson...... 1997 $ 37,500 $ 5,300(2) $204,256 10,000 $ 88
Senior Vice President,
CFO, Treasurer and
Secretary of ICH and
ICCC and Director of
ICCC
Mary C. Glass- 1997 $ 30,870 $27,790(2)(3) $ 42,317 10,000 $119
Schannault.............
Senior Vice President
of ICH and ICCC
William D. Endresen .... 1997 $120,000 $49,000 $ 43,280 50,000 $468
Senior Vice President
of ICH and President
and Director of ICCC
</TABLE>
- --------
(1) Pursuant to their respective employment agreements with IFC, total current
base salaries for Messrs. Tomkinson, Ashmore and Johnson and Ms. Glass-
Schannault are $300,000, $225,000, $112,500 and $92,930, respectively.
(2) 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.
(3) Includes a performance and profitability bonus.
(4) Consists of (i) car allowance paid by the Company, (ii) contributions paid
by the Company under the 401(k) plan, and (iii) the dollar value of the
difference between the price paid by each officer for shares of Common
Stock of ICH and the fair market value of such stock ($3.20) on the date
of purchase. See "Certain Relationships and Related Transactions--
Relationships with Affiliates--Stock Compensation Expense."
(5) Consists of options granted under ICH's Stock Option and Awards Plan (as
described below). Options vest 33.33% per year on each anniversary of the
date of grant and have been granted with related dividend equivalent
rights ("DERs").
(6) For each person, consists of payments on group term-life insurance.
70
<PAGE>
EMPLOYMENT AGREEMENTS
In August 1997, in connection with ICH's public offering, each officer's
employment agreement with IFC was amended and restated to allow him or her to
become an officer of RAI (and of ICH and ICCC). See "--Executive
Compensation--Summary Compensation Table" for annual salary descriptions. RAI
has agreed to cause each of its officers to devote as much of his or her time
to the operations of ICH as is necessary. ICH will reimburse RAI, who will
reimburse IFC, on a dollar for dollar basis (see "Item 13. Certain
Transactions and Related Transactions--Arrangements with IMH"), for the actual
cost of providing the services of its officers to ICH based upon the
compensation payable to them by IFC, plus a 15% service charge. In August
1997, Mr. Endresen entered into an employment agreement with ICCC for a term
of five years with a base salary of $120,000 per year subject to an annual
review and cost of living adjustment.
Pursuant to the employment agreements, if the officer is terminated without
cause (as defined therein) then the officer will receive (i) his or her base
salary for a period of one year following the date of termination, (ii) any
bonus or incentive compensation prorated through the date of termination;
provided that if the bonus or incentive compensation is discretionary, then
the officer will receive a payment at least equal to the last previous payment
made to the officer, if any, for the previous year prorated to the date of
termination, and (iii) any expense reimbursements. Each officer agreed that he
or she will not compete with the Company if the agreement is voluntarily
terminated by the officer. The employment agreements will not be terminated
upon any merger or the transfer of all or substantially all of IFC's assets.
401(k) PLAN
The Company participates 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 of each year
in the form of Company Common Stock. No contributions were made for any period
presented herein.
SUMMARY OF THE PROVISIONS OF THE STOCK OPTION PLAN
The Company has adopted a 1997 Stock Option and Awards Plan (the "Stock
Option and Awards Plan") which provides for the grant of qualified incentive
stock options ("ISOs") which meet the requirements of section 422 of the Code,
stock options not so qualified ("NQSOs"), deferred stock, restricted stock,
performance shares, stock appreciation and limited stock appreciation rights
awards ("Awards") and dividend equivalent rights ("DERs").
The purpose of the Stock Option and Awards Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to others whose job performance affects
the Company. The Stock Option and Awards Plan is administered by the Board of
Directors or a Committee, appointed by the Board of Directors (the
"Administrator"). ISOs may be granted to the officers and key employees of the
Company. NQSOs and Awards may be granted to the directors, officers, key
employees and agents and consultants of the Company, any of its subsidiaries
or parent corporation, of RAI, and to the directors, officers and key
employees of ICCC.
71
<PAGE>
The Stock Option and Awards Plan provides for granting of DERs in tandem
with all options granted under the Stock Option and Awards Plan. Such DERs
accrue for the account of the optionee shares of Common Stock upon the payment
of cash dividends on outstanding shares of Common Stock. The number of shares
accrued is determined by a formula and such shares are currently transferred
to the optionee only upon exercise of the related option. The Stock Option and
Awards Plan permits DERs to be granted under the Stock Option and Awards Plan
with certain characteristics. First, DERs can be issued in "current-pay" form
so that payments can be made to the optionee at the same time as dividends are
paid to holders of outstanding Common Stock. Second, DERs can be made eligible
to participate not only in cash distributions but also distributions of stock
or other property made to holders of outstanding Common Stock. Shares of
Common Stock accrued for the account of the optionee pursuant to a DER grant
may also be made eligible to receive dividends and distributions. Finally,
DERs can be made "performance based" by conditioning the right of the holder
of the DER to receive any dividend equivalent payment or accrual upon the
satisfaction of specified performance objectives.
Subject to anti-dilution provisions for stock splits, stock dividends and
similar events, the Stock Option and Awards Plan currently authorizes the
grant of options to purchase, and Awards of, an aggregate of 420,250 shares.
If an option granted under the Stock Option and Awards Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance
of further options or Awards under the Stock Option and Awards Plan.
Unless previously terminated by the Board of Directors, the Stock Option and
Awards Plan will terminate in April 2007, and no options or Awards may be
granted under the Stock Option and Awards Plan thereafter.
Options granted under the Stock Option and Awards Plan will become
exercisable in accordance with the terms of the grant made by the
Administrator. Awards will be subject to the terms and restrictions of the
Award made by the Administrator. The Administrator has discretionary authority
to select participants from among eligible persons and to determine at the
time an option or Award is granted when and in what increments shares covered
by the option may be purchased and, in the case of options, whether it is
intended to be an ISO or a NQSO provided, however, that certain restrictions
applicable to ISOs are mandatory, including a requirement that ISOs not be
issued for less than 100% of the then fair market value of the Common Stock
(110% in the case of a grantee who holds more than 10% of the outstanding
Common Stock) and a maximum term of ten years (five years in the case of a
grantee who holds more than 10% of the outstanding Common Stock).
Under current law, ISOs may not be granted to any director of the Company
who is not also an employee, or to directors, officers and other employees of
entities unrelated to the Company. No options or Awards may be granted under
the Stock Option and Awards Plan to any person who, assuming exercise of all
options held by such person, would own or be deemed to own more than 9.8% of
the outstanding shares of equity stock of the Company.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
equity stock). Options may be granted on terms providing for exercise either
in whole or in part at any time or times during their respective terms, or
only in specified percentages at stated time periods or intervals during the
term of the option.
The exercise price of any option granted under the Stock Option and Awards
Plan is payable in full in cash, or its equivalent as determined by the
Administrator. The Company may make loans available to option holders to
exercise options evidenced by a promissory note executed by the option holder
and secured by a pledge of Common Stock with fair market value at least equal
to the principal of the promissory note unless otherwise determined by the
Administrator.
The Board of Directors may from time to time revise or amend the Stock
Option and Awards Plan, and may suspend or discontinue it at any time.
However, no such revision or amendment may impair the rights of any
participant under any outstanding Award without his consent or may, without
stockholder approval, increase
72
<PAGE>
the number of shares subject to the Stock Option and Awards Plan or decrease
the exercise price of a stock option to less than 100% of fair market value on
the date of grant (with the exception of adjustments resulting from changes in
capitalization), materially modify the class of participants eligible to
receive options or Awards under the Stock Option and Awards Plan, materially
increase the benefits accruing to participants under the Stock Option and
Awards Plan or extend the maximum option term under the Stock Option and
Awards Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (4)
----------------------------------------------- -----------------------
NUMBER
OF SHARES
UNDERLYING PERCENTAGE OF
OPTIONS OPTIONS EXERCISE
GRANTED(#) GRANTED TO PRICE EXPIRATION
NAME (1) EMPLOYEES (%) ($/SH) (2) DATE (3) 5% ($) 10% ($)
---- ---------- ------------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William D. Endresen..... 50,000 22 15.00 August 2007 471,671 1,195,307
Joseph R. Tomkinson..... 10,000 4 15.00 August 2007 94,334 239,061
William S. Ashmore...... 10,000 4 15.00 August 2007 94,334 239,061
Richard J. Johnson...... 10,000 4 15.00 August 2007 94,334 239,061
Mary C. Glass-
Schannault............. 10,000 4 15.00 August 2007 94,334 239,061
</TABLE>
OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1997
- --------
(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 fair market value of such
shares at the date of grant as determined by the Administrator.
(3) Such stock options expire ten years from the date of grant or earlier upon
termination of employment.
(4) Amounts reflect assumed risks of appreciation set forth in the
Commission's executive compensation disclosure requirements. The actual
value, if any, an executive officer may realize will depend on the excess
of the stock price over the exercise price on the date the option is
exercised.
On August 4, 1997, the Company granted to each of Messrs. Walsh, Filipps,
Peers, Poletti and Busch options to purchase 10,000 shares of ICH Common Stock
at a per share exercise price of $15.00, the IPO price per share, vesting 50%
on the first anniversary of the date of grant and 50% on the second
anniversary date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE (#)(1) UNEXERCISABLE ($)(2)
- ---- ----------- ------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Joseph R. Tomkinson..... -- -- --/10,000 --/ 26,250
Willam S. Ashmore....... -- -- --/10,000 --/ 26,250
Richard J. Johnson...... -- -- --/10,000 --/ 26,250
Mary C. Glass-
Schannault............. -- -- --/10,000 --/ 26,250
William D. Endresen..... -- -- --/50,000 --/131,250
</TABLE>
- --------
(1) For a description of the terms of such options, see "--Stock Option Plan."
(2) Based on a price per share of $17.625, which was the price of a share of
Common Stock as quoted on the American Stock Exchange at the close of
business on December 31, 1997.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Tomkinson, Busch
and Poletti. Other than Joseph R. Tomkinson, Chairman of the Board and Chief
Executive Officer of ICH, no member of the Compensation Committee was, during
the fiscal year, an officer or employee of ICH, nor was any other member of
the Compensation Committee formerly an officer of ICH.
Mr. Tomkinson is also Vice Chairman of the Board and Chief Executive Officer
of IMH, a one-third owner of RAI and an owner of 25% of the common stock of
ICCC. See "Item 13. Certain Relationships and Related Transactions--
Relationships with the Manager" and "--Relationships with IMH." Thomas J.
Poletti is a partner in the law firm Freshman, Marantz, Orlanski, Cooper &
Klein, which is counsel to the Company. Mr. Poletti owns 12,000 shares of the
Company's Common Stock and options to purchase 10,000 shares of Common Stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of March 24,
1998 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>
NUMBER OF PERCENTAGE OF
SHARES SHARES
BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED (1)
------------------------ ------------ -------------
<S> <C> <C>
Impac Mortgage Holdings, Inc. (1)................ 719,789 9.8%
Joseph R. Tomkinson.............................. 101,800 1.4
William S. Ashmore............................... 82,800 1.1
Richard J. Johnson............................... 66,185 *
William D. Endresen.............................. 12,000 *
Mary C. Glass-Schannault......................... 12,100 *
James Walsh...................................... 12,000 *
Frank P. Filipps................................. 12,000 *
Stephan R. Peers................................. 13,500 *
Thomas J. Poletti................................ 12,000 *
All directors and executive officers as a group
(9 persons)..................................... 324,385 4.4%
</TABLE>
- --------
* less than 1%
(1) Excludes 674,211 shares of ICH non-voting Class A Common Stock owned by
IMH. Such shares automatically convert into shares of Common Stock of ICH
upon any issuances of Common Stock by ICH or sales of ICH Common Stock
held by IMH; provided, however, that the shares of ICH Class A Common
Stock will not convert into shares of ICH Common Stock whereby IMH would
own, immediately after such conversion, greater than 9.8% of ICH's
outstanding Common Stock.
74
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIPS WITH THE MANAGER
Executives of the Manager, RAI, have significant experience in purchasing,
financing, servicing, securitizing and investing in mortgage loans and
mortgage securities and all of such persons are officers of IMH and IFC;
however, they have not previously managed a Commercial Mortgage REIT. RAI is a
recently formed entity with no significant assets and no prior history of
operations. RAI is owned equally by each of Messrs. Tomkinson, Ashmore, and
Johnson. IMH owns all of the outstanding shares of non-voting preferred stock
of IFC, its conduit operations, representing 99% of the economic interest in
IFC, and Messrs. Tomkinson, Johnson and Ashmore own all of the outstanding
shares of Common Stock of IFC, representing 1% of the economic interest. The
officers of RAI have modified their employment agreements with IFC to allow
them to become officers of the Manager (and of ICH and ICCC). See Item 11.
"Executive Compensation." The Manager has agreed 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 IFC
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 IFC, 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 IFC for costs and
expenses owed by the Manager to IFC for costs and services under any
submanagement agreement between IFC 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 IFC. 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 IFC. After
the third year, ICH will only be responsible for reimbursing expenses and
services provided, with the 15% service charge for amounts due to IFC. See "--
Management Agreement--Expenses."
The Company has selected an outside advisor in order to coordinate, assist
and manage the duties and responsibilities of the Company. In order to utilize
the IMH infrastructure, which oversees the daily capital, asset and operations
management, investor relations and human resources functions of IMH and its
affiliates, RAI entered into a submanagement agreement with IFC, the conduit
operations of IMH, to provide substantially all of the administrative services
required by the Company including facilities and costs associated therewith,
technology, human resources, management information systems, general ledger
accounts, check processing and accounts payable as RAI deems necessary.
RAI was formed as a vehicle through which the IMH management team could
effectively manage the operations of ICH, IMH and any future REIT, some of
which may have been or will be affiliated with the Company, IMH, or their
respective conduit operations (an "Affiliated REIT"). ICH believes that
contracting directly with IMH to provide services required under the
Management Agreement would have proved unwieldy and cumbersome, if and when
any Affiliated REITs are formed of which RAI is the manager. If ICH were
required to independently hire an executive management team to duplicate the
services to be provided by RAI, ICH believes that it would be subjected to
substantial expenses in terms of fixed salaries, which salary expenses will
not be incurred under the Management Agreement. In addition, ICH believes that
the allocation of expenses on an as needed basis will allow ICH to avoid the
costs to establish the infrastructure currently existing at IMH,
notwithstanding the fact that the Company is required to pay a 15% service
charge on Reimbursable Expenses and Reimbursable Executive Amounts (as those
terms are defined herein).
The address of the Manager is 20371 Irvine Avenue, Santa Ana Heights,
California 92707, telephone (714) 556-0122.
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<PAGE>
Managers and Executive Officers
The persons who are managers and executive officers of RAI are as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<C> <S>
Joseph R. Tomkinson* Chairman and Chief Executive Officer
William S. Ashmore* President and Manager
Richard J. Johnson* Executive Vice President, Chief Financial
Officer and Manager
Mary C. Glass-Schannault* Senior Vice President
</TABLE>
- --------
* Each of these persons also serve as directors or executive officers of the
Company.
For biographical information on these persons, see Item 10. "Directors and
Executive Officers of the Registrant."
MANAGEMENT AGREEMENT
The Company has entered into a Management Agreement with the Manager 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;
76
<PAGE>
(5) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(6) monitoring and providing to the Board of Directors on an on-going
basis price information and other data, obtained from certain nationally-
recognized dealers who maintain markets in Commercial Mortgages identified
by the Board of Directors from time to time, and providing data and advice
to the Board of Directors in connection with the identification of such
dealers;
(7) providing the executive and administrative personnel, office space
and services required in rendering services to the Company, which includes
contracting with appropriate third parties, which may include IMH and its
affiliates, to provide various services including facilities and costs
related therewith, technology, management information systems, human
resource administration, general ledger accounts, check processing,
accounts payable and other similar operational or administrative services;
(8) overseeing the day-to-day operations of ICH and supervising the
performance of such other administrative functions necessary in the
management of ICH as directed by the Board of Directors of ICH;
(9) advising and negotiating of agreements on behalf of the Company with
banking institutions and other lenders to provide for the short-term
borrowing of funds by the Company;
(10) communicating on behalf of the Company with the holders of the
equity and debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies and
to maintain effective relations with such holders;
(11) subject to an agreement executed by the Company, advising as to the
designation of a servicer for those loans sold by ICCC whereby ICCC elected
not to service such loans;
(12) counseling the Company in connection with policy decisions to be
made by its Board of Directors; and
(13) upon request by and in accordance with the direction of the Board of
Directors of the Company, investing or reinvesting any money of the
Company.
In order to utilize the IMH infrastructure, RAI has entered into a
submanagement agreement with IFC, the conduit operations of IMH, to provide
substantially all of the administrative services required by the Company
including facilities and costs associated therewith, technology, human
resources, management information systems, general ledger accounts, check
processing and accounts payable as RAI deems necessary. The Manager may also
enter into additional contracts with other parties, which may include IMH or
its affiliates, to provide any such services for the Manager, which third
party shall be approved by the Company's Board of Directors. See "--Expenses."
RAI currently has a total of four officers and three managers who will
participate in the oversight of the Company's operations.
Management Fees
The Manager will be entitled to receive for each fiscal quarter, an amount
equal to 25% of the Net Income of the Company, before deduction of such
compensation, in excess of the amount that would produce an annualized Return
on Equity equal to the daily average Ten Year U.S. Treasury Rate plus 2% (the
"25% Payment"). The term "Return on Equity" is calculated for any quarter by
dividing the Company's Net Income for the quarter by its Average Net Worth for
the quarter. For such calculations, the "Net Income" of the Company means the
net income of the Company determined in accordance with the Code before the
Manager's compensation, the deduction for dividends paid and any net operating
loss deductions arising from losses in prior periods. A deduction for all of
the Company's interest expenses for borrowed money is also taken in
calculating Net Income. "Average Net Worth" for any period means the
arithmetic average of the sum of the gross proceeds from any offering of its
equity securities by the Company, before deducting any underwriting discounts
and
77
<PAGE>
commissions and other expenses and costs relating to the offering, plus the
Company's retained earnings less dividends declared (without taking into
account any losses incurred in prior periods) computed by taking the daily
average of such values during such period. The 25% Payment to the Manager will
be calculated quarterly in arrears before any income distributions are made to
stockholders for the corresponding period.
The Manager's fees will be calculated by the Manager within 60 days after
the end of each calendar quarter, with the exception of the fourth quarter for
which compensation will be computed within 30 days, and such calculation shall
be promptly delivered to the Company. The Company will be obligated to pay the
fee within 90 days after the end of each calendar quarter.
Expenses
Pursuant to the Management Agreement, ICH will also pay all operating
expenses incurred by the Manager under the Management Agreement. The operating
expenses generally required to be incurred by the Manager and reimbursed by
ICH include out-of-pocket costs, equipment and other personnel required for
the Company's operations, including amounts payable by RAI pursuant to
submanagement agreements with outside third parties, which will include IMH
and its affiliates, to provide various services to the Company including
facilities and costs related therewith, technology, management information
systems, human resource administration, general ledger accounts, check
processing, accounts payable and other similar operational services
("Reimbursable Expenses"). Reimbursable Expenses also include issuance and
transaction costs associated with the purchase, disposition and financing of
investments, regular legal and auditing fees and expenses of the Company, the
fees and expenses of the Company's Directors, premiums for directors' and
officers' liability insurance, premiums for fidelity and errors and omissions
insurance, servicing and sub-servicing expenses, the costs of printing and
mailing proxies and reports to stockholders, and the fees and expenses of the
Company's custodian and transfer agent, if any.
The Company will reimburse the Manager for all Reimbursable Expenses, plus a
service charge of 15% on all Reimbursable Expenses owed by RAI to IFC, the
conduit operations of IMH, for costs and services under any subcontract
between RAI and IFC. 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 IFC.
All of the persons who are officers of the Manager are officers of IMH, IFC,
ICH and ICCC. IMH owns all of the outstanding shares of non-voting preferred
stock of IFC, its conduit operations, representing 99% of the economic
interest in IFC, and Messrs. Tomkinson, Johnson and Ashmore all of the
outstanding shares of common stock of IFC, representing 1% of the economic
interest. Each of these officers have modified their employment agreements
with IFC to allow them to become officers of the Manager (and of ICH and
ICCC). The Manager will agree to cause each of its officers to devote as much
of his or her time to the operations of the Company as is reasonably
necessary. The Company will reimburse the Manager, who will reimburse IFC 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 IFC, 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 IFC. 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
IFC.
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.
78
<PAGE>
Tabular Presentation of Amount Payable to Manager
The following table presents all compensation, fees, profits and other
benefits (including reimbursement of out-of-pocket expenses) which RAI and its
affiliates may earn or receive in connection with the Management Agreement.
<TABLE>
<CAPTION>
RECIPIENT PAYOR AMOUNT
--------- ----- ------
<C> <C> <S>
RAI(1) ICH 25% Payment(2)
RAI(3) ICH Reimbursable Expenses, plus a 15% service charge(4)
RAI(3) ICH Reimbursable Executive Amounts, plus a 15% service
charge(4)
</TABLE>
- --------
(1) RAI is equally owned by each of Messrs. Tomkinson, Ashmore and Johnson;
the 25% payment to RAI will be retained by RAI, resulting in a direct
benefit to its owners.
(2) For a more detailed explanation of the 25% Payment, see "--Management
Fees." There is no minimum or maximum amount of the 25% Payment due in any
year.
(3) All amounts payable by ICH to RAI for Reimbursable Expenses and
Reimbursable Executive Amounts, plus the 15% service charge, are payable
by RAI to IFC.
(4) For a more detailed explanation of Reimbursable Expenses and Reimbursable
Executive Amounts see "--Expenses." For the first three years of the
Management Agreement, there will be a minimum amount of $500,000 per annum
(which includes the 15% service charge) payable by ICH to RAI for
Reimbursable Expenses and Reimbursable Executive Amounts due in any year.
There is no maximum amount of Reimbursable Expenses or Reimbursable
Executive Amounts due in any year.
STOCK OPTION AND AWARDS PLAN
The Company has adopted the Stock Option and Awards Plan and the directors,
officers and employees of the Manager will be granted certain options or
rights under the Stock Option and Awards Plan and may in the future be granted
additional options or rights under the Stock Option and Awards Plan. See Item
11. "Executive Compensation--Summary of the Provisions of the Stock Option
Plan."
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. The Manager,
its directors, officers, equityholders and employees will not be liable to the
Company, any mortgage security issuer, any subsidiary of the Company, the
Unaffiliated Directors, the Company's stockholders or any subsidiary's
shareholders for acts performed in accordance with and pursuant to the
Management Agreement, except by reason of acts or omissions constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. The Manager is a recently formed entity
and does not have significant assets. Consequently, there can be no assurance
that the Company would be able to recover any damages for claims it may have
against the Manager. The Company has agreed to indemnify the Manager, and its
managers, officers, equityholders and employees with respect to all expenses,
losses, damages, liabilities, demands, charges and claims arising from any
acts or omissions of the Manager made in good faith in the performance of its
duties under the Management Agreement.
RELATIONSHIPS WITH IMH
ORGANIZATIONAL TRANSACTIONS WITH IMH
In February 1997, Joseph R. Tomkinson, ICH's Chairman of the Board and Chief
Executive Officer, William S. Ashmore, ICH's President and Chief Operating
Officer, Richard J. Johnson, ICH's Senior Vice President, Chief Financial
Officer, Treasurer and Secretary, William D. Endresen, ICH's Senior Vice
President,
79
<PAGE>
Mary C. Glass-Schannault, ICH's Senior Vice President, and each of James
Walsh, Frank P. Filipps, Stephan R. Peers and Thomas J. Poletti, Directors of
ICH, and H. Wayne Snavely, purchased 76,800, 76,800, 62,400, 12,000, 12,000
and 12,000 shares of the Common Stock of ICH, respectively, at a per share
price of $.01. In addition, IMH purchased 299,000 shares of the Common Stock
of ICH, at a per share price of $.01.
In February 1997, IMH purchased all of the non-voting preferred stock of
ICCC, which represents 95% of the economic interest in ICCC (entitling the
holder to receive 95% of any dividend or distribution made by ICCC), for
$500,000. Each of Messrs. Tomkinson, Ashmore, Johnson and Endresen purchased
all of the outstanding shares of Common Stock of ICCC (500 shares at a per
share price of $1.00), which represent 5% of the economic interest in ICCC.
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 non-voting convertible preferred stock of ICH at the rate of one share of
ICH Preferred Stock for each $5.00 principal amount of said note.
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 automatically converted, upon the closing of
ICH's IPO, into shares of ICH Common Stock determined by multiplying the
number of shares of ICH Preferred Stock converted by a fraction, the numerator
of which was $5.00 and the denominator of which was $15.00, the IPO price per
share. Notwithstanding the foregoing, consistent with IMH's classification as
a REIT, IMH was not entitled to convert into ICH Common Stock more than that
number of shares of ICH Preferred Stock whereby IMH would have owned,
immediately after such conversion, greater than 9.8% of the outstanding ICH
Common Stock. Any shares of ICH Preferred Stock not converted into ICH Common
Stock upon the closing of the IPO automatically converted into shares of ICH
non-voting Class A Common Stock at the same rate as the ICH Preferred Stock
converted into ICH Common Stock on said date. Shares of ICH Class A Common
Stock converted 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 Common Stock by ICH or sales of
ICH Common Stock held by IMH, shares of ICH Class A Common Stock will
automatically convert into additional shares of ICH Common Stock, subject to
said 9.8% limitation.
In April 1997, IMH exchanged the 299,000 shares of ICH Common Stock held by
it for an equal number of shares of ICH Class A Stock.
Upon the closing of the IPO in August 1997, IMH contributed to ICH (the
"Contribution") 100% of the outstanding shares of non-voting preferred stock
of ICCC in exchange for 95,000 shares of ICH Class A Common Stock. As of March
30, 1998, IMH owned 719,789 shares of ICH Common Stock and 674,211 shares of
ICH Class A 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 and IFC.
Pursuant to a non-compete agreement (the "Non-Compete Agreement") between IMH,
IFC, ICH and ICCC, for a period of the earlier of nine months from August 1997
or the date upon which the Company accumulates (for investment or sale)
$300.0 million of Commercial Mortgages and/or CMBSs, neither IMH nor IFC will
originate or acquire any Commercial Mortgages; however, this Agreement shall
not preclude IMH (either directly or through IFC) from purchasing any
Commercial Mortgages or CMBSs under the Right of First Refusal Agreement
discussed below.
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<PAGE>
After the termination of the Non-Compete Agreement, and subject to the Right
of First Refusal Agreement, as defined below, IMH, as a mortgage REIT, and
IFC, as its conduit operations, may compete with the operations of the
Company.
It is anticipated that RAI will act as the Manager for other REITs, some of
which may have been or will be Affiliated REITs. In such an event, any
Affiliated REIT utilizing RAI as its Manager may be in competition with the
Company. In August 1997, RAI, ICH, ICCC, IMH and IFC entered into a ten-year
right of first refusal agreement (the "Right of First Refusal Agreement"). It
is expected that any Affiliated REIT utilizing RAI as its Manager will become
a party to the Right of First Refusal Agreement, but such event is outside the
control of the Company and there can be no assurance that any or all
Affiliated REITs (other than IMH) will actually become parties to the Right of
First Refusal Agreement. Pursuant to this Agreement, RAI agrees that any
mortgage loan or mortgage-backed security investment opportunity (an
"Investment Opportunity") which is offered to it on behalf of either the
Company, IMH or any Affiliated REIT will first be offered to that entity (the
"Principal Party") whose initial primary business as described in its initial
public offering documentation (the "Initial Primary Business") most closely
aligns with such Investment Opportunity. In addition, both IMH and IFC on the
one hand and ICH and ICCC on the other agree that any Investment Opportunity
offered to either of them which falls outside the scope of its Initial Primary
Business should be offered to the Principal Party. Should the Principal Party
decline to take advantage of an Investment Opportunity offered to RAI, RAI
will make an independent evaluation of which REITs business is more greatly
enhanced by such Investment Opportunity. Should all of such REITs decline such
Investment Opportunity RAI may offer the Investment Opportunity to any third
party. Should the Principal Party decline to take advantage of an Investment
Opportunity offered to a REIT which is a party to the Right of First Refusal
Agreement, said REIT shall then be free to pursue the Investment Opportunity.
In such an event there can be no assurance that the Company will be able to
take advantage of any such Investment Opportunity or that any competitive
activity of IMH, IFC 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.
SUBMANAGEMENT AND SERVICING AGREEMENTS
In order to utilize the IMH infrastructure, RAI has entered into a
submanagement agreement with IFC, the conduit operations of IMH, to provide
substantially all of the administrative services required by the Company
including facilities and costs associated therewith, technology, human
resources, management information systems, general ledger accounts, check
processing and accounts payable as RAI deems necessary. IFC charges ICH and
ICCC for these services based upon usage which management believes is
reasonable. Total cost allocations IFC charged to ICH and ICCC for the year
ended December 31, 1997 were $525,000 and $456,000, respectively. For a
general description of the persons who are officers of the Manager and the
terms of the Management Agreement, see "--Relationships with the Manager."
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.
CREDIT ARRANGEMENTS
ICCC maintains an uncommitted warehouse financing facility with an interest
rate indexed to the prime rate with IMH of which $8.5 million was outstanding
on the warehouse line at December 31, 1997. The largest aggregate balance
outstanding during the year ended December 31, 1997 was $8.5 million. Interest
expense recorded by ICCC related to warehouse financing due to IMH for the
year ended December 31, 1997 was $262,000.
81
<PAGE>
During 1997, ICH maintained a warehouse financing facility with IWLG, a
wholly owned subsidiary of IMH, until ICH obtained warehouse financing
facilities with third-party lenders. The interest rate on the warehouse
financing facility was 8.50% per annum and the highest balance outstanding
during the year ended December 31, 1997 was $16.6 million. Interest expense
recorded by ICH related to finance receivables due to IWLG for the year ended
December 31, 1997 was $453,000. As of December 31, 1997, ICH did not maintain
a warehouse facility with IWLG.
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby ICH agreed to advance to IMH up to maximum amount of $15.0 million.
The agreement expires on August 8, 1998. Advances under the revolving credit
arrangement are at an interest rate and maturity to be determined at the time
of each advance (typically, prime plus 1%) with interest and principal paid
monthly. During 1997, the largest aggregate amount outstanding under the
credit arrangement was $12.6 million at an interest rate of 9.5%. As of
December 31, 1997, there were no amounts outstanding under the credit
arrangement. Interest income recorded by ICH related to such advances to IMH
was approximately $68,000.
In August 1997, ICH entered into a revolving credit arrangement with IMH
whereby IMH agreed to advance to ICH up to maximum amount of $15.0 million.
The agreement expires on August 8, 1998. Advances under the revolving credit
arrangement are at an interest rate and maturity to be determined at the time
of each advance (typically, prime plus 1%) with interest and principal paid
monthly. During 1997, the largest aggregate amount outstanding under the
credit arrangement was $15.0 million at an interest rate of 9.5%. As of
December 31, 1997, ICH's outstanding borrowings under the credit arrangement
was $9.1 million. Interest expense recorded by ICH related to such borrowings
from IMH was approximately $55,000.
In October 1997, ICH entered into a revolving credit arrangement with IFC
whereby ICH would advance to IFC up to a maximum amount of $15.0 million.
Advances under the revolving credit arrangement were evidenced by an unsecured
promissory note and at an interest rate and maturity determined at the time of
each advance (typically, prime plus 1%) with interest and principal paid
monthly. The largest balance outstanding under the revolving credit
arrangement during the year ended December 31, 1997 was $2.0 million at an
interest rate of 9.5%. The revolving credit arrangement expired in December
1997 and as of December 31, 1997 there were no amounts outstanding.
PURCHASE OF COMMERCIAL MORTGAGES
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 (see "--Credit Arrangements") and $900,000 in borrowings from IMH. All of
condominium conversion loans were purchased from IFC and $7.3 million of such
mortgage loans were originated by a company with which William D. Endresen was
an affiliate. IMH owns all of the outstanding non-voting preferred stock of
IFC, which represents 99% of the economic interest in IFC, and Messrs.
Tomkinson, Johnson and Ashmore own 100% of the common stock of IFC
representing 1% of the economic interest. As of March 1998, Messrs. Tomkinson,
Ashmore and Johnson owned 100% of the common stock of IFC.
In March 1997, ICH purchased a $10.1 million CMBSs from IFC which was
financed by a promissory note with ICII of which Mr. Tomkinson is a director.
In March 1997, the promissory note was repaid with cash from IMH's $15.0
million investment. Concurrently therewith, the Company repaid the $900,000
owed to IMH in connection with its purchase of condominium conversion loans.
SALE OF RESIDUAL INTERESTS IN SECURITIZATIONS
In March 1997, IFC sold a residual interest in securitization of $10.1
million to ICH at carrying value which approximated fair value.
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<PAGE>
RELATIONSHIPS WITH AFFILIATES
GENERAL
With a view toward protecting the interests of ICH's stockholders, the
Bylaws of ICH provide that a majority of the Board of Directors (and at least
a majority of each committee of the Board of Directors) must not be
"Affiliates" of RAI, as that term is defined in the Bylaws, and that the
investment policies of ICH must be reviewed annually by the Unaffiliated
Directors. Such policies and restrictions thereon may be established from time
to time by the Board of Directors, including a majority of the Unaffiliated
Directors. In addition, any transaction between ICH and any Affiliated Person
requires the affirmative vote of a majority of the Unaffiliated Directors.
Moreover, approval, renewal or termination of the Management Agreement
requires the affirmative vote of a majority of the Unaffiliated Directors. The
Management Agreement may be terminated by ICH upon 60 days' notice. Any such
termination or failure to extend by ICH without cause shall result in the
payment of a termination or non-renewal fee to the Manager determined by an
independent appraisal. See "--Relationships with the Manager--Management
Agreement."
Many of the affiliates of IMH, RAI and ICCC have interlocking executive
positions and share common ownership. Joseph R. Tomkinson, ICH's Chairman of
the Board and Chief Executive Officer, is the Chief Executive Officer and Vice
Chairman of the Board of IMH, a one-third owner of RAI and an owner of 25% of
the common stock of ICCC. William S. Ashmore, ICH's President and Chief
Operating Officer, is the President and a Director of IMH, a one-third owner
of RAI and an owner of 25% of the common stock of ICCC. Richard J. Johnson,
ICH's Senior Vice President, Chief Financial Officer, Treasurer and Secretary,
is Executive Vice President, Chief Financial Officer, Treasurer and Secretary
of IMH, a one-third owner of RAI and a 25% owner of the common stock of ICCC.
William D. Endresen, ICH's Senior Vice President, is an owner of 25% of the
common stock of ICCC. Mary Glass-Schannault, ICH's Senior Vice President, is a
Senior Vice President of IMH and IFC. Each of James Walsh, Frank P. Filipps
and Stephan R. Peers, Directors of ICH, are Directors of IMH. In addition,
since Messrs. Tomkinson, Ashmore, Johnson and Endresen own all of the
outstanding shares of voting stock of ICCC, they have the right to elect all
directors of ICCC and the ability to control the outcome of all matters for
which the consent of the holders of the common stock of ICCC is required.
Ownership of 100% of the common stock of ICCC entitles the owners thereof to
an aggregate of 5% of the economic interest in ICCC.
RELATED PARTY COST ALLOCATIONS
The Company was charged expenses for certain services and costs that
primarily include human resources, data processing, professional services and
accounting functions. These expenses were primarily charged based on a pro
rata allocation of certain IMH employees time spent working on Company related
business, which management believes is reasonable, and included a 15% service
charge which is included in the terms of the management agreement with RAI.
The related party allocations for the period January 15, 1997 (commencement of
operations) through December 31, 1997 totaled $981,000. Management believes
the related party expenses allocated to the Company and included in its
results of operations for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 approximate what the expenses would have
been if the Company had operated as an unaffiliated entity of IMH and its
affiliates.
CREDIT ARRANGEMENTS
ICCC has entered into warehouse line agreements with ICH which provide up to
an aggregate of $900.0 million to finance ICCC's operations as needed. Terms
of the warehouse line agreements 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 on the warehouse line agreements
are at prime which was 8.50% at December 31, 1997. The margins on the
warehouse line agreement are up to 90% of the fair market value of the
collateral. Management believes that the warehouse line agreements will be
sufficient to handle the Company's liquidity needs. During
83
<PAGE>
1997, the highest aggregate amount outstanding under the credit arrangements
was $95.7 million. As of December 31, 1997, amounts outstanding on ICCC's
warehouse line with ICH were $95.7 million. Interest expense recorded by ICCC
related to warehouse lines with ICH for the years ended December 31, 1997 was
$2.4 million.
On December 31, 1997, the Company financed its 50% interest, through its
ownership in Dove, in a commercial office building located in Newport Beach,
California with a loan for $5.2 million from ICCC. During 1997, the highest
amount outstanding under the loan was $5.2 million. Terms of the loan are for
25 years at an adjustable rate of 9.0% with current monthly principal and
interest payments of $44,000. ICCC recorded loan fees of $71,000 on the loan.
See "Item 2. Properties."
During the normal course of business, ICH may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are
reflected as "Due From Affiliates" while borrowings are reflected as "Due To
Affiliates" on the Company's balance sheet. These short-term advances and
borrowings bear interest at a fixed rate of 8.00% per annum. Interest income
recorded by ICH related to short-term advances due from affiliates was
$268,000 for the year ended December 31, 1997. Interest expense recorded by
ICH related to short-term advances due to affiliates was $45,000 for the year
ended December 31, 1997.
During the normal course of business, ICCC may advance or borrow funds on a
short-term basis with affiliated companies. Advances to affiliates are
reflected as "Due From Affiliates" while borrowings are reflected as "Due To
Affiliates" on ICCC's balance sheet. These short-term advances and borrowings
bear interest at a fixed rate of 8.00% per annum. Interest income recorded by
ICCC related to short-term advances due from affiliates was $16,000 for the
year ended December 31, 1997. Interest expense recorded by ICCC related to
short-term advances due to affiliates was $113,000 for the year ended December
31, 1997.
CASH AND CASH EQUIVALENTS
As of December 31, 1997, IMH had $12.5 million of cash and cash equivalents
on deposit with Southern Pacific Bank ("SPB"), formerly Southern Pacific
Thrift and Loan Association, a subsidiary of ICII.
PURCHASE OF COMMERCIAL MORTGAGES
During 1997, ICH purchased $58.5 million of adjustable rate Commercial
Mortgages from ICCC at a net premium of $111,000.
STOCK COMPENSATION EXPENSE
Stock compensation expense of $2,697,000 represents the difference between
the price at which ICH issued 300,000 shares of common stock to directors and
officers of IMH and ICH on February 3, 1997 ($.01 per share) and the estimated
fair value for financial reporting purposes of such shares as determined by
the Company's management, as of February 3, 1997 ($9.00 per share). Fair value
was based primarily on management's projection of the Company's future cash
flow and net earnings, as well as the lack of liquidity of the shares at the
date of issuance and the uncertainty of certain future events regarding the
development of the Company's business and organization structure including,
but not limited to, obtaining independent financing for the organization and
purchase of Commercial Mortgages, funding and closing Commercial Loans, and
developing a pipeline of future Commercial Loan originations.
Stock compensation expense of $25,000 represents the difference between the
price at which ICCC issued 500 shares of Common Stock to directors and offices
of IMH and ICH 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.
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OTHER TRANSACTIONS
In April 1997, ICH, as a stand-alone entity, entered into a warehouse line
agreement to provide up to $200.0 million to finance the Company's businesses.
Terms of the warehouse line of credit require that the Commercial Mortgages be
held by an independent third party custodian, which gives the Company the
ability to borrow against the collateral as a percentage of the fair market
value of the Commercial Mortgages. The borrowing rates are expressed in basis
points over one-month LIBOR, depending on the type of collateral provided by
the Company. The margins on the warehouse line agreement are based on the type
of mortgage collateral used and generally range from 85% to 88% of the fair
market value of the collateral. The warehouse line agreement was guaranteed by
IMH until the closing of the IPO.
Thomas J. Poletti, a Director of ICH, is a partner in the law firm Freshman,
Marantz, Orlanski, Cooper & Klein, which is counsel to the Company and IMH.
Mr. Poletti owns 12,000 shares of the Company's Common Stock and options to
purchase 10,000 shares of Common Stock.
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PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements included in the Form 10-K are:
IMPAC COMMERCIAL HOLDINGS, INC.
<TABLE>
<S> <C>
Consolidated Balance Sheet at December 31, 1997
Consolidated Statement of Operations for the period from January 15, 1997
(commencement of operations) to December 31, 1997;
Consolidated Statement of Changes in Stockholders' Equity for the period
from January 15, 1997 (commencement of operations) to December 31, 1997;
Consolidated Statement of Cash Flows for the period from January 15, 1997
(commencement of operations) to December 31, 1997;
Notes to Consolidated Financial Statements
</TABLE>
IMPAC COMMERCIAL CAPITAL CORPORATION
<TABLE>
<S> <C>
Balance Sheet at December 31, 1997;
Statements of Operations for the period from January 15, 1997
(commencement of operations) to December 31, 1997;
Statement of Changes in Shareholders' Equity for the period from January
15, 1997 (commencement of operations) to December 31, 1997;
Statements of Cash Flows for the period from January 15, 1997
(commencement of operations) to December 31, 1997;
Notes to Financial Statements
</TABLE>
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 Form 10-K.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth quarter of 1997.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
3.1+ Charter of the Registrant.
3.2+ Bylaws of the Registrant.
4.1+ Form of Stock Certificate of the Company.
10.1+ Form of Management Agreement among the Registrant and RAI Advisors,
LLC.
10.2+ Form of Submanagement Agreement among RAI Advisors, LLC, Impac
Mortgage Holdings, Inc. and Impac Funding Corporation.
10.3+ 1997 Stock Option and Awards Plan.
10.4 Lease dated December 8, 1997, among the Registrant, Impac Commercial
Capital Corporation and The Irvine Company.
10.5+ Form of Contribution Agreement among the Registrant, Impac Mortgage
Holdings, Inc., and Impac Commercial Capital Corporation.
</TABLE>
86
<PAGE>
<TABLE>
<C> <S>
10.6+ Form of Non-Competition Agreement among the Registrant, Impac Mortgage
Holdings, Inc., Impac Commercial Capital Corporation and Impac Funding
Corporation.
10.7+ Form of Right of First Refusal Agreement between the Registrant, RAI
Advisors, LLC, Impac Mortgage Holdings, Inc., Impac Commercial Capital
Corporation, and Impac Funding Corporation.
10.8+ Servicing Agreement between the Registrant and Impac Commercial
Capital Corporation.
21 Subsidiaries of the Registrant.
24.1 Power of Attorney (Included on Signature Page).
27 Financial Data Schedule.
</TABLE>
- --------
+ Incorporated by reference to, and all such exhibits have the corresponding
Exhibit Number filed as part of the Registration Statement on Form S-11, as
amended (File No. 333-25423) filed with the Securities and Exchange
Commission on April 18, 1997.
87
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Irvine, State of California, on the 2nd day of April, 1998.
IMPAC COMMERCIAL HOLDINGS, INC.
/s/ Joseph R. Tomkinson
By: _________________________________
Joseph R. Tomkinson
Chairman of the Board and
Chief Executive Officer
We, the undersigned directors and officers of Impac 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 Exchange Act of 1933, as amended, and any rules,
regulations, and requirements of the Securities and Exchange Commission, in
connection with this report, 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 to this report; 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 2, 1998
____________________________________ Chief Executive Officer
Joseph R. Tomkinson (Principal Executive
Officer)
/s/ Richard J. Johnson Chief Financial Officer April 2, 1998
____________________________________ (Principal Financial and
Richard J. Johnson Accounting Officer)
/s/ James Walsh Director April 2, 1998
____________________________________
James Walsh
/s/ Frank P. Filipps Director April 2, 1998
____________________________________
Frank P. Filipps
/s/ Stephan R. Peers Director April 2, 1998
____________________________________
Stephan R. Peers
/s/ Thomas J. Poletti Director April 2, 1998
____________________________________
Thomas J. Poletti
/s/ Timothy R. Busch Director April 2, 1998
____________________________________
Timothy R. Busch
</TABLE>
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EXHIBIT 10.4
OFFICE SPACE LEASE
BETWEEN
THE IRVINE COMPANY
AND
IMH COMMERCIAL HOLDINGS, INC., AND
IMPERIAL COMMERCIAL CAPITAL CORPORATION
<PAGE>
OFFICE SPACE LEASE
THIS LEASE is made as of the 8th day of December 1997, by and between THE
IRVINE COMPANY, hereafter called "Landlord" and IMH COMMERCIAL HOLDINGS, INC., a
Maryland corporation and IMPERIAL COMMERCIAL CAPITAL CORPORATION, a California
corporation as tenants-in-common, hereinafter called "Tenant."
ARTICLE 1. BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean and
refer to the following collective terms, the application of which shall be
governed by the provisions in the remaining Articles of this Lease.
1. Tenant's Trade Name: N/A
2. Premises: Suite No. 1100 (the Premises are more particularly described in
Section 2.1).
Address of Building: 1 Park Plaza, Irvine, CA 92614.
Project Description (if applicable): Jamboree Center
3. Use of Premises: General Office and for no other use. In no event shall the
Premises be used for purposes substantially and directly involved with
mobile telecommunications (i.e., voice or data transmission to, from or
between mobile users of service, but excluding one-way radio for
entertainment purposes or the provision of computer hardware or software)
products and/or services marketed to the public at large.
4. Commencement Date: November 22, 1997
5. Lease Term: Thirty-Six (36) months, plus such additional days as may be
required to cause this Lease to terminate on the final day of the calendar
month. November 22, 2000
6. Basic Rent: Forty-Two Thousand Five Hundred Fifty-Nine Dollars ($42,559.00)
per month.
Rental Adjustments: None
7. Property Tax Base: The Property Taxes per rentable square foot actually
incurred by Landlord during the twelve month period ending June 30, 1998.
Building Cost Base: The Building Costs per rentable square foot actually
incurred by Landlord during the twelve month period ending June 30, 1998.
Expense Recovery Period: Every twelve month period during the Term (or
portion thereof during the first and last Lease years) ending June 30.
8. Floor Area of Premises: approximately 17,882 rentable square feet
9. Security Deposit: $18,124.00
10. Broker(s): Meridian Pacific Commercial Real Estate Brokerage/Consulting
11. Plan Approval Date: N/A
12. Parking: Sixty-Three (63) unreserved vehicle parking spaces.
13. Address for Payments and Notices:
LANDLORD TENANT
The Irvine Company IMH Commercial Holdings, Inc.
c/o Tooley & Company Imperial Commercial Capital Corporation
1 Park Plaza, Suite 190 1 Park Plaza, Suite 1100
Irvine, CA 92614 Irvine, CA 92614
Attn: Property Manager
with a copy of notices to:
THE IRVINE COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Operations -
Office Properties
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ARTICLE II. PREMISES
SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant rents
from Landlord the premises shown in Exhibit A (the "Premises"), containing
approximately the floor area set forth in Item 8 of the Basic Lease Provisions
and known by the suite number identified in Item 2 of the Basic Lease
Provisions. The Premises are located in the building identified in Item 2 of the
Basic Lease Provisions (which together with the underlying real property, is
called the "Building"), and is a portion of the project described in Item 2 (the
"Project"). If, upon completion of the space plans for the Premises, Landlord's
architect or space planner determines that the rentable square footage of the
Premises differs from that set forth in the Basic Lease Provisions, then
Landlord shall so notify Tenant and the Basic Rent (as shown in Item 6 of the
Basic Lease Provisions) shall be promptly adjusted in proportion to the change
in square footage. Within five (5) days following Landlord's request, the
parties shall memorialize the adjustments by executing an amendment to this
Lease prepared by Landlord.
SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that neither
Landlord nor any representative of Landlord has made any representation or
warranty with respect to the Premises or the Building or the suitability or
fitness of either for any purpose, except as set forth in this Lease. The taking
of possession or use of the Premises by Tenant for any purpose other than
construction shall conclusively establish that the Premises and the Building
were in satisfactory condition and in conformity with the provisions of this
Lease in all respects, except for those matters which Tenant shall have brought
to Landlord's attention on a written punch list. The list shall be limited to
any items required to be accomplished by Landlord under the Work Letter (if any)
attached as Exhibit X, and shall be delivered to Landlord within thirty (30)
days after the term ("Term") of this Lease commences as provided in Article III
below. If there is no Work Letter, or if no items are required of Landlord under
the Work Letter, by taking possession of the Premises Tenant accepts the
improvements in their existing condition, and waives any right to claim against
Landlord arising out of the condition of the Premises. Nothing contained in this
Section shall affect the commencement of the Term or the obligation of Tenant to
pay rent. Landlord shall diligently complete all punch list items of which it is
notified as provided above.
SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize any name
selected by Landlord from time to time for the Building and/or the Project as
any part of Tenant's corporate or trade name. Landlord shall have the right to
change the name, number or designation of the Building or Project without
liability to Tenant.
ARTICLE III. TERM
SECTION 3.1. GENERAL. The Term shall be for the period shown in Item 5 of
the Basic Lease Provisions. The Term shall commence ("Commencement Date") on the
Commencement Date as set forth in Item 4 of the Basic Lease Provisions and shall
end upon the expiration of the period set forth In Item 5 of the Basic Lease
Provisions ("Expiration Date").
SECTION 3.2. RIGHT TO EXTEND THIS LEASE. Provided that Tenant is not in
default under any provision of this Lease, either at the time of exercise of the
extension right granted herein or at the time of the commencement of such
extension, and provided further that Tenant is occupying the entire Premises and
has not assigned or sublet any of its interest in this Lease, Tenant may extend
the Term of this Lease for one (1) period of thirty-six (36) months. Tenant
shall exercise its right to extend the Term by and only by delivering to
Landlord, not less than nine (9) months or more than twelve (12) months prior to
the expiration date of the Term, Tenant's irrevocable written notice of its
commitment to extend (the "Commitment Notice"). The Basic Rent payable under the
Lease during any extension of the Term shall be at the fair market rental,
including subsequent adjustments, for comparable office space being leased by
Landlord in the Project; provided that such rate shall in no event be less than
the rate payable by Tenant during the final month of the initial Term. In the
event that the parties are not able to agree on the fair market rental within
one hundred twenty (120) days prior to the expiration date of the Term, then
either party may elect, by written notice to the other party, to cause said
rental, including subsequent adjustments, to be determined by appraisal as
follows.
Within ten (10) days following receipt of such appraisal election, the parties
shall attempt to agree on an appraiser to determine the fair market rental. If
the parties are unable to agree in that time, then each party shall designate an
appraiser within ten (10) days thereafter. Should either party fail to so
designate an appraiser within that time, then the appraiser designated by the
other party shall determine the fair rental value. Should each of the parties
timely designate an appraiser, then the two appraisers so designated shall
appoint a third appraiser who shall, acting alone, determine the fair rental
value of the Premises. Any appraiser designated hereunder shall have an M.A.I.
certification with not less than five (5) years experience in the valuation of
commercial office buildings in Orange County, California.
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Within thirty (30) days following the selection of the appraiser, such appraiser
shall determine the fair market rental value, including subsequent adjustments
of the Premises. In determining such value, the appraiser shall first consider
rental comparables for the Project, provided that if adequate comparables do not
exist then the appraiser may consider transactions involving similarly improved
space in the John Wayne airport area with appropriate adjustments for
differences in location and quality of project. In no event shall the appraiser
attribute factors for market tenant improvement allowances or brokerage
commissions to reduce said fair market rental. The fees of the appraiser(s)
shall be shared equally by both parties.
Within twenty (20) days after the determination of the fair market rental,
Landlord shall prepare a reasonably appropriate amendment to this Lease for the
extension period and Tenant shall execute and return same to Landlord within ten
(10) days. Should the fair market rental not be established by the commencement
of the extension period, then Tenant shall continue paying rent at the rate in
effect during the last month of the initial Term, and a lump sum adjustment
shall be made promptly upon the determination of such new rental.
If Tenant fails to timely comply with any of the provisions of this paragraph,
Tenant's right to extend the Term shall be extinguished and the Lease shall
automatically terminate as of the expiration date of the Term, without any
extension and without any liability to Landlord. Any attempt to assign or
transfer any right or interest created by this paragraph shall be void from its
inception. Tenant shall have no other right to extend the Term beyond the single
thirty-six (36) month extension created by this paragraph. Unless agreed to in a
writing signed by Landlord and Tenant, any extension of the Term, whether
created by an amendment to this Lease or by a holdover of the Premises by
Tenant, or otherwise, shall be deemed a part of, and not in addition to, any
duly exercised extension period permitted by this paragraph.
ARTICLE IV. RENT AND OPERATING EXPENSES
SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant
shall pay to Landlord without deduction or offset a Basic Rent for the Premises
in the total amount shown (including subsequent adjustments, if any) in Item 6
of the Basic Lease Provisions. Notwithstanding the foregoing, however, Landlord
agrees to provide Tenant with a credit in the amount of Two Thousand Five
Hundred Twenty-Four Dollars ($2,524.00) against the Basic Rent payable by Tenant
for the first month of the Lease Term. Any rental adjustment shown in Item 6
shall be deemed to occur on the specified monthly anniversary of the
Commencement Date, whether or not that date occurs at the end of a calendar
month. The rent shall be due and payable in advance commencing on the
Commencement Date (as prorated for any partial month) and continuing thereafter
on the first day of each successive calendar month of the Term. No demand,
notice or invoice shall be required. An installment of rent in the amount of
Forty Thousand Thirty-Five Dollars ($40,035.00) shall be delivered to Landlord
concurrently with Tenant's execution of this Lease and shall be applied against
the Basic Rent first due hereunder.
SECTION 4.2. OPERATING EXPENSE INCREASE.
(a) Commencing twelve (12) months following the Commencement Date,
Tenant shall compensate Landlord, as additional rent, for Tenant's proportionate
shares of "Building Costs" and "Property Taxes," as those terms are defined
below, incurred by Landlord in the operation of the Building and Project.
Property Taxes and Building Costs are mutually exclusive and may be billed
separately or in combination as determined by Landlord. Tenant's proportionate
share of Property Taxes shall equal the product of the rentable floor area of
the Premises multiplied by the difference of (i) Property Taxes per rentable
square foot less (ii) the Property Tax Base set forth in Item 7 of the Basic
Lease Provisions. Tenant's proportionate share of Building Costs shall equal the
product of the rentable floor area of the Premises multiplied by the difference
of (i) Building Costs per rentable square foot less (ii) the Building Cost Base
set forth in Item 7 of the Basic Lease Provisions. Tenant acknowledges
Landlord's rights to make changes or additions to the Building and/or Project
from time to time pursuant to Section 6.5 below, in which event the total
rentable square footage within the Building and/or Project may be adjusted. For
convenience of reference, Property Taxes and Building Costs may sometimes be
collectively referred to as "Operating Expenses."
(b) Commencing prior to the start of the first full "Expense Recovery
Period" of the Lease (as defined in Item 7 of the Basic Lease Provisions), and
prior to the start of each full or partial Expense Recovery Period thereafter,
Landlord shall give Tenant a written estimate of the amount of Tenant's
proportionate shares of Building Costs and Property Taxes for the Expense
Recovery Period or portion thereof. Commencing twelve (12) months following
the Commencement Date, Tenant shall pay the estimated amounts to Landlord in
equal monthly installments, in advance, with Basic Rent. If Landlord has not
furnished its written estimate for any Expense Recovery Period by the time set
forth above, Tenant shall continue to pay cost reimbursements at the rates
established for the prior Expense Recovery Period, if any, provided that when
the new estimate is delivered to Tenant, Tenant shall, at the next monthly
payment date, pay any accrued cost reimbursements based upon the new estimate.
Landlord may from
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time to time change the Expense Recovery Period to reflect a calendar year or a
new fiscal year of Landlord, as applicable, in which event Tenant's share of
Operating Expenses shall be equitably prorated for any partial year.
(c) Within one hundred twenty (120) days after the end of each Expense
Recovery Period, Landlord shall furnish to Tenant a statement showing in
reasonable detail the actual or prorated Property Taxes and Building Costs
incurred by Landlord during the period, and the parties shall within thirty (30)
days thereafter make any payment or allowance necessary to adjust Tenant's
estimated payments, if any, to Tenant's actual proportionate shares as shown by
the annual statement. If Tenant has not made estimated payments during the
Expense Recovery Period, any amount owing by Tenant pursuant to subsection (a)
above shall be paid to Landlord in accordance with Article XVI. If actual
Property Taxes or Building Costs allocable to Tenant during any Expense Recovery
Period are less than the Property Tax Base or the Building Cost Base,
respectively, Landlord shall not be required to pay the differential to Tenant.
Should Tenant fail to object in writing to Landlord's determination of actual
Operating Expenses within sixty (60) days following delivery of Landlord's
expense statement, Landlord's determination of actual Operating Expenses for the
applicable Expense Recovery Period shall be conclusive and binding on the
parties.
(d) Even though the Lease has terminated and the Tenant has vacated
the Premises, when the final determination is made of Tenant's share of Property
Taxes and Building Costs for the Expense Recovery Period in which the Lease
terminates, Tenant shall upon notice pay the entire increase due over the
estimated expenses paid. Conversely, any overpayment made in the event expenses
decrease shall be rebated by Landlord to Tenant.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in excess
of the rate(s) or amount(s) used in calculating the estimated expenses for the
year, then Tenant's estimated share of Property Taxes or Building Costs, as
applicable, shall be increased for the month in which the increase becomes
effective and for all succeeding months by an amount equal to Tenant's
proportionate share of the increase. Landlord shall give Tenant written notice
of the amount or estimated amount of the increase, the month in which the
increase will become effective, Tenant's monthly share thereof and the months
for which the payments are due. Tenant shall pay the increase to Landlord as a
part of Tenant's monthly payments of estimated expenses as provided in paragraph
(b) above, commencing with the month in which effective.
(f) The term "Building Costs" shall include all expenses of operation
and maintenance of the Building and the Project, together with all appurtenant
Common Areas (as defined in Section 6.2), and shall include the following
charges by way of illustration but not limitation: water and sewer charges;
insurance premiums or reasonable premium equivalents should Landlord elect to
self-insure any risk that Landlord is authorized to insure hereunder; license,
permit, and inspection fees; heat; light; power; janitorial services; repairs;
air conditioning; supplies; materials; equipment; tools; tenant services;
programs instituted to comply with transportation management requirements;
amortization of capital investments reasonably intended to produce a reduction
in operating charges or energy conservation; amortization of capital investments
necessary to bring the Building into compliance with applicable laws and
building codes enacted subsequent to the completion of construction of the
Building; labor, reasonably allocated wages and salaries, fringe benefits, and
payroll taxes for administrative and other personnel directly applicable to the
Building and/or Project, including both Landlord's personnel and outside
personnel; any expense incurred pursuant to Sections 6.1, 6.2, 6.4, 7.2, and
10.2 and Exhibits B and C below; and a reasonable overhead/management fee. It
is understood that Building Costs shall include competitive charges for direct
services provided by any subsidiary or division of Landlord. The term "Property
Taxes" as used herein shall include the following: (i) all real estate taxes or
personal property taxes, as such property taxes may be reassessed from time to
time; and (ii) other taxes, documentary transfer fees, charges and assessments
which are levied with respect to this Lease or to the Building and/or the
Project, and any improvements, fixtures and equipment and other property of
Landlord located in the Building and/or the Project, except that general net
income and franchise taxes imposed against Landlord shall be excluded; and (iii)
any tax, surcharge or assessment which shall be levied in addition to or in lieu
of real estate or personal property taxes, other than taxes covered by Article
VIII; and (iv) costs and expenses incurred in contesting the amount or validity
of any Property Tax by appropriate proceedings. A copy of Landlord's unaudited
statement of expenses shall be made available to Tenant upon request. The
Building Costs may be extrapolated by Landlord to reflect at least ninety-five
percent (95%) occupancy of the rentable area of the Building.
SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of this
Lease, Tenant shall deposit with Landlord the sum, if any, stated in item 9 of
the Basic Lease Provisions (the "Security Deposit"), to be held by Landlord as
security for the full and faithful performance of Tenant's obligations under
this Lease to pay any rent as and when due, including without limitation such
additional rent as may be owing under any provision hereof, and to maintain the
Premises as required by Sections 7.1 and 15.3. Upon any breach of those
obligations by Tenant, Landlord may apply all or part of the Security Deposit,
as full or partial compensation. If any portion of the Security Deposit is so
applied, Tenant shall within five (5) days after written demand by Landlord
deposit cash with Landlord in an amount sufficient to restore
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the Security Deposit to its original amount. Landlord shall not be required to
keep this Security Deposit separate from its general funds, and Tenant shall not
be entitled to interest on the Security Deposit. If Tenant fully performs its
obligations under this Lease, the Security Deposit or any balance thereof shall
be returned to Tenant or, at Landlord's option, to the last assignee of Tenant's
interest in this Lease. Landlord hereby agrees to offset the sums owing from
Tenant under this Section 4.3 with the balance of funds remaining from the
security deposit provided to Landlord pursuant to the existing lease with
Tenant's affiliates for Suites 430, 350 and 740 in the Building.
ARTICLE V. USES
SECTION 5.1. USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions. The parties agree that any
contrary use shall be deemed to cause material and irreparable harm to Landlord
and shall entitle Landlord to injunctive relief in addition to any other
available remedy. Tenant shall not do or permit anything to be done in or about
the Premises which will in any way interfere with the rights or quiet enjoyment
of other occupants of the Building or the Project, or use or allow the Premises
to be used for any unlawful purpose, nor shall Tenant permit any nuisance or
commit any waste in the Premises or the Project. Tenant shall not do or permit
to be done anything which will invalidate or increase the cost of any insurance
policy(ies) covering the Building, the Project and/or their contents, and shall
comply with all applicable insurance underwriters rules and the requirements of
the Pacific Fire Rating Bureau or any other organization performing a similar
function. Tenant shall comply at its expense with all present and future laws,
ordinances and requirements of all governmental authorizes that pertain to
Tenant or its use of the Premises, including without limitation all federal and
state occupational health and safety and handicap access requirements, whether
or not Tenant's compliance will necessitate expenditures or interfere with its
use and enjoyment of the Premises. Tenant shall not generate, handle, store or
dispose of hazardous or toxic materials (as such materials may be identified in
any federal, state or local law or regulation) in the Premises or Project
without the prior written consent of Landlord; provided that the foregoing shall
not be deemed to proscribe the use by Tenant of customary office supplies in
normal quantities so long as such use comports with all applicable laws. Tenant
agrees that it shall promptly complete and deliver to Landlord any disclosure
form regarding hazardous or toxic materials that may be required by any
governmental agency. Tenant shall also, from time to time upon request by
Landlord, execute such affidavits concerning Tenant's best knowledge and belief
regarding the presence of hazardous or toxic materials in the Premises. Landlord
shall have the right at any time to perform an assessment of the environmental
condition of the Premises and of Tenant's compliance with this Section. As part
of any such assessment, Landlord shall have the right, upon reasonable prior
notice to Tenant, to enter and inspect the Premises and to perform tests,
provided those tests are performed in a manner that minimizes disruption to
Tenant. Tenant will cooperate with Landlord in connection with any assessment
by, among other things, promptly responding to inquiries and providing relevant
documentation and records. The reasonable cost of the assessment/testing shall
be reimbursed by Tenant to Landlord if such assessment/testing determines that
Tenant failed to comply with the requirements of this Section. In all events
Tenant shall indemnify Landlord in the manner elsewhere provided in this Lease
from any release of hazardous or toxic materials caused by Tenant, its agents,
employees, contractors, subtenants or licensees. The foregoing covenants shall
survive the expiration or earlier termination of this Lease.
SECTION 5.2. SIGNS. Tenant, upon obtaining the approval of Landlord in
writing, may affix a sign (restricted solely to Tenants name as set forth herein
or such other name as Landlord may consent to in writing) adjacent to the entry
door of the Premises and shall maintain the sign in good condition and repair
during the Term. The sign shall conform to the criteria for signs established by
Landlord and shall be ordered through Landlord. Tenant shall not place or allow
to be placed any other sign, decoration or advertising matter of any kind that
is visible from the exterior of the Premises. Any violating sign or decoration
may be immediately removed by Landlord at Tenants expense without notice and
without the removal constituting a breach of this Lease or entitling Tenant to
claim damages.
ARTICLE VI. LANDLORD SERVICES
SECTION 6.1. UTILITIES AND SERVICES. Landlord shall furnish to the Premises
the utilities and services described in Exhibit B, subject to the conditions
and payment obligations and standards set forth in this Lease. Landlord shall
not be liable for any failure to furnish any services or utilities when the
failure is the result of any accident or other cause beyond Landlord's
reasonable control, nor shall Landlord be liable for damages resulting from
power surges or any breakdown in telecommunications facilities or services.
Landlord's temporary inability to furnish any services or utilities shall not
entitle to any damages, relieve Tenant of the obligation to pay rent or
constitute a constructive or other eviction of Tenant, except that Landlord
shall diligently attempt to restore the service or utility promptly. Tenant
shall comply with all rules and regulations which Landlord may reasonably
establish for the provision of services and utilities, and shall cooperate with
all reasonable conservation practices
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established by Landlord. Landlord shall at all reasonable times have free access
to all electrical and mechanical installations of Landlord.
SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term,
Landlord shall operate all Common Areas within the Building and the Project. The
term "Common Areas" shall mean all areas within the Building and other buildings
in the Project which are not held for exclusive use by persons entitled to
occupy space, and all other appurtenant areas and improvements provided by
Landlord for the common use of Landlord and tenants and their respective
employees and invitees, including without limitation parking areas and
structures, driveways, sidewalks, landscaped and planted areas, hallways and
interior stairwells not located within the premises of any tenant, common
entrances and lobbies, elevators, and restrooms not located within the premises
of any tenant. Landlord shall be responsible for the cost of taking any required
measures to ensure that the Common Areas comply, as of the date of this Lease,
with the current provisions of the Americans with Disabilities Act ("ADA"), and
the cost thereof shall not be included within the Operating Expenses allocated
to Tenant.
SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of the Premises
shall include the use of the Common Areas in common with Landlord and with all
others for whose convenience and use the Common Areas may be provided by
Landlord, subject, however, to compliance with all rules and regulations as are
prescribed from time to time by Landlord. Landlord shall at all times during the
Term have exclusive control of the Common Areas, and may restrain any use or
occupancy, except as authorized by Landlord's rules and regulations. Tenant
shall keep the Common Areas clear of any obstruction or unauthorized use related
to Tenant's operations. Landlord may temporarily close any portion of the Common
Areas for repairs, remodeling and/or alterations, to prevent a public dedication
or the accrual of prescriptive rights, or for any other reasonable purpose.
SECTION 6.4. PARKING. Landlord hereby leases to Tenant, and Tenant hereby
agrees to lease from Landlord for the Term of this Lease, the number of vehicle
parking spaces set forth in Item 12 of the Basic Lease Provisions. The parking
spaces shall be provided In accordance with the provisions set forth In Exhibit
C to this Lease.
SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right
to make alterations or additions to the Building or the Project, or to the
attendant fixtures, equipment and Common Areas. No change shall entitle Tenant
to any abatement of rent or other claim against Landlord, provided that the
change does not deprive Tenant of reasonable access to or use of the Premises.
ARTICLE VII. MAINTAINING THE PREMISES
SECTION 7.1. TENANTS MAINTENANCE AND REPAIR. Tenant at its sole expense
shall make all repairs necessary to keep the Premises in the condition as
existed on the Commencement Date (or on any later date that the improvements may
have been installed), excepting ordinary wear and tear. All repairs shall be at
least equal in quality to the original work, shall be made only by a licensed,
bonded contractor approved in writing in advance by Landlord and shall be made
only at the time or times approved by Landlord. Any contractor utilized by
Tenant shall be subject to Landlord's standard requirements for contractors, as
modified from time to time. Landlord may impose reasonable restrictions and
requirements with respect to repairs, as provided in Section 7.3, and the
provisions of Section 7.4 shall apply to all repairs. Alternatively, Landlord
may elect to make any such repair on behalf of Tenant and at Tenant's expense,
and Tenant shall promptly reimburse Landlord as additional rent for all costs
incurred upon submission of an invoice.
SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR
(a) Subject to Section 7.1 and Article XI, Landlord shall provide
service, maintenance and repair with respect to any air conditioning,
ventilating or heating equipment which serves the Premises (exclusive of any
supplemental HVAC equipment installed by or at the request of Tenant) and shall
maintain in good repair the roof, foundations, footings, the exterior surfaces
of the exterior walls of the Building and the structural, electrical and
mechanical systems, except that Tenant at its expense shall make all repairs
which Landlord deems reasonably necessary as a result of the act or negligence
of Tenant, its agents, employees, invitees, subtenants or contractors. Landlord
shall have the right to employ or designate any reputable person or firm,
including any employee or agent of Landlord or any of Landlord's affiliates or
divisions, to perform any service, repair or maintenance function. Landlord need
not make any other improvements or repairs except as specifically required under
this Lease, and nothing contained in this Section shall limit Landlord's right
to reimbursement from Tenant for maintenance, repair costs and replacement costs
as provided elsewhere in this Lease. Tenant understands that it shall not make
repairs at Landlord's expense or by rental offset.
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(b) Except as provided in Sections 11.1 and 12.1 below, there
shall be no abatement of rent and no liability of Landlord by reason of any
injury to or interference with Tenant's business arising from the making of any
repairs, alterations or improvements to any portion of the Building including
repairs to the Premises, nor shall any related activity by Landlord constitute
an actual or constructive eviction; provided, however, that in making repairs,
alterations or improvements, Landlord shall interfere as little as reasonably
practicable with the conduct of Tenant's business in the Premises.
SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or
improvements to the Premises without the prior written consent of Landlord.
Landlord's consent shall not be unreasonably withheld as long as the proposed
changes do not affect the structural, electrical or mechanical components or
systems of the Building and are not visible from the exterior of the Premises.
Landlord may impose, as a condition to its consent, any requirements that
Landlord in its discretion may deem reasonable or desirable, including but not
limited to a requirement that all work be covered by a lien and completion bond
satisfactory to Landlord and requirements as to the manner, time, and contractor
for performance of the work. Without limiting the generality of the foregoing,
Tenant shall use Landlord's designated mechanical and electrical contractors for
all work affecting the mechanical or electrical systems of the Building. Tenant
shall obtain all required permits for the work and shall perform the work in
compliance with all applicable laws, regulations and ordinances, and Landlord
shall be entitled to a supervision fee in the amount of five percent (5%) of the
cost of the work. Under no circumstances shall Tenant make any improvement which
incorporates asbestos-containing construction materials into the Premises. Any
request for Landlord's consent shall be made in writing and shall contain
architectural plans describing the work in detail reasonably satisfactory to
Landlord. Unless Landlord otherwise agrees in writing, all alterations,
additions or improvements affixed to the Premises (excluding moveable trade
fixtures and furniture) shall become the property of Landlord and shall be
surrendered with the Premises at the end of the Term, except that Landlord may,
by notice to Tenant given at the time of Landlord's consent to the alteration or
improvement, require Tenant to remove by the Expiration Date, or sooner
termination date of this Lease, all or any alterations, decorations, fixtures,
additions, improvements and the like installed either by Tenant or by Landlord
at Tenant's request and to repair any damage to the Premises arising from that
removal, Landlord may require Tenant to remove an improvement provided as part
of the initial build-out pursuant to Exhibit X, if any, if and only if the
improvement is a non-building standard item and Tenant is notified of the
requirement prior to the build-out. Except as otherwise provided in this Lease
or in any Exhibit to this Lease, should Landlord make any alteration or
improvement to the Premises at the request of Tenant, Landlord shall be entitled
to prompt reimbursement from Tenant for all costs incurred.
SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from
any liens arising out of any work performed, materials furnished, or obligations
incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause
any such lien to be released by posting a bond in accordance with California
Civil Code Section 3143 or any successor statute. In the event that Tenant shall
not, within thirty (30) days following the imposition of any lien, cause the
lien to be released of record by payment or posting of a proper bond. Landlord
shall have, in addition to all other available remedies, the right to cause the
lien to be released by any means it deems proper, including payment of or
defense against the claim giving rise to the lien. All expenses so incurred by
Landlord, including Landlord's attorneys' fees. shall be reimbursed by Tenant
promptly following Landlord's demand, together with interest from the date of
payment by Landlord at the maximum rate permitted by law until paid. Tenant
shall give Landlord no less than twenty (20) days' prior notice in writing
before commencing construction of any kind on the Premises so that Landlord may
post and maintain notices of nonresponsibility on the Premises.
SECTION 7.6. ENTRY AND INSPECTION. Landlord shall at all reasonable times
have the right to enter the Premises to inspect them, to supply services in
accordance with this Lease, to protect the interests of Landlord in the
Premises, to make repairs and renovations as reasonably deemed necessary by
Landlord, and to submit the Premises to prospective or actual purchasers or
encumbrance holders (or, during the last one hundred and eighty (180) days of
the Term or when an uncured Tenant default exists, to prospective tenants), all
without being deemed to have caused an eviction of Tenant and without abatement
of rent except as provided elsewhere in this Lease. Landlord shall at all times
have and retain a key which unlocks all of the doors in the Premises, excluding
Tenant's vaults and safes, and Landlord shall have the right to use any and all
means which Landlord may deem proper to open the doors in an emergency in order
to obtain entry to the Premises and any entry to the Premises obtained by
Landlord shall not under any circumstances be deemed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant
from the Premises.
SECTION 7.6. SPACE PLANNING AND SUBSTITUTION, Landlord shall have the right,
upon providing not less than forty-five (45) days written notice, to move Tenant
to other space of comparable size in the Building or in the Project. The new
space shall be provided with improvements of comparable quality to those within
the Premises. Landlord shall pay the reasonable out-of-pocket costs to relocate
and reconnect Tenant's personal property and equipment within the new space;
provided that Landlord may erect to cause such work to be done by its
contractors. Landlord shall also reimburse Tenant for such other reasonable
out-of-pocket costs that Tenant may incur in connection with the relocation,
including without limitation necessary stationery revisions, provided that a
reasonable estimate thereof is given to Landlord within twenty (20) days
following Landlord's notice. In no event, however, shall Landlord be obligated
to incur or fund total relocation costs, exclusive of tenant improvement
expenditures, in an amount in excess of two (2) months of Basic Rent at the rate
then payable hereunder. Within ten (10) days following request by Landlord,
Tenant shall execute an amendment to this Lease prepared by Landlord to
memorialize the relocation. Should Tenant fail timely to execute and deliver the
amendment to Landlord for any reason (including without limitation the inability
of the parties to reach an agreement on the proposed relocation), or should
Tenant thereafter fail to comply with the terms thereof, then
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Landlord may at its option elect to terminate this Lease upon not less than
ninety (90) days prior written notice to Tenant. In the event of such
termination, Tenant's obligation to pay Basic Rent during the final two (2)
months of the Term shall be waived. Upon the effective date of any termination
of this Lease, Tenant shall vacate the Premises in accordance with Section 15.3.
ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay before delinquency, all taxes and
assessments levied against all personal property of Tenant located in the
Premises. When possible Tenant shall cause its personal property to be assessed
and billed separately from the real property of which the Premises form a part.
If any taxes on Tenant's personal property are levied against Landlord or
Landlord's property and if Landlord pays the same, or if the assessed value of
Landlord's property is increased by the inclusion of a value placed upon the
personal property of Tenant and if Landlord pays the taxes based upon the
increased assessment, Tenant shall pay to Landlord the taxes so levied against
Landlord or the proportion of the taxes resulting from the increase in the
assessment.
ARTICLE IX. ASSIGNMENT AND SUBLETTING
SECTION 9.1. RIGHTS OF PARTIES
(a) Notwithstanding any provision of this Lease to the contrary,
Tenant will not, either voluntarily or by operation of law, assign, sublet,
encumber, or otherwise transfer all or any part of Tenant's interest in this
lease, or permit the Premises to be occupied by anyone other than Tenant without
Landlord's prior written consent, which consent shall not unreasonably be
withheld in accordance with the provisions of Section 9.1.(c). No assignment
(whether voluntary, involuntary or by operation of law) and no subletting shall
be valid or effective without Landlord's prior written consent and, at
Landlord's election, shall constitute a material default of this Lease. Landlord
shall not be deemed to have given its consent to any assignment or subletting by
any other course of action, including its acceptance of any name for listing in
the Building directory. To the extent not prohibited by provisions of the
Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"),
including Section 365(f)(1), Tenant on behalf of itself and its creditors,
administrators and assigns waives the applicability of Section 365(e) of the
Bankruptcy Code unless the proposed assignee of the Trustee for the estate of
the bankrupt meets Landlord's standard for consent as set forth in Section
9.1(c) of this Lease. If this Lease is assigned to any person or entity pursuant
to the provisions of the Bankruptcy Code, any and all monies or other
considerations to be delivered in connection with the assignment shall be
delivered to Landlord, shall be and remain the exclusive property of Landlord
and shall not constitute property of Tenant or of the estate of Tenant within
the meaning of the Bankruptcy Code. Any person or entity to which this Lease is
assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to
have assumed all of the obligations arising under this Lease on and after the
date of the assignment, and shall upon demand execute and deliver to Landlord an
instrument confirming that assumption.
(b) If Tenant or any guarantor of Tenant ("Tenant's Guarantor") is
a corporation, or is an unincorporated association or partnership, the transfer
of any stock or interest in the corporation, association or partnership which
results in a change in the voting control of Tenant or Tenant's Guarantor, if
any, shall be deemed an assignment within the meaning and provisions of this
Article. In addition, any change in the status of the entity, such as, but not
limited to, the withdrawal of a general partner, shall be deemed an assignment
within the meaning of this Article.
(c) If Tenant desires to transfer an interest in this Lease, it
shall first notify Landlord of its desire and shall submit in writing to
Landlord: (i) the name and address of the proposed transferee; (ii) the nature
of any proposed subtenant's or assignees business to be carried on in the
Premises, (iii) the terms and provisions of any proposed sublease or assignment;
and (iv) any other information requested by Landlord and reasonably related to
the transfer. Except as provided in Subsection (d) of this Section, Landlord
shall not unreasonably withhold its consent, provided: (1) the use of the
Premises will be consistent with the provisions of this Lease and with
Landlord's commitment to other tenants of the Building and Project, (2) seventy-
five percent (75%) of any excess rent received by the Tenant from the assignment
or subletting, whether during or after the Term of this Lease, shall be paid to
Landlord when received; (3) any proposed subtenant or assignee demonstrates that
it is financially responsible by submission to Landlord of all reasonable
information as Landlord may request concerning the proposed subtenant or
assignee, including, but not limited to, a balance sheet of the proposed
subtenant or assignee as of a date within ninety (90) days of the request for
Landlord's consent and statements of income or profit and loss of the proposed
subtenant or assignee for the two-year period preceding the request for
Landlord's consent; (4) any proposed subtenant or assignee demonstrates to
Landlord's reasonable satisfaction a record of successful experience in
business; (5) the proposed assignee or subtenant is neither an existing tenant
of the Building or Project nor a prospective tenant with whom subtenant is
neither an existing tenant of the Building or Project nor a prospective tenant
with whom Landlord is then actively negotiating; and (6) the proposed transfer
will not impose additional burdens or adverse tax effects on Landlord. If
Landlord consents to the proposed transfer, Tenant may within ninety (90) days
after the date of the consent effect the transfer upon the terms described in
the information furnished to Landlord; provided that any material change in the
terms shall be subject to Landlord's consent as set forth in this Section.
Landlord shall approve or disapprove any requested transfer within thirty (30)
days following receipt of Tenant's written request and the information set forth
above. Tenant shall pay to Landlord a transfer fee of Three Hundred Dollars
($300.00) if and when any transfer requested by Tenant is approved.
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(d) Notwithstanding the provisions of Subsection (c) above, in
lieu of consenting to a proposed assignment or subletting, Landlord may elect
to (1) sublease the Premises (or the portion proposed to be subleased), or take
an assignment of Tenant's interest in this Lease, upon the sane terms as
offered to the proposed subtenant or assignee (excluding terms relating to the
purchase of personal property, the use of Tenant's name or the continuation of
Tenant's business), or (ii) terminate this Lease as to the portion of the
Premises proposed to be subleased or assigned with a proportionate abatement in
the rent payable under this Lease, effective on the date that the proposed
sublease or assignment would have become effective. Landlord may thereafter, at
its option, assign or re-let any space so recaptured to any third party,
including without limitation the proposed transferee of Tenant.
SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant, or any successor-in-interest to
Tenant hereunder, of its obligation to pay rent and to perform all its other
obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord
harmless, as provided in Section 10.3, for any act or omission by an assignee
or subtenant. Each assignee, other than Landlord, shall be deemed to assume all
obligations of Tenant under this Lease and shall be liable jointly and severally
with Tenant for the payment of all rent, and for the due performance of all of
Tenant's obligations, under this Lease. Such joint and several liability shall
not be discharged or impaired by any subsequent modification or extension of
this Lease. No transfer shall be binding on Landlord unless any document
memorializing the transfer is delivered to Landlord and both the
assignee/subtenant and Tenant deliver to Landlord an executed consent to
transfer instrument prepared by Landlord and consistent with the requirements of
this Article. The acceptance by Landlord of any payment due under this Lease
from any other person shall not be deemed to be a waiver by Landlord of any
provision of this Lease or to be a consent to any transfer. Consent by Landlord
to one or more transfers shall not operate as a waiver or estoppel to the future
enforcement by Landlord of its rights under this Lease. In addition to the
foregoing, no change in the status of Tenant or any party jointly and severally
liable with Tenant as aforesaid (e.g., by conversion to a limited liability
company or partnership) shall serve to abrogate the liability of any person or
entity for the obligations of Tenant, including any obligations that may be
incurred by Tenant after the status change by exercise of a pre-existing right
in this Lease.
SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises and
shall be included in each sublease:
(a) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs in
the performance of Tenant's obligations under this Lease, Tenant shall have the
right to receive and collect the sublease rentals. Landlord shall not, by reason
of this assignment or the collection of sublease rentals, be deemed liable to
the subtenant for the performance of any of Tenant's obligations under the
sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon
receipt of a written notice from Landlord stating that an uncured default exists
in the performance of Tenant's obligations under this Lease, to pay to Landlord
all sums then and thereafter due under the sublease. Tenant agrees that the
subtenant may rely on that notice without any duty of further inquiry and
notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have
no right or claim against the subtenant or Landlord for any rentals so paid to
Landlord. In the event Landlord collects amounts from subtenants that exceed the
total amount then due from Tenant hereunder, Landlord shall promptly remit the
excess to Tenant.
(b) In the event of the termination of this Lease, Landlord may,
at its sole option, take over Tenant's entire interest in any sublease and, upon
notice from Landlord, the subtenant shall attorn to Landlord. In no event,
however, shall Landlord be liable for any previous act or omission by Tenant
under the sublease or for the return of any advance rental payments or deposits
under the sublease that have not been actually delivered to Landlord, nor shall
Landlord be bound by any sublease modification executed without Landlord's
consent or for any advance rental payment by the subtenant in excess of one
month's rent. The general provisions of this Lease, including without limitation
those pertaining to insurance and indemnification, shall be deemed incorporated
by reference into the sublease despite the termination of this Lease.
(c) Tenant agrees that Landlord may, at its sole option, authorize
a subtenant of the Premises to cure a default by Tenant under this Lease. Should
Landlord accept such cure, the subtenant shall have a right of reimbursement and
offset from and against Tenant under the applicable sublease.
ARTICLE X. INSURANCE AND INDEMNITY
SECTION 10.1. TENANTS INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect the insurance described in Exhibit D.
Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election, provide
any or all of the following types of insurance, with or without deductible and
in amounts and coverages as may be determined by Landlord in its discretion:
"all risk" property insurance, subject to standard exclusions, covering the
Building or Project, and such other risks as Landlord or its mortgagees may from
time to time deem appropriate, and commercial general liability coverage.
Landlord shall not be required to carry insurance of any kind on Tenant's
leasehold improvements, trade fixtures, furnishings, equipment, interior plate
glass, signs and all other items of personal property, and shall not be
obligated to repair or replace that property should damage occur. All proceeds
of insurance maintained by Landlord upon the Building
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and Project shall be the property of Landlord, whether or not Landlord is
obligated to or elects to make any repairs.
SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted by law,
Tenant shall defend, indemnify and hold harmless Landlord, its agents, lenders,
and any and all affiliates of Landlord, from and against any and all claims,
liabilities, costs or expenses arising either before or after the Commencement
Date from Tenant's use or occupancy of the Premises, the Building or the Common
Areas, or from the conduct of its business, or from any activity, work, or
thing done, permitted or suffered by Tenant or its agents, employees,
subtenants, invitees or licensees in or about the Premises, the Building or the
Common Areas, or from any default in the performance of any obligation on
Tenant's part to be performed under this Lease, or from any act or negligence of
Tenant or its agents, employees, subtenants, invitees or licensees. Landlord
may, at its option, require Tenant to assume Landlord's defense in any action
covered by this Section through counsel reasonably satisfactory to Landlord.
SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be liable to
Tenant, its employees, agents and invitees, and Tenant hereby waives all claims
against Landlord, its employees and agents for loss of or damage to any
property, or any injury to any person, or loss or interruption of business or
income, resulting from any condition including, but not limited to, fire,
explosion, falling plaster, steam, gas, electricity, water or rain which may
leak or flow from or into any part of the Premises or from the breakage,
leakage, obstruction or other defects of the pipes, sprinklers, wires,
appliances, plumbing, air conditioning, electrical works or other fixtures in
the Building, whether the damage or injury results from conditions arising in
the Premises or in other portions of the Building. It is understood that any
such condition may require the temporary evacuation or closure of all or a
portion of the Building. Should Tenant elect to receive any service from a
concessionaire, licensee or third party tenant of Landlord, Tenant shall not
seek recourse against Landlord for any breach or liability of that service
provider. Neither Landlord nor its agents shall be liable for interference with
light or other similar intangible interests. Tenant shall immediately notify
Landlord in case of fire or accident in the Premises, the Building or the
Project and of defects in any improvements or equipment.
ARTICLE XI. DAMAGE OR DESTRUCTION
SECTION 11.1. RESTORATION.
(a) If the Building of which the Premises are a part is damaged
as the result of an event of casualty, Landlord shall repair that damage as soon
as reasonably possible unless: (i) Landlord reasonably determines that the cost
of repair would exceed ten percent (10%) of the full replacement cost of the
Building ("Replacement Cost") and the damage is not covered by Landlord's fire
and extended coverage insurance (or by a normal extended coverage policy should
Landlord fail to carry that insurance); or (ii) Landlord reasonably determines
that the cost of repair would exceed twenty-five percent (25%) of the
Replacement Cost; or (iii) Landlord reasonably determines that the cost of
repair would exceed ten percent (10%) of the Replacement Cost and the damage
occurs during the final twelve (12) months of the Term. Should Landlord elect
not to repair the damage for one of the preceding reasons, Landlord shall so
notify Tenant in the "Casualty Notice" (as defined below), and this Lease shall
terminate as of the date of delivery of that notice.
(b) As soon as reasonably practicable following the casualty
event but not later than sixty (60) days thereafter, Landlord shall notify
Tenant in writing ("Casualty Notice") of Landlord's election, if applicable, to
terminate this Lease. If this Lease is not so terminated, the Casualty Notice
shall set forth the anticipated period for repairing the casualty damage. If the
anticipated repair period exceeds two hundred seventy (270) days and if the
damage is so extensive as to reasonably prevent Tenant's substantial use and
enjoyment of the Premises, then Tenant may elect to terminate this Lease by
written notice to Landlord within ten (10) days following delivery of the
Casualty Notice.
(c) To the extent and for the period that Landlord is entitled to
reimbursement from the proceeds of rental interruption insurance carried by
Landlord as part of Operating Expenses, the rental to be paid under this Lease
shall be abated in the same proportion that the floor area of the Premises that
is rendered unusable by the damage from time to time bears to the total floor
area of the Premises.
(d) Notwithstanding the provisions of subsections (a), (b) and
(c) of this Section, the cost of any repairs shall be borne by Tenant, and
Tenant shall not be entitled to rental abatement or termination rights, if the
damage is due to the fault or neglect of Tenant or its employees, subtenants,
invitees or representatives. In addition, the provisions of this Section shall
not be deemed to require Landlord to repair any improvements or fixtures that
Tenant is obligated to repair or insure pursuant to any other provision of this
Lease.
SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of law.
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ARTICLE XIV. DEFAULTS AND REMEDIES
SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of default
set forth in this Lease, the occurrence of any one or more of the following
events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or additional
rent required to be made by Tenant, as and when due, where the failure continues
for a period of three (3) days after written notice from Landlord to Tenant;
provided, however, that any such notice shall be in lieu of, and not in addition
to, any notice required under California Code of Civil Procedure Section 1161
and 1161(a) as amended. For purposes of these default and remedies provisions,
the term "additional rent" shall be deemed to include all amounts of any type
whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of
this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the Lease
by Tenant, either voluntarily or by operation of law, whether by judgment,
execution, transfer by intestacy or testacy, or other means, without the prior
written consent of Landlord.
(c) The discovery by Landlord that any financial statement provided by
Tenant, or by any affiliate, successor or guarantor of Tenant, was materially
false.
(d) The failure or inability by Tenant to observe or perform any of
the covenants or provisions of this Lease to be observed or performed by Tenant,
other than as specified in any other subsection of this Section, where the
failure continues for a period of thirty (30) days after written notice from
Landlord to Tenant; provided, however, that any such notice shall be in lieu of,
and not in addition to, any notice required under California Code of Civil
Procedure Section 1161 and 1161(a) as amended. However, if the nature of the
failure is such that more than thirty (30) days are reasonably required for its
cure, then Tenant shall not be deemed to be in default if Tenant commences the
cure within thirty (30) days, and thereafter diligently pursues the cure to
completion.
(e) (i) The making by Tenant of any general assignment for the benefit
of creditors; (ii) the filing by or against Tenant of a petition to have Tenant
adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts
discharged or a petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition filed against Tenant,
the same is dismissed within sixty (60) days); (iii) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, if possession is
not restored to Tenant within thirty (30) days; (iv) the attachment, execution
or other judicial seizure of substantially all of Tenant's assets located at the
Premises or of Tenant's interest in this Lease, where the seizure is not
discharged within thirty (30) days; or (v) Tenant's convening of a meeting of
its creditors for the purpose of effecting a moratorium upon or composition of
its debts. Landlord shall not be deemed to have knowledge of any event
described in this subsection unless notification in writing is received by
Landlord, nor shall there be any presumption attributable to Landlord of
Tenant's insolvency. In the event that any provision of this subsection is
contrary to applicable law, the provision shall be of no force or effect.
SECTION 14.2. LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, then in addition to any
other remedies available to Landlord, Landlord may exercise the following
remedies:
(i) Landlord may terminate Tenant's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. Such
termination shall not affect any accrued obligations of Tenant under this Lease.
Upon termination, Landlord shall have the right to reenter the Premises and
remove all persons and property. Landlord shall also be entitled to recover from
Tenant:
(1) The worth at the time of award of the unpaid rent and
additional rent which had been earned at the time of termination;
(2) The worth at the time of award of the amount by which
the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that Tenant
proves could have been reasonably avoided;
(3) The worth at the time of award of the amount by which
the unpaid rent and additional rent for the balance of the Term after the time
of award exceeds the amount of such loss that Tenant proves could be reasonably
avoided;
(4) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result from Tenant's default, including, but not limited, to, the cost
of recovering possession of the Premises, commissions and other expenses of
reletting, including necessary repair, renovation, improvement and alteration of
the Premises for a new tenant, the unamortized portion of any tenant
improvements and brokerage commissions funded by Landlord in connection with
this Lease, reasonable attorneys' fees, and any other reasonable costs; and
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(5) At Landlord's election, all other amounts in addition to
or in lieu of the foregoing as may be permitted by law. The term "rent" as used
in this Lease shall be deemed to mean the Basic Rent and all other sums required
to be paid by Tenant to Landlord pursuant to the terms of this Lease. Any sum,
other than Basic Rent, shall be computed on the basis of the average monthly
amount accruing during the twenty-four (24) month period immediately prior to
default, except that if it becomes necessary to compute such rental before the
twenty-four (24) month period has occurred, then the computation shall be on
the basis of the average monthly amount during the shorter period. As used in
subparagraphs (1) and (2) above, the "worth at the time of award" shall be
computed by allowing interest at the rate of ten percent (10%) per annum. As
used in subparagraph (3) above, the "worth at the time of award" shall be
computed by discounting the amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to possession
of the Premises, in which event Landlord may continue to enforce all of its
rights and remedies under this Lease including the right to collect all rent as
it becomes due. Efforts by the Landlord to maintain, preserve or relet the
Premises, or the appointment of a receiver to protect the Landlord's interests
under this Lease shall not constitute a termination of the Tenant's right to
possession of the Premises. In the event that Landlord elects to avail itself of
the remedy provided by this subsection (ii), Landlord shall not unreasonably
withhold its consent to an assignment or subletting of the Premises subject to
the reasonable standards for Landlord's consent as are contained in this Lease.
(b) The various rights and remedies reserved to Landlord in this Lease or
otherwise shall be cumulative and, except as otherwise provided by California
law, Landlord may pursue any or all of its rights and remedies at the same time.
No delay or omission of landlord to exercise any right or remedy shall be
construed as a waiver of the right or remedy or of any default by Tenant. The
acceptance by Landlord of rent shall not be a (i) waiver of any preceding breach
or default by Tenant of any provision of this Lease, other than the failure of
Tenant to pay the particular rent accepted, regardless of Landlord's knowledge
of the preceding breach or default at the time of acceptance of rent, or (if) a
waiver of Landlord's right to exercise any remedy available to Landlord by
virtue of the breach or default. The acceptance of any payment from a debtor in
possession, a trustee, a receiver or any other person acting on behalf of Tenant
or Tenant's estate shall not waive or cure a default under Section 14.1. No
Payment by Tenant or receipt by Landlord of a lesser amount than the rent
required by this Lease shall be deemed to be other than a partial payment on
account of the earliest due stipulated rent, nor shall any endorsement or
statement on any check or letter be deemed an accord and satisfaction and
Landlord shall accept the check or payment without prejudice to Landlord's right
to recover the balance of the rent or pursue any other remedy available to it.
Tenant hereby waives any right of redemption or relief from forfeiture under
California Code of Civil Procedure Section 1174 or 1179, or under any other
present or future law, in the event this Lease is terminated by reason of any
default by Tenant. No act or thing done by Landlord or Landlord's agents during
the Term shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accept a surrender shall be valid unless in writing and signed by
Landlord. No employee of Landlord or of Landlord's agents shall have any power
to accept the keys to the Premises prior to the termination of this lease, and
the delivery of the keys to any employee shall not operate as a termination of
the Lease or a surrender of the Premises.
SECTION 14.3. LATE PAYMENTS.
(a) Any rent due under this Lease that is not paid to Landlord within five
(5) days of the date when due shall bear interest at the maximum rate permitted
by law from the date due until fully paid. The payment of interest shall not
cure any default by Tenant under this Lease. In addition, Tenant acknowledges
that the late payment by Tenant to Landlord of rent will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult and impracticable to ascertain. Those costs may include, but
are not limited to, administrative, processing and accounting charges, and late
charges which may be imposed on Landlord by the terms of any ground lease,
mortgage or trust deed covering the Premises. Accordingly, if any rent due from
Tenant shall not be received by Landlord or Landlord's designee within five (5)
days after the date due, then Tenant shall pay to Landlord, in addition to the
interest provided above, a late charge in the amount of one hundred dollars
($100.00) for each delinquent payment. Acceptance of a late charge by Landlord
shall not constitute a waiver of Tenant's default with respect to the overdue
amount, nor shall it prevent Landlord from exercising any of its other rights
and remedies.
(b) Following each second consecutive installment of rent that is not
paid within five (5) days following notice of nonpayment from Landlord, Landlord
shall have the option (1) to require that beginning with the first payment of
rent next due, rent shall no longer be paid in monthly installments but shall be
payable quarterly three (3) months in advance and/or (ii) to require that Tenant
increase the amount, if any, of the Security Deposit by one hundred percent
(100%). Should Tenant deliver to Landlord, at any time during the Term, two (2)
or more insufficient checks, the Landlord may require that , all monies then and
thereafter due from Tenant be paid to Landlord by cashier's check.
SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be
performed by Tenant under this Lease shall be performed at Tenant's sole cost
and expense and without any abatement of rent or right of set-off. If Tenant
fails to pay any sum of money, or fails to perform any other act on its part to
be performed under this Lease, and the failure continues beyond any applicable
grace period set forth in Section 14.1, then in addition to any other available
remedies, Landlord may, at its election make the payment or perform the other
act on Tenant's part. Landlord's election to make the payment or perform the act
on Tenant's part shall not give rise to any responsibility of Landlord to
continue making the same or similar payments or performing the same of similar
acts. Tenant shall, promptly upon
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demand by Landlord, reimburse Landlord for all sums paid by Landlord and all
necessary incidental costs, together with interest at the maximum rate permitted
by law from the date of the payment by Landlord.
SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in
default in the performance of any obligation under this Lease unless and until
it has failed to perform the obligation within thirty (30) days after written
notice by Tenant to Landlord specifying in reasonable detail the nature and
extent of the failure; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days are required for its
performance, then Landlord shall not be deemed to be in default if it commences
performance within the thirty (30) day period and thereafter diligently pursues
the cure to completion.
SECTION 14.6. EXPENSES AND LEGAL FEES. Should either Landlord or Tenant bring
any action in connection with this Lease, the prevailing party shall be entitled
to recover as a part of the action its reasonable attorneys' fees, and all other
costs. The prevailing party for the purpose of this paragraph shall be
determined by the trier of the facts.
SECTION 14.7. WAIVER OF JURY TRIAL/RIGHT TO ARBITRATE.
(a) LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD
THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHT TO TRIAL BY JURY,
AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH
RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY
EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS
WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE
OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.
(b) SHOULD A DISPUTE ARISE BETWEEN THE PARTIES REGARDING ANY MATTER
DESCRIBED ABOVE, THEN EXCEPT WITH RESPECT TO ACTIONS FOR UNLAWFUL OR FORCIBLE
DETAINER EITHER PARTY MAY CAUSE THE DISPUTE TO BE SUBMITTED TO JAMS/ENDISPUTE OR
ITS SUCCESSOR ("JAMS") IN THE COUNTY IN WHICH THE BUILDING IS SITUATED FOR
BINDING ARBITRATION BEFORE A SINGLE ARBITRATOR. HOWEVER, EACH PARTY RESERVES THE
RIGHT TO SEEK A PROVISIONAL REMEDY BY JUDICIAL ACTION. NO ARBITRATION ELECTION
BY EITHER PARTY PURSUANT TO THIS SUBSECTION SHALL BE EFFECTIVE IF MADE LATER
THAN THIRTY (30) DAYS FOLLOWING SERVICE OF A JUDICIAL SUMMONS AND COMPLAINT BY
OR UPON SUCH PARTY CONCERNING THE DISPUTE. THE ARBITRATION SHALL BE CONDUCTED IN
ACCORDANCE WITH THE RULES OF PRACTICE AND PROCEDURE OF JAMS AND OTHERWISE
PURSUANT TO THE CALIFORNIA ARBITRATION ACT (CODE OF CIVIL PROCEDURE SECTIONS
1280 ET SEQ.). NOTWITHSTANDING THE FOREGOING, THE ARBITRATOR IS SPECIFICALLY
DIRECTED TO LIMIT DISCOVERY TO THAT WHICH IS ESSENTIAL TO THE EFFECTIVE
PROSECUTION OR DEFENSE OF THE ACTION, AND IN NO EVENT SHALL SUCH DISCOVERY BY
EITHER PARTY INCLUDE MORE THAN ONE NON-EXPERT WITNESS DEPOSITION UNLESS BOTH
PARTIES OTHERWISE AGREE. THE ARBITRATOR SHALl APPORTION THE COSTS OF THE
ARBITRATION, TOGETHER WITH THE ATTORNEYS' FEES OF THE PARTIES, IN THE MANNER
DEEMED EQUITABLE BY THE ARBITRATOR, IT BEING THE INTENTION OF THE PARTIES THAT
THE PREVAILING PARTY ORDINARILY BE ENTITLED TO RECOVER ITS REASONABLE COSTS AND
FEES. JUDGMENT UPON ANY AWARD RENDERED BY THE ARBITRATOR MAY BE ENTERED BY ANY
COURT HAVING JURISDICTION.
ARTICLE XV. END OF TERM
SECTION 15.1. HOLDING OVER. This Lease shall terminate without further notice
upon the expiration of the Term, and any holding over by Tenant after the
expiration shall not constitute a renewal or extension of this Lease, or give
Tenant any rights under this Lease, except when in writing signed by both
parties. If Tenant holds over for any period after the expiration (or earlier
termination) of the Term, Landlord may, at its option, treat Tenant as a tenant
at sufferance only, commencing on the first (1st) day following the termination
of this Lease. Any hold-over by Tenant shall be subject to all of the terms of
this Lease, except that the monthly rental shall be two hundred percent (200%)
of the total monthly rental for the month immediately preceding the date of
termination, subject to Landlord's right to modify same upon thirty (30) days
notice to Tenant. If Tenant fails to surrender the Premises upon the expiration
of this Lease despite demand to do so by Landlord, Tenant shall indemnify and
hold Landlord harmless from all loss or liability, including without limitation,
any claims made by any succeeding tenant relating to such failure to surrender.
Acceptance by Landlord of rent after the termination shall not constitute a
consent to a holdover or result in a renewal of this Lease. The foregoing
provisions of this Section are in addition to and do not affect Landlord's right
of re-entry or any other rights of Landlord under this Lease or at law.
SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of this
Lease by Tenant, or a mutual termination of this Lease, shall terminate any or
all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
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SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall quit
and surrender possession of the Premises to Landlord in as good order, condition
and repair as when received or as hereafter may be improved by Landlord or
Tenant, reasonable wear and tear and repairs which are Landlord's obligation
excepted, and shall, without expense to Landlord, remove or cause to be removed
all wallpapering and voice and/or data transmission cabling installed by or for
Tenant, together with all personal property and debris, except for any items
that Landlord may by written authorization allow to remain. Tenant shall repair
all damage to the Premises resulting from the removal, which repair shall
include the patching and filling of holes and repair of structural damage,
provided that Landlord may instead elect to repair any structural damage at
Tenant's expense. If Tenant shall fail to comply with the provisions of this
Section, Landlord may effect the removal and/or make any repairs, and the cost
to Landlord shall be additional rent payable by Tenant upon demand. It requested
by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an
instrument in writing releasing and quitclaiming to Landlord all right, title
and interest of Tenant in the Premises.
ARTICLE XVI. PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction or
offset, in lawful money of the United States to Landlord at its address set
forth in Item 13 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within five (5) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30) day
month and a three hundred sixty (360) day year. Any notice, election, demand,
consent, approval or other communication to be given or other document to be
delivered by either party to the other may be delivered to the other party, at
the address set forth in Item 13 of the Basic Lease Provisions, by personal
service or telegram, telecopier, or electronic facsimile transmission, or by any
courier or "overnight" express mailing service, or may be deposited in the
United States mail, postage prepaid. Either party may, by written notice to the
other, served in the manner provided in this Article, designate a different
address. If any notice or other document is sent by mail, It shall be deemed
served or delivered three (3) business days after mailing or, if sooner, upon
actual receipt. If more than one person or entity Is named as Tenant under this
Lease, service of any notice upon any one of them shall be deemed as service
upon all of them.
ARTICLE XVII. RULES AND REGULATIONS
Tenant agrees to comply with the Rules and Regulations attached as Exhibit
E, and any reasonable and nondiscriminatory amendments, modifications and/or
additions as may be adopted and published by written notice to tenants by
Landlord for the safety, care, security, good order, or cleanliness of the
Premises, Building, Project and/or Common Areas. Landlord shall not be liable to
Tenant for any violation of the Rules and Regulations or the breach of any
covenant or condition in any lease or any other act or conduct by any other
tenant, and the same shall not constitute a constructive eviction hereunder. One
or more waivers by Landlord of any breach of the Rules and Regulations by Tenant
or by any other tenant(s) shall not be a waiver of any subsequent breach of that
rule or any other. Tenant's failure to keep and observe the Rules and
Regulations shall constitute a default under this Lease. In the case of any
conflict between the Rules and Regulations and this Lease, this Lease shall be
controlling.
ARTICLE XVIII. BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Each party warrants that it has had no dealings with any other real
estate broker or agent in connection with the negotiation of this Lease, and
agrees to indemnify and hold the other party harmless from any cost, expense or
liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent employed
or claiming to represent or to have been employed by the indemnifying party in
connection with the negotiation of this Lease. The foregoing agreement shall
survive the termination of this Lease.
ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST
In the event of any transfer of Landlord's interest in the Promises, the
transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an interest
shall be turned over, subject to that interest, to the transferee and Tenant is
notified of the transfer as required by law. No holder of a mortgage and/or deed
of trust to which this Lease is or may be subordinate shall be responsible in
connection with the Security Deposit, unless the mortgagee or holder of the deed
of trust or the landlord actually receives the Security Deposit. It is intended
that the covenants and obligations contained in this Lease on the part of
Landlord shall, subject to the foregoing, be binding on Landlord, its successors
and assigns, only during and in respect to their respective successive periods
of ownership.
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ARTICLE XX. INTERPRETATION
SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well as
the singular, and words used in neuter, masculine or feminine genders shall
include the others.
SECTION 20.2. HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3, JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint and
several and the act of or notice from, or notice or refund to, or the signature
of, any one or more of them shall be binding on all of them with respect to the
tenancy of this Lease, including, but not limited to, any renewal, extension,
termination or modification of this Lease.
SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and
liabilities given to or imposed upon Landlord and Tenant shall extend to and
bind their respective heirs, executors, administrators, successors and assigns.
Nothing contained in this Section is intended, or shall be construed, to grant
to any person other than Landlord and Tenant and their successors and assigns
any rights or remedies under this Lease.
SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor.
SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material benefit
by either party or the deletion of which is consented to by the party adversely
affected, shall be held invalid or unenforceable to any extent, the remainder of
this Lease shall not be affected and each term and provision of this Lease shall
be valid and enforceable to the fullest extent permitted by law.
SECTION 20.8. WAIVER. One or more waivers by Landlord or Tenant of any
breach of any term, covenant or condition contained in this Lease shall not be a
waiver of any subsequent breach of the same or any other terms, covenant or
condition. Consent to any act by one of the parties shall not be deemed to
render unnecessary the obtaining of that party's consent to any subsequent act.
No breach of this Lease shall be deemed to have been waived unless the waiver
is in a writing signed by the waiving party.
SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall
be delayed or hindered in or prevented from the performance of any work or in
performing any act required under this Lease by reason of any cause beyond the
reasonable control of that party, then the performance of the work or the doing
of the act shall be excused for the period of the delay and the time for
performance shall be extended for a period equivalent to the period of the
delay. The provisions of this Section shall not operate to excuse Tenant from
the prompt payment of rent.
SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises, the Building, and the Project, and all
preliminary negotiations, oral agreements, understandings and/or practices,
except those contained in this Lease, are superseded and of no further effect.
Tenant waives its rights to rely on any representations or promises made by
Landlord or others which are not contained in this Lease. No verbal agreement or
implied covenant shall be held to modify the provisions of this Lease, any
statute, law, or custom to the contrary notwithstanding.
SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all
the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease, Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without hindrance
or interruption by Landlord or any other person claiming by or through Landlord.
SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination of
this Lease, including without limitation any warranty or indemnity hereunder,
shall so survive and continue to be binding upon and inure to the benefit of the
respective parties and their successors and assigns.
ARTICLE XXI. EXECUTION AND RECORDING
SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which shall
be one and the same agreement.
SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
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partnership, and that this Lease is binding upon the corporation or partnership
in accordance with its terms. Tenant shall, at Landlord's request, deliver a
certified copy of its board of directors' resolution or partnership agreement or
certificate authorizing or evidencing the execution of this Lease.
SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution of
this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact executed
and delivered this Lease to Tenant, it being intended that this Lease shall only
become effective upon execution by Landlord and delivery of a fully executed
counterpart to Tenant.
SECTION 21.4. RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord, shall
execute and acknowledge a "short form" memorandum of this Lease for recording
purposes.
SECTION 21.5. AMENDMENTS. No amendment or mutual termination of this Lease
shall be effective unless in writing signed by authorized signatories of Tenant
and Landlord, or by their respective successors in interest. No actions,
policies, oral or informal arrangements, business dealings or other course of
conduct by or between the parties shall be deemed to modify this Lease in any
respect.
ARTICLE XXII. MISCELLANEOUS
SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees
that the terms of this Lease are confidential and constitute proprietary
information of Landlord. Disclosure of the terms could adversely affect the
ability of Landlord to negotiate other leases and impair Landlord's relationship
with other tenants. Accordingly, Tenant agrees that it, and its partners,
officers, directors, employees and attorneys, shall not intentionally and
voluntarily disclose the terms and conditions of this Lease to any other tenant
or apparent prospective tenant of the Building or Project, either directly or
indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
SECTION 22.2. REPRESENTATIONS BY TENANT. The application, financial
statements and tax returns, if any, submitted and certified to by Tenant as an
accurate representation of its financial condition have been prepared, certified
and submitted to Landlord as an inducement and consideration to Landlord to
enter into this Lease. The application and statements are represented and
warranted by Tenant to be correct and to accurately and fully reflect Tenant's
true financial condition as of the date of execution of this Lease by Tenant.
Tenant shall during the Term promptly furnish Landlord with annual financial
statements reflecting Tenant's financial condition upon written request from
Landlord.
SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Building, the lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications do
not materially increase the obligations of Tenant or materially and adversely
affect the leasehold interest created by this Lease.
SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of
Landlord which would otherwise entitle Tenant to be relieved of its obligations
hereunder or to terminate this Lease shall result in such a release or
termination unless (a) Tenant has given notice by registered or certified mail
to any beneficiary of a deed of trust or mortgage covering the Building whose
address has been furnished to Tenant and (b) such beneficiary is afforded a
reasonable opportunity to cure the default by Landlord, including, if necessary
to effect the cure, time to obtain possession of the Building by power of sale
or judicial foreclosure provided that such foreclosure remedy is diligently
pursued.
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SECTION 22.5. DISCLOSURE STATEMENT. Tenant acknowledges that it has read,
understands and, if applicable, shall comply with the provisions of Exhibit F to
this Lease, if that Exhibit is attached.
LANDLORD: TENANT:
THE IRVINE COMPANY IMH COMMERCIAL HOLDINGS, INC.,
a Maryland corporation
/s/ William R. Halford /s/ WILLIAM D. ENDRESEN
By __________________________________ By _________________________________
William R. Halford, President,
Irvine Office Company,
a division of The Irvine Company Printed Name WILLIAM D. ENDRESEN
-------------------------
Title SENIOR VICE PRESIDENT
------------------------------
/s/ John C. Tsu /s/ RICHARD J. JOHNSON
By __________________________________ By _________________________________
John C. Tsu,
Assistant Secretary
Printed Name RICHARD J. JOHNSON
------------------------
Title CHIEF FINANCIAL OFFICER
------------------------------
IMPERIAL COMMERCIAL CAPITAL
CORPORATION, a California corporation
/s/ WILLIAM D. ENDRESEN
By _________________________________
Printed Name WILLIAM D. ENDRESEN
------------------------
President
Title ______________________________
By _________________________________
Printed Name ________________________
Title ______________________________
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EXHIBIT B
UTILITIES AND SERVICES
The following standards for utilities and services shall be in effect at
the Building. Landlord reserves the right to adopt nondiscriminatory
modifications and additions to these standards. In the case of any conflict
between these standards and the Lease, the Lease shall be controlling. Subject
to all of the provisions of the Lease, including but not limited to the
restrictions contained in Section 6.1. the following shall apply:
1. Landlord shall furnish to the Premises during the hours of 8:00 a.m.
to 6:00 p.m., Monday through Friday, and 8:00 a.m. to 1:00 p.m. on Saturday,
generally recognized national holidays and Sundays excepted, reasonable air
conditioning, heating and ventilation services. Subject to the provisions set
forth below, Landlord shall also furnish the Building with elevator service (if
applicable), reasonable amounts of electric current for normal lighting by
Landlord's standard overhead fluorescent and incandescent fixtures and for
fractional horsepower office machines, and water for lavatory and drinking
purposes. Tenant will not, without the prior written consent of Landlord,
consume electricity in the Premises at a level in excess of 3 watts per square
foot or otherwise increase the amount of electricity, gas or water usually
furnished or supplied for use of the Premises as general office space; nor shall
Tenant connect any apparatus, machine or device with water pipes or electric
current (except through existing electrical outlets in the Premises) for the
purpose of using electric current or water. This paragraph shall at all times be
subject to applicable governmental regulations.
2. Upon written request from Tenant delivered to Landlord at least 24
hours prior to the period for which service is requested but during normal
business hours, Landlord will provide any of the foregoing building services to
Tenant at such times when such services are not otherwise available. Tenant
agrees to pay Landlord for those afterhour services at rates that Landlord may
establish from time to time. If Tenant requires electric current in excess of
that which Landlord is obligated to furnish under this Exhibit B, Tenant shall
first obtain the consent of Landlord, and Landlord may cause an electric current
meter to be installed in the Premises to measure the amount of electric current
consumed. The cost of installation, maintenance and repair of the meter shall be
paid for by Tenant, and Tenant shall reimburse Landlord promptly upon demand for
all electric current consumed for any special power use as shown by the meter.
The reimbursement shall be at the rates charged for electrical power by the
local public utility furnishing the current, plus any additional expense
incurred in keeping account of the electric current consumed.
3. If any lights, machines or equipment (including without limitation
electronic data processing machines) are used by Tenant in the Premises which
materially affect the temperature otherwise maintained by the air conditioning
system, or generate substantially more heat in the Premises than would be
generated by the building standard lights and usual fractional horsepower of
office equipment, Landlord shall have the right at its election to install or
modify any machinery and equipment to the extent Landlord reasonably deems
necessary to restore temperature balance. The cost of installation, and any
additional cost of operation and maintenance, shall be paid by Tenant to
Landlord promptly upon demand.
4. Landlord shall furnish water for drinking, personal hygiene and
lavatory purposes only. If Tenant requires or uses water for any purposes in
addition to ordinary drinking, cleaning and lavatory purposes, Landlord may, in
its discretion, install a water meter to measure Tenant's water consumption.
Tenant shall pay Landlord for the cost of the meter and the cost of its
installation, and for consumption throughout the duration of Tenant's occupancy.
Tenant shall keep the meter and installed equipment in good working order and
repair at Tenant's own cost and expense, in default of which Landlord may cause
the meter to be replaced or repaired at Tenant's expense. Tenant agrees to pay
for water consumed, as shown on the meter and when bills are rendered, and on
Tenant's default in making that payment Landlord may pay the charges on behalf
of Tenant. Any costs or expenses or payments made by Landlord for any of the
reasons or purposes stated above shall be deemed to be additional rent payable
by Tenant to Landlord upon demand.
5. In the event that any utility service to the Premises is separately
metered or billed to Tenant, Tenant shall pay all charges for that utility
service to the Premises and the cost of furnishing the utility to tenant suites
shall be excluded from the Operating Expenses as to which reimbursement from
Tenant is required in the Lease. If any utility charges are not paid when due
Landlord may pay them, and any amounts paid by Landlord shall immediately become
due to Landlord from Tenant as additional rent. If Landlord elects to furnish
any utility service to the Premises, Tenant shall purchase its requirements of
that utility from Landlord as long as the rates charged by Landlord do not
exceed those which Tenant would be required to pay if the utility service were
furnished it directly by a public utility.
6. Landlord shall provide janitorial services five days per week,
equivalent to that furnished in comparable buildings, and window washing as
reasonably required; provided, however, that Tenant shall pay for any additional
or unusual janitorial services required by reason of any nonstandard
improvements in the Premises, including without limitation wall coverings and
floor coverings installed by or for Tenant, or by reason of any use of Premises
other than exclusively as offices. The cleaning services provided by Landlord
shall also exclude refrigerators, eating utensils (plates, drinking containers
and silverware), and interior glass partitions. Tenant shall pay to Landlord the
cost of removal of any of Tenant's refuse and rubbish, to the extent that they
exceed the refuse and rubbish usually attendant with general office usage.
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7. Tenant shall have access to the Building 24 hours per day, 7 days per
week, 52 weeks per year; provided that Landlord may install access control
systems as it deems advisable for the Building. Such systems may, but need not,
include full or part-time lobby supervision, the use of a sign-in sign-out log,
a card identification access system, building parking and access pass system,
closing hours procedures, access control stations, fire stairwell exit door
alarm system, electronic guard system, mobile paging system, elevator control
system or any other access controls. In the event that Landlord elects to
provide any or all of those services, Landlord may discontinue providing them at
any time with or without notice. Landlord may impose a reasonable charge for
access control cards and/or keys issued to Tenant. Landlord shall have no
liability to Tenant for the provision by Landlord of improper access control
services, for any breakdown in service, or for the failure by Landlord to
provide access control services. Tenant further acknowledges that Landlord's
access systems may be temporarily inoperative during building emergency and
system repair periods. Tenant agrees to assume responsibility for compliance by
its employees with any regulations established by Landlord with respect to any
card key access or any other system of building access as Landlord may establish
Tenant shall be liable to Landlord for any loss or damage resulting from its or
its employees use of any access system.
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EXHIBIT C
PARKING
The following parking regulations shall be in effect at the Building.
Landlord reserves the right to adopt reasonable, nondiscriminatory modifications
and additions to the regulations by written notice to Tenant. In the case of any
conflict between these regulations and the Lease, the Lease shall be
controlling.
1. Landlord agrees to maintain, or cause to be maintained, an automobile
parking area ("Parking Area") in reasonable proximity to the Building for the
benefit and use of the visitors and patrons and, except as otherwise provided,
employees of Tenant, and other tenants and occupants of the Building. The
Parking Area shall include, whether in a surface parking area or a parking
structure, the automobile parking stalls, driveways, entrances, exits, sidewalks
and attendant pedestrian passageways and other areas designated for parking.
Landlord shall have the right and privilege of determining the nature and extent
of the automobile Parking Area, whether it shall be surface, underground or
other structure, and of making such changes to the Parking Area from time to
time which in its opinion are desirable and for the best interests of all
persons using the Parking Area. Landlord shall keep the Parking Area in a neat,
clean and orderly condition, and shall repair any damage to its facilities.
Landlord shall not be liable for any damage to motor vehicles of visitors or
employees, for any loss of property from within those motor vehicles, or for any
injury to Tenant, its visitors or employees, unless ultimately determined to be
caused by the sole active negligence or willful misconduct of Landlord. Unless
otherwise instructed by Landlord, every parker shall park and lock his or her
own motor vehicle. Landlord shall also have the right to establish, and from
time to time amend, and to enforce against all users of the Parking Area all
reasonable rules and regulations (including the designation of areas for
employee parking) as Landlord may deem necessary and advisable for the proper
and efficient operation and maintenance of the Parking Area. Garage managers or
attendants are not authorized to make or allow any exceptions to these
regulations.
2. Landlord may, if it deems advisable in its sole discretion, charge for
parking and may establish for the Parking Area a System or systems of permit
parking for Tenant, its employees and its visitors, which may include, but not
be limited to, a System of charges against nonvalidated parking, verification of
users, a set of regulations governing different parking locations, and an
allotment of reserved or nonreserved parking spaces based upon the charges paid
and the identity of users. In no event shall Tenant or its employees park in
reserved stalls leased to other tenants or in stalls within designated visitor
parking zones. It is understood that Landlord shall not have any obligation to
cite improperly parked vehicles or otherwise attempt to enforce reserved parking
rules during hours when parking attendants are not present at the Parking Area.
Tenant shall comply with such system in its use (and in the use of its visitors,
patrons and employees) of the Parking Area, provided, however, that the system
and rules and regulations shall apply to all persons entitled to the use of the
Parking Area, and all charges to Tenant for use of the Parking Area shall be no
greater than Landlord's then current scheduled charge for parking.
3. Tenant shall, upon request of Landlord from time to time, furnish
Landlord with a list of its employees names and of Tenant's and its employees'
vehicle license numbers. Tenant agrees to acquaint its employees with these
regulations and assumes responsibility for compliance by its employees with
these parking provisions, and shall be liable to Landlord for all unpaid parking
charges incurred by its employees. Any amount due from Tenant shall be deemed
additional rent. Tenant authoress Landlord to tow away from the Building any
vehicle belonging to Tenant or Tenant's employees parked in violation of these
provisions, and/or to attach violation stickers or notices to those vehicles. In
the event Landlord elects or is required to limit or control parking by tenants,
employees, visitors or invitees of the Building, whether by validation of
parking tickets, parking meters or any other method of assessment, Tenant agrees
to participate in the validation or assessment program under reasonable rules
and regulations as are established by Landlord and/or any applicable
governmental agency.
4. Landlord may estabilsh an identification system for vehicles of Tenant
and its employees which may consist of stickers, magnetic parking cards or other
identification devices supplied by Landlord. All identification devices shall
remain the property of Landlord, shall be displayed as required by Landlord or
upon request and may not be mutilated or obliterated in any manner. Those
devices shall not be transferable and any such device in the possession of an
unauthorized holder shall be void and may be confiscated. Landlord may impose
a reasonable fee for identification devices and a replacement charge for devices
which are lost or stolen. Each identification device shall be resumed to
Landlord promptly following the Expiration Date or sooner termination of this
Lease. Loss or theft of parking identification devices shall be reported to
Landlord or its Parking Area operator immediately and a written report of the
loss filed if requested by Landlord or its Parking Area operator.
5. Persons using the Parking Area shall observe all directional signs and
arrows and any posted speed limits. Unless otherwise posted, In no event shall
the speed limit of 5 miles per hour be exceeded. All vehicles shall be parked
entirely within painted stalls, and no vehicles shall be parked in areas which
are posted or marked as "no parking" or on or in ramps, driveways and aisles.
Only one vehicle may be parked in a parking space. In no event shall Tenant
interfere with the use and enjoyment of the Parking Area by other tenants of the
Building or their employees or invitees.
6. Parking Areas shall be used only for parking vehicles. Washing, waxing,
cleaning or servicing of vehicles,or the parking of any vehicle on an overnight
basis, in the Parking Area (other than emergency services) by any parker or his
or her agents or employees is prohibited unless otherwise authorized by
Landlord. Tenant shall have no right to install any fixtures, equipment or
personal property (other than vehicles) in the Parking Area, nor shall Tenant
make any alteration to the Parking Area.
1
<PAGE>
7. It is understood that the employees of Tenant and the other tenants of
Landlord within the Building and Project shall not be permitted to park their
automobiles in the portions of the Parking Area which may from time to time be
designated for patrons of the Building and/or Project and that Landlord shall at
all times have the right to establish rules and regulations for employee
parking. Employees shall pay to Landlord or its agents for the use of the
allotted employee parking spaces Forty Dollars ($40.00) per unreserved stall per
month during the initial twelve (12) months of the Lease Term and Sixty Dollars
($60.00) per unreserved stall per month during the remaining twenty-four (24)
months of the Lease Term. Thereafter, the stall charge payable by Tenant's
employees shall be the amounts as Landlord shall from time to time determine.
Landlord may authorize persons other than those described above, including
occupants of other buildings, to utilize the Parking Area. In the event of the
use of the Parking Area by other persons, those persons shall pay for that use
in accordance with the terms established above; provided, however, Landlord may
allow those persons to use the Parking Area on weekends, holidays, and at other
non-office hours without payment. Landlord agrees that Tenant may convert up to
six (6) of its allotted unreserved parking spaces to reserved parking; provided
that should Tenant fail to lease any such reserved stall within the initial
thirty (30) days following the Commencement Date, that reserved stall shall
thereafter be subject to availability as determined by Landlord. During the
initial thirty-six (36) month Lease Term only, the monthly stall charge for
each such reserved parking space shall be One Hundred Ten Dollars ($110.00) per
stall per month. Thereafter, the reserved stall charges shall be the amounts
then currently charged by Landlord from time to time.
8. Notwithstanding the foregoing paragraphs 1 through 7, Landlord shall be
entitled to pass on to Tenant its proportionate share of any charges or parking
surcharge or transportation management costs levied by any governmental agency.
The foregoing parking provisions are further subject to any governmental
regulations which limit parking or otherwise seek to encourage the use of
carpools, public transit or other alternative transportation forms or traffic
reduction programs. Tenant agrees that it will use its best efforts to
cooperate, including registration and attendance, in programs which may be
undertaken to reduce traffic. Tenant acknowledges that as a part of those
programs, it may be required to distribute employee transportation information,
participate in employee transportation surveys, allow employees to participate
in commuter activities, designate a liaison for commuter transportation
activities, distribute commuter information to all employees, and otherwise
participate in other programs or services initiated under a transportation
management program.
9. Should any parking spaces be allotted by Landlord to Tenant, either on
a reserved or nonreserved basis, Tenant shall not assign or sublet any of those
spaces, either voluntarily or by operation of law, without the prior written
consent of Landlord, except in connection with an authorized assignment of this
Lease or subletting of the Premises.
2
<PAGE>
EXHIBIT D
TENANTS INSURANCE
The following standards for Tenant's insurance shall be in effect at the
Building. Landlord reserves the right to adopt reasonable nondiscriminatory
modifications and additions to those standards. Tenant agrees to obtain and
present evidence to Landlord that it has fully complied with the insurance
requirements.
1. Tenant shall, at its sole cost and expense, commencing on the date
Tenant is given access to the Premises for any purpose and during the entire
Term, procure, pay for and keep in full force and effect: (i) commercial general
liability insurance with respect to the Premises and the operations of or on
behalf of Tenant in, on or about the Premises, including but not limited to
personal injury, nonowned automobile, blanket contractual, independent
contractors, broad form property damage, fire legal liability, products
liability (if a product is sold from the Premises), liquor law liability (if
alcoholic beverages are sold, served or consumed within the Premises), and cross
liability and severability of interest clauses, which policy(ies) shall be
written on an "occurrence" basis and for not less than $2,000,000 combined
single limit (with a $50,000 minimum limit on fire legal liability) per
occurrence for bodily injury, death, and property damage liability, or the
current limit of liability carried by Tenant, whichever is greater, and subject
to such increases in amounts as Landlord may determine from time to time; (ii)
workers' compensation insurance coverage as required by law, together with
employers' liability insurance coverage; (iii) with respect to improvements,
alterations, and the like required or permitted to be made by Tenant under this
Lease, builder's all-risk insurance, in amounts satisfactory to Landlord; (iv)
insurance against fire, vandalism, malicious mischief and such other additional
perils as may be included in a standard "all risk" form, insuring the leasehold
improvements, trade fixtures, furnishings, equipment and items of personal
property in the Premises, in an amount equal to not less than ninety percent
(90%) of their actual replacement cost (with replacement cost endorsement),
which policy shall also include loss of income/business interruption/extra
expense coverage in an amount not less than nine months loss of income from
Tenant's business in the Premises. In no event shall the limits of any policy be
considered as limiting the liability of Tenant under this Lease.
2. All policies of insurance required to be carried by Tenant pursuant to
this Exhibit D shall be written by responsible insurance companies authorized to
do business in the State of California and with a Best's policyholder rating of
not less than A-X subject to final acceptance and approval by Landlord. Any
insurance required of Tenant may be furnished by Tenant under any blanket policy
carried by it or under a separate policy. A true and exact copy of each paid up
policy evidencing the insurance (appropriately authenticated by the insurer) or
a certificate of insurance, certifying that the policy has been issued, provides
the coverage required by this Exhibit D and contains the required provisions,
shall be delivered to Landlord prior to the date Tenant is given the right of
possession of the Premises. Proper evidence of the renewal of any insurance
coverage shall also be delivered to Landlord not less than thirty (30) days
prior to the expiration of the coverage. Landlord may at any time, and from time
to time, inspect and/or copy any and an insurance policies required by this
Lease.
3. Each policy evidencing insurance required to be carried by Tenant
pursuant to this Exhibit D shall contain the following provisions and/or clauses
satisfactory to Landlord: (i) a provision that the policy and the coverage
provided shall be primary and that any coverage carried by Landlord shall be
noncontributory with respect to any policies carried by Tenant; (ii) a provision
including Landlord and any other parties in interest designated by Landlord as
an additional insured, except as to workers compensation insurance; (iii) a
waiver by the insurer of any right to subrogation against Landlord, its agents,
employees, contractors and representatives which arises or might arise by reason
of any payment under the policy or by reason of any act or omission of Landlord,
its agents, employees, contractors or representatives; and (iv) a provision that
the insurer will not cancel or change the coverage provided by the policy
without first giving Landlord thirty (30) days prior written notice.
4. In the event that Tenant fails to procure, maintain and/or pay for, at
the times and for the durations specified in this Exhibit D, any insurance
required by this Exhibit D, or fails to carry insurance required by any
governmental authority, Landlord may at its election procure that insurance and
pay the premiums. In which event Tenant shall repay Landlord all sums paid by
Landlord, together with interest at the maximum rate permitted by law and any
related costs or expenses incurred by Landlord, within ten (10) days following
Landlord's written demand to Tenant.
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<PAGE>
EXHIBIT E
RULES AND REGULATIONS
The following Rules and Regulations shall be in effect at the Building.
Landlord reserves the right to adopt reasonable nondiscriminatory modifications
and additions at any time. In the case of any conflict between these regulations
and the Lease, the Lease shall be controlling.
1. Except with the prior written consent of Landlord, Tenant shall not
sell, or permit the retail sale of, newspapers, magazines, periodicals. or
theater tickets, in or from the Premises, nor shall Tenant carry on, or permit
or allow any employee or other person to carry on, the business of stenography,
typewriting or any similar business in or from the Premises for the service or
accommodation of occupants of any other portion of the Building. Tenant shall
not allow the Premises to be utilized for any manufacturing of any kind, or the
business of a public barber shop, beauty parlor, or a manicuring and chiropodist
business, or any business other than that specifically provided for in the
Lease.
2. The sidewalks, halls, passages, elevators, stairways, and other common
areas shall not be obstructed by Tenant or used by it for Storage or for any
purpose other than for ingress to and egress from the Premises. The halls,
passages, entrances, elevators, stairways, balconies and roof are not for the
use of the general public, and Landlord shall in all cases retain the right to
control and prevent access to those areas of all persons whose presence, in the
judgment of Landlord, shall be prejudicial to the safety, character, reputation
and interests of the Building and its tenants. Nothing contained in this Lease
shall be construed to prevent access to persons with whom Tenant normally deals
only for the purpose of conducting its business on the Premises (such as
clients, customers. office suppliers and equipment vendors and the like) unless
those persons are encased in illegal activities. Neither Tenant nor any employee
or contractor of Tenant shall go upon the roof of the Building without the prior
written consent of Landlord.
3. The sashes, sash doors, windows, glass lights, solar film and/or
screen, and any lights or skylights that reflect or admit light into the halls
or other places of the Building shall not be covered or obstructed. The toilet
rooms, water and wash closets and other water apparatus shall not be used for
any purpose other than that for which they were constructed, and no foreign
substance of any kind shall be thrown in those facilities, and the expense of
any breakage, stoppage or damage resulting from the violation of this rule shall
be borne by Tenant.
4. No sign, advertisement or notice visible from the exterior of the
Premises shall be inscribed, painted or affixed by Tenant on any part of the
Building or the Premises without the prior written consent of Landlord. If
Landlord shall have given its consent at any time, whether before or after the
execution of this Lease, that consent shall in no way operate as a waiver or
release of any of the provisions of this Lease, and shall be deemed to relate
only to the particular sign, advertisement or notice so consented to by Landlord
and shall not be construed as dispensing with the necessity of obtaining the
specific written consent of Landlord with respect to any subsequent sign,
advertisement or notice. If Landlord, by a notice in writing to Tenant, shall
obtest to any curtain, blind, tinting, shade or Screen attached to, or hung in,
or used in connection with, any window or door of the Premises the use of that
curtain, blind, tinting, shade or screen shall be immediately discontinued and
removed by Tenant. No awnings shall be permitted on any part of the Premises.
5. Tenant shall not do or permit anything to be done in the Premises, or
bring or keep anything in the Premises, which shall in any way increase the rate
of fire insurance on the Building, or on the property kept in the Building, or
obstruct or interfere with the rights of other tenants, or in any way injure or
annoy them, or conflict with the regulations of the Fire Department or the fire
laws, or with any insurance policy upon the Building, or any portion of the
Building or its contents, or with any rules and ordinances established by the
Board of Health or other governmental authority.
6. The installation and location of any unusually heavy equipment in the
Premises, including without limitation file storage units, saws and electronic
data processing equipment, shall require the prior written approval of Landlord.
Landlord may restrict the weight and position of any equipment that may exceed
the weight load limits for the structure of the Building, and may further
require, at Tenant's expense, the reinforcement of any flooring on which such
equipment may be placed and/or an engineering study to be performed to determine
whether the equipment may safely be installed in the Building and the necessity
of any reinforcement. The moving of large or heavy objects shall occur only
between those hours as may be designated by, and only upon previous written
notice to, Landlord, and the persons employed to move those objects in or out of
the Building must be reasonably acceptable to Landlord. No freight, furniture or
bulky matter of any description shall be received Into or moved out of the lobby
of the Building or carried in any elevator other than the freight elevator
designated by Landlord unless approved in writing by landlord.
7. Landlord shall clean the Premises as provided in the Lease, and except
with the written consent of landlord, no person or persons other than those
approved by Landlord will be permitted to enter the Building for that purpose.
Tenant shall not cause unnecessary labor by reason of Tenant's carelessness
and indifference in the preservation of good order and cleanliness. Landlord
shall not be responsible to Tenant or its employees for loss or damage to
property in connection with the provision of janitorial services by third party
contractors.
8. Tenant shall not sweep or throw, or permit to be swept or thrown, from
the Premises any dirt or other substance into any of the corridors or halls or
elevators, or out of the doors or windows or stairways of the Building, and
Tenant shall not use, keep or permit to be used or kept any foul or noxious gas
or substance in the Premises, or permit or suffer the Premises to be occupied or
used in a manner offensive
1
<PAGE>
or objectionable to Landlord or other occupants of the Building reason of noise,
odors and/or vibrations or interfere in any way with other tenants or those
having business with other tenants, nor shall any animals or birds be kept by
Tenant in or about the Building. Smoking or carrying of lighted cigars,
cigarettes, pipes or similar products anywhere within the elevators, restrooms,
common corridors, lobbies or other common areas of the Building is strictly
prohibited. Any such activity within the Premises shall, until further notice,
be permitted only absent written notification to Landlord from another tenant of
the Building that such activity is creating fumes or odors that are offensive or
objectionable; in the event such notice is given to Landlord, Landlord may
prohibit smoking within the Premises and may enforce such prohibition pursuant
to Landlord's leasehold remedies. Smoking is permitted outside the Building and
within the project only in areas designated by Landlord.
9. No cooking shall be done or permitted by Tenant on the Premises,
except pursuant to the normal use of a U.L. approved microwave oven and coffee
maker for the benefit of Tenant's employees and invitees, nor shall the Premises
be used for the storage of merchandise or for lodging.
10. Tenant shall not use or keep in the Building any kerosene, gasoline,
or inflammable fluid or any other illuminating material, or use any method of
heating other than that supplied by Landlord.
11. If Tenant desires telephone, telegraph, burglar alarm or similar
connections, Landlord will direct electricians as to where and how the wires are
to be introduced. No boring or cutting for wires or otherwise shall be made
without directions from Landlord.
12. Upon the termination of its tenancy, Tenant shall deliver to Landlord
all the keys to offices, rooms and toilet rooms and all access cards which shall
have been furnished to Tenant or which Tenant shall have had made.
13. Tenant shall not mark, drive nails, screw or dell into the partitions,
woodwork or plaster or in any way deface the Premises, except to install normal
wall hangings. Tenant shall not affix any floor covering to the floor of the
Premises in any manner except by a paste, or other material which may easily be
removed with water, the use of cement or other similar adhesive materials being
expressly prohibited. The method of affixing any floor covering shall be
subject to approval by Landlord. The expense of repairing any damage resulting
from a violation of this rule shall be borne by Tenant.
14. On Saturdays, Sundays and legal holidays, and on other days between
the hours of 6:00 p.m. and 8:00 a.m., access to the Building, or to the halls,
corridors, elevators or stairways in the Building, or to the Premises, may be
refused unless the person seeking access compiles with any access control system
that Landlord may establish. Landlord shall in no case be liable for damages for
the admission to or exclusion from the Building of any person whom Landlord has
the right to exclude under Rules 2 or 18 of this Exhibit. In case of invasion,
mob, riot, public excitement, or other commotion, or in the event of any other
situation reasonably requiring the evacuation of the Building, Landlord reserves
the right at its election and without liability to Tenant to prevent access to
the Building by closing the doors or otherwise, for the safety of the tenants
and protection of property in the Building.
15. Tenant shall be responsible for protecting the Premises from theft,
which includes keeping doors and other means of entry closed and securely
locked. Tenant shall cause all water faucets or water apparatus to be shut off
before Tenant or Tenant's employees leave the Building, and that all
electricity, gas or air shall likewise be shut off, so as to prevent waste or
damage, and for any default or carelessness Tenant shall make good all injuries
sustained by other tenants or occupants of the Building or Landlord.
16. Tenant shall not alter any lock or install a new or additional lock or
any bolt on any door of the Premises without the prior written consent of
Landlord. If Landlord gives its consent, Tenant shall in each case promptly
furnish Landlord with a key for any new or altered lock.
17. Tenant shall not install equipment, such as but not limited to
electronic tabulating or computer equipment, requiring electrical or air
conditioning service in excess of that to be provided by Landlord under the
Lease except in accordance with Exhibit B.
18. Landlord shall have full and absolute authority to regulate or
prohibit the entrance to the Premises of any vendor, supplier, purveyor,
petitioner, proselytizer or other similar person. In the event any such person
is a guest or invites of Tenant, Tenant shall notify Landlord in advance of each
desired entry, and Landlord shall authorize the person so designated to enter
the Premises, provided that in the sole and absolute discretionary judgment of
Landlord, such person will not be involved in general solicitation activities,
or the proselytizing, petitioning, or disturbance of other tenants or their
customers or invitees, or engaged or likely to engage in conduct which may in
Landlord's opinion distract from the use of the Premises for its intended
purpose. Notwithstanding the foregoing, Landlord reserves the absolute right and
discretion to limit or prevent access to the Buildings by any food or beverage
vendor, whether or not invited by Tenant, and Landlord may condition such
access upon the vendor's execution of an entry permit agreement which may
contain provisions for insurance coverage and/or the payment of a fee to
Landlord.
19. Tenant shall be required to utilize the third party contractor
designated by Landlord for the Building to provide any telephone wiring
services from the minimum point of entry of the telephone cable in the Building
to the Premises. Notwithstanding the foregoing, however, in the event Tenant
does not have a telephone switch within the Premises, Tenant may, with
Landlord's approval and supervision, use a trained contractor to provide such
wiring services, but only from the Premises to the telephone room on the floor
on which the Premises are situated.
2
<PAGE>
20. Landlord may from time to time grant tenants individual and temporary
variances from these Rules, provided that any variance does not have a material
adverse effect on the use and enjoyment of the Premises by Tenant.
3
<PAGE>
EXHIBIT X
WORK LETTER
-----------
TENANT IMPROVEMENTS
-------------------
The tenant improvement work by Landlord shall consist of such work as
may be specified by Tenant and approved by Landlord ("Tenant Improvements"). All
materials and finishes utilized in completing the Tenant Improvements shall be
Landlord's building standard. Landlord's total contribution for the Tenant
Improvements, inclusive of Landlord's construction management fee, shall not
exceed One Hundred One Thousand Nine Hundred Twenty-Seven Dollars (S101.927.00)
("Landlord's Contribution"). Any excess cost shall be borne solely by Tenant and
shall be paid to Landlord within ten (10) days following Landlord's billing for
such excess cost. Tenant understands and agrees that any portion of the
Landlord's Contribution not utilized by November 30, 1999, shall thereafter be
forfeited by Tenant.
It is understood that the tenant improvements shall be done during
Tenant's occupancy of the Premises. In this regard, Tenant agrees to assume any
risk of injury, loss or damage which may result. Tenant further agrees that no
rental abatement shall result while the tenant improvements are completed in the
Premises.
EXHIBIT X
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
IMH/ICH Dove Street, LLC
Impac Commercial Capital Corporation (the Registrant owns 100% of the Preferred
Stock)
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL FORM
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<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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0
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