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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
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, 1998 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
_____________________
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)
_____________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock $0.01 par value American Stock Exchange
_____________________
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 February 16, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $48.9 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 outstanding as of February 16, 1999, was
8,625,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement, issued in connection
with the 1999 Annual Meeting of Stockholders of the Registrant, are incorporated
by reference into Part III.
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IMPAC COMMERCIAL HOLDINGS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS........................................................................................ 3
ITEM 2. PROPERTIES...................................................................................... 31
ITEM 3. LEGAL PROCEEDINGS............................................................................... 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 32
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................................ 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................... 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................................................ 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................. 51
ITEM 11. EXECUTIVE COMPENSATION.......................................................................... 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................. 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................ 52
SIGNATURES..................................................................................................... 54
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PART I
Certain information contained in this Report constitutes forward-looking
statements under the Securities Act and the Exchange Act. These forward-looking
statements can be identified by the use of forward-looking terminology
including, but not limited to, "may," "will," "expect," "intend," "should,"
"anticipate," "estimate," or "believe" or comparable terminology. The Company's
actual results may differ materially from those contained in the forward-looking
statements. Factors that might cause such differences include, but are not
limited to, those discussed in "Item 1. Business--Risk Factors" as well as those
discussed elsewhere in this Report.
ITEM 1. BUSINESS
Impac Commercial Holdings, Inc. 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. References to the "Company" refer to Impac
Commercial Holdings, Inc. ("ICH") and its subsidiaries, Impac Commercial Assets
Corporation ("ICH Assets"), IMH/ICH Dove Street, LLC ("Dove") and Impac
Commercial Capital Corporation, (together with its wholly-owned subsidiary ICCC
Secured Assets Corporation, ("ICCC")). References to ICH refer to Impac
Commercial Holdings, Inc. as a separate entity from ICH Assets, Dove or ICCC.
General
The Company was formed to seek opportunities in the commercial mortgage
market, including the origination, purchase, securitization and sale of
commercial mortgages and investment in commercial mortgages and commercial
mortgage-backed securities. Commercial mortgage assets include mortgage loans on
condominium-conversions, 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, to date, has invested primarily in
Commercial Mortgages and mortgage-backed securities on commercial properties
("CMBSs") and, subsequent to ICH's initial public offering ("IPO") in August of
1997, the Conduit Operations, conducted by ICCC, which originates and purchases
and securitizes and sells Commercial Mortgages. The Company's Conduit Operations
operates three divisions: the CommercialExpress Division, the ConduitExpress
Division, and the CondoSelect Division. The Company is a specialty commercial
property finance company that elects 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's non-compete agreement with Impac Mortgage Holdings, Inc. ("IMH"), an
affiliate of the Company, expired in March 1998 and, as a result, ICH now has
the ability to invest in single-family residential mortgages held-for-
investment, investment securities available-for-sale, residual interests in
securitizations, and finance receivables ("Residential Mortgage Assets"). To
date, ICH has not invested in any Residential Mortgage Assets and there can be
no assurance that ICH will invest in any such assets in the future. Due to the
asset size of ICH, any investments in Residential Mortgage Assets may constitute
a substantial percentage of the Company's total investments in mortgage assets.
The Manager
RAI Advisors, LLC ("RAI" or the "Manager") was formed as a vehicle through
which the management team of IMH could effectively manage the operations of the
Company, IMH 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 is responsible for (1)
asset-liability management primarily the analysis and oversight of the
purchasing, financing and disposition of the Company's assets, (2) capital
management primarily the oversight of the Company's capital raising and (3)
investor relations activities and operations management primarily the oversight
of ICH's operating subsidiaries. The Manager has also entered into a
submanagement agreement (the "Submanagement Agreement") with Impac Funding
Corporation ("IFC"), IMH's conduit operations, to provide substantially all of
the administrative services required by the Company.
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Long-Term Investment Operations
The Long-Term Investment Operations, conducted by ICH, invests in mortgage
loans to be held as long-term investment and mortgage-backed securities
("MBSs"). Income is earned principally from net interest income earned on
mortgage loans and MBSs held in the long-term investment portfolio and on short-
term warehouse loans or finance receivables. The purchase of mortgage loans and
MBSs are financed with capital, long-term financing through Collateralized
Mortgage Obligations ("CMOs") and borrowings under warehouse line and reverse
repurchase agreements. To date, the Long-Term Investment Operations has invested
primarily in Commercial Mortgages and CMBSs. ICCC supports the investment
objectives of ICH by selling Commercial Mortgages and CMBSs to ICH at costs that
are comparable to those available through investment bankers and other third
parties.
Commercial Mortgages Held in the Portfolio
The Company originates Commercial Mortgages through its Conduit Operations,
conducted by ICCC. All Commercial Mortgages originated by ICCC are offered to
ICH at costs that are comparable to those available through investment bankers
and other third parties. ICH invests a portion of its assets in these Commercial
Mortgages, which are held in the long-term investment portfolio. Initially, the
Commercial Mortgages are held in the long-term investment portfolio as
Commercial Mortgages held-for-investment and are financed by short-term
warehouse line agreements and capital. The Commercial Mortgages held-for-
investment are used as collateral for the issuance of CMOs which provide the
Company with long-term financing to fund its Commercial Mortgages. At the time
CMOs are issued, the Commercial Mortgages are reflected on the balance sheet as
CMO collateral with a corresponding liability referred to as CMO borrowings.
Although the Company has acquired all Commercial Mortgages held in its long-term
investment portfolio from ICCC, the Company can, and in the future expects to,
purchase mortgage loans from third party investors for long-term investment and
for resale.
Finance Receivables
ICH provides short-term warehouse loans to ICCC to fund the origination and
acquisition of Commercial Mortgages during the time between the closing of the
Commercial Mortgages to their sale or other settlement with pre-approved
investors or ICH. 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.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" for a description of
these warehouse lines.
Investments in Mortgage-Backed Securities
The Company may also acquire CMBSs and MBSs generated through its own
securitization efforts as well as CMBSs and MBSs 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.
MBSs are securities that represent an interest in, or are secured by, mortgage
loans. MBSs may pay fixed or floating rates of interest. MBSs 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 the 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.
MBSs generally are structured with some form of credit enhancement to protect
against potential losses on the underlying mortgage loans. Credit support
increases the likelihood of timely and full payment of principal and interest to
the more senior class of MBSs. Because of the particular risks that accompany
MBSs, the amount of such credit support may be substantial. Credit supports used
in the MBS market has included issuer guarantees, reserve funds, subordinated
securities (which bear the risks of default before the more senior classes of
securities of the same issuer), cross-collateralization and over-
collateralization. In addition to credit support, MBSs may be structured with
liquidity
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protections intended to provide assurance of timely payment of principal and
interest. Such protections may include surety bonds, letters of credit and
payment advance agreements.
The CMBS market is newer than the residential MBS market and in terms of total
outstanding principal amount of issues is relatively small compared to the total
size of the market for residential MBSs. 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 market, 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.
Financing
The Long-Term Investment Operations is principally financed through the
issuance of CMOs, short-term borrowings under warehouse line and reverse
repurchase agreements, and proceeds from the sale of capital stock. Refer to
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" for more information regarding
the Company's financing arrangements.
Collateralized Mortgage Obligations. As the Long-Term Investment Operations
accumulates Commercial Mortgages in its long-term investment portfolio, the
Company issues CMOs secured by such loans as a method 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, in situations when the CMO qualifies as a
financing arrangement under Statement of Financial Accounting Standard No. 125
("SFAS 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. 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 would 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 by a mortgage loan insurer, giving the CMOs the highest rating
established by a nationally recognized rating agency.
Warehouse Line Agreements. The Company has warehouse facilities at interest
rates that are consistent with the Company's financing objectives. 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 75% to 92% 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. The
Company'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 terms of the 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") or Eurodollar rate plus a certain
margin, depending on the type of mortgage collateral provided by the Company,
and is repriced daily. In an event of default, the lender may force the
liquidation of the pledged collateral subject to any bankruptcy proceeding
rights and remedies available to a creditor.
Reverse Repurchase Agreements. The Company also obtains reverse repurchase
agreements with third-party lenders, at interest rates that are consistent with
its financing objectives. 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. A reverse repurchase agreement,
although structured as a sale and repurchase obligation, acts as a financing
vehicle under which the Company pledges certain mortgage loans and/or MBSs 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
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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 mortgage loans or MBSs in the event the market value of
the existing collateral declines. The Company may be required to sell assets to
reduce its borrowings to the extent that cash reserves are insufficient to cover
such deficiencies in collateral.
To reduce its exposure to the potential credit risk of reverse repurchase
agreement lenders, the Company enters into such agreements with different
parties and follows its own credit exposure procedures. The Company monitors 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.
Investment Policies
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 mortgage loans and MBSs 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
MBSs of any one issue which the Company may acquire. It is the Company's policy
to acquire assets primarily for income and to finance its operations by
warehouse line and 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 originates and purchases and subsequently securitizes and sells
Commercial Mortgages primarily secured by first liens on commercial properties
that are originated or purchased in accordance with ICCC's underwriting
guidelines. As the Conduit Operations of the Company, ICCC acts as a flow
originator and bulk 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. Since ICCC's
inception, ICCC has originated all Commercial Mortgages, however, ICCC can, and
in the future expects to, purchase Commercial Mortgages from third party
investors for long-term investment and for resale.
The Company's Conduit Operations operates three divisions: the
CommercialExpress Division, the ConduitExpress Division and the CondoSelect
Division.
CommercialExpress Division
The CommercialExpress Division markets Commercial Mortgages directly to
property owners who seek Commercial Mortgages to purchase a building or
refinance an existing mortgage. The CommercialExpress Division offers smaller
balance, primarily fixed rate, Commercial Mortgages to project owners or
developers for smaller
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properties and projects than those offered by the ConduitExpress Division. The
CommercialExpress Division's standard program are fixed rate Commercial
Mortgages with principal balances ranging from $500,000 to $1.5 million. The
amortization schedules range from 15 to 30 years with maturities of 10 or 15
years with a substantial balloon payment due at maturity and with a maximum
loan-to-value ("LTV") generally not to exceed 80%. The CommercialExpress
Division also offers adjustable rate Commercial Mortgages with a principal
amount between $500,000 and $1.5 million. Such adjustable rate Commercial
Mortgages bear interest based on LIBOR, 1-Year constant maturity treasury index
("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 80%. ICCC utilizes short-term prepayment lock-outs and prepayment
penalties in order to reduce its exposure to early mortgage loan payoffs. The
Commercial Mortgages offered by the CommercialExpress Division generally utilize
non-negotiable loan documents and limited scope third party reports which
provide more efficient underwriting and closing. Processing and funding relating
to these Commercial Mortgages are performed centrally at ICCC's executive
offices. The CommercialExpress Division's marketing strategy is to solicit
Commercial Mortgage originations through direct mailings to selected investors
in commercial and multi-family real estate, and through advertising in various
forms of mass media and trade magazines. The Company believes this centralized
approach to processing and closing allows the CommercialExpress Division to
originate Commercial Mortgages at a competitive cost.
ConduitExpress Division
Correspondent Origination. The Company's ConduitExpress Division offers larger
principal balance Commercial Mortgages through specified correspondents such as
savings and loan associations, banks, mortgage bankers and other mortgage
brokers. These Commercial Mortgages are generally for projects of larger size as
compared to those funded by the CommercialExpress Division. The ConduitExpress
Division's strategic focus is to be a low cost national originator, through a
national correspondent network, of Commercial Mortgages to be held for long-term
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 ConduitExpress 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 ConduitExpress Division and (3) purchase Commercial Mortgages
and securitize and sell them in the secondary market or to ICH.
The ConduitExpress Division's standard programs are adjustable and fixed rate
Commercial Mortgages with principal balances ranging from $1.5 million to
$10.0 million. 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%. The ConduitExpress Division offers fixed rate
Commercial Mortgages with 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 full-term prepayment lockout and prepayment penalties in order to
reduce its exposure to early mortgage loan payoffs as well.
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 correspondent in the event of certain defects with respect to Commercial
Mortgages sold to ICCC. All Commercial Mortgages originated through
correspondents are underwritten by ICCC.
Bulk Purchases. In addition to originating Commercial Mortgages on a
correspondent basis, the division may 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 will be 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 may engage a third-party underwriter to
underwrite the Commercial Mortgages, determine credit grade, verify the quality
of the appraisal, verify the operations of the
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property, including the Debt Service Coverage Ratios ("DSCR"), and on Commercial
Mortgages with smaller balances, verify the borrower's employment status.
The Company has established 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 brokers to enter into a broker agreement with
customary representations and warranties regarding the loans these Commercial
Mortgage brokers will refer and sell to the Company.
CondoSelect Division
Through its CondoSelect 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 CondoSelect program are: (1) when existing
financing precludes release provisions on individual units, (2) to replace
existing matured loans, or (3) for acquisition financing. Commercial Mortgages
offered by the CondoSelect 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, the current maximum 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 and the DSCR
generally exceeds 1.25.
The Company believes an opportunity has developed to finance the sale of
previously constructed condominium complexes within certain geographic regions.
Increases in the prices of single-family detached homes have decreased the
ability of many potential first time home buyers to purchase such properties. In
addition, the Company believes that rents for high quality apartments have
substantially increased and vacancies for such apartments have substantially
decreased. The Company believes that previously constructed condominium
complexes have become an important alternative for 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.
The Commercial Mortgages offered by the CondoSelect 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 CondoSelect
Division offers Commercial Mortgages, which require master loan agreements that
include provisions for cross-collateralization and cross-default of units within
a complex. In addition, Commercial Mortgages offered by the CondoSelect Division
are generally with full recourse to the sponsor/developer. The units may be
released at par or on an accelerated basis depending on sales absorption, DSCRs
and the integrity of sales values. DSCRs of similar income producing properties
will be compared with those of the property to be financed at the time of
origination of the Commercial Mortgage. The CondoSelect Division originates,
underwrites, processes and funds Commercial Mortgages on a retail basis from
ICCC's executive offices.
Commercial Mortgage Originations
In light of the deterioration of the commercial mortgage-backed securitization
market during the third and fourth quarters of 1998, the Company made
significant changes in its business strategy and operations. The Company's
business strategy was revised to focus on the origination of smaller balance
loans that have higher margins, wider spreads and more profitability. Therefore,
the Company is concentrating its efforts on the origination of CommercialExpress
loans and de-emphasizing the origination of ConduitExpress loans until the
commercial mortgage-backed securitization market stabilizes. CommercialExpress
loans are Commercial Mortgages with balances generally from $500,000 to $3.0
million while ConduitExpress loans are Commercial Mortgages with balances
generally from $3.0 million to $10.0 million. While this decision resulted in
lower origination balances in the third and fourth quarters of 1998, the Company
anticipates better results on the subsequent sale or securitization of its
loans. Historically, the
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Company's experience has been that CommercialExpress loans have generally had
better pricing in the execution of whole loan sales and structured transactions
than prices received on ConduitExpress loans. A factor in the higher
profitability on CommercialExpress loans is the higher interest rate margins on
these loans which generally range from 100 basis points to 150 basis points more
than interest rate margins on ConduitExpress loans.
The credit quality of the loans originated or purchased by ICCC will vary
depending upon the specific program under which such loans are originated or
purchased. The following table sets forth ICCC's Commercial Mortgage
originations by type and by division for the periods shown:
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------ --------------------
(in millions,
except for average loan size)
<S> <C> <C>
Fixed Rate Loans:
ConduitExpress Division--
Volume of Loans.......................................................... $ 233.1 $ 142.7
Percent of total volume.................................................. 54.8% 61.1%
CommercialExpress Division--
Volume of Loans.......................................................... 166.9 37.6
Percent of total volume.................................................. 39.3% 16.1%
CondoSelect Division--
Volume of Loans.......................................................... -- --
Percent of total volume.................................................. --% --%
----------------- ------------------
Total Fixed Rate Loans--
Volume of Loans.......................................................... $ 400.0 $ 180.3
Percent of total volume.................................................. 94.1% 77.2%
Variable Rate Loans:
ConduitExpress Division--
Volume of Loans.......................................................... $ 6.6 $ 16.5
Percent of total volume.................................................. 1.5% 7.1%
CommercialExpress Division--
Volume of Loans.......................................................... 5.8 13.1
Percent of total volume.................................................. 1.4% 5.6%
CondoSelect Division--
Volume of Loans.......................................................... 12.7 23.6
Percent of total volume.................................................. 3.0% 10.1%
----------------- ------------------
Total Variable Rate Loans--
Volume of Loans.......................................................... $ 25.1 $ 53.2
Percent of total volume.................................................. 5.9% 22.8%
Total Loan Originations...................................................... $ 425.1 $ 233.5
================= ==================
Average Loan Size............................................................ $ 971,000 $ 474,000
</TABLE>
9
<PAGE>
ICCC's Commercial Mortgage origination and purchase activities typically focus
on those regions of the country where higher volumes of Commercial Mortgages are
originated. 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 periods shown:
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
---------------------------- -------------------------------
Aggregate % of Aggregate Aggregate % of Aggregate
Principal Principal Principal Principal
Balance Balance Balance Balance
--------- -------------- ------------ --------------
(dollars in millions)
<S> <C> <C> <C> <C>
California................................... $ 183.1 43.1% $ 121.3 52.0%
Arizona...................................... 59.6 14.0 13.7 5.9
Texas........................................ 47.0 11.1 16.6 7.1
Washington................................... 33.4 7.9 -- --
Ohio......................................... -- -- 27.9 11.9
Others (1)................................... 102.0 23.9 54.0 23.1
------- ----- --------- -------
$ 425.1 100.0% $ 233.5 100.0%
======= ===== ========= =======
</TABLE>
(1) No other state accounted for more than 5% of mortgage loans originations or
acquisitions during the periods shown.
Pricing
ICCC establishes yield spreads 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 minimize such risk.
Hedging transactions may include, 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, expected duration of the
Commercial Mortgages and the expected securitization of Commercial Mortgages.
Gains and losses on hedging transactions are deferred until the subsequent sale
of the Commercial Mortgages.
10
<PAGE>
Underwriting and Quality Control
Origination and Purchase Guidelines. ICCC has developed comprehensive
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. For
Commercial Mortgages that are underwritten by contract underwriters, ICCC
performs a full underwriting review prior to origination or purchase.
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
underwritable cash flows produced by the related mortgaged property compared 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 underwritable cash flows for a mortgaged property equals the
operating revenues for such mortgaged property minus its operating expenses,
replacement reserves, tenant improvements and leasing commissions, but without
giving effect to debt service, depreciation and non-recurring capital
expenditures 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 will also consider the creditworthiness of the
borrower, the borrower's income, liquid assets and liabilities. While the
primary consideration in underwriting a Commercial Mortgage is the property
securing the Commercial Mortgage and its net underwritable cash flows,
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 CondoSelect 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 and must have adequate parking.
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
unacceptable covenants, the property is not to code or the cost of restoring the
property to code is prohibitive or there is the existence of or potential for
contamination by hazardous toxic materials as 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
11
<PAGE>
other real estate holdings are heavily encumbered or consist substantially of
unimproved or underimproved properties having little or no gross income so that
their debt service requirements may consume a high percentage of the rental
income from the mortgaged property, 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 the 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 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 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 $200 million to $300 million or more than 100 Commercial Mortgages,
ICCC will securitize them through the issuance of CMBSs in the form of REMICs,
sell them to ICH for the issuance of CMOs or resell them in bulk whole loan
sales. The period between the time ICCC commits to purchase or originate a
Commercial Mortgage and the time it sells or securitizes Commercial Mortgages
generally ranges 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 typically 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
("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Governmental National Mortgage Association ("GNMA")) in which the principal and
interest payments are guaranteed by the U.S. government or an agency thereof,
securities created by the 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 typically
utilizes multiple forms of credit enhancement, including special hazard
insurance, letters of credit, over-collateralization and subordination or any
combination thereof. In determining whether to provide credit enhancement
through subordination or other credit
12
<PAGE>
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.
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 adverse developments in general economic trends
affecting real estate values or the mortgage industry, could result in
downgrades of such ratings.
Servicing
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. ICCC also acts as the servicer for all loans purchased by
the Long-Term Investment Operations. ICCC has contracted with independent third
parties, pursuant to sub-servicing agreements, (the "Sub-Servicing Agreements"),
for the performance of its servicing functions. While ICCC expects to have its
loans sub-serviced by others, ICCC may be retained for special servicing on the
securities it issues. As part of this process, ICCC may in the future form a
separate collection group to assist sub-servicers in the servicing of these
Commercial Mortgages. ICCC has established guidelines for the servicing of
mortgage loans and for monitoring the performance of other loan servicers which
service mortgage loans 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,
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 periods shown:
<TABLE>
<CAPTION>
Period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------ ------------------
(dollars in millions, except for
average loan size)
<S> <C> <C>
Beginning servicing portfolio.............................................. $ 169.2 $ --
Loans added to the servicing portfolio..................................... 425.1 251.1
Loans sold servicing released and principal paydowns (1)................... (215.3) (81.9)
---------- ---------
Ending servicing portfolio................................................. $ 379.0 $ 169.2
========== =========
Number of loans serviced................................................... 443 559
Average loan size.......................................................... $ 856,000 $ 303,000
Weighted average interest rate............................................. 8.09% 8.45%
</TABLE>
_______________
(1) Includes normal principal amortization and prepayments.
ICCC currently originates or purchases all of its mortgage loans on a
"servicing released" basis and thereby acquires the servicing rights. Mortgage
loans 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 mortgage loans. The rights of any party to service mortgage loans
for a fee are commonly referred to as "mortgage servicing rights" or "MSRs."
ICCC subcontracts all of its servicing obligations under Commercial Mortgages
originated or purchased on a "servicing released basis" pursuant to the Sub-
Servicing Agreements with terms that are in accordance with ICCC's
13
<PAGE>
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 0.03% to 0.25%
per annum on the declining principal balances of the loans sub-serviced or an
amount based on the type and number of loans serviced. Each sub-servicer is
required to pay all expenses related to the performance of its duties under the
Sub-Servicing Agreements. 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.
ICCC may terminate a Sub-Servicing Agreement with any subservicer upon the
occurrence of one or more of the events specified in the Sub-Servicing
Agreements. 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, ICCC has the right to
terminate any Sub-Servicing Agreement with respect to any or all of the
Commercial Mortgages sub-serviced 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
serviced under the Sub-Servicing Agreement. Each Sub-Servicing Agreement
provides that the sub-servicer may not assign any of its rights or obligations
with respect to the Commercial Mortgages serviced for ICCC without ICCC's
consent. With respect to Commercial Mortgages that support CMOs or CMBSs, ICCC
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.
The Company issues CMBSs or CMOs backed by the Commercial Mortgages it
originates or purchases through its Conduit Operations or Long-Term Investment
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, 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 and special servicing roles. In the future, the Company may act
as special servicer. The Company believes that acting as special servicer will
allow it to monitor and manage those matters of significant risk associated with
the Commercial Mortgages. In this manner, the Company believes it will be best
positioned to protect any beneficial interest it may retain in the trusts it
creates. However, the Company reserves the right to act as either the master
servicer, the special servicer, both or neither in the future.
When ICCC purchases Commercial Mortgages that include the associated
Commercial Mortgage servicing rights ("CMSRs") or originates Commercial
Mortgages, the allocated cost of the servicing rights will be reflected on its
financial statements as CMSRs. CMSRs will be amortized in proportion to, and
over the period of, expected future net servicing income. SFAS No. 125 requires
that a portion of the cost of originating or purchasing a mortgage loan be
allocated to the mortgage loan servicing rights based on its fair value relative
to the 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 sub-
servicing, an inflation rate, ancillary income per Commercial
14
<PAGE>
Mortgage, a prepayment rate, loss severity, a default rate and a discount rate
commensurate with the risks involved. During periods of declining interest
rates, prepayments on mortgage loans increase as borrowers look to refinance at
lower rates, resulting in a decrease in the value of the mortgage loan servicing
portfolio. Mortgage loans with higher interest rates are more likely to result
in prepayments.
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. 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 believes it
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 CMOs
issued by the Long-Term Investment Operations face 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.
In acquiring residential loans and residential mortgage-backed securities, the
Company will compete with other REITs, investment banking firms, savings and
loan associations, banks, mortgage bankers, insurance companies, mutual funds,
and other entities purchasing mortgage assets, most of which have greater
financial resources than the Company. The existence of these competitors may
increase competition for the available supply of residential mortgage assets
suitable for purchase by the Company. Increased competition for the acquisition
of eligible residential mortgage assets or a diminution in the supply could
result in higher prices and, thus, lower yields on such residential mortgage
assets.
Employees
All employees and operating management of the Company are employees of ICCC.
As of December 31, 1998, ICCC had approximately 48 employees, as compared to
approximately 50 employees at December 31, 1997. The Company believes that
relations with its employees are good. The Company is not a party to any
collective bargaining agreement.
Risk Factors
In addition to the other information in the Form 10-K, the following factors
should be considered in evaluating the Company and its business.
15
<PAGE>
Current Conditions of Mortgage Industry Adversely Affect Our Liquidity and Our
Ability to Pay Dividends
We must access liquidity to continue our operations, grow our asset base and
pay dividends. We have traditionally derived our liquidity from three sources:
. financing facilities provided to us by others to acquire mortgage assets;
. whole loan sales and securitizations of acquired mortgage loans, and
. sales of equity securities.
Margin Calls on Financing Facilities Have Adversely Affected Our Operations
and Resulted in Losses
Until recently, we have not had difficulty in obtaining favorable financing
facilities or in selling acquired mortgage loans. However, recently the mortgage
industry has experienced substantial turmoil as a result of a lack of liquidity
in the secondary markets. Investors have expressed unwillingness to purchase
interests in securitizations due in part to:
. higher than expected credit losses on many companies' securitization
interests, and
. the widening of returns expected by institutional investors on
securitization interests over the prevailing Treasury rate.
As a result, many mortgage loan originators, including our company, have been
unable to access the securitization market on favorable terms and some other
companies have declared bankruptcy. Originators have been required to sell loans
on a whole loan basis and liquidate holdings of mortgage-backed securities to
repay financing facilities. However, the large influx of loans available for
sale on a whole loan basis has affected the pricing offered for these loans
which in turn has reduced the value of the collateral underlying the financing
facilities. Therefore, many providers of financing facilities have initiated
margin calls. Margin calls result when our lenders evaluate the market value of
the collateral securing our financing facilities and require us to provide them
with additional equity or collateral to secure our borrowings. Late in the third
quarter and in the fourth quarter of 1998, we experienced substantial margin
calls on borrowings secured by mortgage loans and mortgage backed securities
which we were unable to sell through securitizations. We delayed the payment of
our third quarter dividend and sold mortgage-backed securities and mortgage
loans on a whole loan basis as a result of these margin calls. We did not
declare a dividend for the fourth quarter of 1998. Future margin calls will
adversely affect our ability to pay dividends in future periods.
Our financing facilities are short-term borrowings. Due to the turmoil in the
mortgage industry, many traditional providers of financing facilities have been
unwilling to provide facilities on favorable terms or at all. If we cannot renew
or replace maturing borrowings, we will have to sell on a whole loan basis the
loans securing these facilities and, depending upon market conditions, these
sales may result in substantial losses.
Deterioration of Secondary Market Has Adversely Affected Our Operations
If we cannot profitably securitize or sell on a whole loan basis a sufficient
number of our mortgage loans in a particular financial reporting period, then
our revenues for such period will decline. As a result of turmoil in the
securitization market, many mortgage lenders, including our company, have been
required to sell mortgage loans on a whole loan basis under adverse market
conditions in order to generate liquidity. Many of these sales were made at
prices lower than our carrying value of the mortgage loans and we experienced
losses. We cannot assure you that we will be able to continue to sell our loans
on a whole loan basis profitably or at all.
Gains on sales from our securitizations have historically represented most of
our earnings. Our ability to complete securitizations is dependent upon general
conditions in the securities and secondary markets and the credit quality of the
mortgage loans. We are currently unable to profitably access the securitization
market to sell our loans. To improve liquidity and to meet our obligations to
our financing sources, we were required to sell our mortgage assets. Our future
cash flows will be negatively impacted if the turmoil in the mortgage-backed
securities market continues and by the elimination of the cash flows that would
have been realized from the securities that are sold.
In addition, delays in closing sales of our loans increase our risk by
increasing the warehousing period for the loans, further exposing our company to
credit risk. If we continue to be unable to profitably complete securitizations
or whole loan sales, we will be required to utilize other sources of financing
which may be on less favorable terms or not
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available to all. These trends may continue to adversely affect our operations
and our ability to pay dividends in the future.
Inability to Access Capital Markets and Generate Liquidity will Continue to
Adversely Affect Our Operations and May Result in Losses
We do not believe our current operating cash flows are sufficient to fund our
lending activities and the growth of our mortgage assets, to pay cash dividends
at historical levels. We continue to explore alternatives for increasing our
liquidity through additional asset sales and capital raising efforts. However,
we cannot assure you that any of these alternatives will be available to us, or
if available, that we will be able to negotiate favorable terms. If we cannot
raise cash by selling debt and equity, we may be forced to sell our assets at
unfavorable prices or discontinue various business activities. Our inability to
access the capital markets will have a negative impact on our earnings and
ability to pay dividends.
REIT provisions of the Internal Revenue Code require us to distribute to our
stockholders substantially all of our taxable income. These provisions restrict
our ability to retain earnings at our long term-investment operations and renew
capital for our business activities. We may decide in future periods not to be
treated as a REIT which would cause us to be taxed at the corporate level and to
cease paying regular dividends. Also, to date a large portion of our dividends
to stockholders consisted of distributions by our conduit operations subsidiary
to our long-term investment operations entity. However, our conduit operations
was not and is not required under the REIT provisions to make these
distributions. Since we are trying to retain earnings for future growth and due
to liquidity concerns, we may not cause our conduit operations subsidiary to
make these distributions in the future. This would materially affect the amount
of dividends, if any, paid by us to our stockholders.
Our Prior History is Not Reflective of Future Performance
Our historical financial performance is of limited relevance in predicting our
future performance. We began our operations in January 1997. Although our
mortgage loan originations and total revenues have grown substantially, we had a
net loss for the year ended December 31, 1998. We believe that our origination
levels and profitability will continue to be adversely affected if the turmoil
in the mortgage industry continues. Our future operating results will depend
largely upon our ability to expand our long-term investment operations and our
conduit operations. We cannot assure you that we will be able to successfully
grow or that our operations will be profitable in the future. We cannot assure
you that any prior rates of growth can be sustained or that they are indicative
of future results. It is unlikely that any of our future dividends will be equal
to or more than those dividends we have paid in the past.
The loans we purchased to date and included in our securitizations have been
outstanding for a relatively short period of time and our delinquency and loss
experience to date may not be indicative of future results. It is unlikely that
we will be able to maintain our delinquency and loan loss ratios at their
present levels as our portfolio becomes more seasoned.
Our Borrowings and Substantial Leverage May Cause Losses
Risks of Use of Collateralized Mortgage Obligations
To grow our investment portfolio, we borrow a substantial portion of the
market value of substantially all of our investments in mortgage loans and
mortgage-backed securities. We currently prefer to use collateralized mortgage
obligations as financing vehicles to increase our leverage, since mortgage loans
held for collateralized mortgage obligation collateral are retained for
investment rather than sold in a secondary market transaction. Retaining
mortgage loans as collateralized mortgage obligation collateral exposes our
operations to greater credit losses than the use of securitization techniques
that are treated as sales. In creating a collateralized mortgage obligation, we
make a cash equity investment to fund collateral in excess of the amount of the
securities issued. If we experience credit losses on the pool of loans subject
to the collateralized mortgage obligation greater than we expected, the value of
our equity investment decreases and we would have to adjust the value of the
investment in our financial statements.
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Renewal Risks of Financing Facilities
We rely on short-term borrowings to purchase long-term mortgage loans and
mortgage-backed securities. If we cannot renew or replace borrowings that are
about to expire, we may have to sell all or a portion of these loans and
investment securities. We could incur losses in this event depending upon market
conditions. In addition, we may have to terminate hedge positions, which could
result in further losses.
Cost of Borrowings May Exceed Return on Assets
The cost of borrowings under our financing facilities corresponds to a
referenced interest rate plus or minus a margin. The margin varies depending on
factors such as the nature and liquidity of the underlying collateral and the
availability of financing in the market. We will experience net interest losses
if the returns on our assets financed with borrowed funds fail to cover the cost
of our borrowings.
Default Risks Under Financing Facilities
If we default under our collateralized borrowings, our lenders could force us
to liquidate the collateral. If the value of the collateral is less than the
amount borrowed, we would be required to pay the difference in cash. If we were
to declare bankruptcy, some of our reverse repurchase agreements may obtain
special treatment and our creditors would then be allowed to liquidate the
collateral without any delay. On the other hand, if a lender with whom we have a
reverse repurchase agreement declares bankruptcy, we might experience difficulty
repurchasing our collateral, or enforcing our claim for damages, and it is
possible that our claim could be repudiated and we could be treated as an
unsecured creditor. If this occurs, our claims would be subject to significant
delay and we may receive substantially less than our actual damages.
Risk of Lack of Return of Investment on Liquidation
We have pledged a substantial portion of our assets to secure the repayment of
collateralized mortgage obligations issued in securitizations, our financing
facilities or other borrowings. We will also pledge substantially all of our
current and future commercial mortgages to secure borrowings pending their
securitization or sale. The cash flows we receive from our investments that have
not yet been distributed, pledged or used to acquire commercial mortgages or
other investments may be the only unpledged assets available to our unsecured
creditors and you if our company were liquidated.
Interest Rate Fluctuations May Adversely Affect Our Operating Results
Our operations may be adversely affected by rising and falling interest rates.
Higher interest rates may discourage potential borrowers from refinancing
mortgages or borrowing to purchase or expand commercial property. This may
decrease the amount of mortgages available to be acquired by our conduit
operations. If short-term interest rates exceed long-term interest rates, there
is a higher risk of increased loan prepayments, as borrowers may seek to
refinance their mortgage loans at lower long-term interest rates. Increased loan
prepayments could lead to a reduction in the number of loans we service, the
fees we receive for loan servicing and our loan servicing income.
We are subject to the risk of rising mortgage interest rates between the time
we commit to purchase commercial mortgages at a fixed price and the time we sell
or securitize those mortgages. An increase in interest rates will generally
result in a decrease in the market value of commercial mortgages that we have
committed to purchase at a fixed price, but have not yet sold or securitized.
Risks of Repricing of Assets and Liabilities
Our principal source of revenue is net interest income or net interest spread,
which is the difference between the interest we earn on our interest earning
assets and the interest we pay on our interest bearing liabilities. The rates we
pay on our borrowings are independent of the rates we earn on our assets and may
be subject to more frequent periodic rate adjustments. Therefore, we could
experience a decrease in net interest income or a net interest loss because the
interest rates on our borrowings could increase faster than the interest rates
on our assets. If our net interest spread becomes negative, we will be paying
more interest on our borrowings than we will be earning on our assets and we
will be exposed to a significant risk of loss.
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Additionally, the rates paid on our borrowings and the rates received on our
assets may be based upon different indices (i.e., LIBOR, U.S. Treasuries, etc.).
If the index used to determine the rate on our borrowings increases faster than
the index used to determine the rate on our assets, we will experience a
declining net interest spread which will have a negative impact on our
profitability and may result in losses.
Risks of Adjustable Rate Mortgages
A significant portion of the mortgage assets held by our long-term investment
operations are adjustable rate mortgages or bear interest based upon short-term
interest rate indices. We generally fund these mortgage assets with borrowings.
To the extent that there is a difference between the interest rate index used to
determine the interest rate on our adjustable rate mortgage assets and the
interest rate index used to determine the borrowing rate for our related
financing, our business may be negatively impacted.
Interest Rate Caps
Adjustable rate mortgages typically have interest rate caps which limit
interest rates charged to the borrower during any given period. Our borrowings
are not subject to similar restrictions. In a period of rapidly increasing
interest rates, the interest rates we pay on our borrowings could increase
without limitation, while the interest rates we earn on our adjustable rate
mortgage assets would be capped. If this occurs, our net earnings could be
significantly reduced or we could suffer a net interest loss.
Payment Caps
Some of our adjustable rate mortgages may be subject to payment caps meaning
some portion of the interest accruing on the mortgage is deferred and added to
the outstanding principal. Our borrowings do not have similar provisions. This
could cause us to receive less cash on our adjustable rate assets than the
interest due on our related borrowings. Also, the increased principal amount
outstanding as a result of interest deferral may result in a higher rate of
defaults on these loans.
Our Quarterly Operating Results May Fluctuate
Our results of operations, and more specifically our earnings, may
significantly fluctuate from quarter to quarter based on several factors,
including:
. changes in the amount of loans we originate;
. differences between our cost of funds on borrowings and the average
interest rates earned on our loans;
. inability or decisions not to complete significant bulk whole loan sales or
securitizations in a particular quarter, and
. problems generally affecting the mortgage loan industry.
A delay in closing a particular mortgage loan sale or securitization would
also increase our exposure to interest rate fluctuations by lengthening the
period during which our variable rate borrowings under our warehouse facilities
are outstanding. If we were unable to sell a sufficient number of mortgage loans
at a premium during a particular reporting period, our revenues for that period
would decline, which could have a material adverse affect on our operations. As
a result, our stock price could also fluctuate.
Our Share Prices Have Been and May Continue to be Highly Volatile
The market price of our common stock has been extremely volatile. During the
third quarter of 1998 our stock reached a high of $11.63 and a low of $1.81. On
December 31, 1998, the closing sale price was $5.38. The market price of our
common stock is likely to continue to be highly volatile and could be
significantly affected by factors including:
. availability of liquidity;
. volatility in the securitization market;
. whole loan sale pricing;
. margin calls by warehouse lenders;
. actual or anticipated fluctuations in our operating results;
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. interest rates;
. prepayments on mortgages;
. valuations of securitization related assets;
. cost of funds, and
. general market conditions.
In addition, significant price and volume fluctuations in the stock market
have particularly affected the market prices for the common stocks of specialty
finance companies such as ours. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of our common
stock.
If our results of operations fail to meet the expectations of securities
analysts or investors in a future quarter, the market price of our common stock
could also be materially adversely affected.
Prepayments of Commercial Mortgages May Adversely Affect Our Operations
To reduce our exposure on prepayment, we generally prohibit our commercial
mortgage borrowers (other than condo-conversions and other multi-family
properties) from prepaying the mortgage for a period of time and penalize the
borrowers for early prepayment. However, mortgage prepayment rates vary from
time to time which may change the amount of our net interest income. Mortgage
prepayments generally increase when fixed mortgage interest rates fall below the
then-current interest rates on outstanding adjustable rate mortgage loans.
Prepayments on mortgage loans are also affected by the terms and credit grades
of the loans and general economic conditions. Most of our adjustable rate
mortgages and those backing mortgage-backed securities are originated within six
months of the time we purchased the mortgages and generally bear initial
interest rates which are lower than their "fully-indexed" amount (the applicable
index plus the margin). If we acquire these mortgages at a premium and they are
prepaid prior to or soon after the time of adjustment to a fully-indexed rate,
we would not have received interest at the fully-indexed rate during such
period. This means we would lose the opportunity to earn interest at that rate
over the expected life of the mortgage. Also, if prepayments on our adjustable
rate mortgage loans increase when interest rates are declining, our net interest
income may decrease if we cannot reinvest the prepayments in mortgage assets
bearing comparable rates.
Such prepayment restrictions can, but do not necessarily, provide a deterrent
to prepayments. In addition, the borrower on a commercial mortgage may not be
able to pay all or a portion of any required prepayment charges. This may occur
where the prepayment results from acceleration of the commercial mortgage
following a payment default. At the time any prepayment charges are required to
be made in connection with a defaulted commercial mortgage, foreclosure proceeds
may not be sufficient to make such payments. We also do not know that the
obligation to pay such prepayment charge will be enforceable under applicable
law.
We currently acquire mortgages on a "servicing released" basis, meaning we
acquire both the mortgages and the rights to service them. This strategy
requires us to pay a higher purchase price or premium for the mortgages. If any
mortgage loans that we acquired at a premium are prepaid, generally accepted
accounting principles require us to immediately write off any remaining
capitalized premium amount, which would decrease our interest income.
Value of Our Portfolio of Mortgage-Backed Securities May be Adversely Affected
We invest in mortgage-backed securities known as "interest-only," "principal-
only," residual interest and subordinated securities. These securities are
either created through our own securitizations or those of third parties.
Investments in residual interest and subordinated securities are much riskier
than investments in senior mortgage-backed securities because these subordinated
securities bear all credit losses prior to the related senior securities. On a
percentage basis, the risk associated with holding residual interest and
subordinated securities is greater than holding the underlying mortgage loans
directly due to the concentration of losses in the subordinated securities.
We estimate future cash flows from these securities and value them utilizing
assumptions based in part on projected discount rates, mortgage loan prepayments
and credit losses. If our actual experience differs from our assumptions, we
would be required to reduce the value of these securities. The market for our
asset-backed securities is extremely limited and we cannot assure you that we
could sell these securities at their reported value or at all or that we could
recoup our initial investment.
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We also bear the risk of loss on any mortgage-backed securities we purchase in
the secondary mortgage market. If third parties have been contracted to insure
against these types of losses, we would be dependent in part upon the
creditworthiness and claims paying ability of the insurer and the timeliness of
reimbursement in the event of a default on the underlying obligations. The
insurance coverage for various types of losses is limited, and we bear the risk
of any losses in excess of the limitation or outside of the insurance coverage.
In addition, we may not obtain our anticipated yield or we may incur losses if
the credit support available within certain mortgage-backed securities is
inadequate due to unanticipated levels of losses, or due to difficulties
experienced by the credit support provider. If we encounter delays or
difficulties in servicing mortgage-backed securities, it may cause greater
losses and, therefore, greater resort to credit support than was originally
anticipated, and may cause a rating agency to downgrade certain classes of our
securities.
The commercial mortgage-backed security market is newer and has a relatively
small amount of total outstanding principal amount of issues compared to the
market for residential mortgage-backed securities. Thus, rating agencies have
not had substantial experience over a long period through different economic
cycles in assigning ratings to commercial mortgage-backed securities or
monitoring previously rated commercial mortgage-backed securities. Difficulties
encountered in servicing may cause a rating agency to reevaluate or downgrade
the credit quality of an issue of commercial mortgage-backed securities.
We May Undertake Additional Risks by Depending on Securitizations
Potential Losses Related to Recourse Obligations
Mortgage-backed securities issued in connection with our securitizations have
been non-recourse to us, except in the case of a breach of standard
representations and warranties made by us when the loans are securitized. While
we have recourse against the sellers of mortgage loans, we cannot assure you
that they will honor their obligations. We also engaged in bulk whole loan sales
pursuant to agreements that provide for recourse by the purchaser against us. In
some cases, the remedies available to a purchaser of mortgage loans from us are
broader than those available to us against those who sell us these loans. If a
purchaser exercises its rights against us, we may not always be able to enforce
whatever remedies we may have against our sellers.
Dependence on Securitizations for Liquidity
We rely significantly upon securitizations to generate cash proceeds to repay
borrowings and to create credit availability. Gains on sales from our
securitizations represent a significant portion of our earnings. Several factors
are expected to affect our ability to complete securitizations of our commercial
mortgages, including:
. conditions in the securities markets;
. the credit quality of the commercial mortgages originated or purchased by
our conduit operations;
. the volume of our commercial mortgage originations and purchases, and
. our ability to obtain credit enhancement.
If we were unable to securitize profitably a sufficient number of our
commercial mortgages in a particular financial reporting period, then it could
result in lower income or a loss for that period. During the fourth quarter of
1998, we did not perform any securitizations. Any reduction in our ability to
complete securitizations would require us to utilize other sources of financing
which may be on less favorable terms.
First Loss Risk Securities
The market for first loss risk securities (securities that first take a loss
when mortgages are not paid by the borrowers) is generally limited. In
connection with our securitizations, we will endeavor to sell all securities
subjecting us to a first loss risk. If we cannot sell these securities, then we
may be required to hold them for an extended period, subjecting us to a first
loss risk.
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Risk in Reduction in Demand for Commercial Mortgages
If we cannot obtain a sufficient amount of commercial mortgages meeting our
criteria, our operations will be adversely affected. The availability of these
commercial mortgages is dependent in part upon the size and level of activity in
the commercial and multifamily real estate lending market which is affected by:
. interest rates;
. regional and national economic conditions;
. fluctuations in commercial and multifamily property values, and
. general regulatory and tax developments.
If our mortgage loan purchases decrease, we will have:
. decreased economies of scale;
. higher origination costs per loan;
. reduced fee income;
. smaller gains on the sale of commercial mortgages, and
. an insufficient volume of loans to effect securitizations which requires us
to accumulate loans over a longer period.
The Value of our Mortgage Servicing Rights is Subject to Adjustment
When we purchase loans that include the associated servicing rights, the
allocated cost of the servicing rights is reflected on our financial statements
as mortgage servicing rights. To determine the fair value of these servicing
rights, we use assumptions to estimate future net servicing income including
projected discount rates, mortgage loan prepayments and credit losses. If actual
prepayments or defaults with respect to loans serviced occur more quickly than
we originally assumed, we would have to reduce the carrying value of our
mortgage servicing rights. We do not know if our assumptions will prove correct.
Our Operating Results Will be Affected by the Results of Our Hedging Activities
To offset the risks associated with our conduit operations, we enter into
transactions designed to hedge our interest rate risks. To offset the risks
associated with our long-term investment operations, we attempt to match the
interest rate sensitivities of our adjustable rate mortgage assets held for
investment with the associated financing liabilities. Our management determines
the nature and quantity of the hedging transactions based on various factors,
including market conditions and the expected volume of commercial mortgage loan
originations and purchases. We do not limit management's use of certain
instruments in such hedging transactions. Although our hedging program currently
qualifies for hedge accounting under generally accepted accounting principles,
we cannot assure you that our hedging transactions will offset our risks of
loss, and we could incur significant losses.
Our Delinquency Ratios and Our Performance May be Adversely Affected by the
Performance of Parties Who Sub-Service Our Loans
We contract with third-party sub-servicers for the sub-servicing of all our
mortgage loans, including those in our securitizations, and our operations are
subject to risks associated with inadequate or untimely servicing. Poor
performance by a sub-servicer may result in greater than expected delinquencies
and losses on our loans. A substantial increase in our delinquency or
foreclosure rate could adversely affect our ability to access the capital and
secondary markets for our financing needs. Also, with respect to loans subject
to a securitization, greater delinquencies would adversely impact the value of
any "interest-only," "principal-only" and subordinated securities we hold in
connection with that securitization.
In a securitization, relevant agreements permit us to be terminated as
servicer under specific conditions described in those agreements, such as the
failure of a sub-servicer to perform certain functions within specific time
periods. If, as a result of a sub-servicer's failure to perform adequately, we
were terminated as servicer of a securitization, the value of any servicing
rights held by us would be adversely impacted.
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Costs of Compliance with Americans with Disabilities Act of 1990 May Be
Substantial
Under the Americans with Disabilities Act of 1990 all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. If a mortgaged property securing one of our commercial
mortgages does not comply with the Disabilities Act, we, or the borrower, as the
case may be, is likely to incur costs of complying with the Act. In addition,
noncompliance could result in the imposition of fines by the federal government
or an award of damages to private litigants.
Risks of Originating and Investing in Mortgages and Commercial Mortgages
General
Risk of Borrower Defaults
During the time we hold commercial mortgages for investment we are subject to
risks of borrower defaults, bankruptcies and losses that are not covered by
insurance (such as those occurring from earthquakes or floods). Commercial
mortgage lending is generally viewed as a greater risk than residential mortgage
lending partly because it typically involves larger loans. Further, the
repayment of commercial mortgages secured by income-producing properties is
typically dependent upon the tenant's ability to meet its obligations under the
lease relating to the property. A borrower default may subject us to a loss on
the mortgage. Defaulted commercial mortgages will also cease to be eligible
collateral for borrowings, and they we will have to be financed out of other
funds until they are ultimately sold.
Profitability of Property
Profits of commercial properties are dependent on the performance and
viability of the property. The property manager is responsible for:
. responding to changes in the local market;
. planning and implementing the rental structure, and
. advising the borrower so that maintenance and capital improvements can be
carried out in a timely fashion.
All of these factors may impact the borrower's ability to make payments under
the commercial mortgage, which may adversely affect the timing and amount of
payments we receive with respect to the commercial mortgages.
Foreclosure
Commercial mortgages generally are non-recourse to the borrower. In the event
of foreclosure on a commercial mortgage, we may experience a loss if the value
of the property and other collateral securing the commercial mortgage is less
than the unpaid amount on the mortgage. Also, we may experience costs and delays
involved in enforcing rights of a property owner against tenants in default
under the terms of their leases. These factors may adversely affect the timing
and amount of payment we receive on foreclosed commercial mortgages.
The Value of Our Commercial Mortgages May Be Adversely Affected Due to the
Underlying Commercial Properties
A borrower's ability to meet its obligations under a commercial mortgage is
affected by several factors. These factors include the ability to lease, renew
and relet the space, regional and national economic conditions, increased costs
of operating a property and the following:
Multifamily Properties:
. construction of additional housing units;
. local military base closings;
. current or future rent stabilization and rent control laws, and
. the level of mortgage interest rates which may encourage tenants to
purchase homes.
Retail, Office and Industrial Properties:
. tenants' inability to meet lease obligations;
. bankruptcy of a tenant;
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. decline in sales in the retail properties;
. delays in enforcing the lessor's rights;
. costs associated with reletting;
. health of the retail industry;
. operations of an anchor tenant;
. a shift in consumer demand due to demographic changes;
. changes in consumer preference;
. dependency on a single tenant;
. a significant concentration of tenants in a particular business or
industry;
. cash for general capital improvements, and
. reduced demand for industrial space or decline in a particular industry
segment.
Self-Storage Facilities:
. low acquisition costs and break-even occupancy;
. conversion of self-storage facilities requiring substantial improvements
and repairs;
. decreased demand;
. increased competition;
. the liquidation value, and
. environmental risks.
Congregate Care Facilities:
. significant governmental regulation of the ownership, operation,
maintenance and financing.
Geographic Concentration of Mortgage Loans Has Higher Risks
We do not set limitations on the percentage of our mortgage asset portfolio
composed of properties located in any one area (whether by state, zip code or
other geographic measure). Concentration in any one area increases our passive
exposure to the economic and natural hazard risks associated with that area. We
estimate that a high concentration of the loans included in securitizations in
which we hold subordinated interests are secured by properties in California.
Certain parts of California have experienced an economic downturn in past years
and have suffered the effects of certain natural hazards.
Risks of Balloon Payments
A substantial percentage of our commercial mortgages have a balloon payment
due at its maturity date. These loans involve a greater risk than loans which
are paid off gradually since the borrower will typically depend on its ability
to fully refinance the commercial mortgage or sell the related property at a
price sufficient to permit the borrower to make the balloon payment.
Environmental Risks May Adversely Affect Value of Underlying Commercial
Mortgages
Contamination of real property may give rise to a lien on that property to
assure payment of the cost of clean up. Contamination may also result in
liability to the lender for that cost. Such contamination may also reduce the
value of the property. Our servicing guidelines require us to obtain an
environmental site assessment of a mortgaged property prior to acquiring title
or assuming its operation. However, this may not protect us from potential
liability for an adverse environmental condition at any mortgaged property. If
we are or become liable, we can bring an action for contribution against the
owner or operator who created the environmental hazard, but that person or
entity may be bankrupt or otherwise judgment proof.
We Undertake Additional Risks by Acquiring and Investing in Residential Mortgage
Loans
We may also make investments in residential mortgage loans and mortgage-backed
securities on residential properties. Some of the risks applicable to commercial
mortgages are also applicable to residential mortgage loans, which include the
following:
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Risk of Failure to Obtain Credit Enhancements
We do not obtain credit enhancements such as mortgage pool or special hazard
insurance for all of our mortgage loans and investments. Borrowers may obtain
private mortgage insurance, but we only require this insurance in limited
circumstances. During the time we hold mortgage loans for investment, we are
subject to risks of borrower defaults and bankruptcies and special hazard losses
that are not covered by standard hazard insurance (such as losses occurring from
earthquakes or floods). If a borrower defaults on a mortgage loan that we hold,
we bear the risk of loss of principal to the extent there is any deficiency
between the value of the related mortgaged property and the amount owing on the
mortgage loan. In addition, since defaulted mortgage loans are not considered
eligible collateral under our borrowing arrangements, we bear the risk of being
required to finance these loans with funds other than borrowed funds until they
are ultimately liquidated.
Risks of Delay in Collecting Mortgage Loan Proceeds
We could encounter substantial delays in the foreclosure of defaulted mortgage
loans, with corresponding delays in our receipt of related proceeds. State and
local statutes may delay or prevent our foreclosure on, or sale of, the
residential mortgaged property and they may prevent us from receiving proceeds
sufficient to repay all amounts due on the related mortgage loan. Some
properties that may collateralize our residential mortgage loans may have unique
characteristics or may be subject to seasonal factors that could materially
prolong the time period required to resell the property.
Seller's Inability to Repurchase Residential Mortgage Loans Following Breach
of Representations Could Cause Loan Losses
When we buy residential mortgage loans, we anticipate that the seller will
agree to repurchase any mortgage loan if there is fraud or misrepresentation
with respect to the sale of the mortgage loan. We will provide similar
representations and warranties when we sell or pledge the residential mortgage
loans as collateral for mortgage-backed securities. However, we will be at a
risk for loss if the seller does not perform its repurchase obligations.
Risk of Inadequate Sub-servicing Could Negatively Impact Mortgage Loan
Repayments
We intend to contract with third-party sub-servicers for the sub-servicing of
all residential mortgage loans we hold for investment. We will be subject to
risks associated with inadequate or untimely services, such as the risk that a
sub-servicer becomes financially unsound or cannot perform its duties.
Additionally, each of our sub-servicing agreements with our third-party sub-
servicers will likely provide a termination fee if the sub-servicer is
terminated without cause. This will limit our alternatives in the event we
desire to change sub-servicers.
Competition
In acquiring residential mortgage loans and securities we will generally
compete with the same type of entities that purchase commercial mortgages. The
existence of these competitors may increase competition for the available supply
of residential mortgage loans. Increased competition for the acquisition of
eligible residential mortgage loans or mortgage-backed securities or a decrease
in the supply could result in higher prices and, thus, lower yields on such
residential mortgage assets.
Intense Competition for Commercial Mortgage Loans May Adversely Affect Our
Operations
We compete in purchasing commercial mortgages and issuing commercial mortgage-
backed securities with:
. other mortgage conduit programs;
. investment banking firms;
. savings and loan associations;
. banks;
. thrift and loan associations;
. finance companies;
. mortgage bankers;
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. insurance companies;
. other lenders, and
. other entities purchasing mortgage assets.
Continued consolidation in the mortgage banking industry may adversely affect
us by reducing the number of current sellers to our conduit operations and our
potential customer base. As a result, we may have to purchase a larger
percentage of mortgage loans from a smaller number of sellers which could cause
us to have to pay higher premiums for loans.
Furthermore, 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 to attract residents, retail correspondents,
tenants and customers. The principal means of competition are price, location
and the nature and condition of the facility to be leased. Increased competition
could adversely affect income from the market value of the mortgaged property.
In addition, the business conducted at each mortgaged property may face
competition from other industries and industry segments.
Lease Terms May Affect Value of Commercial Mortgage
In some cases, lease terms and conditions of commercial and multifamily
properties could have a material adverse effect on the value of the commercial
mortgage. If the lease contains provisions inconsistent with the commercial
mortgage then the lease will have priority over the commercial mortgage.
Junior Mortgages May Affect Our Rights
In some circumstances, our commercial mortgages may be secured by junior
mortgages which are subordinate to senior mortgages or deeds of trust held by
other lenders or institutional investors. In these cases, our rights would be
inferior to the holders of the senior mortgage or deed of trust. This includes
rights to receive rents, hazard insurance and condemnation and foreclosure
proceeds and satisfaction of the mortgage in foreclosure litigation or a
defaulted senior loan.
Lack of Experience of the Manager in Managing a Commercial Mortgage REIT
We depend on the Manager, and the skill of its officers and employees, to
monitor our day-to-day operations, including, selecting, structuring and
monitoring our assets and borrowings. The Manager is a recently formed company
with no significant assets and no significant prior history of operations. The
Manager has not previously acted as a Manager or advisor for any other company.
Although the officers of the Manager have experience operating Impac Mortgage,
also a REIT, none of them has any prior experience in managing a commercial
mortgage REIT.
Termination of the Management Agreement Could Adversely Affect Our Operating
Results
We may terminate the Management Agreement with the Manager for any reason with
60 days' written notice. If we terminate or do not continue the agreement
without a reason, then we will have to pay the Manager a termination or non-
renewal fee. The fee is determined by an independent appraisal. If we pay this
fee it could have an adverse effect on our business and results of operations
and reduce our distributions.
If We Fail to Maintain Our REIT Status We May be Subject to Taxation as a
Regular Corporation
Consequences if We Fail to Qualify as a REIT
We believe that we have operated and intend to continue to operate in a manner
that enables us to meet the requirements for qualification as a REIT for Federal
income tax purposes. We have not requested, and do not plan to request, a ruling
from the Internal Revenue Service that we qualify as a REIT.
You should be aware that opinions of counsel are not binding on the IRS or any
court. Moreover, no assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. Both
26
<PAGE>
the validity of the opinion of counsel and our continued qualification as a REIT
will depend on our satisfaction of certain asset, income, organizational and
stockholder ownership requirements on a continuing basis.
If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to stockholders in computing our taxable income and would be
subject to Federal income tax at regular corporate rates. We also could be
subject to the Federal alternative minimum tax. Unless we are entitled to relief
under specific statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Therefore, if we lose our REIT status, the funds available for distribution to
you would be reduced substantially for each of the years involved.
Effect of Distribution Requirements
As a REIT, we are subject to annual distribution requirements, which limit the
amount of cash we have available for other business purposes, including amounts
to fund our growth.
Other Tax Liabilities
Even if we qualify as a REIT, we may be subject to certain Federal, state, and
local taxes on our income, property and operations that could reduce operating
cash flow.
Recent Developments
On February 1, 1999, President Clinton announced his Fiscal Year 2000 Budget
Proposal. The Budget Proposal includes a provision that would prohibit a REIT
from holding securities representing more than 10% of the vote or value of all
classes of stock of an issuer, other than a qualified REIT subsidiary or another
REIT. The proposal, however, would provide an exception so that REITs could have
certain types of "taxable REIT subsidiaries." Under the proposal, there would be
two types of taxable REIT subsidiaries, a "qualified independent contractor
subsidiary" and a "qualified business subsidiary." A number of constraints would
be imposed on a taxable REIT subsidiary to ensure that a REIT could not, through
a taxable REIT subsidiary, engage in substantial non-real estate activities, and
also to ensure that the taxable REIT subsidiary pays a corporate level tax on
its earnings. For example, the value of all taxable REIT subsidiaries owned by a
REIT could not represent more that 15% of the value of the REIT's total assets
and a taxable REIT subsidiary would not be entitled to deduct any interest
incurred on debt funded directly or indirectly by the REIT. This proposal would
be effective after the date of enactment. REITs would be allowed to combine and
convert preferred stock subsidiaries into taxable REIT subsidiaries tax-free
prior to a certain date. There would be a transition period to allow for
conversion of preferred stock subsidiaries before the 10% vote or value test
would become effective.
Because we own 100% of the nonvoting preferred stock of Impac Commercial
Capital Corporation which represents approximately 95% of the economic value of
all classes of stock of Impac Commercial, we could not satisfy the proposed 10%
vote or value test. Our continued ownership of greater than 10% of the value of
Impac Commercial Capital Corporation could cause us to fail to qualify as a
REIT. Thus, if enacted in its present form, the proposal may limit Impac
Commercial's future activities and growth. We do not know if this proposal will
be introduced as a bill in Congress or, if it were introduced, whether it would
be enacted.
Potential Characterization of Distributions or Gain on Sale as Unrelated
Business Taxable Income to Tax-Exempt Investors
If (1) we are subject to the rules relating to taxable mortgage pools or we
are a "pension-held REIT," or (2) a tax-exempt stockholder has incurred debt to
purchase or hold our common stock or is not exempt from federal income taxation
under certain special sections of the Internal Revenue Code, or (3) the residual
REMIC interests we buy generate "excess inclusion income," then distributions to
and, in the case of a stockholder described in (2), gains realized on the sale
of common stock by, such tax-exempt stockholder may be subject to federal income
tax as unrelated business taxable income under the Internal Revenue Code.
Classification as a Taxable Mortgage Pool Could Subject Us to Increased Taxation
If we have borrowings with two or more maturities and it is secured by
mortgage loans or mortgage-backed securities and the payments made on the
borrowings are related to the payments received on the underlying assets, then
27
<PAGE>
the borrowings may be classified as a "taxable mortgage pool" under the Internal
Revenue Code. If any part of our company was treated as a taxable mortgage pool,
then our REIT status would not be impaired, but a portion of the taxable income
we generated may, under regulations to be issued by the Treasury Department, be
characterized as "excess inclusion" income and allocated to our stockholders.
Any excess inclusion income would
1. not be allowed to be offset by a stockholder's net operating losses;
2. be subject to tax as unrelated business income if a stockholder were a tax-
exempt stockholder;
3. be subject to the application of federal income tax withholding at the
maximum rate (without reduction for any otherwise applicable income tax
treaty) with respect to amounts allocable to foreign stockholders, and
4. be taxable (at the highest corporate tax rate) to us, rather than to our
stockholders, to the extent the excess inclusion income relates to stock
held by disqualified organizations (generally, tax-exempt companies not
subject to tax on unrelated business income, including governmental
organizations).
We take the position that our existing financing arrangements do not create a
taxable mortgage pool. However, the IRS may successfully maintain that our
financing arrangements do qualify as a taxable mortgage pool. In addition, we
may enter into arrangements creating excess inclusion income in the future.
Our Operations May be Adversely Affected if We are Subject to the Investment
Company Act
We intend to conduct our business at all times so as not to become regulated
as an investment company under the Investment Company Act. The Investment
Company Act exempts entities that are primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate. In order to qualify for this exemption we must maintain at least
55% of our assets directly in mortgage loans, qualifying pass-through
certificates and certain other qualifying interests in real estate. Our
ownership of certain mortgage assets may be limited by the provisions of the
Investment Company Act. If the Securities and Exchange Commission adopts a
contrary interpretation with respect to these securities or otherwise believes
we do not satisfy the above exception, we could be required to restructure our
activities or sell certain of our assets. To insure that we continue to qualify
for the exemption we may be required at times to adopt less efficient methods of
financing certain of our mortgage assets and we may be precluded from acquiring
certain types of higher-yielding mortgage assets. The net effect of these
factors will be to lower at times our net interest income. If we fail to qualify
for exemption from registration as an investment company, our ability to use
leverage would be substantially reduced, and we would not be able to conduct our
business as described. Our business will be materially and adversely affected if
we fail to qualify for this exemption.
Future Revisions in Policies and Strategies at the Discretion of our Board of
Directors May be Effected Without Stockholder Consent
Our board of directors, including a majority of our unaffiliated directors,
has established our investment and operating policies and strategies. We may:
. invest in the securities of other REITs for the purpose of exercising
control;
. offer securities in exchange for property, and
. offer to repurchase or otherwise reacquire our shares or other securities
in the future.
In October 1998, we adopted a repurchase plan to repurchase up to $5.0 million
of our common stock in the open market. As of December 31, 1998, we had not
repurchased any shares. We may also underwrite the securities of other issuers,
although we have no present intention to do so. Any of the policies, strategies
and activities may be modified or waived by our board of directors, subject in
certain cases to approval by a majority of our unaffiliated directors, without
stockholder consent.
Effect of Future Offerings May Adversely Affect Market Price of our Securities
We intend to increase our capital resources by making additional private or
public offerings of securities in the future. We do not know:
. the actual or perceived effect of these offerings;
. the timing of these offerings;
. the dilution of the book value or earnings per share of our securities then
outstanding, and
28
<PAGE>
. the effect on the market price of our securities then outstanding.
Risk Relating to Common Stock
The sale or the proposed sale of substantial amounts of our common stock in
the public market could materially adversely affect the market price of our
common stock or other outstanding securities.
Risk Relating to Preferred Stock
Our charter authorizes our board of directors to issue shares of preferred
stock and to classify or reclassify any unissued shares of common stock or
preferred stock into one or more classes or series of stock. The preferred stock
may be issued from time to time with terms as determined by our board of
directors. Our preferred stock is available for our possible future financing of
acquisitions and for our general corporate purposes without further stockholder
authorization. In October 1998, our board announced a dividend to all common
stockholders of certain shares of our Series A Junior Preferred Stock. Our
Series A Junior Preferred Stock has terms and conditions which could have the
effect of delaying, deferring or preventing a hostile change in control of our
company. Our board could authorize the issuance of shares of another class or
series of preferred stock with terms and conditions which could also have the
effect of delaying, deferring or preventing a change in control of our company
which could involve a premium price for holders of common stock or otherwise be
in their best interest. The preferred stock, if issued, may have a preference on
dividend payments which could reduce the assets we have available to make
distributions to our common stockholders.
Maryland Business Combination Statute
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
shareholders" unless exemptions are applicable. An interested shareholder is any
person who beneficially owns ten percent or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between us and an
interested shareholder unless the Board approved the transaction prior to the
party becoming an interested shareholder. The five-year period runs from the
most recent date on which the interested shareholder became an interested
shareholder. The law also requires a supermajority shareholder vote for such
transactions after the end of the five-year period. This means that the
transaction must be approved by at least:
. 80% of the votes entitled to be cast by holders of outstanding voting
shares, and
. 66% of the votes entitled to be cast by holders of outstanding voting
shares other than shares held by the interested shareholder with whom the
business combination is to be effected.
The business combination statute could have the effect of discouraging offers
to acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our shareholders' best interests.
Maryland Control Share Acquisition Statute
Maryland law provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a shareholder vote. Two-thirds of the shares eligible to vote must
vote in favor of granting the "control shares" voting rights. "Control shares"
are shares of stock that, taken together with all other shares of stock the
acquirer previously acquired, would entitle the acquirer to exercise at least
20% of the voting power in electing directors. Control shares do not include
shares of stock the acquiring person is entitled to vote as a result of having
previously obtained shareholder approval. A "control share acquisition" means
the acquisition of control shares, subject to certain exceptions.
If a person who has made (or proposes to make) a control share acquisition
satisfies certain conditions (including agreeing to pay expenses), he may compel
the Board of Directors to call a special meeting of shareholders to be held
within 50 days to consider the voting rights of the shares. If such a person
makes no request for a meeting, we have the option to present the question at
any shareholders' meeting.
If voting rights are not approved at a meeting of shareholders then we may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value. We will determine the fair value
of the shares, without regard to voting rights, as of the date of either:
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<PAGE>
. the last control share acquisition, or
. any meeting where shareholders considered and did not approve voting
rights of the control shares.
If voting rights for control shares are approved at a shareholders' meeting
and the acquirer becomes entitled to vote a majority of the shares of stock
entitled to vote, all other shareholders may exercise appraisal rights. This
means that you would be able to redeem your stock back to us for fair value.
Under Maryland law, the fair value may not be less than the highest price per
share paid in the control share acquisition. Furthermore, certain limitations
otherwise applicable to the exercise of dissenters' rights would not apply in
the context of a control share acquisition.
The control share acquisition statute would not apply to shares acquired in a
merger, consolidation or share exchange if we were a party to the transaction.
The control share acquisition statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating any such
offers, even if our acquisition would be in our shareholders' best interests.
Possible Adverse Consequences of Limits on Ownership of Shares
Our Articles of Incorporation limit ownership of our capital stock by any
single shareholder to 9.8% of the outstanding shares. The Articles also prohibit
anyone from buying shares if the purchase would result in us losing our REIT
status. This could happen if a share transaction results in fewer than 100
persons owning all of our shares or in five or fewer persons, applying certain
broad attribution rules of the Internal Revenue Code, owning 50% or more of our
shares. If you or anyone else acquires shares in excess of the ownership limit
or in violation of the ownership requirements of the Internal Revenue Code for
REITs, we:
. will consider the transfer to be null and void;
. will not reflect the transaction on our books;
. may institute legal action to enjoin the transaction;
. will not pay dividends or other distributions with respect to those shares;
. will not recognize any voting rights for those shares;
. will consider the shares held in trust for the benefit of the Company, and
. will either direct the affected person to sell the shares and turn over any
profit to us, or we will redeem the shares. If we redeem the shares, it
will be at a price equal to the lesser of:
(a) the price paid by the transferee of the shares, or
(b) the average of the last reported sales prices on the American Stock
Exchange on the ten trading days immediately preceding the date fixed
for redemption by our Board of Directors.
An individual who acquires shares that violate the above rules bears the risk
that (i) he may lose control over the power to dispose of the shares, (ii) he
may not recognize profit from the sale of such shares if the market price of the
shares increases and (iii) he may be required to recognize a loss from the sale
of such shares if the market price decreases.
Failure to Comply with Year 2000 Computer Standards
We are not aware of any material operational issues or costs associated with
preparing our internal systems for the year 2000. However, we may have
operational problems or increased costs because of our implementation of systems
and changes necessary to address year 2000 issues. Our inability to implement
such systems and changes in a timely manner could have a material adverse effect
on our business, financial condition and results of operations. See "Item 7.
Management's Discussion and Analysis and Financial Condition and Results of
Operations--Year 2000 Compliance" for a description of our compliance program.
We also rely, directly and indirectly, on external systems of business
enterprises such as financial institutions, third party mortgage banks,
correspondent loan originators and government agencies for accurate exchange of
data. Even if the year 2000 issue does not materially affect our internal
systems, disruptions in the operation of the enterprises with which we interact
could adversely affect us.
30
<PAGE>
Limitations on Acquisition and Change in Control Ownership Limit
The 9.8% ownership limit discussed above may have the effect of precluding
acquisition of control of us by a third party without consent of the board of
directors.
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. In addition, 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. ICCC currently occupies approximately 3,600 square feet in
Sherman Oaks, California and approximately 4,300 square feet in Dallas, Texas
under premises operating leases expiring in May 2001 and August 2003,
respectively. The Company believes that these facilities will adequately provide
for the Company's future growth needs.
The Company owns a commercial office building located in Newport Beach,
California. The commercial office building has approximately 74,000 square feet
of rentable office space. The Company currently leases office space in the
building to IMH and IFC and other third party tenants.
ITEM 3. LEGAL PROCEEDINGS
SPI Danvers, LLC v. Impac Commercial Capital Corporation, William D. Endresen
and Lawrence R. Goswiller, Orange County Superior Court Case No. 802070
On November 13, 1998, SPI Danvers, LLC ("Danvers") filed a complaint against
the above defendants alleging 13 causes of action including breach of contract
and numerous tort causes of action, including fraud. Danvers seeks approximately
$312,000 against all defendants, which allegedly represents its deposits, plus
10% lost opportunity costs, $840,000 in alternative financing costs, lost
profits in an unspecified amount, and punitive damages and attorneys fees
according to proof.
Danvers' allegations set forth generally that it sought refinancing of an
existing loan as well as obtaining a new loan in the amount of $4.2 million, and
thus entered into certain discussions and negotiations with ICCC. The purpose of
the loan was to conclude the purchase of property. Danvers alleges that it paid
ICCC certain "good faith" and "rate lock deposits" totaling an aggregate of
approximately $312,000. It is alleged that ICCC entered into a loan agreement,
defined as the letter of interest, rate lock agreement, and loan commitment
letter, with Danvers. Following plaintiff's alleged continual compliance with
requests for information and other loan conditions from ICCC, ICCC did not close
and fund the loan.
In February 1999, the court granted ICCC's and the other defendant's demurrer
to most of the tort causes of action and granted a motion to strike the punitive
damages and attorney fees allegation. However, the court also granted Danvers an
opportunity to file an amended complaint to attempt to reassert all the claims
and damages in a proper pleading. The Company believes that this case is without
merit and intends to vigorously defend the action.
Other than the foregoing, 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 security holders for vote during the fourth
quarter of 1998.
31
<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 ("AMEX")
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 AMEX for the
periods indicated:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
High Low Close High Low Close
--------- -------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter (1)................ $ 19.75 $ 17.00 $ 17.88 $ -- $ -- $ --
Second Quarter (1)............... 18.13 14.00 14.38 -- -- --
Third Quarter.................... 15.25 8.81 11.63 20.75 16.56 18.63
Fourth Quarter................... 11.63 1.88 5.38 19.31 15.25 17.63
</TABLE>
- -----------
(1) ICH became a public entity on August 4, 1997.
On February 16, 1999, the last reported sales price of the Common Stock on the
AMEX was $5.94 per share. As of February 16, 1999, there were 877 holders of
record (including holders who are nominees for an undetermined number of
beneficial owners) of the Company's Common Stock.
Share Repurchase Program. On September 25, 1998, the Company's Board of
Directors authorized the Company to repurchase up to $5.0 million of the
Company's common stock, $.01 par value, in open market purchases from time to
time at the discretion of the Company's management; the timing and extent of the
repurchases will depend on market conditions. The Company intends to effect such
repurchases, if any, in compliance with the Rule 10b-18 under the Securities
Exchange Act of 1934. Any acquired shares will be canceled. Through February 16,
1999, the Company had not repurchased any shares under this program.
Stockholder Rights Plan. On October 7, 1998, the Company's Board of Directors
adopted a Stockholder Rights Plan in which Preferred Stock Purchase Rights were
distributed as a dividend at the rate of one Right for each outstanding share of
common stock. The dividend distribution was made on October 19, 1998, payable to
stockholders of record on that date. The Rights are attached to the Company's
common stock. The Rights will be exercisable and trade separately only in the
event that a person or group acquires or announces the intent to acquire 10
percent or more of the Company's common stock. Each Right will entitle
stockholders to buy one one-hundredth of a share of a new series of Series A
junior participating preferred stock at an exercise price of $16.25. If the
Company is acquired in a merger or other transaction after a person has acquired
10 percent or more of the Company's outstanding common stock, each Right will
entitle the stockholder to purchase, at the Right's then-current exercise price,
a number of the acquiring Company's common shares having a market value of twice
such price. In addition, if a person or group acquires 10 percent or more of the
Company's common stock, each Right will entitle the stockholder (other than the
acquiring person) to purchase, at the Right's then-current exercise price, a
number of shares of the Company's common stock having a market value of twice
such price. Following the acquisition by a person of 10 percent or more of the
Company's common stock and before an acquisition of 50 percent or more of the
common stock, the Board of Directors may exchange the Rights (other than the
Rights owned by such person) at an exchange ratio of one share of common stock
per Right. Before a person or group acquires beneficial ownership of 10 percent
or more of the Company's common stock, the Rights are redeemable for $.0001 per
right at the option of the Board of Directors. The Rights will expire on October
19, 2008. The Rights distribution is not taxable to stockholders. The Rights are
intended to enable all the Company stockholders to realize the long-term value
of their investment in the Company.
On October 21, 1998, ICH repurchased from IMH 937,084 shares of Common Stock
and 456,916 shares of Class A Common Stock at a per share price of $4.375, based
upon the closing sales price of the Common Stock on the AMEX on October 19,
1998, for a total repurchase of $6.1 million. The repurchase of Common Stock and
Class A Common Stock was not part of the share repurchase program described
above.
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<PAGE>
Dividends
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 earnings 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 dividend payment
date of the following taxable year. The dividend policy is subject to revision
at the discretion of the Board of Directors. All distributions in excess of
those required for ICH to maintain REIT status will be made by 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.
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 for the 1998 tax year, approximately
$1.0 million represented a tax-free return of capital.
The following table sets forth 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.................... December 31, 1997 0.38
Quarter ended March 31, 1998....................... April 9, 1998 0.40
Quarter ended June 30, 1998........................ June 19, 1998 0.45
Quarter ended September 30, 1998(2)................ October 9, 1998 0.45
</TABLE>
- -------------
(1) ICH became a public entity on August 4, 1997.
(2) ICH paid interest in the form of an additional cash dividend at an interest
rate of 4% per annum for the period from the previously announced payment
date of October 26, 1998 through November 6, 1998. The total amount of
interest paid by the Company was $6,000 or $0.0006 per common share
outstanding.
The Company did not declare a dividend for the quarter ended December 31,
1998. See "Item 1. Business--Risk Factors--Current Conditions of Mortgage
Industry Adversely Affect Our Liquidity and Our Ability to Pay Dividends."
33
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
--------------------- ----------------------
<S> <C> <C>
Statement of Operations Data:
Interest income:
Commercial Mortgage Assets................................................. $ 32,933 $ 6,720
Cash equivalents and due from affiliates................................... 2,912 739
----------- -----------
Total interest income..................................................... 35,845 7,459
Interest expense:
Warehouse line and reverse repurchase agreements........................... 13,461 1,962
CMO borrowings............................................................. 7,203 15
Other borrowings........................................................... 912 373
----------- -----------
Total interest expense.................................................... 21,576 2,350
----------- -----------
Net interest income........................................................ 14,269 5,109
Provision for loan losses................................................. 1,546 564
----------- -----------
Net interest income after provision for loan losses........................ 12,723 4,545
Non-interest income:
Equity in net earnings (loss) of Impac Commercial Capital Corporation...... (19,199) 1,694
Other income............................................................... 701 174
----------- -----------
Total non-interest income................................................. (18,498) 1,868
Non-interest expense:
General and administrative and other expense............................... 2,803 905
Write-down of residual interest in securitization, held-for-trading........ 1,690 --
Advisory fees.............................................................. 745 --
Stock compensation expense................................................. -- 2,697
----------- -----------
Total non-interest expense.............................................. 5,238 3,602
----------- -----------
Net earnings (loss)....................................................... $ (11,013) $ 2,811
=========== ===========
Net earnings (loss) per share--basic and diluted.......................... $ (1.26) $ 0.61
=========== ===========
Dividends declared per share.............................................. $ 1.30 $ 0.53
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1998 1997
------------------ ------------------
<S> <C> <C>
Balance Sheet Data:
Investment securities available-for-sale........................................ $ 17,154 $ 19,353
Residual interest in securitization, held-for-trading........................... 8,790 9,936
CMO collateral.................................................................. 326,559 4,255
Finance receivables............................................................. 40,972 95,711
Commercial Mortgages held-for-investment........................................ 24,569 62,790
Total assets.................................................................... 451,219 218,839
CMO borrowings.................................................................. 285,021 4,176
Warehouse line agreements....................................................... 45,654 90,374
Total borrowings................................................................ 335,544 104,391
Total stockholders' equity...................................................... 103,337 103,242
</TABLE>
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<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
(in thousands, except Operating Data)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
---------------------- ----------------------
<S> <C> <C>
Statement of Operations Data:
Interest income:
Commercial Mortgages held-for-sale....................................... $ 9,573 $ 2,787
Cash and due from affiliates............................................. 205 17
----------- ------------
Total interest income.................................................. 9,778 2,804
Interest expense:
Borrowings from ICH...................................................... 9,064 2,372
Other affiliated borrowings.............................................. 1,739 375
----------- ------------
Total interest expense................................................. 10,803 2,747
----------- ------------
Net interest income (expense)............................................ (1,025) 57
Non-interest income:
Gain (loss) on sale of loans............................................. (14,345) 3,657
Other income............................................................. 24 62
----------- ------------
Total non-interest income (expense).................................... (14,321) 3,719
Non-interest expense:
Other operating expense.................................................. 5,365 1,176
Provision for repurchases................................................ 176 201
----------- ------------
Total non-interest expense............................................. 5,541 1,377
----------- ------------
Net earnings (loss) before income taxes.................................. (20,887) 2,399
Income taxes (benefit)................................................... (680) 1,022
----------- ------------
Net earnings (loss)...................................................... $ (20,207) $ 1,377
=========== ============
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Balance Sheet Data:
Commercial Mortgages held-for-sale................................................ $ 44,854 $ 106,654
Total assets...................................................................... 54,200 112,635
Warehouse line agreements......................................................... 44,881 104,219
Total shareholders' equity (deficit).............................................. (15,804) 4,403
Operating Data (in millions):
Commercial Mortgage acquisitions (volume)......................................... $ 425.1 $ 233.5
Servicing portfolio at period-end................................................. 379.0 169.2
</TABLE>
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations constitute forward-
looking statements within the meaning of the Securities Act of 1933 and Section
21e of the Exchange Act of 1934 which can be identified by the use of forward-
looking terminology such as "may," "will," "expect," "intend," "anticipate,"
"estimate," "believe" or "should" or the negatives thereof or other variations
thereon or comparable terminology. The Company's actual results may differ
materially from those contained in the forward-looking statements. Factors which
may cause differences to occur include those described in "Item 1. Business--
Risk Factors" as well as those factors discussed below.
General
ICH was formed to seek opportunities in the commercial mortgage market,
including the origination, purchase, securitization and sale of commercial
mortgages and investment in commercial mortgages and commercial mortgage-backed
securities. The Company's commercial mortgage assets include mortgage loans on
condominium-conversions, 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. The Company operates the Long-Term Investment Operations, which
invests primarily in mortgage loans and MBSs (to date, the Long-Term Investment
Operations has invested primarily in Commercial Mortgages and CMBSs) and the
Conduit Operations, conducted by ICCC, which originates, purchases, securitizes
and sells Commercial Mortgages. The Company's Conduit Operations operates three
divisions: the CommercialExpress Division, the ConduitExpress Division, and the
CondoSelect Division.
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. The Company is a specialty commercial property finance
company that elects to be taxed at the corporate level as a 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.
The Contribution
In February 1997, certain officers and directors of the Company, as a group,
and IMH purchased 300,000 and 299,000 shares of the Common Stock of ICH,
respectively. In 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
36
<PAGE>
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.
Relationships with Impac Entities
Many of the officers and directors of the Company are officers, directors and
owners of IMH, IFC, RAI and ICCC. The Company and IMH have entered into various
financing arrangements. Certain of the officers and directors of the Company own
RAI, which provides management services to the Company. RAI has also entered
into a Submanagment Agreement with IFC whereby the Company pays IFC (through
RAI) for all costs and services under contract, plus a 15% service charge. The
Company owns all of the preferred stock of, and 95% of the economic interest in,
ICCC.
Significant Transactions
On October 21, 1998, ICH repurchased from IMH 937,084 shares of Common Stock
and 456,916 shares of Class A Common Stock at a per share price of $4.375, based
upon the closing sales price of the Common Stock on the AMEX on October 19,
1998, for a total repurchase of $6.1 million.
On September 25, 1998, the Company's Board of Directors authorized the Company
to repurchase up to $5.0 million of the Company's common stock, $0.01 par value,
in open market purchases from time to time at the discretion of the Company's
management; the timing and extent of the repurchases will depend on market
conditions. The Company intends to effect such repurchases, if any, in
compliance with the Rule 10b-18 under the Securities Exchange Act of 1934. Any
acquired shares will be canceled. As of February 16, 1999, no shares had been
repurchased.
On October 27, 1998, the Company purchased from IMH its remaining 50%
ownership interest in a commercial office building in Newport Beach, California
for $6.0 million. After the purchase of the 50% ownership interest from IMH, the
Company has a 100% ownership interest in the commercial office building.
Business Operations
Business Strategy. Due to the deterioration of the commercial mortgage-
securitization market during the third and fourth quarters of 1998, the Company
made significant changes in its business strategy and operations. The Company's
business strategy was revised to focus on the origination of smaller balance
loans that have higher margins, wider spreads and more profitability. Therefore,
the Company is concentrating its efforts on the origination of CommercialExpress
loans and de-emphasizing the origination of ConduitExpress loans until the
commercial mortgage-backed securitization market stabilizes. CommercialExpress
loans are Commercial Mortgages with balances generally from $500,000 to $3.0
million while ConduitExpress loans are Commercial Mortgages with balances
generally from $3.0 million to $10.0 million. While this decision resulted in
lower origination balances in the third and fourth quarters of 1998, the Company
anticipates better results on the subsequent sale or securitization of its
loans. Historically, the Company's experience has been that CommercialExpress
loans have generally had better pricing in the execution of whole loan sales and
structured transactions than prices received on ConduitExpress loans. A factor
in the higher profitability on CommercialExpress loans is the higher interest
rate margins on these loans which generally range from 100 basis points to 150
basis points more than interest rate margins on ConduitExpress loans. Therefore,
in conjunction with the change in business strategy and the resulting decrease
in originations during the third and fourth quarters of 1998, the Company
reduced staff levels at ICCC by 35% during the fourth quarter of 1998.
Long-Term Investment Operations. During the year ended December 31, 1998, the
Long-Term Investment Operations, conducted by ICH, acquired $522.1 million of
Commercial Mortgages as compared to $41.2 million of Commercial Mortgages
acquired during the period from January 15, 1997 (commencement of operations)
through December 31, 1997 ("Commencement Period"). Commercial Mortgages
purchased from ICCC during 1998 consisted of $499.1 million of fixed rate
mortgages ("FRMs") and $23.0 million of adjustable rate mortgages ("ARMs")
secured by first liens on commercial property. Commercial Mortgages purchased
from ICCC during 1998 consisted of $325.3 million of ConduitExpress loans,
$184.1 million of CommercialExpress loans and $12.7 million of CondoSelect
loans. As of December 31, 1998, the Long-Term Investment Operations' portfolio
of Commercial Mortgages consisted of
37
<PAGE>
$24.6 million of Commercial Mortgages held-for-investment and $326.6 million of
mortgage loans held as collateral for CMOs of which approximately 85% were FRMs
and 15% were ARMs. The weighted average coupon of the Long-Term Investment
Operations' portfolio of Commercial Mortgages was 8.13% at December 31, 1998.
During 1998, the Long-Term Investment Operations sold $172.3 million of
Commercial Mortgages to third party investors and $43.2 million of Commercial
Mortgages to ICCC as compared to none during the Commencement Period. In
addition, the Long-Term Investment Operations had outstanding finance
receivables of $41.0 million, investment securities available-for sale of $17.2
million and residual interest in securitization held-for-trading of $8.8 million
at December 31, 1998.
Conduit Operations. The Conduit Operations, conducted by ICCC, supports the
Long-Term Investment Operations of the Company by supplying ICH with Commercial
Mortgages for its long-term investment portfolio. ICCC originated $425.1
million of Commercial Mortgages during 1998 as compared to $233.5 million of
Commercial Mortgages originated during the Commencement Period. ICCC originated
$239.7 million of ConduitExpress loans during the year ended December 31, 1998
as compared to $159.2 million during the Commencement Period. The
CommercialExpress Division originated $172.7 million of CommercialExpress loans
during 1998 as compared to $50.7 million during the Commencement Period. The
CondoSelect Division originated $12.7 million of CondoSelect loans during 1998
as compared to $23.6 million during the Commencement Period. During the year
ended December 31, 1998 and the Commencement Period, ICCC sold $525.2 million
and $23.7 million, respectively, of Commercial Mortgages to ICH and none and
$73.4 million, respectively, to third parties. ICCC's servicing portfolio
increased 124% to $379.0 million as of December 31, 1998 as compared to $169.2
million as of December 31, 1997. The loan delinquency rate of Commercial
Mortgages in ICCC's servicing portfolio was 1.13% at December 31, 1998 as
compared to none at December 31, 1997.
RESULTS OF OPERATIONS--
IMPAC COMMERCIAL HOLDINGS, INC.
Year Ended December 31, 1998 as compared to the period from January 15, 1997
(commencement of operations) through December 31, 1997
Net Earnings
The Company recorded a net loss of $(11.0) million, or $(1.26) basic and
diluted loss per common share, during the year ended December 31, 1998 as
compared to net earnings of $2.8 million, or $0.61 basic and diluted earnings
per common share, for the Commencement Period. The Company's net loss for 1998
was primarily the result of an increase of $18.0 million in loss on sale of
Commercial Mortgages held-for-sale by ICCC, a non-cash charge of $1.7 million on
the write-down of the residual interest in securitization held-for-trading and
an increase of $982,000 in provision for loan losses. These increases to 1998
net loss were partially offset by an increase of 180% in net interest income to
$14.3 million during 1998 as compared to $5.1 million during the Commencement
Period.
The loss on sale of Commercial Mortgages held-for-sale by the Conduit
Operations during 1998 was $14.3 million as compared to a gain on sale of
Commercial Mortgages held-for-sale of $3.7 million during the Commencement
Period. The loss on sale of Commercial Mortgages held-for-sale resulted in a
deficit in equity in net loss of ICCC of $(19.2) million for 1998 as compared to
equity in net earnings of ICCC of $1.7 million during the Commencement Period.
The loss on sale of Commercial Mortgages held-for-sale was the result of the
sale of Commercial Mortgages during the fourth quarter of 1998 in order to
generate liquidity and help to protect the Company against any future margin
calls on borrowings under warehouse line and reverse repurchase facilities. The
Company's lenders required margin calls on the Company's warehouse line and
reverse repurchase facilities due to turmoil in the commercial mortgage market-
backed securitization during the third and fourth quarters of 1998. Therefore,
in order to meet those margin calls and provide the Company additional
liquidity, the Company completed the sale of $172.3 million of Commercial
Mortgages during the fourth quarter of 1998, which increased the Company's
liquidity by $25.6 million, at the time of sale, after paying down borrowings on
warehouse lines and reverse repurchase facilities. With net proceeds from the
sale of Commercial Mortgages, the Company was able to use these funds to pay its
third quarter dividend, which had been suspended, repurchase shares of its
capital stock at a price significantly below book value, purchase the remaining
50% ownership interest in its commercial office building from IMH and have
additional liquidity for general working capital needs.
38
<PAGE>
Net Interest Income
Net interest income increased 180% to $14.3 million during 1998 as compared to
$5.1 million during the Commencement Period. Interest income is primarily
interest on Commercial Mortgage Assets and includes interest income on cash and
cash equivalents and amounts due from affiliates. Interest expense is primarily
borrowings on Commercial Mortgage Assets and includes interest expense on due to
affiliates. Commercial Mortgage Assets include investment securities available-
for-sale, residual interest in securitization held-for-trading, Commercial
Mortgages held-for-investment, CMO collateral and finance receivables. The
increase in net interest income during 1998 as compared to the Commencement
Period was primarily the result of higher average Commercial Mortgage Assets,
which increased to $385.3 million during 1998 as compared to $63.0 million
during the Commencement Period. The net interest spread on Commercial Mortgage
Assets decreased to 1.77% during 1998 as compared to 3.15% during the
Commencement Period. The decrease in net interest spread on Commercial Mortgage
Assets during 1998 as compared to the Commencement Period was primarily due to
an increase in lower yielding finance receivables outstanding with ICCC and a
decrease in the ten-year treasury yield, which the Company uses as an index to
determine initial interest rates on its Commercial Mortgages.
The following table summarizes average balance, interest and weighted-average
yield on Commercial Mortgage Assets and borrowings for the year ended December
31, 1998 and the Commencement Period and includes interest income on Commercial
Mortgage Assets and interest expense related to borrowings on Commercial
Mortgage Assets only (dollars in thousands):
<TABLE>
<CAPTION>
For the year ended December 31, 1998 For the Commencement Period
----------------------------------------------- ------------------------------------------
Average Weighted % of Average Weighted % of
Balance Interest Avg Yield Portfolio Balance Interest Avg Yield Portfolio
------------- ---------- --------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL
MORTGAGE ASSETS
---------------
Investment and $ 28,349 $ 4,357 15.37% 7.36% $ 12,786 $ 2,234 17.47% 20.29%
residual securities
Loan receivables:
Commercial Mortgages
held-for-investment 127,015 10,452 8.23 32.97 22,030 2,066 9.38 34.97
CMO collateral 122,122 9,061 7.42 31.70 233 48 20.60 0.37
Finance receivables 107,777 9,063 8.41 27.97 27,956 2,372 8.48 44.37
----------- ---------- ---------- ---------
Total Loan Receivables 356,914 28,576 8.01 92.64 50,219 4,486 8.93 79.71
----------- ---------- ---------- ---------
Total Commercial $ 385,263 $ 32,933 8.55% 100.00% $ 63,005 $ 6,720 10.67% 100.00%
Mortgage Assets =========== ========== ========== =========
BORROWINGS
----------
Warehouse line agreements $ 193,370 $ 12,947 6.70% 63.44% $ 25,463 $ 1,847 7.25% 85.06%
CMO borrowings 103,180 7,203 6.98 33.85 228 15 6.58 0.76
Reverse repurchase 8,270 514 6.22 2.71 1,938 115 5.93 6.47
agreements
Borrowings on residual -- -- -- -- 2,307 275 11.92 7.71
interest in securitization
----------- ---------- ---------- ---------
Total Borrowings $ 304,820 $ 20,664 6.78% 100.00% $ 29,936 $ 2,252 7.52% 100.00%
=========== ========== ========== =========
Net Interest Spread 1.77% 3.15%
Net Interest Margin 3.18% 7.09%
</TABLE>
Interest income on Commercial Mortgage Assets: Interest income on Commercial
Mortgages held-for-investment increased to $10.5 million during 1998 as compared
to $2.1 million during the Commencement Period as average Commercial Mortgages
held-for-investment increased to $127.0 million as compared to $22.0 million,
respectively. The increase in average Commercial Mortgages held-for-investment
was the result of the Long-Term Investment Operations acquiring $522.1 million
of Commercial Mortgages during 1998 as compared to $41.2 million during the
Commencement Period. The weighted-average yield on Commercial Mortgages held-
for-investment decreased to 8.23% during 1998 as compared to 9.38% during the
Commencement Period. The decrease in the weighted-average
39
<PAGE>
yield during 1998 was due to the acquisition of lower yielding ConduitExpress
loans as compared to the Commencement Period and the decrease in the ten-year
treasury yield, which the Company uses as an index to determine initial interest
rates on its Commercial Mortgages.
Interest income on finance receivables increased to $9.1 million during 1998
as compared to $2.4 million during the Commencement Period as average finance
receivables increased to $107.8 million as compared to $28.0 million,
respectively. The increase was primarily the result of an increase in ICCC's
loan originations, which are financed by the Long-Term Investment Operations
until ICCC sells the loans to third party investors or to ICH. ICCC originated
$425.1 million of Commercial Mortgages during 1998 as compared to $233.5 million
of Commercial Mortgages originated during the Commencement Period. The weighted-
average yield on finance receivables decreased to 8.41% during 1998 as compared
to 8.48% during the Commencement Period as the prime rate decreased during 1998.
The prime rate is used as the index to determine the interest rate on finance
receivables.
Interest income on CMO collateral increased to $9.1 million during 1998 as
compared to $48,000 during the Commencement Period as average CMO collateral
increased to $122.1 million as compared to $233,000, respectively. Average CMO
collateral increased as the Long-Term Investment Operations issued CMOs totaling
$301.8 million, which were collateralized by $325.0 million in Commercial
Mortgages, in August 1998. The weighted-average yield on CMO collateral was
7.42% during 1998.
Interest income on investment securities available-for-sale increased to $4.4
million during 1998 as compared to $2.2 during the Commencement Period as
average investment securities available-for-sale, net of securities valuation
allowance, increased to $28.3 million as compared to $12.8 million,
respectively. The weighted-average yield on investment securities available-for-
sale decreased to 15.37% during 1998 as compared to 17.47% during the
Commencement Period.
Interest expense on borrowings: Interest expense on warehouse line agreements
used to fund finance receivables to ICCC and Commercial Mortgages held-for-
investment increased to $12.9 million during 1998 as compared to $1.8 million
during the Commencement Period as the average balance of warehouse line
agreements increased to $193.4 million and $25.5 million, respectively. The
increase was a result of an increase in finance receivables made to ICCC to fund
the acquisition of Commercial Mortgages and to also fund the Long-Term
Investment Operations Commercial Mortgages held-for-investment, which were
acquired from ICCC. The weighted-average yield of warehouse line agreements
decreased to 6.70% during 1998 as compared to 7.25% during the Commencement
Period.
Interest expense on CMO borrowings increased to $7.2 million during 1998 as
compared to $15,000 during the Commencement Period as average borrowings on CMO
collateral increased to $103.2 million as compared to $228,000, respectively.
Average CMO borrowings increased as the Long-Term Investment Operations issued
CMOs totaling $301.8 million during 1998. The weighted-average yield of CMO
borrowings was 6.98% during 1998.
Interest expense on borrowings on residual interest in securitization, held-
for-trading decreased to none during 1998 as compared to $275,000 during the
Commencement Period as the borrowings against the residual interest were repaid
with proceeds received from the Company's IPO on August 5, 1997. The weighted-
average yield of borrowings on residual interest in securitization, held-for-
trading was 11.92% during the Commencement Period.
The Company also uses CMBSs as collateral to borrow under reverse repurchase
agreements to fund the purchase of CMBSs and to act as an additional source of
liquidity for the Company's operations. Interest expense on these reverse
repurchase agreements increased to $514,000 during 1998 as compared to $115,000
during the Commencement Period as the average balance on these reverse
repurchase agreements increased to $8.3 million as compared to $1.9 million,
respectively. The weighted-average yield of these reverse repurchase agreements
was 6.22% during 1998 as compared to 5.93% during the Commencement Period.
Equity in net earnings (loss) of Impac Commercial Capital Corporation
Equity in net loss of ICCC for 1998 was $(19.2) million as compared to equity
in net earnings of ICCC of $1.7 million for the Commencement Period. The
decrease in equity in net earnings (loss) of ICCC for 1998 was primarily the
result of the aforementioned $14.3 million loss on sale of Commercial Mortgages
during 1998 as compared to a gain on sale of Commercial Mortgages of $3.7
million during the Commencement Period. For more information on the results of
operations of ICCC refer to "--Results of Operations--Impac Commercial Capital
Corporation." The Company
40
<PAGE>
records 95% of the earnings or losses from ICCC as the Company owns 100% of
ICCC's preferred stock of, which represents 95% of the economic interest in,
ICCC.
Expenses
General and Administrative and Other Expense
General and administrative and other expense increased to $1.2 million during
1998 as compared to $156,000 during the Commencement Period. The increase in
general and administrative expense was primarily related to operational expenses
the Company incurred subsequent to August of 1997 as a result of becoming a
public company. Additionally, property expense on a commercial office building
which the Company owns, increased to $779,000 during 1998 as compared to
$109,000 during the Commencement Period.
Advisory Fees
Advisory fees are computed quarterly on tax basis earnings, which are
calculated by adjusting the Company's book basis earnings by various differences
between book basis earnings and tax basis earnings. Differences between book
basis earnings and tax basis earnings are estimates that are derived from
management's best knowledge. Although the Company recorded a net loss during
1998, the Company recorded advisory fees based on tax basis earnings, which were
approximately $11.7 million. Therefore, the Company recorded an expense of
$745,000 during 1998 as compared to none during the Commencement Period.
Credit Exposures
The Company recorded provision for loan losses of $1.5 million during 1998 as
compared to $564,000 during the Commencement Period. Correspondingly, the
allowance for loan losses increased to $2.1 million at December 31, 1998 as
compared to $564,000 at December 31, 1997. At December 31, 1998 and 1997, the
Company's allowance for loan losses expressed as a percentage of Commercial
Mortgages held-for-investment, CMO collateral and finance receivables
(collectively "Gross Loan Receivables") was 0.54% and 0.35%, respectively. The
allowance for loan losses is determined primarily on management's judgment of
net loss potential including specific allowances for any known impaired loans,
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.
Delinquencies. The following table sets forth delinquency statistics for the
Long-Term Investment Operations' portfolio of Commercial Mortgages held-for-
investment and CMO collateral for the periods shown:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
----------------------- ----------------------------
Number % of Number % of
of Servicing of Servicing
Loans Portfolio Loans Portfolio
-------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Loans delinquent for:
90 days............................................................. 5 1.21 -- 0.0
-------- ---------- ----------- ------------
Total delinquencies, foreclosures and bankruptcies............... 5 1.21% -- 0.0%
======== ========== =========== ============
</TABLE>
RESULTS OF OPERATIONS--
IMPAC COMMERCIAL CAPITAL CORPORATION
Year Ended December 31, 1998 as compared to the period from January 15, 1997
(commencement of operations) through December 31, 1997
Net Earnings
ICCC recorded a net loss of $(20.2) million during the year ended December 31,
1998 as compared to net earnings of $1.4 million for the Commencement Period.
The Company's net loss for 1998 was primarily the result of an increase of $18.0
million in loss on sale of Commercial Mortgages held-for-sale, an increase of
$1.0 million in net interest loss and an increase of $4.3 million in other
operating expense.
41
<PAGE>
Net Interest Income (Expense)
ICCC's net interest expense increased by $1.0 million to $(1.0) million during
1998 as compared to $57,000 during the Commencement Period as the deterioration
of the commercial mortgage-backed securitization market forced ICCC to hold
Commercial Mortgages in its portfolio during 1998. Commercial Mortgages held-
for-sale earned lower yields than interest rates paid on borrowings used to
finance the Commercial Mortgages. The average yield earned on Commercial
Mortgages held-for-sale was 7.88% during 1998 as compared to financing costs of
8.40%. During the fourth quarter of 1998, the Company began concentrating its
efforts on the origination of higher yielding CommercialExpress loans and de-
emphasizing the origination of lower yielding ConduitExpress loans.
Non-Interest Income
The loss on sale of Commercial Mortgages held-for-sale during 1998 was $14.3
million as compared to a gain on sale of Commercial Mortgages held-for-sale of
$3.7 million during the Commencement Period. The loss on sale of Commercial
Mortgages held-for-sale was the result of the sale of Commercial Mortgages
during the fourth quarter of 1998 in order to generate liquidity and help to
protect the Company against any future margin calls on borrowings under
warehouse line and reverse repurchase facilities. The Company's lenders required
margin calls on the Company's warehouse line and reverse repurchase facilities
due to turmoil in the commercial mortgage-backed securitization market during
the third and fourth quarters of 1998. In order to meet those margin calls and
provide the Company additional liquidity, ICCC completed the sale of $172.3
million of Commercial Mortgages during the fourth quarter of 1998.
Non-Interest Expense
Other operating expense increased to $5.4 million during 1998 as compared to
$1.0 million during the Commencement Period as ICCC's loan originations
increased to $425.1 million as compared to $233.5 million, respectively.
Personnel expense increased to $2.5 million during 1998 as compared to $38,000
during the Commencement Period as ICCC's staffing increased to 89 employees at
September 30, 1998 as compared to 50 employees at December 31, 1997 and 27
employees at September 30, 1997. During the fourth quarter of 1998, ICCC reduced
its staff levels by 35% due to the decrease in loan originations during the
second half of 1998 as compared to the first half of 1998. In addition,
occupancy expense increased to $1.0 million during 1998 as compared to $160,000
during the Commencement Period and general and administrative and other expense
increased to $1.1 million as compared to $288,000, respectively, due to the
increase in ICCC's staffing levels and the expansion of its loan origination
operations.
Liquidity and Capital Resources
Overview. The Company's business operations are primarily funded from monthly
interest and principal payments from its Commercial Mortgages and CMBS
portfolios, warehouse line and reverse repurchase agreements secured by
Commercial Mortgages and CMBS, CMO financing, proceeds from the sale of
Commercial Mortgages, short-term unsecured borrowings and proceeds from the
issuance of Common Stock. The acquisition of Commercial Mortgages and CMBS by
the Long-Term Investment Operations are primarily funded from monthly principal
and interest payments, warehouse and reverse repurchase agreements, CMO
financing, short-term unsecured borrowings and proceeds from the sale of Common
Stock. The acquisition of Commercial Mortgages by the Conduit Operations are
funded from reverse repurchase agreements and the sale of Commercial Mortgages.
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 compliance with the terms of its existing credit arrangements, financial
performance, industry and market trends in various businesses, the general
availability of and rates applicable to financing and investments, lenders'
and/or investors' own resources and policies concerning loans and investments
and the relative attractiveness of alternative investment or lending
opportunities.
During the third and fourth quarters of 1998, the deterioration of the CMBS
market created a lack of liquidity for the Company as the Company's lenders made
margin calls on their warehouse and reverse repurchase lines. Margin calls
result from the Company's lenders evaluating the market value of underlying
collateral securing the warehouse
42
<PAGE>
lines of credit and requiring additional equity or collateral on the warehouse
lines. These margin calls resulted in the Company delaying its third quarter
dividend and selling $172.3 million of Commercial Mortgages in order to meet its
margin calls and provide additional working capital. The sale of the Commercial
Mortgages increased the Company's liquidity by $25.6 million, at the time of
sale, after paying down borrowings on warehouse and reverse repurchase lines.
With net proceeds from the sale of Commercial Mortgages, the Company was able to
use these funds to pay its third quarter dividend, which had been suspended,
repurchase shares of its capital stock at a price significantly below book
value, purchase the remaining 50% ownership interest in its commercial office
building from IMH and have additional liquidity for general working capital
needs.
By selling Commercial Mortgages, the Company reduced its exposure to future
margin calls on existing borrowings under its current warehouse lines and
repurchase facilities by paying down outstanding borrowings on these facilities.
In addition, by concentrating on the origination of CommercialExpress loans
which have lower loan balances and higher interest margins, the Company's
liquidity improved during the fourth quarter of 1998. Based upon past
experience, the Company has received better execution, both in terms of price
and completion time, on both securitizations and whole loan sales on
CommercialExpress loans than on ConduitExpress loans, which have larger loan
balances and smaller interest margins. Also, by de-emphasizing originations of
ConduitExpress loans, loan originations decreased in the third and fourth
quarters of 1998 and reduced borrowing needs during these periods of market
volatility. The Company expects that by originating primarily CommercialExpress
loans, the length of time specific loans are outstanding on the Company's
warehouse lines will be reduced. In addition, the reduction in staff during the
fourth quarter of 1998 provided additional liquidity from operating activities.
However, cash flows were negatively impacted by the deterioration of the CMBS
market and the subsequent sale of Commercial Mortgages as the Company did not
benefit from the positive cash flows generated by these financial instruments.
In addition, any future margin calls or termination of warehouse lines or
repurchase facilities by the Company's lenders may adversely affect the
Company's future operations. Many former lenders to other companies in the same
business as ICH are no longer in the business of providing warehouse lines for
the funding of Commercial Mortgages. This may affect the Company's ability to
obtain new financing at comparable rates and terms or any new financing at all.
Long-Term Investment Operations. ICH has a warehouse line agreement with an
investment bank, which expires in May 1999, unless terminated earlier, which
provides up to an aggregate of $300.0 million, of which $100.0 million is
uncommitted, to finance the Company's operations as needed. Terms of the
warehouse line agreement requires that the Commercial Mortgages be held by an
independent third party custodian, which gives the Company the ability to borrow
against the collateral provided as a percentage of the fair market value of the
Commercial Mortgages. The borrowing rates are expressed in basis points over the
one-month LIBOR. The margins on the warehouse line agreements are based on the
type of mortgage collateral provided, with loan amounts generally range from 75%
to 92% of the fair market value of the collateral. As of December 31, 1998, an
aggregate of $45.7 million was outstanding under the 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 provided, with loan amounts generally range from 50% to 75% of the
fair market value of the collateral. As of December 31, 1998, amounts
outstanding on the reverse repurchase agreements were $4.9 million.
The Long-Term Investment Operations uses CMO borrowings to finance Commercial
Mortgages as a means of eliminating certain risks associated with warehouse line
and reverse repurchase agreements, such as the potential need for deposits of
additional collateral, that are not present with CMO borrowings. Terms of the
CMO borrowings require that an independent third party custodian hold the
mortgages. The maturity of each class is directly affected by the rate of
principal prepayments on the related collateral. Equity in the CMOs is
established at the time the CMOs are issued at levels sufficient to achieve
desired credit ratings on the securities from rating agencies. The amount of
equity invested in CMOs by the Long-Term Investment Operations is also
determined by the Company based upon the anticipated return on equity as
compared to the estimated proceeds from additional debt issuance. Total credit
loss exposure is limited to the equity invested in the CMOs at any point in
time. At December 31, 1998, the Long-Term Investment Operations had $285.0
million of CMO borrowings used to finance $326.6 million of CMO collateral.
In 1998, ICH entered into a revolving credit arrangement with a commercial
bank whereby ICH can borrow up to maximum amount of $10.0 million for general
working capital needs. The revolving credit agreement expires on March
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<PAGE>
29, 1999. Advances under the revolving credit arrangement are at an interest
rate of prime plus 0.25%. Interest is paid monthly and as an open-ended
revolving line of credit there is no set principal payment schedule. As of
December 31, 1998, ICH had no outstanding borrowings under the revolving credit
arrangement.
During 1998, ICH had a credit arrangement with IMH whereby IMH advanced to ICH
up to maximum amount of $15.0 million for general working capital needs.
Subsequent to 1998, the credit agreement was terminated and will no longer be
used by ICH. Advances under the credit arrangement were at an interest rate and
maturity determined at the time of each advance with interest and principal paid
monthly. As of December 31, 1998 and 1997, ICH's outstanding borrowings under
the credit arrangement were none and $9.1 million, respectively, with an
interest rate of prime plus 1% at the time of each advance.
During 1998, pursuant to a public offering, ICH sold 2,000,0000 shares of
Common Stock at $15.3125 per share, which raised additional capital of $28.4
million, net of underwriting discounts and other expenses.
Conduit Operations. ICCC has entered into uncommitted 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
provided as a percentage of the fair market value of the Commercial Mortgages.
The borrowing rates on the warehouse line agreements are at Bank of America's
prime rate, which was 7.75% at December 31, 1998. The margins on the warehouse
line agreements are up to 90% of the fair market value of the collateral
provided. As of December 31, 1998 and 1997, amounts outstanding on ICCC's
warehouse line agreements with ICH were $41.2 million and $95.7 million,
respectively.
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 provided. The interest rates on
the borrowings are indexed to Bank of America's prime rate, which was 7.75% at
December 31, 1998. As of December 31, 1998 and 1997, outstanding amounts on the
warehouse line agreement were $3.7 million and $8.5 million, respectively.
Cash Flows
Operating Activities--During 1998, net cash used in operating activities was
$18.0 million. Net cash used in operating activities was primarily the result of
a net loss of $11.0 million and a net decrease of $29.5 million in due from
affiliates and due to affiliates, which was primarily due to an increase of
$13.4 million related to advances to finance the operations of ICCC.
Investing Activities--During 1998, net cash used in investing activities was
$228.8 million. Net cash used in investing activities was primarily the result
of the acquisition and subsequent securitization of $325.0 million of Commercial
Mortgages. The increase in CMO collateral was partially offset by a decrease of
$54.7 million in finance receivables and a decrease of $38.2 million in
Commercial Mortgages held-for-investment.
Financing Activities--During 1998, net cash provided by financing activities
was $245.1 million. Net cash provided by financing activities was primarily the
result of proceeds from CMO borrowings of $301.8 million, which was partially
offset by a decrease in warehouse line agreements of $44.7 million.
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. During periods
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<PAGE>
of decreasing interest rates, borrowers may prepay their mortgages, which in
turn may adversely affect the Company's yield and consequently the value of its
portfolio of Mortgage Assets.
YEAR 2000 COMPLIANCE
PROJECT STATUS
The Company's Year 2000 project was approximately 75% complete as of the end
of December 1998. The Company has contracted with an outside vendor to provide
coordination, support, testing and implementation in regards to Year 2000
compliance of hardware and software systems, both on an information technology
("IT") and non-IT level.
The Company also has its own in-house IT department and is currently assisting
the outside vendor with Year 2000 compliance issues. The Company's primary IT
systems include loan servicing, which is contracted to an outside vendor, loan
tracking, and accounting and reporting. The Company has received a Year 2000
compliance plan from its loan servicing vendor and receives monthly status
reports. As of December 31, 1998 and according to its last status report, the
loan servicing vendor is on track with its Year 2000 compliance plan and expects
to be in Year 2000 compliance by the first half of 1999. The loan tracking
system is a proprietary system that was written using Microsoft Access, which is
Year 2000 compliant. The accounting and reporting systems have been upgraded to
versions that are currently Year 2000 compliant. The Company's non-IT systems
include its file servers, network systems, workstations and communication
systems. Testing on all other in-house hardware is currently underway and is
expected to be complete by the end of the second quarter of 1999.
The Year 2000 project is divided into two primary phases, as follows: (1)
define scope of project and identify all IT and non-IT systems, and (2) testing
of existing systems and implementation of new systems, if required. The outside
contractor on the Year 2000 project submits monthly status reports to the
Company's IT manager and communicates with the IT department on a daily basis.
The Company's executive committee, which includes the CEO and Chairman,
President, and Chief Financial Officer, reviews the progress of the Company's
Year 2000 project through monthly status reports from the Company's IT manager.
Phase I-Define Scope of Project
- --------------------------------
This phase primarily included the inventorying of Year 2000 items, contacting
outside vendors, including reviewing contractual terms and conditions, reviewing
internal software for compliance and determining costs to complete the project.
Phase I of the project also included the testing and implementation or upgrade
of non-IT systems. As of the end of October 1998, Phase I of the project had
been completed.
Phase II-Testing of Systems
- ----------------------------
This phase of the Year 2000 project can be divided into four separate
processes, as follows: (1) Compliance Questionnaires, (2) Hardware Certification
Information, (3) Software/Data Testing, and (4) Hardware Testing.
Compliance Questionnaires and Hardware Certification Information. As of the
end of October 1998, these portions of Phase II were complete.
Software/Data Testing. As of the end of December 1998, this portion of Phase
II was approximately 80% complete. The remaining tasks within this process
include analyzing list of software being used, testing all software programs,
testing all data from incoming sources, testing all outgoing data processes and
reporting. The Company expects that this process will be complete by March 31,
1999.
Hardware Testing. As of the end of December 1998, this portion of Phase II had
not been started. This phase is contingent on the completion of software/data
testing. Tasks yet to be started include testing all workstation, servers and
network systems. The Company expects to be compliant with all internal Year 2000
issues by the end of the second quarter of 1999.
45
<PAGE>
COSTS
The total cost associated with required modifications or installations to
become Year 2000 compliant is not expected to be material to the Company's
financial condition. The estimated cost of the project is expected to be
approximately $108,000. As of the end of December 1998, the Company had paid
$34,000 to the outside vendor for completed work on the project. The majority of
the Company's estimated cost for the Year 2000 compliance has been or will be
spent on software upgrades and writing new program code to existing proprietary
software. Since most of the Company's hardware has been purchased within the
last two years, the cost of replacing hardware will be minimal.
RISKS
The Company does not anticipate any material disruption of its operations as a
result of any failure by the Company to be compliant. However, there can be no
assurance that there will not be a delay in, or increased costs associated with,
the need to address the Year 2000 issue. The Company also relies, directly and
indirectly, on other businesses such as third party service providers, creditors
and financial organizations and governmental entities. Even if the Company's
computer systems are not materially adversely affected by the Year 2000 issue,
the Company's business and operations could be materially adversely affected by
disruptions in the operations of the enterprises with which the Company
interacts.
CONTINGENCY PLANS
The Company believes its Year 2000 compliance process should enable it to be
successful in modifying its computer systems to be Year 2000 compliant. As
previously stated, acceptance testing and sign-off has begun with respect to the
Company's in-house systems. In addition to Year 2000 system modification plans,
the Company has also developed contingency plans for all other systems
classified as critical and high risk. These contingency plans provide timetables
to pursue various alternatives based upon the failure of a system to be
adequately modified and/or sufficiently tested and validated to ensure Year 2000
compliance. However, there can be no assurance that either the compliance
process or contingency plans will avoid partial or total system interruptions or
the costs necessary to update hardware and software would not have a material
adverse effect upon the Company's financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General
A significant portion of the Company's revenues and earnings are derived from
net interest income and, accordingly, the Company strives to manage its
interest-earning assets and interest-bearing liabilities to generate what
management believes to be an appropriate contribution from net interest income.
Asset and liability management seeks to control the volatility of the Company's
performance due to changes in interest rates. The Company attempts to achieve an
appropriate relationship between rate sensitive assets and rate sensitive
liabilities. Although the Company manages other risks, such as credit,
operational and liquidity risk in the normal course of business, management
considers interest rate risk to be a significant market risk which could
potentially have the largest material effect on the Company's financial
condition and results of operations.
Rate Sensitive Assets and Liabilities
Interest rate risk is the responsibility of the Asset and Liability Committee
("ALCO"), which reports to the Board of Director's of the Company. ALCO
establishes policies that monitor and coordinate the Company's sources, uses and
pricing of its funds. The Company attempts to reduce the volatility in net
interest income by managing the relationship of interest rate sensitive assets
to interest rate sensitive liabilities.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
that amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of falling interest rates, the
net earnings of an institution with a
46
<PAGE>
positive gap theoretically may be adversely affected due to its interest-earning
assets repricing to a greater extent than its interest-bearing liabilities.
Conversely, during a period of rising interest rates, theoretically, the net
earnings of an institution with a positive gap position may increase as it is
able to invest in higher yielding interest-earning assets at a more rapid rate
than its interest-bearing liabilities reprice.
The Company manages its interest rate risk by, (1) retaining adjustable-rate
Commercial Mortgages to be held for long-term investment, (2) selling fixed-rate
Commercial Mortgages on a whole-loan basis, and (3) securitizing both
adjustable- and fixed-rate Commercial Mortgages through the issuance of CMOs.
The Company retains adjustable-rate Commercial Mortgages, which are generally
indexed to six-month LIBOR and reprice every six months, to be held for
investment or as CMO collateral. The index on adjustable rate Commercial
Mortgages provide a comparable match to the one-month LIBOR index that is used
for the funding of Commercial Mortgages on the Company's warehouse line
agreements. In addition, the Company securitizes both variable- fixed-rate
Commercial Mortgages as CMOs to reduce its interest rate risk as CMOs provide a
net interest spread between the interest income on the Commercial Mortgages and
the interest and other expenses associated with the CMO financing. To a great
extent, market risk arising from early prepayment of Commercial Mortgages is
minimized as the Company uses short-term prepayment lock-outs and prepayment
penalties.
As a result of this strategy, the Company's total interest-earning assets
maturing or repricing within one year exceed interest-bearing liabilities
maturing or repricing in one year by $58.9 million, representing a positive gap.
Therefore, the Company's net interest income would be negatively affected by
decreases in interest rates as interest-earning assets would reprice to lower
interest rates faster than would interest-bearing liabilities. Conversely, in an
increasing interest rate environment the Company's net interest income would
increase as more interest-earning assets would reprice to higher rates faster
than would interest-bearing liabilities. As a rule, the Company attempts to keep
the cumulative difference between interest-earning assets and interest-bearing
liabilities as low as possible over a one year cycle.
The Company currently does not maintain a trading portfolio. As a result, the
Company is not exposed to market risk as it relates to trading activities. The
Company's investment securities portfolio are held for sale which requires the
Company to perform market valuations of the portfolio in order to properly
record the portfolio at the lower of cost or market. Therefore, the Company
continually monitors the interest rates of its investment securities portfolio
as compared to prevalent interest rates in the market.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. The amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the earlier
of term to repricing or the contractual terms of the asset or liability.
<TABLE>
<CAPTION>
Greater
than
1999 2000 2001 2002 2003 5 Years Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Cash equivalents $ 14,161 $ -- $ -- $ -- $ -- $ -- $ 14,161
Average interest rate 5.03% 5.03%
Investment and residual securities 25,944 -- -- -- -- -- 25,944
Average interest rate 14.01% 14.01%
Finance receivables 40,972 -- -- -- -- -- 40,972
Average interest rate 7.75% 7.75%
Commercial Mortgages:
Adjustable (3) 50,767 -- -- -- -- -- 50,767
Average interest rate 9.28% 9.28%
Fixed (3) -- -- -- -- -- 281,393 281,393
Average interest rate 7.91% 7.91%
Due from affiliates 22,131 -- -- -- -- -- 22,131
Average interest rate 8.00% 8.00%
--------- --------- --------- --------- --------- --------- ---------
Total interest-sensitive assets $ 153,975 $ -- $ -- $ -- $ -- $ 281,393 $ 435,368
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Greater
than
1999 2000 2001 2002 2003 5 Years Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE LIABILITIES:
Warehouse facilities $ 45,654 $ -- $ -- $ -- $ -- $ -- $ 45,654
Average interest rate 6.12% 6.12%
Reverse repurchase agreements 4,869 -- -- -- -- -- 4,869
Average interest rate 6.10% 6.10%
CMO borrowings (4) 33,336 -- -- -- -- 257,881 291,217
Average interest rate 5.34% 6.59% 6.45%
Due to affiliates 11,170 -- -- -- -- -- 11,170
Average interest rate 8.46% 8.46%
--------- --------- --------- --------- --------- --------- ---------
Total interest-sensitive
liabilities $ 95,029 $ -- $ -- $ -- $ -- $ 257,881 $ 352,910
--------- --------- --------- --------- --------- --------- ---------
Interest rate sensitivity gap $ 58,946 $ -- $ -- $ -- $ -- $ 23,512 $ 82,458
Cumulative interest sensitivity
gap $ 58,946 $ 58,946 $ 58,946 $ 58,946 $ 58,946 $ 82,458
</TABLE>
___________________
(1) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
(2) Interest-sensitive assets and liabilities are based upon contractual
maturity and repricing date.
(3) Amounts are based on the unpaid principal balance of Commercial Mortgages
at December 31, 1998.
(4) Excludes bond discount.
In addition to measuring interest rate risk via a GAP analysis, the Company
measures the sensitivity of its net interest income to changes in interest
rates. Changes in interest rates are defined as instantaneous and sustained
movements in interest rates in 100 basis point increments. The Company estimates
its interest income for the next twelve months assuming no changes in interest
rates from those at period end. Once the base case has been estimated,
calculations are made for each of the defined changes in interest rates. Those
results are then compared against the base case to determine the estimated
change to net interest income. Assuming immediate interest rate decreases of 100
and 200 basis points, the Company estimates that the decrease in net interest
income would be $825,000, or 6%, and $1.7 million, or 12%, respectively.
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-sensitive assets and interest-sensitive
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided on Commercial Mortgage
Assets and borrowings on Commercial Mortgage Assets, only, with respect to (1)
changes attributable to changes in volume (changes in volume multiplied by prior
rate), (2) changes attributable to changes in rate (changes in volume multiplied
by prior volume), (3) changes in interest due to both rate and volume and (4)
the net change.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 OVER 1997
---------------------------------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
--------- ------- ---------- ---------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Increase (decrease) in:
Investment and residual securities..................... $ 2,719 $ (269) $ (327) $ 2,123
Commercial Mortgages held-for-investment............... 9,848 (253) (1,209) 8,386
CMO collateral......................................... 25,109 (31) (16,065) 9,013
Finance receivables.................................... 6,769 (20) (58) 6,691
--------- ------- ---------- ---------
TOTAL INTEREST INCOME................................. $ 44,445 $ (573) $ (17,659) $ 26,213
========= ======= ========== =========
Warehouse line agreements.............................. $ 12,173 $ (140) $ (933) $ 11,100
CMO borrowings......................................... 6,774 1 413 7,188
Reverse repurchase agreements.......................... 375 6 18 399
Borrowings on residual interest in securitization...... (275) -- -- (275)
--------- ------- ---------- ---------
TOTAL INTEREST EXPENSE................................ $ 19,047 $ (133) $ (502) $ 18,412
========= ======= ========== =========
</TABLE>
48
<PAGE>
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 mortgage loans and MBSs and (2) the differences
between the interest rate adjustment indices and interest rate adjustment
periods of its adjustable rate mortgage loans 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. As a result, the Company may adjust 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 would minimize any
differences between interest rate adjustment periods of mortgage loans and
related borrowings that may occur due to prepayments of mortgage loans 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 mortgage loans 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 mortgage loans 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 of 1986 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.
As of December 31, 1998 and 1997, the Company had no outstanding interest rate
cap or interest rate swap agreements or other derivative instruments.
Conduit Operations: In conducting its Conduit Operations, ICCC is subject to
the risk of rising mortgage interest rates between the time it commits to
originate or purchase Commercial Mortgages at a fixed price or rate 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 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 the Manager, based on various factors,
including market conditions and the average duration of the mortgage loans and
the expected subordination of the mortgage loans upon securitization.
Futures 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 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 Treasury 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
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<PAGE>
utilizes these instruments on a short-term basis to fine tune its overall hedge
position at a lower cost. The Company sells future contracts against five- and
ten-year Treasury notes with major dealers in such securities. At December 31,
1998 and 1997, the Company had $20.0 million and $105.1 million, respectively,
in outstanding commitments to sell U.S. Treasury notes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference to Impac
Commercial Holdings, Inc.'s Consolidated Financial Statements and Independent
Auditors' Report beginning at page F-1 of this Form 10-K.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by reference
to Impac Commercial Holdings, Inc.'s definitive proxy statement, to be filed
pursuant to Regulation 14A within 120 days after the end of Impac Commercial
Holdings, Inc.'s 1998 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by reference
to Impac Commercial Holdings, Inc.'s definitive proxy statement, to be filed
pursuant to Regulation 14A within 120 days after the end of Impac Commercial
Holdings, Inc.'s 1998 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by reference
to Impac Commercial Holdings, Inc.'s definitive proxy statement, to be filed
pursuant to Regulation 14A within 120 days after the end of Impac Commercial
Holdings, Inc.'s 1998 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by reference
to Impac Commercial Holdings, Inc.'s definitive proxy statement, to be filed
pursuant to Regulation 14A within 120 days after the end of Impac Commercial
Holdings, Inc.'s 1998 fiscal year.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) All schedules have been omitted because they are either not applicable,
not required or the information required has been disclosed in the
Consolidated Financial Statements and related Notes to Consolidated
Financial Statements at page F-1, or are otherwise included in Form 10-K.
(b) Reports on Form 8-K--
A current report on Form 8-K, dated October 7, 1998, was filed on
October 14, 1998 reporting on Items 5 and 7.
(c) Exhibits
Exhibit
Number Description
------- -----------
3.1 Charter of the Registrant.(1)
3.1(a) Articles of Amendment of Registrant.(1)
3.1(b) Articles of Amendment of Registrant.(2)
3.1(c) Articles of Amendment of Registrant.(3)
3.1(d) Articles Supplementary and Certificate of Correction for Series
A Junior Participating Preferred Stock of Registrant.
3.2 Bylaws of the Registrant.(1)
4.1 Form of Common Stock Certificate of the Company.(1)
4.2 Rights Agreement, dated October 7, 1998, between the
Registrant and BankBoston, N.A.(4)
10.1 Management Agreement among the Registrant and
RAI Advisors, LLC.
10.2 Submanagement Agreement among RAI Advisors, LLC, Impac
Mortgage Holdings, Inc. and Impac Funding Corporation.
10.3 1997 Stock Option and Awards Plan.(1)
10.4 Lease dated December 8, 1997, among the Registrant, Impac
Commercial Capital Corporation and The Irvine Company.(1)
10.5 Contribution Agreement among the Registrant, Impac Mortgage
Holdings, Inc., and Impac Commercial Capital Corporation.
10.6 Non-Competition Agreement among the Registrant, Impac Mortgage
Holdings, Inc., Impac Commercial Capital Corporation and Impac
Funding Corporation.
10.7 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.(1)
10.9 Revolving Credit and Term Loan Agreement, dated August 21,
1997, between the Registrant and Impac Mortgage Holdings,
Inc.(5)
51
<PAGE>
10.10 Real Estate Purchase, Sale and Escrow Agreement, dated August
25, 1997, by and between TW/BRP Dove, LLC and IMH/ICH Dove
Street, LLC. (5)
10.10(a) Contract of Sale, dated October 27, 1998, between the
Registrant and Impac Mortgage Holdings, Inc.
10.11 Employment Agreement, dated August 8, 1997, between William D.
Endresen and Impac Commercial Capital Corporation.
10.12 Servicing Agreement, dated July 31, 1998, among the Registrant,
ICCC and Midland Loan Services, Inc.
21 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP re: Registrant.
23.2 Consent of KPMG LLP re: Impac Commercial Capital Corporation.
24.1 Power of Attorney (included on signature page).
27 Financial Data Schedule.
_______________
(1) Incorporated by reference to, and all such exhibits have the corresponding
exhibit number filed as part of the Registrant's registration statement on
Form S-11 (File No. 333-25423) and Amendments Nos. 1, 2, 3, 4 and 5 filed
with the Securities and Exchange Commission on April 18, June 10, June 30,
July 8, July 17 and July 29, 1997, respectively.
(2) Incorporated by reference to exhibit number 3.1(a) of the Registrant's
Current Report on Form 8-K, as amended, dated January 28, 1998.
(3) Incorporated by reference to the corresponding exhibit number of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(4) Incorporated by reference to the corresponding exhibit number of the
Registrant's Registration Statement on Form 8-A as filed with the
Securities and Exchange Commission on October 14, 1998.
(5) Incorporated by reference to the corresponding exhibit number of the
Registrant's Quarterly Report on Form 10-Q for the period ended September
30, 1997.
52
<PAGE>
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 26th day of February, 1999.
IMPAC COMMERCIAL HOLDINGS, INC.
By: /s/ JOSEPH R. TOMKINSON
-------------------------
Joseph R. Tomkinson
Chairman of the Board and
Chief Executive Officer
We, the undersigned directors and officers of 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 Chief February 26, 1999
- ------------------------- Executive Officer (Principal
Joseph R. Tomkinson Executive Officer)
/s/ Richard J. Johnson Chief Financial Officer (Principal February 26, 1999
- ------------------------- Financial and Accounting
Richard J. Johnson Officer)
/s/ James Walsh Director February 26, 1999
- -------------------------
James Walsh
/s/ Frank P. Filipps Director February 26, 1999
- -------------------------
Frank P. Filipps
/s/ Stephan R. Peers Director February 26, 1999
- -------------------------
Stephan R. Peers
/s/ Thomas J. Poletti Director February 26, 1999
- -------------------------
Thomas J. Poletti
/s/ Timothy R. Busch Director February 26, 1999
- -------------------------
Timothy R. Busch
</TABLE>
53
<PAGE>
INDEPENDENT AUDITORS' REPORT AND
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
<TABLE>
<CAPTION>
Page
-----
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
------------------------------------------------
<S> <C>
Independent Auditors' Report................................................................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................... F-3
Consolidated Statements of Operations and Comprehensive Earnings (Loss) for the year ended December 31,
1998 and for the period from January 15, 1997 (commencement of operations) through December 31, 1997........ F-4
Consolidated Statement of Changes in Stockholders' Equity for the period from January 15, 1997
(commencement of operations) through December 31, 1998...................................................... F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1998 and for the period from
January 15, 1997 (commencement of operations) through December 31, 1997...................................... F-6
Notes to Consolidated Financial Statements................................................................... F-7
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
---------------------------------------------------
Independent Auditors' Report................................................................................. F-27
Consolidated Balance Sheets at December 31, 1998 and 1997.................................................... F-28
Consolidated Statements of Operations for the year ended December 31, 1998 and for the period from
January 15, 1997 (commencement of operations) through December 31, 1997...................................... F-29
Consolidated Statement of Changes in Shareholders' Equity and for the period from January 15, 1997
(commencement of operations) through December 31, 1998...................................................... F-30
Consolidated Statements of Cash Flows for the year ended December 31, 1998 and for the period from
January 15, 1997 (commencement of operations) through December 31, 1997...................................... F-31
Notes to Consolidated Financial Statements................................................................... F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Commercial Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Impac
Commercial Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations and comprehensive earnings
(loss), changes in stockholders' equity and cash flows for the year ended
December 31, 1998 and 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
audits.
We conducted our audits 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 audits provide 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 subsidiaries as of December 31, 1998 and
1997 and the results of their operations and their cash flows for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Orange County, California
February 3, 1999
F-2
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1998 1997
------------------- ------------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents............................................................. $ 14,161 $ 15,908
Investment securities available-for-sale.............................................. 17,154 19,353
Residual interest in securitization, held-for-trading................................. 8,790 9,936
Loan receivables:
CMO collateral...................................................................... 326,559 4,255
Finance receivables................................................................. 40,972 95,711
Commercial Mortgages held-for-investment............................................ 24,569 62,790
Allowance for loan losses........................................................... (2,110) (564)
------------------- ------------------
Net loan receivables............................................................. 389,990 162,192
Investment in Impac Commercial Capital Corporation.................................... (15,016) 4,182
Due from affiliates................................................................... 22,131 1,592
Premises and equipment, net........................................................... 9,146 3,857
Accrued interest receivable........................................................... 2,627 1,361
Other assets.......................................................................... 2,236 458
------------------- ------------------
Total assets..................................................................... $ 451,219 $ 218,839
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CMO borrowings........................................................................ $ 285,021 $ 4,176
Warehouse line agreements............................................................. 45,654 90,374
Reverse repurchase agreements......................................................... 4,869 9,841
Due to affiliates..................................................................... 11,170 8,067
Other liabilities..................................................................... 1,168 3,139
------------------- ------------------
Total liabilities................................................................ 347,882 115,597
Commitments and contingencies
Stockholders' Equity:
Preferred Stock; $.01 par value; 9,000,000 shares authorized; no shares -- --
outstanding at December 31, 1998 and 1997.........................................
Series A Junior Participating Preferred Stock; $.01 par value; 1,000,000 shares -- --
authorized; no shares outstanding at December 31, 1998 and 1997...................
Common Stock; $.01 par value; 46,217,295 shares authorized; 8,625,000 86 73
and 7,344,789 shares issued and outstanding at December 31, 1998 and
1997, respectively..................................................................
Class A Common Stock; $.01 par value; 3,782,705 shares authorized; none -- 7
and 674,211 shares issued and outstanding at December 31, 1998 and
1997, respectively..................................................................
Additional paid-in-capital.......................................................... 127,004 104,761
Accumulated other comprehensive earnings (loss)..................................... 24 (160)
Cumulative dividends declared....................................................... (15,575) (4,250)
Retained earnings (accumulated deficit)............................................. (8,202) 2,811
------------------- ------------------
Total stockholders' equity....................................................... 103,337 103,242
------------------- ------------------
$ 451,219 $ 218,839
=================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except earnings per share data)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------------ -------------------------
INTEREST INCOME:
<S> <C> <C>
Commercial Mortgage Assets.................................................. $ 32,933 $ 6,720
Cash equivalents and due from affiliates.................................... 2,912 739
------------------------ -------------------------
Total interest income...................................................... 35,845 7,459
INTEREST EXPENSE:
Warehouse line and reverse repurchase agreements............................ 13,461 1,962
CMO borrowings.............................................................. 7,203 15
Other borrowings............................................................ 912 373
------------------------ -------------------------
Total interest expense..................................................... 21,576 2,350
------------------------ -------------------------
Net interest income......................................................... 14,269 5,109
Provision for loan losses.................................................. 1,546 564
------------------------ -------------------------
Net interest income after provision for loan losses......................... 12,723 4,545
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Commercial Capital Corporation....... (19,199) 1,694
Other income................................................................ 701 174
------------------------ -------------------------
Total non-interest income.................................................. (18,498) 1,868
NON-INTEREST EXPENSE:
Write-down of residual interest in securitization, held-for-trading......... 1,690 --
General and administrative and other expense................................ 1,227 156
Professional services....................................................... 797 640
Property expense............................................................ 779 109
Advisory fees............................................................... 745 --
Stock compensation expense.................................................. -- 2,697
------------------------ -------------------------
Total non-interest expense................................................. 5,238 3,602
------------------------ -------------------------
Net earnings (loss)......................................................... (11,013) 2,811
Other comprehensive earnings (loss):
Unrealized gains (losses) arising during period............................. 184 (160)
------------------------ -------------------------
Comprehensive earnings (loss)............................................... $ (10,829) $ 2,651
======================== =========================
Net earnings (loss) per share--basic and diluted........................... $ (1.26) $ 0.61
======================== =========================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Class A
Preferred Stock Common Stock Common Stock
------------------- ----------------- ----------------- Additional
Number Number Number Paid-in
of Dollar of Dollar of Dollar Capital
Shares Amount Shares Amount Shares Amount (Loss)
----------------------------------------------------------------------
<S> <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
Conversion of promissory notes to 3,000 30 -- -- -- -- 14,970
Preferred Stock...........................
Dividends declared ($0.53 per share)....... -- -- -- -- -- --
Net proceeds from public stock offering.... -- -- 6,325 63 -- -- 86,961
Class A Common Stock issued to IMH for
ICCC Preferred Stock...................... -- -- -- -- 95 1 113
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 --
Other comprehensive loss................... -- -- -- -- -- --
Net earnings from January 15, 1997 -- -- -- -- -- -- --
(commencement of operations) through
December 31, 1997......................... -- -- -- -- -- -- --
----------------------------------------------------------------------
Balance, December 31, 1997................. -- -- 7,345 73 674 7 104,761
Dividends declared ($1.30 per share)....... -- -- -- -- -- -- --
Net proceeds from public stock offering.... -- -- 2,217 22 (217) (2) 28,368
Repurchase of capital stock................ -- -- (937) (9) (457) (5) (6,125)
Other comprehensive earnings............... -- -- -- -- -- -- --
Net loss for the year ended December 31,
1998...................................... -- -- -- -- -- -- --
----------------------------------------------------------------------
Balance, December 31, 1998................. -- $ -- 8,625 $ 86 -- $ -- 127,004
======================================================================
Acumulated Retained
Other Cumulative Earnings Total
Comprehensive Dividends (Accumulated Stockholder's
Earnings (Loss) Declared Deficit) Equity
--------------------------------------------------------------------
Balance, January 15, 1997 (commencement $ -- $ -- $ -- $ --
of operations)
Sale of Common Stock to IMH and certain
officers and directors of the Company..... -- -- -- 2,703
Conversion of promissory notes to -- -- -- 15,000
Preferred Stock...........................
Dividends declared ($0.53 per share)....... -- (4,250) -- (4,250)
Net proceeds from public stock offering.... -- -- -- 87,024
Class A Common Stock issued to IMH for
ICCC Preferred Stock...................... -- -- -- 114
Conversion of ICH Preferred Stock to
Class A Common Stock...................... -- -- -- --
Conversion of ICH Common Stock to
Class A Common Stock...................... -- -- -- --
Other comprehensive loss................... (160) -- -- (160)
Net earnings from January 15, 1997 -- -- 2,811 2,811
(commencement of operations) through
December 31, 1997.........................
------------------------------------------------------------------
Balance, December 31, 1997................. (160) (4,250) 2,811 103,242
Dividends declared ($1.30 per share)....... -- (11,325) -- (11,325)
Net proceeds from public stock offering.... -- -- -- 28,388
Repurchase of capital stock................ -- -- -- (6,139)
Other comprehensive earnings............... 184 -- -- 184
Net loss for the year ended December 31,
1998...................................... -- -- (11,013) (11,013)
------------------------------------------------------------------
Balance, December 31, 1998.................$ 24 $ (15,575) $ (8,202) $ 103,337
==================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the period from
For the January 15, 1997
year ended (commencement of
December 31, operations) through
1998 December 31, 1997
------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)................................................................ $ (11,013) $ 2,811
Adjustments to reconcile net earnings (loss) to net cash provided by (used in)
operating activities:
Equity in net (earnings) loss of Impac Commercial Capital Corporation........... 19,199 (1,694)
Stock compensation expense...................................................... -- 2,697
Provision for loan losses....................................................... 1,546 564
Write-down of residual interest in securitization, held-for-trading............. 1,690 --
Depreciation and amortization................................................... 499 65
Net change in accrued interest on receivables................................... (1,266) (1,361)
Net change in other assets and liabilities...................................... 848 (366)
Net change in due from affiliates and due to affiliates......................... (29,536) 6,475
------------------- -------------------
Net cash provided by (used in) operating activities............................. (18,033) 9,191
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in Commercial Mortgages held-for-investment............................. 38,221 (62,790)
Net change in finance receivables.................................................. 54,739 (95,711)
Net change in CMO collateral....................................................... (322,304) (4,255)
Purchase of investment securities available-for-sale............................... -- (20,202)
Principal reductions on investment securities available-for-sale................... 2,383 689
Purchase of residual interest in securitization, held-for-trading.................. -- (10,098)
Principal reductions on residual interest in securitization, held-for-trading...... (544) 162
Purchase of premises and equipment................................................. (1,338) (3,922)
Contributions to Impac Commercial Capital Corporation.............................. -- (2,375)
------------------- -------------------
Net cash used in investing activities.......................................... (228,843) (198,502)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse line agreements............................................ (44,720) 90,374
Net change in reverse repurchase agreements........................................ (4,972) 9,841
Proceeds from CMO borrowings....................................................... 301,800 4,176
Repayments of CMO borrowings....................................................... (20,955) --
Issuance of Common Stock........................................................... 28,348 87,024
Issuance of promissory notes....................................................... -- 15,000
Issuance of Class A Common Stock................................................... -- 7
Dividends paid..................................................................... (14,372) (1,203)
------------------- -------------------
Net cash provided by financing activities...................................... 245,129 205,219
------------------- -------------------
Net change in cash and cash equivalents............................................. (1,747) 15,908
Cash and cash equivalents at beginning of period.................................... 15,908 --
------------------- -------------------
Cash and cash equivalents at end of period.......................................... $ 14,161 $ 15,908
=================== ===================
SUPPLEMENTARY INFORMATION:
Interest paid...................................................................... $ 20,236 $ 1,974
NON-CASH TRANSACTIONS:
Repurchase of Common Stock and Class A Common Stock................................ $ 6,099 $ --
Acquisition of Dove St. building and other assets in exchange for debt............. 6,000 --
Increase (decrease) in accumulated other comprehensive earnings................... 184 (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.
F-6
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Summary of Significant Accounting Policies
1. Financial Statement Presentation
The operations of the Company have been presented in the consolidated
financial statements for the year ended December 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through December 31, 1997 and
include the financial results of Impac Commercial Holdings, Inc. (ICH), Impac
Commercial Assets Corporation (ICH Assets) and ICH/IMH Dove St. LLC (Dove) as
stand-alone entities and the financial results of ICH's equity interest in net
earnings (loss) in Impac Commercial Capital Corporation (ICCC) as a stand-alone
entity, subsequent to the Contribution (the Contribution).
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. 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 ICCC. Gain on the sale of loans or securities by ICCC to ICH are deferred and
accreted over the estimated life of the loans or securities using the interest
method.
All significant intercompany balances and transactions with ICH's consolidated
subsidiaries have been eliminated in consolidation. Interest income on
affiliated short-term advances, due from affiliates, has been earned at the rate
of 8% per annum. Interest expense on affiliated short-term borrowings, due to
affiliates, has been incurred at the rate of 8% per annum. Costs and expenses of
IMH have been allocated to ICH in proportion to services provided, plus a 15%
service charge. Certain amounts in the prior period's consolidated financial
statements have been reclassified to conform to the current presentation.
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 consolidated financial
statements, and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
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 Securities Available-for-Sale
The Company classifies commercial mortgage-backed securities (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 included in earnings. 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. Such investments may subject the Company to credit, interest
rate and/or prepayment risk.
F-7
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Residual Interest in Securitization, held-for-trading
ICH has estimated future cash flows from residual interest in securitization,
held for trading (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 the Residual as a held-for-trading security. Unrealized gains and
losses will be included in current operations. To the Company's knowledge, there
is currently no active market for the purchase or sale of the 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 (0.60%) to be incurred on the
portfolio of Commercial Mortgages sold over the estimated lives of the
Commercial Mortgages and using an estimated future prepayment assumption (15%).
The prepayment assumption 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 14.9%. 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 over-
collateralization 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 real estate mortgage
investment conduit (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
over-collateralization 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 over-collateralization balance held by
the trust are recorded as part of the Residual.
5. CMO Collateral and Commercial Mortgages Heldfor-Investment
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 loans secured by
mortgages on commercial real property and loans to developers secured by first
liens on converted condominium complexes. Premiums and discounts, which may
result from the purchase or acquisition of Commercial Mortgages in excess of the
outstanding principal balance, are amortized to interest income over their
estimated lives using the interest method as an adjustment to the carrying
amount of the loan. Prepaid securitization costs related to the issuance of CMOs
are amortized to interest expense over their estimated lives using the interest
method as an adjustment to the carrying amount of the loan. 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.
F-8
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Finance Receivables
Finance receivables represent transactions with ICCC involving commercial real
estate lending. 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 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.
7. 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 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 borrower's 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.
8. CMO Borrowings
The Company issues CMOs, which are secured by Commercial Mortgages as a means
of financing its Long-Term Investment Operations. CMOs are carried at their
outstanding principal balances including accrued interest on such obligations.
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.
9. 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, 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 the 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.
F-9
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. Net Earnings (Loss) per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share" (SFAS 128). SFAS 128
replaces the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earning per share,
basic earnings per share excludes any dilutive effects of stock options. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. Basic net earnings per share are computed on the basis of
the weighted average number of shares outstanding for the period. Diluted net
earnings per share are computed on the basis of the weighted average number of
shares and common equivalent shares outstanding for the period.
The following table represents the computation of basic and diluted earnings
per share for the periods presented (in thousands, except per share data):
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
--------------------- ---------------------
<S> <C> <C>
NUMERATOR:
Numerator for basic earnings per share--
Net earnings (loss)................................................... $ (11,013) $ 2,811
===================== ======================
DENOMINATOR:
Denominator for basic earnings per share--
Weighted average number of common shares outstanding during
the period.......................................................... 8,773 4,631
Net effect of dilutive stock options.................................. -- 14
--------------------- ----------------------
Denominator for diluted earnings per share............................... 8,773 4,645
===================== ======================
Net earnings (loss) per share--basic..................................... $ (1.26) $ 0.61
===================== ======================
Net earnings (loss) per share--diluted................................... $ (1.26) $ 0.61
===================== ======================
</TABLE>
11. Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 is effective for fiscal years beginning after December 15,
1997. SFAS 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 131. The
Company recognizes the Long-Term Investment Operations and the Conduit
Operations as two distinct reporting segments. The consolidated financial
statements of Impac Commercial Holdings, Inc. is considered the Long-Term
Investment Operations while the financial statements of Impac Commercial Capital
Corporation is considered the Conduit Operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a
F-10
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
foreign-currency-denominated forecasted transaction. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 is an amendment to SFAS 65, which
required that after the securitization of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed security as a trading security. SFAS No. 134 further amends SFAS No. 65
and requires that after the securitization of mortgage loans held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability and intent to
sell or to hold those investments. SFAS 134 conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by a mortgage
banking enterprise with the subsequent accounting for securities retained after
the securitization of other types of assets by non-mortgage banking enterprises.
SFAS 134 is effective for the first fiscal quarter beginning first quarter 1999.
The Company believes that the adoption of SFAS No. 134 will not have a material
impact on the Company's financial position or results of operations.
NOTE B--INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company's mortgage-backed securities are primarily secured by commercial
real property. The yield to maturity on each security depends on, among other
things, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations), the pass-through rate, and interest
rate fluctuations. The Company's interest in these securities is subordinated so
that, in the event of a loss, payments to senior certificate holders will be
made before the Company receives its payments.
The amortized cost and estimated fair value of investment securities
available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAIN LOSS FAIR VALUE
---------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
At December 31, 1998:
Commercial mortgage-backed securities................... $ 6,515 $ -- $ -- $ 6,515
Interest only securities................................ 10,615 24 -- 10,639
---------- --------- --------- ----------
Total investment securities available-for-sale........ $ 17,130 $ 24 $ -- $ 17,154
========== ========= ========= ==========
At December 31, 1997:
Commercial mortgage-backed securities................... $ 6,363 $ -- $ -- $ 6,363
Interest only securities................................ 13,150 -- 160 12,990
---------- --------- --------- ----------
Total investment securities available-for-sale........ $ 19,513 $ -- $ 160 $ 19,353
========== ========= ========= ==========
</TABLE>
NOTE C--RESIDUAL INTEREST IN SECURITIZATION, HELD-FOR-TRADING
The accompanying 1998 and 1997 balance sheets include one Residual which was
recorded as a result of a 1995 securitization by Imperial Credit Industries,
Inc. (ICII) of commercial loans issued through a special purpose trust vehicle.
As of December 31, 1998 and 1997, the carrying amount of the residual was $8.8
million and $9.9 million, respectively.
NOTE D--COMMERCIAL MORTGAGES HELD-FOR-INVESTMENT
The Company purchases Commercial Mortgages to be held as long-term investment.
Commercial Mortgages held-for-investment include various types of loans secured
by mortgages on commercial real property and loans to developers secured by
first liens on condominium complexes. Approximately 47% and 65%, respectively,
of the
F-11
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal amount of Commercial Mortgages held-for-investment at December 31,
1998 and 1997 were collateralized by properties located in Arizona. During 1998
and 1997, the Long-Term Investment Operations purchased $522.1 million and $41.2
million, respectively, of Commercial Mortgages. As of December 31, 1998 and
1997, Commercial Mortgages held-for-investment were $24.6 million and $62.8
million, respectively, which include premiums of $42,000 and $111,000,
respectively.
NOTE E--CMO COLLATERAL
CMO collateral includes various types of loans secured by mortgages on
commercial real property and loans to developers secured by first liens on
condominium complexes. Approximately 50% of the principal amount of CMO
collateral at December 31, 1998 were collateralized by properties located in
California. During 1998 and 1997, the Long-Term Investment Operations originally
issued $301.8 million and $4.2 million, respectively, of CMOs which were
collateralized by $325.0 million and $4.3 million, respectively, of Commercial
Mortgages. The following table represents the outstanding amounts for the
periods shown:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------
1998 1997
-------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
CMO collateral....................................................................... $ 313,211 $ 4,255
Unamortized net premiums on Commercial Mortgages..................................... 6,134 --
Prepaid securitization costs......................................................... 7,214 --
-------------- ---------------
$ 326,559 $ 4,255
============== ===============
</TABLE>
NOTE F--FINANCE RECEIVABLES
Terms of the Company's warehouse lines to ICCC are at Bank of America's prime
rate, which was 7.75% at December 31, 1998, with advance rates to 90% of the
fair value of the Commercial Mortgages outstanding. The maximum available on
ICCC's warehouse line agreements as of December 31, 1998 and 1997 was $900.0
million and $900.0 million, respectively, of which $41.0 million and $95.7
million, respectively, was outstanding.
NOTE G--ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
--------------------- ----------------------
<S> <C> <C>
(IN THOUSANDS)
Balance, beginning of period............................................ $ 564 $ --
Provision for loan losses............................................... 1,546 564
Charge-offs............................................................. -- --
--------------------- ----------------------
Balance, end of period.................................................. $ 2,110 $ 564
===================== ======================
</TABLE>
F-12
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--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 twenty years).
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
(IN THOUSANDS)
Premises and equipment................................................................ $ 9,710 $ 3,922
Less accumulated depreciation......................................................... (564) (65)
-------------- --------------
$ 9,146 $ 3,857
============== ==============
</TABLE>
NOTE I--CMO BORROWINGS
The following table sets forth CMOs issued by the Company, CMOs outstanding as
of December 31, 1998, and certain interest rate information:
<TABLE>
<CAPTION>
Range of Interest Range of
Range of Interest Rate Rate Interest Rate
Fixed Margins Over Margin Margins After
Issue Issuance CMOs Interest One-Month Adjustment Adjustment
Date Issuance Name Amount Outstanding Rates LIBOR Date Date
- -------- ------------------- --------- ----------- ---------- ------------- ---------- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
12/10/97 Imperial CMB
Trust Series 1997-2 $ 4,255 $ 738 N/A 0.26-1.30% 2/2004 0.52-2.60%
6/23/98 Impac CMB
Trust Series 1998-3 7,069 1,275 N/A 0.18-1.24% 7/2005 0.36-2.48%
8/20/98 Impac CMB
Trust 1998 C-1 (1) 294,731 283,008 6.06-7.58% 0.28% N/A N/A
-----------
$ 285,021
===========
</TABLE>
________________
(1) The variable rate portion of CMOs outstanding as of December 31, 1998 were
$31.3 million. The issuance amount includes an additional bond class of
$18.3 million, which was subsequently issued in December 1998.
The weighted average coupon on CMOs was 8.32% and 6.58% at December 31, 1998
and December 31, 1997. At December 31, 1998 and 1997, CMO borrowings include
accrued interest payable of $1.5 million and $4,000, respectively.
NOTE J--WAREHOUSE LINE AGREEMENTS
ICH entered into warehouse line agreements with investment banks to fund the
purchase of Commercial Mortgages. 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 interest
rates on the loans are based on one-month LIBOR or Eurodollar Rate plus a margin
depending on the type of mortgage collateral provided. The loan amounts
generally range from 75% to 92% of the fair market value of the collateral.
F-13
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables set forth information regarding warehouse line agreements
(in thousands):
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------------
Maximum Maximum Warehouse Underlying
Type of Committed Uncommitted Line Collateral Maturity
Collateral Amount Amount Liability (1) Date
---------- --------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lender 1............................... Mortgages $ 200,000 $ 100,000 $ 45,208 $ 59,322 5/1999
Lender 2............................... Mortgages 446 (2) N/A 446 459 N/A
---------- ----------
$ 45,654 $ 59,781
========== ==========
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------------
Maximum Maximum Warehouse Underlying
Type of Committed Uncommitted Line Collateral Maturity
Collateral Amount Amount Liability (1) Date
---------- --------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Lender 1............................... Mortgages $ 200,000 N/A $ 8,529 $ 9,458 4/1998
Lender 2............................... Mortgages 200,000 N/A 81,845 98,750 2/1999
---------- ----------
$ 90,374 $ 108,208
========== ==========
</TABLE>
_______________
(1) The amount of underlying collateral represents the unpaid principal balance
of Commercial Mortgages provided as collateral for the warehouse lines.
(2) There is no formal warehouse line agreement with Lender 2. Advances are
provided to the Company at the discretion of the lender. During 1998, the
warehouse line agreement was modified from a committed to an uncommitted
warehouse line.
At December 31, 1998 and 1997, warehouse line agreements include accrued
interest payable of $244,000 and $309,000, respectively. 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
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------ -------------------
(dollars in thousands)
<S> <C> <C>
Maximum Month-End Outstanding Balance.................................... $ 376,247 $ 90,374
Average Balance Outstanding.............................................. $ 193,370 $ 25,463
Weighted Average Rate.................................................... 6.70% 7.25%
</TABLE>
NOTE K--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. 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.
The following table sets forth information regarding reverse repurchase
agreements (in thousands):
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------------------
Reverse
Type of Repurchase Underlying Maturity
Collateral Liability Collateral Date
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Lender 1..................................................... Securities $ 2,322 $ 5,316 1/20/99
Lender 2..................................................... Securities 1,953 6,515 1/5/99
Lender 3..................................................... Securities 594 1,008 1/20/99
---------- ----------
$ 4,869 $ 12,839
========== ==========
<CAPTION>
At December 31, 1998
-----------------------------------------------------
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>
F-14
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1998 and 1997, reverse repurchase agreements included accrued
interest payable of $15,000 and $48,000, respectively.
NOTE L--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, 1998 At December 31, 1997
---------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair value Amount Fair value
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
(in thousands)
ASSETS
------
Cash and cash equivalents...................................... $ 14,161 $ 14,161 $ 15,908 $ 15,908
Investment securities available-for-sale....................... 17,154 17,154 19,353 19,353
Residual interest in securitization, held-for-trading.......... 8,790 8,790 9,936 9,936
Commercial Mortgages held-for-investment....................... 24,569 23,941 62,790 62,867
Finance receivables............................................ 40,972 40,972 95,711 95,711
CMO collateral................................................. 326,559 324,923 4,255 4,298
Due from affiliates............................................ 22,131 22,131 1,592 1,592
LIABILITIES
-----------
Warehouse line agreements...................................... 45,654 45,654 90,374 90,374
Reverse repurchase agreements.................................. 4,869 4,869 9,841 9,841
CMO borrowings................................................. 285,021 286,637 4,176 4,176
Due to affiliates.............................................. 11,170 11,170 8,067 8,067
Short-term commitments to extend credit........................ -- -- -- --
</TABLE>
The fair value estimates as of December 31, 1998 and 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.
Investment Securities Available-for-Sale
Fair value is estimated using a bond model, which incorporates certain
assumptions such as prepayment, yield and losses.
Residual Interest in Securitization, Held-for-Trading
F-15
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
that would be realized on a whole loan sale.
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 based on estimated 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 does 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 does 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 does not present unanticipated interest rate or credit
concerns.
CMO Borrowings
Fair value of fixed rate borrowings is estimated based on the use of a bond
model, which incorporates certain assumptions such as yield, prepayment and
losses. Fair value of variable rate borrowings 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.
NOTE M--LIQUIDITY
Management of ICH is committed to funding any potential operating cash flow
deficiencies of ICCC to the extent necessary through December 31, 1999. ICCC
recorded a net loss for the year ended December 31, 1998 of $20.2
F-16
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
million resulting in negative net worth of $15.8 million as of December 31,
1998. The loss was primarily due to the deterioration of the commercial
mortgage-backed securitization market in the third and fourth quarters of 1998.
During the first quarter of 1999, ICCC anticipates selling a significant portion
of its Commercial Mortgage portfolio thus eliminating related net interest
expense. In addition, ICCC may pursue opportunities in retail loan originations
operations, which could generate loan origination fees. Management is also
exploring opportunities to form an alliance with one or more strategic partners
which allow ICCC to fund the growth its operations. Management anticipates the
alliance will also enable ICCC to access the securitization marketplace and
achieve better sale execution.
NOTE N--RELATED PARTY TRANSACTIONS
Credit Arrangements
ICCC has uncommitted warehouse financing facilities with ICH up to a maximum
aggregate amount of $900.0 million. Advances under such warehouse facilities
bear interest at Bank of America's prime rate, which was 7.75% at December 31,
1998. As of December 31, 1998 and 1997, amounts outstanding on ICH's warehouse
line agreements to ICCC were $41.0 million and $95.7 million, respectively.
Interest income recorded by ICH related to warehouse line agreements to ICCC for
the year ended December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997 was $9.1 million and $2.4
million, respectively.
During 1997 and 1998, ICH had a credit arrangement with IMH whereby ICH
advanced to IMH up to maximum amount of $15.0 million for general working
capital needs. Subsequent to 1998, the credit agreement was terminated and will
no longer be used by ICH. Advances under the credit arrangement were at an
interest rate and maturity determined at the time of each advance with interest
and principal paid monthly. As of December 31, 1998 and 1997, IMH had no
outstanding borrowings under the credit arrangement. Interest income recorded by
ICH for the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997 was $295,000 and
$68,000, respectively.
During 1997 and 1998, ICH had a credit arrangement with IMH whereby IMH
advanced to ICH up to maximum amount of $15.0 million for general working
capital needs. Subsequent to 1998, the credit agreement was terminated and will
no longer be used by ICH. Advances under the credit arrangement were at an
interest rate and maturity determined at the time of each advance with interest
and principal paid monthly. As of December 31, 1998 and 1997, ICH's outstanding
borrowings under the credit arrangement were none and $9.1 million,
respectively. Interest expense recorded by ICH for the year ended December 31,
1998 and for the period from January 15, 1997 (commencement of operations)
through December 31, 1997 was $43,000 and $55,000, respectively.
On November 9, 1998, IFC borrowed $5.0 million from ICH on a demand note
secured by mortgage servicing rights of $1.1 billion at an interest rate of 10%.
This rate was adjusted to 15% on December 15, 1998. On December 22, 1998, this
note was paid in full. Interest income recorded by ICH for 1998 was $66,000.
ICH entered into a 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. Interest income recorded by ICH for 1997
was $66,000.
On December 31, 1997, ICH financed its 50% interest in a commercial office
building located in Newport Beach, California with a loan for $5.2 million from
ICCC. The loan was repaid by ICH in the fourth quarter of 1998 with proceeds
from the sale of Commercial Mortgages. ICCC received loan fees of $71,000 upon
origination of the loan.
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
F-17
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8.00% per annum. Interest income recorded by ICH related to short-term advances
due from affiliates for the year ended December 31, 1998 and for the period from
January 15, 1997 (commencement of operations) through December 31, 1997 was $2.1
million and $268,000, respectively. Interest expense recorded by ICH related to
short-term advances due to affiliates for the year ended December 31, 1998 and
for the period from January 15, 1997 (commencement of operations) through
December 31, 1997 was $825,000 and $45,000, respectively.
Lease Agreement
During 1998, ICH entered into a premises operating lease with IMH and IFC to
rent approximately 74,000 square feet of office space. The lease agreement is
for a term of ten years expiring in May 2008 with monthly lease payments of
$145,000 per month.
Purchase of Commercial Mortgages
During the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997, ICH purchased
$525.2 million and $23.7 million, respectively, of Commercial Mortgages from
ICCC at net discounts of $3.1 million and net premiums of $111,000,
respectively.
Purchase of Commercial Office Building
On October 27, 1998, the Company purchased from IMH its remaining 50%
ownership interest in a commercial office building located in Newport Beach,
California for $6.0 million. After the purchase of the 50% ownership interest
from IMH, the Company has a 100% ownership interest in the building.
Repurchase of Capital Stock
On October 21, 1998, the Company repurchased from IMH 937,084 shares of Common
Stock and 456,916 shares of Class A Common Stock at a per share price of $4.375,
based upon the closing price of the Common Stock on AMEX on October 19, 1998,
for a total repurchase of $6.1 million.
Sale of Commercial Mortgages
During the year ended December 31, 1998, ICH sold $43.2 million of Commercial
Mortgages to ICCC at no gain or loss.
Stock Compensation Expense
Stock compensation expense of $2.7 million represents the difference between
the price at which ICH issued 300,000 shares of common stock to directors and
officers of IMH and ICH on February 3, 1997 ($.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 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
provide 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
F-18
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
charge. RAI charges ICH for these services based upon usage. Total cost
allocations RAI charged to ICH for the year ended December 31, 1998 and the
period from January 15, 1997 (commencement of operations) through December 31,
1997 were $521,000 and $525,000, respectively.
Unsecured Promissory Note
In July 1998, William D. Endresen and Rae Ann Endresen, the makers, signed an
unsecured promissory note for $100,000 with ICH, the holder, which was modified
in November 1998 and states that the makers are to repay the note and accrued
interest at a rate of nine percent (9%) per annum with 50% of the after tax
dividend equivalent payments made to Mr. Endresen in accordance with the Stock
Options and Awards Plan. As of December 31, 1998, the balance outstanding on the
note was $101,000.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH initial
public offering, IFC will not acquire any commercial mortgages for a period of
the earlier of nine months from the closing of the ICH initial public offering
or the date upon which ICH and/or ICCC accumulates (for investment or sale)
$300.0 million of commercial mortgages or commercial mortgage-backed securities.
This agreement expired in March 1998.
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.
NOTE O--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 non-performance by the counterparties to the various agreements associated
with loan purchases. However, ICH does not anticipate non-performance 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.
Commercial Mortgage Loan Sales Commitments
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,, approximately 3,600 square feet in Sherman
Oaks, California and approximately 4,300 square feet in Dallas, Texas under
premises operating leases expiring in November 2000, May 2001 and August 2003,
respectively. Minimum premises rental commitments are as follows (in thousands):
F-19
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1999.......................................................... $ 734
2000.......................................................... 691
2001.......................................................... 166
2002.......................................................... 126
2003.......................................................... 84
-------
Total.................................................... $ 1,801
=======
All rent expense associated with the lease is charged to ICCC as ICCC's
employees occupy 100% of the 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, 1998 and 1997, ICH's outstanding balances on warehouse lines to ICCC was
$41.2 million and $95.7 million, respectively.
Litigation
SPI Danvers, LLC v. Impac Commercial Capital Corporation, William D. Endresen
and Lawrence R. Goswiller, Orange County Superior Court Case No. 802070
On November 13, 1998, SPI Danvers, LLC (Danvers) filed a complaint against the
above defendants alleging 13 causes of action including breach of contract and
numerous tort causes of action, including fraud. Danvers seeks approximately
$312,000 against all defendants, which allegedly represents its deposits, plus
10% lost opportunity costs, $840,000 in alternative financing costs, lost
profits in an unspecified amount, and punitive damages and attorneys fees
according to proof.
Danvers' allegations set forth generally that it sought refinancing of an
existing loan as well as obtaining a new loan in the amount of $4.2 million, and
thus entered into certain discussions and negotiations with ICCC. The purpose of
the loan was to conclude the purchase of property. Danvers alleges that it paid
ICCC certain "good faith" and "rate lock deposits" totaling an aggregate of
approximately $312,000. It is alleged that ICCC entered into a loan agreement,
defined as the letter of interest, rate lock agreement, and loan commitment
letter, with Danvers. Following plaintiff's alleged continual compliance with
requests for information and other loan conditions from ICCC, ICCC did not close
and fund the loan.
In February 1999, the court granted ICCC's and the other defendant's demurrer
to most of the tort causes of action and granted a motion to strike the punitive
damages and attorney fees allegation. However, the court also granted Danvers an
opportunity to file an amended complaint to attempt to reassert all the claims
and damages in a proper pleading. The Company believes that this case is without
merit and intends to vigorously defend the action.
Note P--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
F-20
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. Management fees paid to
RAI during the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997 were $745,000 and
none, respectively.
In order to utilize the IMH infrastructure, RAI entered into a submanagement
agreement with IFC 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.
Note Q--Stock Option and Awards 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 and Awards 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 subsidiaries, 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
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, 1998 and 1997, options to purchase 65,663 shares and none,
respectively, were exercisable and 214,078 shares and 420,250 shares,
respectively, were available for future grants under the Stock Option and Awards
Plan.
F-21
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Option transactions for the periods shown are summarized as follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------
1998 1997
-----------------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Range of Number Average Range of
Of Exercise Exercise Of Exercise Exercise
Shares Price Prices Shares Price Prices
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of year.. 212,250 $ 15.41 $ 15.018.8 -- -- --
Options granted........................... 293,510 9.77 6.017.6 222,250 $ 15.41 $15.0-18.8
Options forfeited or cancelled............ (87,338) 16.76 6.018.8 (10,000) 15.41 15.0-18.8
------- -------
Options outstanding at end of year........ 418,422 11.17 6.018.8 212,250 15.41 15.0-18.8
======= =======
</TABLE>
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). 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 earnings (loss)
computed as if the fair value based method as defined in SFAS 123 had been
applied.
The Company elected to continue to apply APB Opinion No. 25 in accounting for
its Stock Options and Awards 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 earnings
and earnings per share would have decreased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
For the period
from January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------ ---------------------
(in thousands)
<S> <C> <C>
Net earnings (loss) as reported....................................... $ (11,013) $ 2,811
Pro forma net earnings (loss)......................................... (12,010) 2,280
Basic earnings (loss) per share as reported........................... (1.26) 0.61
Diluted earnings (loss) per share as reported......................... (1.26) 0.61
Basic pro forma earnings (loss) per share............................. (1.37) 0.49
Diluted pro forma earnings (loss) per share........................... (1.37) 0.49
</TABLE>
The derived fair value of the options granted during 1998 and 1997 was
approximately $3.90 and $2.39 per share, respectively, using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of
5.10% and 5.84%, respectively, dividend yield of 8.1% and 8.7%, respectively,
expected lives of 3.9 and 9.3 years and expected volatility of 92.7% and 37.2%,
respectively.
Note R--Stockholders' Equity
On November 6, 1998, the Company paid the previously announced third quarter
dividend of $0.45 per share to stockholders of record on October 9, 1998. The
Company paid interest in the form of an additional cash dividend at an interest
rate of 4% per annum for the period from the previously announced payment date
of October 26, 1998 through November 6, 1998. The total amount of the interest
the Company paid as a result of the dividend payment delay was $6,000 or $0.0006
per common share outstanding.
On October 21, 1998, the Company repurchased from IMH 937,084 shares of Common
Stock and 456,916 shares of Class A Common Stock at a per share price of $4.375,
which was based upon the closing price of the Common Stock on AMEX on October
19, 1998, for a total repurchase of $6.1 million.
On October 7, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan in which Preferred Stock Purchase Rights were distributed as a
dividend at the rate of one Right for each outstanding share of common stock.
The dividend distribution was made on October 19, 1998, payable to stockholders
of record on that date. The
F-22
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rights are attached to the Company's common stock. The Rights will be
exercisable and trade separately only in the event that a person or group
acquires or announces the intent to acquire 10 percent or more of the Company's
common stock. Each Right will entitle stockholders to buy one one-hundredth of a
share of a new series of Series A junior participating preferred stock at an
exercise price of $16.25. If the Company is acquired in a merger or other
transaction after a person has acquired 10 percent or more of the Company's
outstanding common stock, each Right will entitle the stockholder to purchase,
at the Right's then-current exercise price, a number of the acquiring Company's
common shares having a market value of twice such price. In addition, if a
person or group acquires 10 percent or more of the Company's common stock, each
Right will entitle the stockholder (other than the acquiring person) to
purchase, at the Right's then-current exercise price, a number of shares of the
Company's common stock having a market value of twice such price. Following the
acquisition by a person of 10 percent or more of the Company's common stock and
before an acquisition of 50 percent or more of the common stock, the Board of
Directors may exchange the Rights (other than the Rights owned by such person)
at an exchange ratio of one share of common stock per Right. Before a person or
group acquires beneficial ownership of 10 percent or more of the Company's
common stock, the Rights are redeemable for $.0001 per right at the option of
the Board of Directors. The Rights will expire on October 19, 2008. The Rights
distribution is not taxable to stockholders. The Rights are intended to enable
all the Company stockholders to realize the long-term value of their investment
in the Company.
On September 28, 1998, the Company declared a third quarter dividend of $4.5
million, or $0.45 per share. The original payment date of this dividend was set
for October 26, 1998 to stockholders of record on October 9, 1998 but was
delayed until November 6, 1998.
On September 25, 1998, the Company's Board of Directors authorized the Company
to repurchase up to $5.0 million of the Company's common stock, $.01 par value,
in open market purchases from time to time at the discretion of the Company's
management; the timing and extent of the repurchases will depend on market
conditions. The Company intends to effect such repurchases, if any, in
compliance with the Rule 10b-18 under the Securities Exchange Act of 1934. Any
acquired shares will be canceled. Through February 16, 1999, the Company had not
repurchased any shares under this program.
On June 22, 1998, the Company completed a common stock offering. The Company
raised additional capital of $28.4 million, net of underwriting discounts and
other expenses, as stockholders purchased 2,000,000 shares of common stock at a
price of $15.3125 per share.
On June 8, 1998, the Company declared a second quarter dividend of $3.6
million, or $0.45 per share. This dividend was paid on July 15, 1998 to
stockholders of record on June 19, 1998.
On April 1, 1998, the Company declared a first quarter dividend of $3.2
million, or $0.40 per share. This dividend was paid on April 24, 1998 to
stockholders of record on April 9, 1998.
Note S--Quarterly Financial Data (unaudited)
Selected quarterly financial data for the year ended December 31, 1998 follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months Ended,
----------------------------------------------------------------
December 31, September 30, June 30, March 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income after provision for loan losses (1)... $ 2,837 $ 3,306 $ 3,570 $ 3,010
Non-interest income (1)................................... (3,805) (14,243) (105) (345)
Non-interest expense (1).................................. 1,670 2,288 792 488
Net earnings (loss)....................................... (2,638) (13,225) 2,673 2,177
Net earnings (loss) per share basic and diluted (2)...... (0.30) (1.32) 0.33 0.27
Dividends declared per share.............................. -- 0.45 0.45 0.40
</TABLE>
F-23
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected quarterly financial data for the period from January 15, 1997
(commencement of operations) through December 31, 1997 follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
For the Three Months Ended,
------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------------------------------------------------------
<S> <C>
Net interest income after provision for loan losses (1).. $ 2,338 $ 1,690 $ 443 $ 74
Non-interest income (1).................................. 1,183 685 -- --
Non-interest expense (1)................................. 440 278 124 2,760
Net earnings (loss)...................................... 3,081 2,097 319 (2,686)
Net earnings (loss) per share basic and diluted (2)..... 0.38 0.38 N/A N/A
Dividends declared per share (3)......................... 0.38 0.15 N/A N/A
</TABLE>
- -----------------
(1) Conforms to current year presentation.
(2) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total for the year.
(3) ICH became a public company on August 5, 1997, therefore per share amounts
for the quarters ended June 30, 1997 and March 31, 1997 are not applicable.
F-24
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note T--Impac Commercial Capital Corporation and Subsidiary
The following condensed consolidated financial information summarizes the
consolidated financial position and consolidated results of operations of Impac
Commercial Capital Corporation (in thousands):
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
At December 31,
---------------------------------
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
------
Cash.................................................................................... $ 692 $ 2,273
Commercial Mortgages held-for-sale...................................................... 44,854 106,654
Due from affiliates..................................................................... 5,740 1,538
Premises and equipment, net............................................................. 909 381
Other assets............................................................................ 2,005 1,789
----------- ------------
Total assets....................................................................... $ 54,200 $ 112,635
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Warehouse line agreements............................................................... $ 44,881 $ 104,219
Due to affiliates....................................................................... 21,101 758
Other liabilities....................................................................... 4,022 3,255
----------- ------------
Total liabilities.................................................................. 70,004 108,232
----------- ------------
Shareholders' Equity:
Preferred Stock....................................................................... 2,875 2,875
Common Stock.......................................................................... 1 1
Contributed capital................................................................... 150 150
Retained earnings (accumulated deficit)............................................... (18,830) 1,377
----------- ------------
Total shareholders' equity......................................................... (15,804) 4,403
----------- ------------
$ 54,200 $ 112,635
=========== ============
</TABLE>
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------- -------------------
<S> <C> <C>
Net interest income:
Total interest income.................................................... $ 9,778 $ 2,804
Total interest expense................................................... 10,803 2,747
------------------- -------------------
Net interest income (expense).......................................... (1,025) 57
Non-interest income:
Gain (loss) on sale of loans............................................. (14,345) 3,657
Other income............................................................. 24 62
------------------- -------------------
Total non-interest income.............................................. (14,321) 3,719
Non-interest expense:
Other operating expense.................................................. 5,365 1,176
Provision for repurchases................................................ 176 201
------------------- -------------------
Total non-interest expense............................................. 5,541 1,377
------------------- -------------------
Net earnings (loss) before income taxes.................................. (20,887) 2,399
Income taxes (benefit)................................................... (680) 1,022
------------------- -------------------
Net earnings (loss)...................................................... $ (20,207) $ 1,377
=================== ===================
</TABLE>
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Impac Commercial Capital Corporation:
We have audited the accompanying consolidated balance sheets of Impac
Commercial Capital Corporation and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1998 and 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 audits.
We conducted our audits 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 audits provide 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 Capital Corporation and subsidiary as of December 31, 1998 and
1997, and the results of their operations and their cash flows for the year
ended December 31, 1998 and for the period from January 15, 1997 (commencement
of operations) through December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Orange County, California
February 3, 1999
F-26
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
------
Cash................................................................................... $ 692 $ 2,273
Commercial Mortgages held-for-sale..................................................... 44,854 106,654
Due from affiliates.................................................................... 5,740 1,538
Premises and equipment, net............................................................ 909 381
Accrued interest receivable............................................................ 272 337
Deferred tax asset..................................................................... -- 924
Other assets........................................................................... 1,733 528
-------------- --------------
Total assets......................................................................... $ 54,200 $ 112,635
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Warehouse line agreements.............................................................. $ 44,881 $ 104,219
Due to affiliates...................................................................... 21,101 758
Other liabilities...................................................................... 4,022 3,255
-------------- --------------
Total liabilities.................................................................... 70,004 108,232
-------------- --------------
Commitments and contingencies
Shareholders' Equity:
Preferred stock; no par value; 50,000 shares authorized; 2,875 2,875
9,500 shares issued and outstanding at December 31, 1998 and 1997....................
Common stock; no par value; 50,000 shares authorized; 1 1
500 shares issued and outstanding at December 31, 1998 and 1997......................
Contributed capital................................................................... 150 150
Retained earnings (accumulated deficit)............................................... (18,830) 1,377
-------------- --------------
Total shareholders' equity........................................................... (15,804) 4,403
-------------- --------------
$ 54,200 $ 112,635
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------ -------------------
<S> <C> <C>
INTEREST INCOME:
Commercial Mortgages held-for-sale....................................... $ 9,573 $ 2,787
Cash and due from affiliates............................................. 205 17
------------------ -----------------
Total interest income.................................................. 9,778 2,804
INTEREST EXPENSE:
Borrowings from ICH...................................................... 9,064 2,372
Other affiliated borrowings.............................................. 1,739 375
------------------ -----------------
Total interest expense................................................. 10,803 2,747
------------------ -----------------
Net interest income (expense)............................................ (1,025) 57
NON-INTEREST INCOME:
Gain (loss) on sale of loans............................................. (14,345) 3,657
Other income............................................................. 24 62
------------------ -----------------
Total non-interest income.............................................. (14,321) 3,719
NON-INTEREST EXPENSE:
Personnel expense........................................................ 2,507 38
General and administrative and other expense............................. 1,070 288
Occupancy expense........................................................ 1,036 160
Professional services.................................................... 752 540
Provision for repurchases................................................ 176 201
Stock compensation expense............................................... -- 150
------------------ -----------------
Total non-interest expense............................................. 5,541 1,377
------------------ -----------------
Net earnings (loss) before income taxes.................................. (20,887) 2,399
Income taxes (benefit)................................................... (680) 1,022
------------------ -----------------
Net earnings (loss)...................................................... $ (20,207) $ 1,377
================== =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- ----------------- Retained
Number Number Earnings Total
of Dollar of Dollar Contributed (Accumulated Shareholders
Shares Amount Shares Amount Capital (Deficit) Equity
-------------------- ------------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 15, 1997 -- $ -- -- $ -- $ -- $ -- $ --
(commencement of operations).....
Issuance of common stock........... -- -- 500 1 25 -- 26
Issuance of preferred stock........ 9,500 500 -- -- -- -- 500
Capital contribution............... -- 2,375 -- -- 125 -- 2,500
Net earnings 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
-------------------------------------------------------------------------------------------
Net loss for the year ended
December 31, 1998................. -- -- -- -- -- (20,207) (20,207)
-------------------------------------------------------------------------------------------
Balance, December 31, 1998......... 9,500 $ 2,875 500 $ 1 $ 150 $ (18,830) $ (15,804)
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------------ -------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings (loss)....................................................... $ (20,207) $ 1,377
Adjustments to reconcile net earnings (loss) to net cash provided by
(used in) operating activities:
Depreciation............................................................. 226 50
Deferred income taxes.................................................... 924 (924)
Stock compensation expense............................................... -- 150
Provision for repurchases................................................ 176 201
Net change in accrued interest receivable................................ 65 (337)
Net change in due from affiliates and due to affiliates.................. 16,141 (780)
Net change in other assets and liabilities............................... (614) 2,526
------------------------ -------------------------
Net cash provided by (used in) operating activities.................... (3,289) 2,263
------------------------ -------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Originations of Commercial Mortgages held-for-sale....................... (425,096) (233,545)
Sale of Commercial Mortgages held-for-sale................................ 486,896 126,891
Purchases of premises and equipment....................................... (754) (431)
------------------------ -------------------------
Net cash provided by (used) in investing activities.................... 61,046 (107,085)
------------------------ -------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse line agreements................................... (59,338) 104,219
Issuance of preferred stock............................................... -- 500
Issuance of common stock.................................................. -- 1
Contributions from ICH.................................................... -- 2,375
------------------------ -------------------------
Net cash provided by (used in) financing activities.................... (59,338) 107,095
------------------------ -------------------------
Net change in cash and cash equivalents.................................... (1,581) 2,273
Cash and cash equivalents at beginning of period........................... 2,273 --
------------------------ -------------------------
Cash and cash equivalents at end of period................................. $ 692 $ 2,273
======================== =========================
SUPPLEMENTARY INFORMATION:
Interest paid............................................................. $ 11,779 $ 2,276
Taxes paid................................................................ 486 422
NON-CASH TRANSACTIONS:
Issuance of Common Stock.................................................. $ -- $ 25
Capital contribution of common stockholders............................... -- 125
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Summary of Business and Significant Accounting Policies
1. Basis of Financial Statement Presentation
The operations of the Company have been presented in the consolidated
financial statements for the year ended December 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through December 31, 1997 and
include the financial results of Impac Commercial Capital Corporation (ICCC) as
a stand-alone company.
Interest income on affiliated short-term advances (Due from affiliates) has
been earned at the rate of 8% per annum. Interest expense on affiliated short-
term borrowings (Due to affiliates), has been incurred at the rate of 8% per
annum. Costs and expenses of IMH have been allocated to ICCC in proportion to
services provided, plus a 15% service charge. Certain amounts in the prior
period's consolidated financial statements have been reclassified to conform to
the current presentation.
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.
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 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.
4. 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 on sale of loans or securities to ICH are deferred
and accreted over the estimated life of the loans or securities using the
interest method.
5. 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.
F-31
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Commercial Mortgage Servicing Income
Servicing income is reported as earned, principally on a cash basis when the
majority of the service process is completed.
Note B--Commercial Mortgages Held-for-Sale
Substantially all Commercial Mortgages originated by ICCC are fixed-rate or
adjustable-rate commercial mortgage loans secured by first liens on commercial
properties. Approximately 32% and 51%, respectively, of Commercial Mortgages
held-for-sale at December 31, 1998 and 1997, respectively, are collateralized by
commercial real properties located in California. During the year ended December
31, 1998 and for the period from January 15, 1997 (commencement of operations)
through December 31, 1997, ICCC originated $425.1 million and $233.5 million,
respectively, of Commercial Mortgages and sold none and $73.4 million,
respectively, of Commercial Mortgages to third party investors. In addition,
ICCC sold $525.2 million and $23.7 million, respectively, of Commercial
Mortgages to ICH during the year ended December 31, 1998 and for the period from
January 15, 1997 (commencement of operations) through December 31, 1997.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1998 1997
----------------------- ------------------------
(in thousands)
<S> <C> <C>
Commercial Mortgages.................................... $ 45,524 $ 106,346
Unamortized net discounts on Commercial Mortgages....... (721) --
Deferred loan fees...................................... 77 308
Deferred hedging........................................ (26) --
----------------------- ------------------------
$ 44,854 $ 106,654
======================= ========================
</TABLE>
At December 31, 1998 and 1997, other liabilities includes an allowance for
repurchases of $377,000 and $201,000, respectively.
Note C--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).
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------
1998 1997
----------------------- ------------------------
(in thousands)
<S> <C> <C>
Premises and equipment................... $ 1,185 $ 431
Less accumulated depreciation............ (276) (50)
----------------------- ------------------------
$ 909 $ 381
======================= ========================
</TABLE>
Note D--Warehouse Line Agreements
ICCC enters into warehouse line agreements with ICH and IMH to fund the
origination and purchase of Commercial Mortgages. 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.
ICCC has entered into warehouse facilities with ICH to obtain financing up to
an aggregate of $900.0 million. The margins on the warehouse facility are at 90%
of the fair market value of the collateral. The interest rates on the borrowings
are at Bank of America's prime rate. ICCC has entered into a warehouse facility
with IMH to provide
F-32
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Bank of America's prime rate.
The following tables set forth information regarding warehouse line agreements
(in thousands):
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum Warehouse Underlying
Type of Uncommitted Line Collateral Maturity
Collateral Amount Liability (1) Date
----------------------------------------------------------------------------
Impac Commercial Holdings, Inc..................... Mortgages $900,000 $ 41,217 $ 41,963 N/A
Impac Mortgage Holdings, Inc....................... Mortgages N/A 3,664 3,730 N/A
--------------------------------
Total............................................ $ 44,881 $ 45,693
================================
<CAPTION>
At December 31, 1997
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum Warehouse Underlying
Type of Uncommitted Line Collateral Maturity
Collateral Amount Liability (1) Date
------------------------------------------------------------------------------
Impac Commercial Holdings, Inc..................... Mortgages $900,000 $ 95,711 $ 103,280 N/A
Impac Mortgage Holdings, Inc....................... Mortgages N/A 8,508 9,181 N/A
----------------------------------
Total............................................ $ 104,219 $ 112,461
==================================
</TABLE>
- ---------------------
(1) The amount of underlying collateral represents the unpaid principal balance
of Commercial Mortgages provided as collateral for the warehouse lines.
Note E--Income Taxes
The components of income taxes consist of the following:
<TABLE>
<CAPTION>
For the period from
January 15, 1997
(commencement of
For the year ended operations) through
December 31, 1998 December 31, 1997
------------------------ -------------------------
(in thousands)
<S> <C> <C>
Current income taxes:
Federal................................................................ $ (1,604) $ 1,483
State.................................................................. -- 463
------------------------ -------------------------
Total current income taxes............................................ (1,604) 1,946
------------------------ -------------------------
Deferred income taxes:
Federal................................................................ 724 (723)
State.................................................................. 200 (201)
------------------------ -------------------------
Total deferred income taxes........................................... 924 (924)
------------------------ -------------------------
Total income taxes.................................................. $ (680) $ 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>
1998 1997
----------------- -----------------
(in thousands)
<S> <C> <C>
Computed "expected" income tax (benefit) at federal rate.............................. $ (7,102) $ 816
California franchise tax, net of federal income tax (benefit)......................... (727) 173
Valuation allowance................................................................... 7,779 --
Effect of change in state valuation allowance......................................... (443) --
Other................................................................................. (187) 33
----------------- -----------------
$ (680) $ 1,022
================= =================
</TABLE>
F-33
<PAGE>
The tax effects that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 1998 and 1997 are presented
below:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
(in thousands)
<S> <C> <C>
Deferred tax assets:
--------------------
Deferred revenue.......................... $ 1,346 $ 551
Future state tax benefit.................. -- 89
Loan mark-to-market....................... -- 844
Provision for repurchases................. 167 90
Non-accrual loan.......................... 96 --
Accrued vacation.......................... 31 --
Minimum tax credit........................ 86 --
Net operating losses...................... 7,045 --
----------------- ------------------
Total gross deferred tax assets........ 8,771 1,574
Valuation allowance.................... 7,779 --
Deferred tax liabilities:
-------------------------
Mortgage servicing rights................. 985 (650)
Depreciation.............................. 7 --
----------------- -----------------
Net deferred tax asset................. $ -- $ 924
================= =================
</TABLE>
As of December 31, 1998, the Company has net operating loss carry-forwards for
federal and state income tax purposes of $17.5 million and $10.7 million,
respectively, which are available to offset future taxable income, if any,
through 2018 and 2003, respectively. In addition, the Company has an alternative
minimum tax credit carry-forward of approximately $86,000 which is available to
reduce future federal regular income taxes, if any, over an indefinite period.
The Company believes that the deferred tax asset will not be realized with the
reversal of the deferred tax liability and expected future taxable income, and
therefore, the Company has established a valuation allowance of $7.8 million.
ICCC does not have a current tax payable as of December 31, 1998.
Note F--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.
F-34
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1998 1997
--------------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------- -------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................................... $ 692 $ 692 $ 2,273 $ 2,273
Commercial Mortgages held-for-sale.......................... 44,854 46,625 106,654 112,461
Due from affiliates......................................... 5,740 5,740 1,538 1,538
Liabilities:
Warehouse line agreements................................... 44,881 44,881 104,219 104,219
Due to affiliates........................................... 21,101 21,101 758 758
Futures contracts........................................... -- 97 -- 510
Off balance-sheet loan commitments.......................... -- -- -- --
</TABLE>
The fair value estimates as of December 31, 1998 and 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 based on estimated 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 does 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 based on estimated quoted market prices from dealers and brokers
for similar types of instruments.
Off Balance-Sheet Loan Commitments
Fair value of commitments, including hedging position, is determined in the
aggregate on current investor yield requirements.
F-35
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note G--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%. If 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. The
Company contributed matching and discretionary amounts to the 401(k) plan for
the year ended December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997 of $63,000 and $17,000,
respectively.
Note H--Liquidity
ICCC recorded a net loss for the year ended December 31, 1998 of $20.2
million resulting in negative net worth of $15.8 million as of December 31,
1998. The loss for 1998 was primarily due to the deterioration of the commercial
mortgage backed securitization market in the third and fourth quarters of 1998.
To the extent necessary, ICH intends to support and fund the cash flow
requirements of ICCC for the next twelve months through December 31, 1999.
During the first quarter of 1999, ICCC anticipates selling a significant portion
of its Commercial Mortgage portfolio thus eliminating related net interest
expense. In addition, ICCC may pursue opportunities in retail loan originations
operations, which could generate loan origination fees. Management is also
exploring opportunities to form an alliance with one or more strategic partners
which will allow ICCC to fund the growth its operations. Management anticipates
the alliance will also enable ICCC to access the securitization marketplace and
achieve better sale execution.
Note I--Related Party Transactions
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. The
interest rates on the borrowings are at Bank of America's prime rate, which was
7.75% at December 31, 1998. The margins on the warehouse line agreements are up
to 90% of the fair market value of the collateral provided. As of December 31,
1998 and 1997, amounts outstanding on ICCC's warehouse line agreements with ICH
were $41.2 million and $95.7 million, respectively. Interest expense recorded by
ICCC for the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997 was $9.1 million and
$2.4 million, respectively.
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 provided. The interest rates on
the borrowings are at Bank of America's prime rate. As of December 31, 1998 and
1997, outstanding amounts on the warehouse line agreement were $3.7 million and
$8.5 million, respectively. Interest expense recorded by ICCC for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 was $785,000 and $262,000, respectively.
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
F-36
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
annum. Interest income recorded by ICCC for the year ended December 31, 1998 and
for the period from January 15, 1997 (commencement of operations) through
December 31, 1997 related to short-term advances due from affiliates was
$204,000 and $16,000, respectively. Interest expense recorded by ICCC for the
year ended December 31, 1998 and for the period from January 15, 1997
(commencement of operations) through December 31, 1997 related to short-term
advances due to affiliates was $954,000 and $113,000, respectively.
Repurchase of Commercial Mortgages
During the year ended December 31, 1998, ICCC purchased $43.2 million of
Commercial Mortgages from ICH at no gain or loss.
Sale of Commercial Mortgages
During the year ended December 31, 1998 and for the period from January 15,
1997 (commencement of operations) through December 31, 1997, ICCC sold $525.2
million and $23.7 million, respectively, in principal balance of Commercial
Mortgages to ICH at a net discount of $3.1 million and a net premium of
$111,000, respectively.
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. Total cost allocations IFC charged to ICCC for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997 were $574,000 and $456,000, respectively.
Non-Compete Agreement and Right of First Refusal Agreement
Pursuant to the Non-Compete Agreement executed on the date of the ICH initial
public offering, IFC will not acquire any commercial mortgages for a period of
the earlier of nine months from the closing of the ICH initial public offering
or the date upon which ICH and/or ICCC accumulates (for investment or sale)
$300.0 million of commercial mortgages or commercial mortgage-backed securities.
This agreement expired in March 1998.
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.
Note J--Commitments and Contingencies
Commercial Mortgage Loan Sales Commitments
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
F-37
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Futures 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 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 Treasury 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, 1998 and 1997, the
Company had $20.0 million and $105.1 million, respectively, in outstanding
commitments to sell U.S. Treasury notes.
Lease Commitments
ICH and ICCC, as tenants in common, lease approximately 18,000 square feet of
office space in Irvine, California, approximately 3,600 square feet in Sherman
Oaks, California and approximately 4,300 square feet in Dallas, Texas under
premises operating leases expiring in November 2000, May 2001 and August 2003,
respectively. Minimum premises rental commitments are as follows (in thousands):
<TABLE>
<S> <C>
1999.................................................... $ 734
2000.................................................... 691
2001.................................................... 166
2002.................................................... 126
2003.................................................... 84
------------
Total................................................... $ 1,801
============
</TABLE>
All rent expense associated with the lease is charged to ICCC as ICCC's
employees occupy 100% of office space.
Note K--Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended,
------------------------------------------------------------------
December 31, September 30, June 30, March 31,
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest expense (1)............ $ (319) $ (369) $ (264) $ (73)
Non-interest income (1)............. 264 (14,932) 263 84
Non-interest expense (1)............ 3,613 315 444 489
Net loss............................ (3,668) (15,616) (445) (478)
</TABLE>
F-38
<PAGE>
IMPAC COMMERCIAL CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Selected quarterly financial data for the period from January 15, 1997
(commencement of operations) through December 31, 1997 follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
For the Three Months Ended,
--------------------------------------------------------------
December 31, September 30, June 30, March 31,
<S> <C> <C> <C> <C>
Net interest income (1).............................. $ 27 $ 14 $ 15 $ 1
Non-interest income (1).............................. 2,156 1,524 37 2
Non-interest expense (1)............................. 1,059 1,009 142 189
Net earnings (loss).................................. 1,124 529 (90) (186)
</TABLE>
- ----------------
(1) Conforms to current year presentation.
F-39
<PAGE>
EXHIBIT 3.1(d)
STATE OF MARYLAND
672000
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: OCTOBER 14, 1998
THIS IS TO ADVISE YOU THAT THE ARTICLES OF CONSOLIDATION FOR IMPAC COMMERCIAL
HOLDINGS, INC. WERE RECEIVED AND APPROVED FOR RECORD ON OCTOBER 14, 1998 AT
11:48 AM.
FEE PAID: 82.00
[SEAL] JOSEPH V. STEWART
CHARTER SPECIALIST
<PAGE>
ARTICLES SUPPLEMENTARY
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
IMPAC COMMERCIAL HOLDINGS, INC.
Impac CommercialHoldings, Inc., a corporation organized and existing under the
laws of the State of Maryland (the "Corporation"), hereby certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to the authority granted to and vested in the Board of
Directors of the Corporation (the "Board of Directors") in accordance with
Article VI of the charter of the Corporation, including these Articles
Supplementary (the "Charter"), the Board of Directors adopted resolutions
reclassifying 1,000,000 shares (the "Shares") of Preferred Stock (as defined in
the Charter) as a separate class of stock, Series A Junior Participating
Preferred Stock, $.01 par value per share (the "Series A Preferred Stock"), with
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications, and terms
and conditions of redemption set forth below. Upon any restatement of the
Charter, the immediately following heading and Sections 1 through 10 of this
Article FIRST shall become Section 6.9 of Article VI of the Charter.
Series A Junior Participating Preferred Stock.
Section 1. Designation and Amount. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock" (hereinafter referred to as "Series A Preferred Stock") and the number of
shares constituting such series shall be 1,000,000. Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of shares of Series A Junior
Participating Preferred Stock to less than the number of shares then issued and
outstanding plus the number of shares issuable upon exercise of outstanding
rights, options or warrants or upon conversion of outstanding securities issued
by the Corporation.
Section 2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of assets legally available for the purpose,
quarterly dividends payable in cash on the first business day of January, April,
July and October in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all cash
dividends, and 100 times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a dividend payable in
shares of Common Stock, $.01 par value per share, of the Corporation (the
"Common Stock") or a subdivision of the outstanding shares of Common Stock (by
reclassification or otherwise), declared on the Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock.
(b) The Corporation shall declare a dividend or distribution on the Series
A Preferred Stock as provided in paragraph (a) above immediately after it
declares a dividend or distribution on the Common Stock (other than a dividend
payable in shares of Common Stock); provided that, in the event no dividend or
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
<PAGE>
(c) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is before the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days before the date fixed
for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(a) Except as provided in paragraph (c) of this Section 3 and subject to
the provision for adjustment hereinafter set forth, each share of Series A
Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters
submitted to a vote of the stockholders of the Corporation.
(b) Except as otherwise provided herein or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock shall vote
together as one class on all matters submitted to a vote of stockholders of the
Corporation.
(c) (i) If, on the date used to determine stockholders of record for any
meeting of stockholders for the election of directors, a default in preference
dividends (as defined in subparagraph (v) below) on the Series A Preferred Stock
shall exist, the holders of the Series A Preferred Stock shall have the right,
voting as a class as described in subparagraph (ii) below, to elect two
directors, and the holders of shares of Common Stock shall have the right to
elect the remaining directors. Such right may be exercised at any meeting of
stockholders for the election of directors until all such cumulative dividends
(referred to above) shall have been paid in full or until noncumulative
dividends have been paid regularly for at least one year.
(ii) The right of the holders of Series A Preferred Stock to elect two
directors, as described above, shall be exercised as a class concurrently with
the rights of holders of any other series of Preferred Stock upon which voting
rights to elect such directors have been conferred and are then exercisable. The
Series A Preferred Stock and any additional series of Preferred Stock which the
Corporation may issue and which may provide for the right to vote with the
foregoing series of Preferred Stock are collectively referred to herein as
"Voting Preferred Stock."
(iii) Each director elected by the holders of shares of Voting
Preferred Stock shall be referred to herein as a "Preferred Director." A
Preferred Director so elected shall continue to serve as such director for a
term of one year, except that upon any termination of the right of all of such
holders to vote as a class for Preferred Directors, the term of office of such
directors shall terminate. Any Preferred Director may be removed by, and shall
not be removed except by, the vote of the holders of record of a majority of the
outstanding shares of Voting Preferred Stock then entitled to vote for the
election of directors, present (in person or by proxy) and voting together as a
single class (a) at a meeting of the stockholders, or (b) at a meeting of the
holders of shares of such Voting Preferred Stock, called for the purpose in
accordance with the Bylaws of the Corporation, or (c) by written consent signed
by the holders of a majority of the then outstanding shares of Voting Preferred
Stock then entitled to vote for the election of directors, taken together as a
single class.
(iv) So long as a default in any preference dividends on the Series A
Preferred Stock shall exist or the holders of any other series of Voting
Preferred Stock shall be entitled to elect Preferred Directors, (a) any vacancy
in the office of a Preferred Director may be filled (except as provided in the
following clause (b)) by an instrument in writing signed by the remaining
Preferred Director and filed with the Corporation and (b) in the case of the
removal of any Preferred Director, the vacancy may be filled by the vote or
written consent of the holders of a majority of the outstanding shares of Voting
Preferred Stock then entitled to vote for the election of directors, present (in
person or by proxy) and voting together as a single class, at such time as the
removal shall be effected. Each director appointed as aforesaid by the
<PAGE>
remaining Preferred Director shall be deemed, for all purposes hereof, to be a
Preferred Director. Whenever (x) no default in preference dividends on the
Series A Preferred Stock shall exist and (y) the holders of any other Series of
Voting Preferred Stock shall no longer be entitled to elect such Preferred
Directors, then the number of directors of the Corporation shall be reduced by
two.
(v) For purposes hereof, a "default in preference dividends" on the
Series A Preferred Stock shall be deemed to have occurred whenever the amount of
cumulative and unpaid dividends on the Series A Preferred Stock shall be
equivalent to six full quarterly dividends or more (whether or not consecutive),
and, having so occurred, such default shall be deemed to exist thereafter until,
but only until, all cumulative dividends on all shares of the Series A Preferred
Stock then outstanding shall have been paid through the last Quarterly Dividend
Payment Date or until, but only until, non-cumulative dividends have been paid
regularly for at least one year.
(d) Except as set forth herein (or as otherwise required by applicable
law), holders of Series A Preferred Stock shall have no general or special
voting rights and their consent shall not be required for taking any corporate
action
Section 4. Certain Restrictions.
(a) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not
(i) declare or pay dividends, or make any other distributions, on any
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions, on any
shares of stock ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, except dividends
paid ratably on the Series A Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to which
the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
(except as provided in (iv) below) shares of any stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Preferred Stock;
(iv) redeem or purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, in any other Certificate of Amendment creating a
series of Preferred Stock or as otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up.
(a) Subject to the prior and superior rights of holders of any shares of
any series of Preferred Stock ranking
<PAGE>
prior and superior to the shares of Series A Preferred Stock with respect to
rights upon liquidation, dissolution or winding up (voluntary or otherwise), no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock unless, prior thereto, the holders of shares of Series
A Preferred Stock shall have received $100 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment (the "Series A Liquidation Preference"). Following
the payment of the full amount of the Series A Liquidation Preference, no
additional distributions shall be made to the holders of shares of Series A
Preferred Stock unless, prior thereto, the holders of shares of Common Stock
shall have received an amount per share (the "Capital Adjustment") equal to the
quotient obtained by dividing (i) the Series A Liquidation Preference by (ii)
100 (such number in clause (ii), the "Adjustment Number"). Following the payment
of the full amount of the Series A Liquidation Preference and the Capital
Adjustment in respect of all outstanding shares of Series A Preferred Stock and
Common Stock, respectively, holders of Series A Preferred Stock and holders of
Common Stock shall receive their ratable and proportionate share of the
remaining assets to be distributed in the ratio of the Adjustment Number to 1
with respect to such Preferred Stock and Common Stock, on a per share basis,
respectively.
(b) In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Preferred Stock, then such remaining assets
shall be distributed ratably to the holders of Series A Preferred Stock and the
holders of such parity shares in proportion to their respective liquidation
preferences. In the event, however, that there are not sufficient assets
available to permit payment in full of the Capital Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
Section 8. No Redemption. The shares of Series A Preferred Stock shall not be
redeemable.
Section 9. Ranking. The Series A Preferred Stock shall rank junior to all
other series of the Corporation's Preferred Stock as to the payment of dividends
and the distribution of assets, unless the terms of any such series shall
provide otherwise.
Section 10. Amendment. The Certificate of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding shares of Series A Preferred Stock, voting
separately as a class.
SECOND: The Shares have been reclassified by the Board of Directors pursuant
------
to Article VI of the Charter.
THIRD: These Articles Supplementary have been approved by the Board of
-----
Directors in the manner and by the vote required by law.
FOURTH: The undersigned Chairman of the Corporation acknowledges these
------
Articles Supplementary to be the corporate act of the Corporation and, as to all
matters or facts required to be verified under oath, the undersigned President
acknowledges that to the best of his knowledge, information and belief, these
matters and facts are true in all material respects and that this statement is
made under the penalties for perjury.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles Supplementary
to be signed in its name and on its behalf by its Chairman and attested to by
its Secretary on this 13th day of October, 1998.
ATTEST:
By: /s/ Ronald Morrison By: /s/ Joseph R. Tomkinson (SEAL)
------------------- -----------------------
Ronald Morrison Joseph R. Tomkinson
Secretary Chairman
<PAGE>
STATE OF MARYLAND
682697
STATE DEPARTMENT OF
ASSESSMENTS AND TAXATION
301 West Preston Street Baltimore, Maryland 21201
DATE: NOVEMBER 20, 1998
THIS IS TO ADVISE YOU THAT THE CERTIFICATE OF CORRECTION FOR IMPAC COMMERCIAL
HOLDINGS, INC. WAS RECEIVED AND APPROVED FOR RECORD ON NOVEMBER 20, 1998 AT
12:51 PM.
FEE PAID: 68.00
[SEAL] JOSEPH V. STEWART
CHARTER SPECIALIST
<PAGE>
IMPAC COMMERCIAL HOLDINGS, INC.
Certificate of Correction
THIS IS TO CERTIFY THAT:
Impac Commercial Holdings Inc., a Maryland corporation (the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
that:
FIRST: The title of the document being is: Articles Supplementary.
SECOND: The name of the corporation for with the Articles Supplementary were
filed is:
Impac Commercial Holdings, Inc.
THIRD: The document being corrected was filed on October 14, 1998.
FOURTH: Section 3(a) of the Articles Supplementary as previously filed reads
as follows:
Except as provided in paragraph (c) of this Section 3 and subject to
the provision for adjustment hereinafter set forth, each share of
Series A Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the
Corporation.
FIFTH: Section 3(a) of the Articles Supplementary as correct reads as
follows:
Except as provided in paragraph (c) of this Section 3 and subject to
the provision for adjustment hereinafter set forth, each share of
Series A Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the
Corporation.
SIXTH: The undersigned President of the Corporation acknowledges this
Certificate of Correction to be the corporation act of the
Corporation and, as to all matters and facts required to be verified
under oath, the undersigned President acknowledges to the best of his
knowledge, information and belief, these matters and facts are true
in all material respect and that this statement is made under the
penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Correction
to be signed in its name and on its behalf by its president and attested by its
secretary on November 19, 1998.
ATTEST: IMPAC COMMERCIAL HOLDINGS, INC.
By: /s/ Ronald Morrison By: /s/ William S. Ashmore
----------------------------- -----------------------------
Ronald Morrison William S. Ashmore, President
<PAGE>
EXHIBIT 10.1
MANAGEMENT AGREEMENT
THIS AGREEMENT, entered into as of August 4, 1997, to be effective as of
August 8, 1997, the closing date of the public offering of Common Stock on a
Registration Statement Form S-11 (No. 333-25423) of IMH COMMERCIAL HOLDINGS,
INC., a Maryland corporation (the "Company"), is by and between the Company, and
RAI ADVISORS, LLC (the "Manager");
WITNESSETH:
WHEREAS, the Company is a recently-formed corporation that intends to be taxed
as a real estate investment trust;
WHEREAS, the Company operates the Long-Term Investment Operations, which
invests primarily in Commercial Mortgages and CMBSs, and the Conduit Operations,
conducted by Imperial Commercial Capital Corporation ("ICCC"), which originates,
purchases and sells or securitizes Commercial Mortgages;
WHEREAS, the Manager's personnel have substantial experience in the purchase,
financing, servicing and administration of mortgage loans and mortgage
securities, and the Company would like to benefit from such experience in
conducting its operations;
WHEREAS, in order to obtain the benefit of the Manager's experience and to
enhance the success of its operations, the Company desires to retain the
Manager, at competitive rates and fees, primarily to perform capital, asset and
operations management services in the manner and on the terms hereinafter set
forth.
NOW, THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:
1. Definitions. Whenever used in this Agreement, the following terms,
-----------
unless the context otherwise requires, shall have the following meanings:
(a) "Affiliate" of any entity means (i) any person directly or indirectly
owning, controlling or holding with power to vote, five percent (5%) or more of
the outstanding voting securities of such entity; (ii) any person five percent
(5%) or more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote, by such entity; (iii) any person
directly or indirectly controlling, controlled by, or under common control with,
such entity; or (iv) any officer, director, partner or employee of such entity
or any person set forth in (i) - (iii) above. Any person who owns beneficially,
either directly or through one or more controlled companies, more than twenty-
five percent (25%) of the voting securities of any entity shall be presumed to
control such entity. Any person who does not so own more than twenty-five
percent (25%) of the voting securities of any entity shall be presumed not to
control such entity. A natural person shall be presumed not to be a controlled
entity.
(b) "Affiliated REIT" means any other REIT that may have been or will be
affiliated with the Company or IMH and for which the Manager will provide
services pursuant to a management agreement that is similar to this Agreement.
(c) "Agreement" means this Management Agreement.
(d) "Average Net Worth" for any period means the arithmetic average of
the sum of the gross proceeds from any sale of the Company's equity securities,
before deducting any underwriting discounts and commissions and other expenses
and costs relative 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.
(e) "Board of Directors" means the Board of Directors of the Company.
<PAGE>
(f) "CMBSs" means (1) Pass-Through Certificates and (2) REMICs.
(g) "CMO" means an adjustable or fixed-rate debt obligation (bond) that
is collateralized by Commercial Mortgages or mortgage certificates and issued by
private institutions.
(h) "Code" means the Internal Revenue Code of 1986, as amended.
(i) "Commercial Mortgages" mean commercial mortgage assets including
condo-conversion, multi-family property and cooperative apartment mortgage loans
on commercial real property such as industrial and warehouse properties, office
buildings, retail space and shopping malls, hotels and motels, nursing homes,
hospitals, congregate care facilities and senior living centers.
(j) "Commitment" means the document containing the terms pursuant to
which the Company purchases on a forward basis Mortgage Loans from various
originators, including Affiliates of the Manager.
(k) "Company" means IMH Commercial Holdings, Inc., a Maryland
corporation.
(l) "GAAP" means generally accepted accounting principles.
(m) "Governing Instruments" means the articles of incorporation or
charter, as the case may be, and bylaws of the Company or its subsidiary.
(n) "ICCC" means Imperial Commercial Capital Corporation, a California
corporation that conducts the Conduit Operations.
(o) "ICIFC" means ICI Funding Corporation, a California corporation.
(p) "IMH" means Imperial Credit Mortgage Holdings, Inc., a Maryland
corporation.
(q) "Manager" means RAI Advisors, LLC, a California limited liability
company.
(r) "Net Income" means the net income of the Company as determined by the
Code before the Manager's incentive compensation, the deduction for dividends
paid and any net operating loss deductions arising from losses in prior periods.
The Company's interest expenses for borrowed money shall be deducted in
calculating Net Income.
(s) "Offering" means the public offering of the Company's Common Stock
pursuant to a Registration Statement on Form S-11 pursuant to the Securities Act
of 1933, as amended.
(t) "Pass-Through Certificates" means securities (or interests therein)
which are Qualified REIT Assets evidencing undivided ownership interests in a
pool of mortgage loans, the holders of which receive a "pass-through" of the
principal and interest paid in connection with the underlying mortgage loans in
accordance with the holders' respective, undivided interests in the pool. Pass-
Through Certificates evidence interests in loans secured by single family, but
not multifamily or commercial, real estate properties.
(u) "Qualified REIT Assets" means (i) real property (including interests
in real property and interests in mortgages on real property), (ii) shares (or
transferable certificates of beneficial interest) in other REITs which meet the
requirements of Sections 856-859 of the Code, (iii) stock or debt instruments
(not otherwise described in (i), (ii) or (iv)) held for not more than one year
that were purchased with the proceeds of (a) an offering of stock in the Company
(other than amounts received pursuant to a dividend reinvestment plan) or (b) a
public offering of debt obligations of the Company which have maturities of at
least 5 years, and (iv) a regular or residual interest in a REMIC, but only if
95% or more of the assets of such REMIC are assets described in (i) through
(iii).
(v) "REIT" means Real Estate Investment Trust as defined under Section
856 of the Code.
<PAGE>
(w) "REMICs" means serially maturing debt securities secured by a pool of
mortgage loans, the payments on which bear a relationship to the debt
securities, and the issuer of which qualifies as a Real Estate Mortgage
Investment Conduit under Section 860D of the Code.
(x) "Reimbursable Expenses" shall have the meaning set forth in Section 7
hereof.
(y) "Reimbursable Executive Amounts" means that amount which the Company
will reimburse the Manager, on a dollar for dollar basis, for the actual costs
of the services provided by the officers of the Company to the Manager based
upon the compensation payable to them by ICIFC pursuant to employment
agreements.
(z) "Return on Equity" means return calculated for any quarter by
dividing the Company's Net Income for such quarter by the Company's Average Net
Worth for such quarter.
(aa) "Stockholders" shall mean the owners of the stock of the Company.
(bb) "Ten Year U.S. Treasury Rate" for a quarterly period shall mean the
arithmetic average of the weekly per annum Ten Year Average Yields published by
the Federal Reserve Board during such quarter. In the event that the Federal
Reserve Board does not publish a weekly per annum Ten Year Average Yield during
any week in a quarter, then the Ten Year U.S. Treasury Rate for such week shall
be the weekly per annum Ten Year Average Yields published by any Federal Reserve
Bank or by any U.S. Government department or agency selected by the Company for
such week. In the event that the Company determines in good faith that for any
reason the Company cannot determine the Ten Year U.S. Treasury Rate for any
quarter as provided above, then the Ten Year U.S. Treasury Rate for such quarter
shall be the arithmetic average of the per annum average yields to maturity
based upon the daily closing bids during such quarter for each of the issues of
actively traded marketable U.S. Treasury fixed interest rate securities (other
than securities which can, at the option of the holder, be surrendered at face
value in payment of any federal estate tax) with a final maturity date not less
than eight nor more than twelve years from the date of each such quotation, as
chosen and for each business day (or less frequently if daily quotations shall
not be generally available) in each such quarterly period in New York City to
the Company by at least three recognized dealers in U.S. Government securities
selected by the Company.
(cc) "Unaffiliated Director" means a Director who is independent of the
Company, any manager of the Company (including the Manager) and IMH and its
Affiliates.
2. General Duties of the Manager. Subject to the supervision and approval
-----------------------------
of the Board of Directors, the Manager shall provide services to the Company,
and to the extent directed by the Board of Directors, shall provide similar
services to any subsidiary or Affiliate of the Company, which includes ICCC and
may also include Affiliated REITs, as follows:
(a) serve as the Company's consultant with respect to formulation of
investment criteria by the Board of Directors;
(b) advise 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 Board of Directors;
(c) advise, negotiate and oversee the securitization of the Company's
Commercial Mortgages in REMICs or CMOs and negotiate terms with rating agencies
and coordinate with investment-bankers as to structure and pricing of the
securities formed by the Company as directed by the Board of Directors;
(d) advise the Company in connection with and assist in its Long-Term
Investment Operations;
(e) furnish reports and statistical and economic research to the Company
regarding the Company's activities and the services performed for the Company by
the Manager;
<PAGE>
(f) monitor and provide 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 provide data and advice to the Board of
Directors in connection with the selection and identification of such dealers.
(g) provide 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, or any Affiliated REIT, 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;
(h) oversee the day-to-day operations of the Company and supervise the
performance of such other administrative functions necessary in the management
of the Company as directed by the Board of Directors;
(i) advise and negotiate agreements on behalf of the Company with banking
institutions and other lenders to provide for the short-term borrowing of funds
by the Company, as directed by the Board of Directors;
(j) communicate 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 maintain effective
relations with such holders of the Company's securities, as directed by the
Board of Directors;
(k) subject to an agreement executed by the Company, advise as to the
designation of a servicer for those loans sold by ICCC whereby ICCC has elected
not to service such loans;
(l) counsel the Company in connection with policy decisions to be made by
the Board of Directors;
(m) upon request by and in accordance with the direction of the Board of
Directors, invest or reinvest any money of the Company; and
(n) as approved and directed by the Board of Directors, perform such
other services as may be required for management and other activities relating
to the assets of the Company as the Manager shall deem appropriate under the
particular circumstances.
3. Additional Activities of Manager. Subject to the Non-Competition
--------------------------------
Agreement, dated the date hereof, by and among the Company, ICCC, IMH and ICIFC,
and the Right of First Refusal Agreement, dated the date hereof, by and among
the Company, ICCC, the Manager, IMH and ICIFC, nothing herein shall prevent the
Manager or its Affiliates from engaging in other businesses or from rendering
services of any kind to any other person or entity, including investment in or
advisory service to others investing in any type of real estate investment,
including investments which meet the principal investment objectives of the
Company, ICCC or their respective Affiliates. Directors, officers, employees and
agents of the Manager or Affiliates of the Manager may serve as directors,
officers, employees, agents, nominees or signatories for the Company, any
subsidiary or Affiliate of the Company or any Affiliated REIT, to the extent
permitted by its Governing Instruments, as from time to time amended, or by any
resolutions duly adopted by the Board of Directors pursuant to its Governing
Instruments. When executing documents or otherwise acting in such capacities for
the Company, such persons shall use their respective titles in the Company.
4. Records; Confidentiality. The Manager shall maintain appropriate books
of account and records relating to services performed hereunder, which books of
account and records shall be accessible for inspection by officers of the
Company or officers of any subsidiary of the Company at any time during normal
business hours. The Manager agrees to keep confidential any and all information
it obtains from time to time in connection with the services it renders
hereunder and shall not disclose any portion thereof to non-affiliated third
parties except with the prior written consent of the Company, any subsidiary of
the Company and any entity of which the Company owns an economic interest.
<PAGE>
In addition, to the extent executive officers of the Manager provide
services to the Company and its Affiliates through this Agreement, the Manager
will cause such executive officers to enter into non-competition and
confidentiality agreements so that they will not, directly or indirectly,
compete with the business of the Company and its Affiliates, including ICCC;
provided, however, that the executive officers may provide services to IMH, any
Affiliated REIT, the Manager, and the executive officers may perform the duties
set forth in their respective employment agreements with ICIFC.
5. Obligations of Manager. Anything else in this Agreement to the contrary
notwithstanding, the Manager shall refrain from any action which in its sole
judgment made in good faith (i) would adversely affect the status of the Company
and any subsidiary of the Company as a real estate investment trust as defined
and limited in sections 856 through 860 of the Code, (ii) would violate any law,
rule or regulation of any governmental body or agency having jurisdiction over
the Company and such subsidiary, or (iii) which would otherwise not be permitted
by the Company's or its subsidiary's Governing Instruments, except if any of
such actions shall be ordered by the Board of Directors, in which event the
Manager shall promptly notify the Board of Directors of the Manager's judgment
that such action would adversely affect such status or violate any such law,
rule or regulation or the Governing Instruments and shall refrain from taking
such action pending further clarification or instructions from the Board of
Directors. If the Board of Directors thereafter instructs the Manager, despite
the Manager's notification as provided herein, to take any such action and the
Manager so acts upon the instructions given, the Manager shall not be
responsible for any loss of the Company's or its subsidiary's status as a REIT
or violation of any law, rule or regulation or the Governing Instruments caused
thereby.
6. Compensation.
(a) If the Company's annualized Return on Equity during any fiscal
quarter (computed by multiplying the Return on Equity for such fiscal quarter by
four) is in excess of the Ten Year U.S. Treasury Rate plus 2%, the Company will
pay the Manager, for such quarter, an amount equal to 25% of such excess, but in
no event shall any payment of compensation under this subsection reduce the
Company's annualized Return on Equity for such quarter to less than the Ten Year
U.S. Treasury Rate plus 2%.
(b) The Manager shall compute the compensation payable under Subsection
(a) within 60 days after the end of each calendar quarter, with the exception of
the fourth quarter for which compensation shall be computed within 30 days. In
any event, the compensation payable under Subsection (a) shall be calculated
before any income distributions are made to stockholders for the corresponding
period. A copy of the computations made by the Manager to calculate its
compensation shall thereafter be promptly delivered to any executive officer of
the Company and, upon such delivery, payment of the compensation earned under
Subsection (a) shown therein shall be due and payable within 90 days after the
end of such calendar quarter. The compensation due and payable to the Manager
under Subsection (a) shall be paid to the Manager in the subsequent quarter in
which the incentive compensation was earned. The aggregate amount of the
Manager's compensation for each fiscal year shall be adjusted within 120 days
after the end of such fiscal year so as to provide compensation for such year in
the annual amounts stated in Subsection (a) and any excess owed to, or shortfall
owed by, the Manager with respect to such compensation, collectively, shall be
promptly remitted by, or paid to, the Company. In the event that the time in
which the compensation is paid by the Company to the Manager violates the
Company's status to be taxed as a REIT, both parties shall mutually agree to
modify the time set forth in this Section in which the Manager will be paid the
compensation earned under Subsection (a).
7. Reimbursable Expenses of the Manager. Without regard to the compensation
received hereunder by the Manager, the Company or any subsidiary of the Company
shall reimburse the Manager of its expenses, as set forth in Section 8, and
without limiting the generality of the foregoing, it is specifically agreed that
the following expenses of the Company or any subsidiary of the Company
(including ICCC) shall not be paid by the Manager (collectively, "Reimbursable
Expenses"):
(a) The pro rata employment expenses of the personnel and executive
officers (who are governed by employment agreements with ICIFC, and thus, deemed
"Reimbursable Executive Amounts") employed by the Manager, including, but not
limited to, salaries, wages, payroll taxes, and the cost of employee benefit
plans;
<PAGE>
(b) Travel and other expenses of directors, officers and employees of the
Manager and of directors, officers, or employees of the Company or any
subsidiary of the Company who are also directors, officers or employees of the
Manager, except expenses of such persons who are directors of the Company or any
subsidiary of the Company incurred in connection with attending meetings of the
Board of Directors or meetings of holders of the securities of the Company or
any subsidiary of the Company or expenses of persons who are directors,
officers, or employees of the Company or any subsidiary of the Company incurred
in connection with attending meetings, conferences or conventions which relate
solely to the business affairs of the Company or any subsidiary of the Company;
(c) Rent, telephone, utilities, office furniture, equipment and machinery
(including computers, to the extent utilized) and other office expenses (such as
asset/liability software, modeling software and other software and hardware) of
the Manager needed in order to perform its duties as set forth in Section 2
herein;
(d) Bookkeeping fees and expenses of the Company and the Manager
including any costs of computer services in connection with this function;
(e) Amounts payable by the Manager pursuant to submanagement agreements
with outside third parties 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 ;
(f) Miscellaneous administrative expenses incurred in supervising and
monitoring the Company's investments or any subsidiary's investments of relating
to performance by the Manager of its functions hereunder;
(g) The cost of borrowed money of the Company;
(h) All taxes applicable to the Company or any subsidiary of the Company
including interest and penalties thereon;
(i) Legal audit, accounting, underwriting, brokerage, listing, rating
agency, registration and other fees, printing, engraving and other expenses and
taxes incurred in connection with the issuance, distribution, transfer,
registration and stock exchange listing of the Company's or any subsidiary's
equity securities or debt securities;
(j) Fees and expenses paid to independent contractors, consultants,
managers, and other agents employed directly by the Company or any subsidiary of
the Company or by the Manager at the Company's or such subsidiary's request for
the account of the Company or any subsidiary of the Company (other than the
Manager);
(k) Expenses connected with the acquisition, disposition and ownership of
the Company's or any subsidiary's investment assets (including without
limitation commitment fees, brokerage fees, guaranty fees and hedging fees),
including but not limited to ad valorem taxes, costs of foreclosure,
maintenance, repair and improvement of property and premiums for insurance on
property owned by the Company or any subsidiary of the Company; and with regard
to brokerage fees, it is understood that neither the Manager nor any of its
Affiliates shall charge a brokerage commission or similar fee to the Company or
any subsidiary of the Company in connection with the acquisition, disposition or
ownership of the Company's or any subsidiary's investment assets;
(l) The expenses of organizing, modifying or dissolving the Company or
any subsidiary of the Company;
(m) All insurance costs incurred in connection with the Company or any
subsidiary of the Company;
(n) Expenses connected with payments of dividends or interest or
distributions in each or any other form made or caused to be made by the Board
of Directors to holders of the securities of the Company or any subsidiary of
the Company;
<PAGE>
(o) Expenses connected with the structuring of the issuance of CMBSs by
the Company or any subsidiary of the Company, including but not limited to
trustee's fees, insurance premiums, and costs of required credit enhancements;
(p) All expenses by third parties connected with communications to
holders of equity securities or debt securities of the Company or any subsidiary
of the Company and the other bookkeeping and clerical work necessary in
maintaining relations with holders of such securities and in complying with the
continuous reporting and other requirements of governmental bodies or agencies,
including any costs of computer services in connection with this function, the
cost of printing and mailing certificates for such securities and proxy
solicitation materials and reports to holders of the Company's or any
subsidiary's securities and reports to third parties required under any
indenture to which the Company or any subsidiary of the Company is a party;
(q) Transfer agent's and registrar's fees and charges;
(r) Fees and expenses paid to directors of the Company or any subsidiary
of the Company, the cost of director and officer liability insurance and
premiums for fidelity and errors and omissions insurance;
(s) Legal, accounting and auditing fees and expenses relating to the
Company's or any subsidiary's operations;
(t) Any judgment rendered against the Company or any subsidiary of the
Company, or against any director of the Company or any subsidiary of the Company
in his capacity as such for which the Company or any subsidiary of the Company
is required to indemnify such director, by any court or governmental agency;
(u) Expenses relating to any office or office facilities maintained by
the Company or any subsidiary of the Company separate from the office of the
Manager;
(v) Expenses related to the servicing and subservicing of Commercial
Mortgages;
(w) All offering expenses (including accounting, legal, printing,
clerical, personnel, filing and other expenses) incurred by the Company, the
Manager or its Affiliates on behalf of the Company in connection with the
Offering; and
(x) Other miscellaneous expenses of the Company or any subsidiary of the
Company.
8. Computation of Reimbursable Expenses.
------------------------------------
(a) The Company shall reimburse the Manager for all Reimbursable Expenses
and Reimbursable Executive Amounts on a dollar for dollar basis. Furthermore,
with respect to Reimbursable Expenses and Reimbursable Executive Amounts owed by
the Manager to IMH for costs and services rendered under any submanagement
agreement with the Manager, the Company shall pay an additional service charge
of 15% on such amounts. Pursuant to submanagement agreements, the Manager shall
pay all third party service providers, on a dollar-for-dollar basis, the
aforementioned amounts received by the Manager from the Company, provided,
however, that no such 15% service charge will be paid to third party service
providers other than ICIFC.
(b) For the first three years of this Agreement, there will be a minimum
amount of $500,000 per annum (which includes the 15% service charge) payable by
the Company to the Manager for Reimbursable Expenses and Reimbursable Executive
Amounts. Thereafter, the Company shall only be responsible for the Reimbursable
Expenses and Reimbursable Executive Amounts incurred, plus the additional 15%
service charge amount due to the Manager in connection with services rendered by
ICIFC under any submanagement agreement.
(c) The Manager shall compute the Reimbursable Expenses and Reimbursable
Executive Amounts payable under Subsections (a) and (b) within 10 days after the
end of each month. A copy of the computations made by the Manager to calculate
its compensation shall thereafter be promptly delivered to any executive officer
of the Company
<PAGE>
and, upon such delivery, payment of the compensation earned under Subsection (a)
and (b) shown therein shall be due and payable within 15 days after the end of
such month. The Reimbursable Expenses and Reimbursable Executive Amounts due and
payable to the Manager under Subsections (a) and (b) shall be paid to the
Manager in the subsequent month in which the Reimbursable Expenses and the
Reimbursable Executive Amounts were incurred.
9. Limits of Manager Responsibility. (a) The Manager assumes no
--------------------------------
responsibility under this Agreement other than to render the services called for
hereunder in good faith and shall not be responsible for any action of the Board
of Directors in following or declining to follow any advice or recommendations
of the Manager, including as set forth in Section 5 above. The Manager, its
directors, officers, shareholders and employees will not be liable to the
Company, any subsidiary of the Company (including ICCC), the Unaffiliated
Directors or the Company's or its subsidiary's stockholders for any acts
performed by the Manager, its directors, officers, shareholders and employees in
accordance with this Agreement, except by reason of acts or omissions
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties. The Company or its subsidiaries (including ICCC)
shall reimburse, indemnify and hold harmless the Manager, its shareholders,
directors, officers and employees of and from any and all expenses, losses,
damages, liabilities, demands, charges and claims of any nature whatsoever in
respect of or arising from any acts or omissions of the Manager, its
shareholders, directors, officers and employees made in good faith in the
performance of the Manager's duties under this Agreement and not constituting
bad faith, willful misconduct, gross negligence or reckless disregard of its
duties.
(b) The Manager shall reimburse, indemnify and hold harmless the Company,
any subsidiaries (including ICCC), or any of their stockholders, directors,
officers and employees of and from any and all expenses, losses, damages,
liabilities, demands, charges and claims (including, without limitation,
reasonable attorneys fees) arising out of any willful and intentional
misstatements of fact made by the Manager in connection with this Agreement and
the services to be rendered hereunder.
10. No Joint Venture. The Company and the Manager are not partners or joint
----------------
venturers with each other and nothing herein shall be construed to make them
such partners or joint venturers or impose any liabilities as such on either of
them.
11. Term. This Agreement shall continue in force until December 31, 2002
----
and thereafter it may be extended with the consent of the Manager and by the
affirmative vote of a majority of the Unaffiliated Directors or by a vote of the
holders of a majority of the outstanding shares of Common Stock of the Company.
Each extension shall be executed in writing by all parties hereto before the
expiration of this Agreement or of any extension thereof. Each such extension
shall be effective for a period corresponding to the fiscal year of the Company,
but in no case exceeding twelve months.
12. Termination for Cause. This Agreement, or any extension hereof, may be
---------------------
terminated by either party for cause immediately upon written notice, (i) by a
majority vote of the Unaffiliated Directors or by a vote of a majority of the
holders of the Company's Common Stock, in the case of termination by the
Company, or, (ii) in the case of termination by the Manager, by a majority vote
of the directors of the Manager. Grounds for termination for cause will occur
with respect to a party if:
(a) Such party shall have violated any provision of this Agreement and,
after notice of such violation, shall not cure such default within 30 days; or
(b) There is entered an order for relief or similar decree or order with
respect to such party by a court having jurisdiction in the premises in an
involuntary case under the federal bankruptcy laws as now or hereafter
constituted or under any applicable federal or state bankruptcy, insolvency or
other similar laws; or such party (A) ceases or admits in writing its inability
to pay its debts as they become due and payable, or makes a general assignment
for the benefit of, or enters into any composition or arrangement with,
creditors; (B) applies for, or consents (by admission of material allegations of
a petition or otherwise) to the appointment of a receiver, trustee, assignee,
custodian, liquidator or sequestrator (or other similar official) of such party
or of any substantial part of its properties or assets, or authorizes such an
application or consent, or proceedings seeking such appointment are commenced
without such authorization, consent or application against such party and
continue undismissed for 30 days; (C) authorizes or files
<PAGE>
a voluntary petition in bankruptcy, or applies for or consents (by admission of
material allegations of a petition or otherwise) to the application of any
bankruptcy, reorganization, arrangement, readjustment of debt, insolvency,
dissolution, liquidation or other similar law of any jurisdiction, or authorizes
such application or consent, or proceedings to such end are instituted against
such party without such authorization, application or consent and are approved
as properly instituted and remain undismissed for 30 days or results in
adjudication of bankruptcy or insolvency; or (D) permits or suffer all or any
substantial part of its properties or assets to be sequestered or attached by
court order and the order remains undismissed for 30 days.
(c) Each party agrees that if any of the events specified in this
Section 12 shall occur, it will give prompt written notice thereof to the other
party's Board of Directors after the happening of such event.
In addition to the foregoing, grounds for termination for cause will
occur with respect to the Manager if the Manager has engaged in willful
misconduct in the performance of its duties hereunder, the effect of which has a
direct material adverse effect on the financial condition and operations of the
Company and ICCC in the aggregate.
If this Agreement is terminated pursuant to this Section, such
termination shall be without any further liability or obligation of either party
to the other, except as provided in Section 15.
13. Termination Without Cause. The Company may terminate this Agreement
-------------------------
without cause upon 60 days prior written notice, by a majority vote of the
Unaffiliated Directors or by a vote of the holders of a majority of the
outstanding shares of the Company's Common Stock. In the event this Agreement is
terminated by the Company without cause, or in the event this Agreement is not
renewed by the Company without cause, the Company, in addition to its
obligations under Section 15, shall pay the Manager a termination or non-renewal
fee determined by an independent appraisal. Such appraisal shall be conducted by
a nationally-recognized appraisal firm mutually agreed upon by the parties and
the costs of such appraisal shall be borne equally by the parties. If the
parties are unable to agree upon such appraisal firm within 30 days following
notice of termination or, in the event of non-renewal, the termination date,
then each party shall as soon as reasonably practicable, but in no event more
than 45 days following notice of termination or, in the event of non-renewal,
the termination date, choose a nationally-recognized independent appraisal firm
to conduct an appraisal. In such event, (i) the termination fee shall be deemed
to be the average of the appraisals as conducted by each party's chosen
appraiser and (ii) each party shall pay the costs of its appraiser so chosen.
Any appraisal conducted hereunder shall be performed no later than 45 days
following selection of the appraiser or appraisers.
14. Assignment; Subcontract. (a) This Agreement shall terminate
-----------------------
automatically in the event of its assignment, in whole or in part, by the
Manager unless such assignment is consented to in writing by the Company with
the consent of a majority of the Unaffiliated Directors. Such an assignment
shall bind the assignee hereunder in the same manner as the Manager is bound
hereunder and, to further evidence its obligations hereunder, the assignee shall
execute and deliver to the Company a counterpart of this Agreement. This
Agreement shall not be assignable by the Company without the consent of the
Manager, except in the case of assignment by the Company to a real estate
investment trust or other organization which is a successor (by merger,
consolidation or purchase of assets) to the Company, in which case such
successor organization shall be bound hereunder and by the terms of said
assignment in the same manner as the Company is bound hereunder.
(b) Notwithstanding the foregoing, the Company and the Manager agree
that the Manager may enter into a subcontract with any third party, including
IMH, which third party shall be approved by the Company's Board of Directors,
pursuant to which such third party will provide such of the management services
required hereunder as the Manager deems necessary, and the Company hereby
consents to the entering into and performance of such subcontract; provided,
however, that no such arrangement between the Manager and IMH or any third party
shall relieve the Manager of any of its duties or obligations hereunder.
15. Action Upon Termination. From and after the effective date of
-----------------------
termination of this Agreement, pursuant to Sections 12, 13 and 14 hereof, the
Manager shall not be entitled to compensation for further services hereunder,
but shall be paid all compensation accruing to the date of termination, subject
to adjustments on an annualized basis in accordance with Section 6(b) and
subject to the minimum amount of $500,000 per annum for the first three years.
<PAGE>
The Manager shall forthwith upon such termination deliver to the Board of
Directors all property and documents, corporate records, reports and software of
the Company or any subsidiary of the Company then in the custody of the Manager.
16. Representations and Warranties.
------------------------------
(a) The Company hereby represents and warrants to the Manager as follows:
(i) Corporate Existence. The Company is duly organized, validly
-------------------
existing and in good standing under the laws of Maryland, has the power to own
its assets and to transact the business in which it is now engaged and is duly
qualified as a foreign corporation and in good standing under the laws of such
jurisdictions where its ownership or lease of property or the conduct of its
business requires such qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of the Company
and its subsidiaries, taken as a whole.
(ii) Corporate Power; Authorization; Enforceable Obligations. The
-------------------------------------------------------
Company has the corporate power, authority and legal right to execute, deliver
and perform this Agreement and all obligations required hereunder and has taken
all necessary corporate action to authorize this Agreement on the terms and
conditions hereof and the execution, delivery and performance of this Agreement
and all obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the Company, and no
license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by the Company in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by a duly authorized
officer of the Company, and this Agreement constitutes, and each instrument or
document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as such enforcement may
be limited by bankruptcy, insolvency, moratorium or similar laws now or
hereafter in effect relating to the rights and remedies of creditors generally,
and general principles of equity.
(iii) No Legal Bar to This Agreement. The execution, delivery and
performance of this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law or regulation
binding on the Company, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Company, or the charter or
Bylaws of, or any securities issued by the Company or any mortgage, indenture,
lease, contract or other agreement, instrument or undertaking to which the
Company is a party or by which the Company or any of its assets may be bound,
the violation of which would have a material adverse effect on the business
operations, assets or financial condition of the Company and its subsidiaries,
taken as a whole, and will not result in, or require, the creation or imposition
of any lien on any of its property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
(b) The Manager hereby represents and warrants to the Company as follows:
(i) Corporate Existence. The Manager is duly organized, validly
-------------------
existing and in good standing under the laws of California, has the power to own
its assets and to transact the business in which it is now engaged and is duly
qualified as a foreign corporation and in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification, except for failures to be so qualified,
authorized or licensed that could not in the aggregate have a material adverse
effect on the business operations, assets or financial condition of the Manager
and its subsidiaries, taken as a whole. The Manager does not do business under
any fictitious business name.
(ii) Company Power; Authorization; Enforceable Obligations. The
-----------------------------------------------------
Manager has the power, authority and legal right to execute, deliver and perform
this Agreement and all obligations required hereunder and has taken all
necessary action to authorize this Agreement on the terms and conditions hereof
and its execution, delivery and performance of this Agreement and all
obligations required hereunder. No consent of any other person
<PAGE>
including, without limitations, shareholders and creditors of the Manager, and
no license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by the Manager in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by a duly authorized
officer of the Manager, and this Agreement constitutes, and each instrument or
document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Manager enforceable
against the Manager in accordance with its terms.
(iii) No Legal Bar to This Agreement. The execution, delivery and
------------------------------
performance of this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law or regulation
binding on the Manager, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Manager, or the certificate
of incorporation or by-laws of, or any securities issued by the Manager or of
any mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which the Manager is a party or by which the Manager or any of
its assets may be bound, the violation of which would have a material adverse
effect on the business operations, assets or financial condition of the Manager
and its subsidiaries, taken as a whole, and will not result in, or require, the
creation or imposition of any lien on any of its property, assets or revenues
pursuant to the provision of any such mortgage, indenture, lease, contract or
other agreement, instrument or undertaking.
17. Arbitration.
------------
(a) Each controversy, dispute or claim between the parties arising out
of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to this Agreement gives written notice to the
other that a controversy, dispute or claim exists), will be settled by binding
arbitration in Orange County, California in accordance with the provisions of
the Judicial Arbitration and Mediation Services, which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim, and
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court of Orange
County (the "Court"). Any decision rendered by the arbitrator and such
arbitration will be final, binding and conclusive and judgment shall be entered
pursuant to the California Code of Civil Procedure Section 644 in any court in
the State of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the arbitrator
shall determine the manner in which the proceeding is conducted, including the
time and place of all hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the proceeding. All
proceedings and hearings conducted before the arbitrator, except for trial,
shall be conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before the
arbitrator. The party making such a request shall have the obligation to arrange
for any pay for the court reporter. The costs of the court reporter shall be
borne equally by the parties.
(c) The arbitrator shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the state
of California will be applicable to the reference proceeding. The arbitrator
shall be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The arbitrator shall issue a single judgment at the
close of the proceeding which shall dispose of all of the claims of the parties
that are the subject of the proceeding. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the arbitrator. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a proceeding governed under this
provision.
18. Notices. All notices, requests, demands and other communications
-------
provided for hereunder shall be in writing (including telegraphic or facsimile
communications) and shall be in mailed (return receipt requested), telegraphed,
sent by facsimile, overnight courier or hand delivered to each party at the
address set forth as follows,
<PAGE>
or at such other address as either party may designate by notice to the others,
and any such notice, request, demand or other communication shall be effective
upon receipt:
The Company: IMH Commercial Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, California 92707
Telephone: (714) 556-0122
Facsimile: (714) 433-2122
Attention: Joseph R. Tomkinson,
Chief Executive Officer
The Manager: RAI Advisors, LLC
20371 Irvine Avenue
Santa Ana Heights, California 92707
Telephone: (714) 556-0122
Facsimile: (714) 438-2150
Attention: William S. Ashmore
President
Either party may at any time give notice in writing to the other party of a
change of its address for the purpose of this Section 18.
19. Amendments. This Agreement shall not be amended, changed, modified,
----------
terminated or discharged in whole or in part except by an instrument in writing
signed by all parties hereto, or their respective successors or assigns, or
otherwise as provided herein. The parties hereto agree that in no event shall an
oral modification of this Agreement be enforceable or valid.
20. Successors and Assigns. This Agreement shall become effective when it is
----------------------
executed by all parties and thereafter shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns.
21. Attorneys' Fees. In the event that any party shall bring an action or
---------------
proceeding in connection with the performance, breach or interpretation hereof,
then the prevailing party in such action as determined by the court or other
body having jurisdiction shall be entitled to recover from the losing party in
such action, as determined by the court or other body having jurisdiction, all
reasonable costs and expense of litigation or arbitration, including reasonable
attorney's fees, court costs, costs of investigation and other costs reasonably
related to such proceeding.
22. Governing Law. This Agreement shall be governed, construed and
-------------
interpreted in accordance with the laws of the State of California.
23. Headings and Cross References. The section headings hereof have been
-----------------------------
inserted for convenience of reference only and shall not be construed to affect
the meaning, construction or effect of this Agreement. Any reference in this
Agreement to a "Section" or "Subsection" shall be construed, respectively, as
referring to a section of this Agreement or a subsection of a section of this
Agreement.
24. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity of any other provision, and all
other provisions shall remain in full force and effect.
25. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties relating to the subject matter hereof, and the parties hereto have made
no agreements, representations or warranties relating to the subject matter of
this Agreement that are not set forth otherwise herein. This Agreement
supersedes any and all prior agreements, written or oral, between the parties
hereto.
26. Waiver. Any forbearance by a party to this Agreement in exercising any
------
right or remedy under this Agreement or otherwise afforded by applicable law
shall not by a waiver of or preclude the exercise of that or any other right or
remedy.
<PAGE>
27. Execution in Counterparts. This Agreement may be executed in one or
-------------------------
more counterparts, any of which shall constitute an original as against any
party whose signature appears on it, and all of which shall together constitute
a single instrument. This Agreement shall become binding when one or more
counterpart, individually or taken together, bear the signatures of both
parties.
[The remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first above written.
IMH COMMERCIAL HOLDINGS, INC.
By: /s/ Joseph R. Tomkinson
-----------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
RAI ADVISORS, LLC
By: /s/ William S. Ashmore
---------------------------------
Name: William S. Ashmore
Title: President
<PAGE>
SUBMANAGEMENT AGREEMENT EXHIBIT 10.2
THIS AGREEMENT (the "Agreement") entered into as of August 4, 1997 to be
effective as of August 8, 1997, the closing date of the public offering of
Common Stock, $.01 par value per share, on Registration Statement Form S-11 (No.
333-25423) of IMH Commercial Holdings, Inc. (the "Company") is by and between
RAI ADVISORS, LLC, (the "Manager"), IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a
Maryland corporation ("IMH") and ICI FUNDING CORPORATION, a California
corporation ("ICIFC").
BACKGROUND
A. The Manager and the Company have entered into an agreement as of the
date hereof (the "Management Agreement") pursuant to which the Manager will
provide certain management services to IMH and any subsidiary or Affiliate (as
defined therein) of the Company, including its conduit operations Imperial
Commercial Capital Corporation, a California corporation ("ICCC") (the
"Management Services") for which the Manager will be paid certain compensation
as described therein; and
B. The Manager desires to retain ICIFC to assist it in the performance of
its duties and obligations under the Management Agreement in the manner and on
the terms hereinafter set forth.
C. ICIFC has agreed that it will take no action to modify this agreement
without the prior written consent of IMH.
NOW THEREFORE, in consideration of the mutual agreements herein set forth,
the parties hereto agree as follows:
1. Duties and Obligations of ICIFC. ICIFC shall provide any and all
-------------------------------
administrative services required by the Company including facilities and costs
associated therewith, technology, management information systems, general ledger
accounts, human resources and payroll, check processing and accounts payable and
other services as the Manager may reasonably request from time to time in order
to assist the Manager in discharging its obligation to provide the Management
Services.
2. Additional Activities of IMH. Except to the extent limited by the
----------------------------
Management Agreement or that certain Non-Competition Agreement dated the date
hereof and entered into by and among IMH, ICIFC, the Company and ICCC (the "Non-
Competition Agreement"), nothing herein shall prevent IMH, ICIFC or their
respective Affiliates (as defined in the Management Agreement) from engaging in
any business or from rendering services of any kind to any other person or
entity, including investment in or advisory service to others investing in any
type of real estate investment including investments which meet the principal
investment objectives of the Company. Directors, officers, employees and agents
of IMH, ICIFC or their respective Affiliates may serve as directors, officers,
employees, agents, nominees or signatories for the Manager. When executing
documents or otherwise acting in such capacities for the Manager, such persons
shall use their respective titles in the Manager.
3. Records; Confidentiality. ICIFC shall maintain appropriate books
------------------------
of account and records relating to services performed hereunder, which books of
account and records shall be accessible for inspection and copying by the
Manager at any time during normal business hours. ICIFC agrees to keep
confidential any and all information it obtains from time to time in connection
with the services it renders hereunder and shall not disclose any portion
thereof to non-affiliated third parties except with the prior written consent of
the Manager.
4. Obligations of ICIFC. Anything else in this Agreement to the
--------------------
contrary notwithstanding, ICIFC shall refrain from any action which it
reasonably believes would adversely affect the status of the Company or any
subsidiary of the Company as a real estate investment trust as defined in and
limited by Sections 856 to 860 of the Internal Revenue Code of 1986, as amended,
or which in its sole judgment made in good faith would violate any law, rule or
regulation of any government body or agency having jurisdiction over the Company
and such subsidiary or
<PAGE>
which would otherwise not be permitted by the Company's or such subsidiary's
Governing Instruments (as defined in the Management Agreement), except if such
action shall be ordered by the Manager, in which event ICIFC shall promptly
notify the Manager of ICIFC's judgment that such action would adversely affect
such status or violate any such law, rule or regulation or the Company's or such
subsidiary's Governing Instruments, and shall refrain from taking such action
pending further clarification or instructions from the Manager. If the Manager
thereafter instructs ICIFC despite ICIFC's notification as provided herein, to
take any such action and ICIFC so acts upon the instructions given, ICIFC shall
not be responsible or have any liability for any loss of the Company's or such
subsidiary's status as a real estate investment trust or violation of any law,
rule or regulation or the Governing Instruments caused thereby.
5. Compensation. ICIFC shall be paid for services rendered by it
------------
under this Agreement commensurate with the services rendered by the Manager on a
dollar for dollar basis plus a service charge of 15% to the extent such services
are rendered under the Management Agreement. ICIFC shall also be paid on a
dollar for dollar basis plus a service charge of 15% for the actual cost of the
services provided by the executive officers of the Company based upon the
compensation payable to them by ICIFC pursuant to certain employment agreements.
For the first three years of the Submanagement Agreement, there will be a
minimum amount of $500,000 per annum (which includes the 15% service charge)
payable by the Manager to ICIFC. Such fee or any incremental part thereof shall
be payable within 30 days of the receipt of any such compensation or any part
thereof by the Manager. ICIFC agrees that the Manager shall not be obligated to
make any payment to it under this Agreement if to do so would cause the
Manager's liabilities to exceed its assets or would cause the Manager to be
unable to meet its debts as they become due and payable.
6. Limits of ICIFC Responsibility. ICIFC assumes no responsibility
------------------------------
under this Agreement other than to render the services called for hereunder in
good faith and shall not be responsible for any action of the Manager in
following or declining to follow any advice or recommendations of ICIFC,
including, without limitation, actions described in Section 4 above. ICIFC, its
directors, officers, shareholders and employees and its Affiliates will not be
liable to the Manager or the Manager's shareholders for any acts performed by
ICIFC, its directors, officers, shareholders and employees in accordance with
this Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties. The Manager
shall reimburse, indemnify and hold harmless ICIFC, and its Affiliates,
shareholders, directors, officers and employees of and from any and all
expenses, losses, damages, liabilities, demands, charges and claims of any
nature whatsoever in respect of or arising from any acts or omissions of ICIFC,
its Affiliates, shareholders, directors, officers and employees made in good
faith in the performance of IMH's duties under this Agreement and not
constituting bad faith, willful misconduct, gross negligence and reckless
disregard of its duties.
7. No Joint Venture. The Manager and ICIFC are not partners or joint
----------------
venturers with each other and nothing herein shall be construed to make them
such partners or joint venturers or impose any liability as such on either of
them.
8. Term; Termination.
-----------------
(a) This Agreement shall continue in force until December 31, 2002,
and thereafter it may be extended only with the affirmative vote of a majority
of the Unaffiliated Directors of IMH and by the affirmative vote of a majority
of the directors of the Manager. "Unaffiliated Directors" means a Director who
is independent of the Company, the Manager and IMH and its Affiliates.
(b) Each extension shall be executed in writing by all parties hereto
before the expiration of this Agreement or of any extension thereof. Each such
extension shall be effective for a period corresponding to the fiscal year of
the Manager, but in no case exceeding 12 months, excluding the first year.
(c) Notwithstanding any other provision herein to the contrary, this
Agreement, or any extension hereof, shall terminate automatically upon the
termination of the Management Agreement and may be terminated without cause by
the Manager upon 60 days' prior written notice, by a majority vote of the
directors of the Manager.
<PAGE>
9. Assignment. This Agreement shall terminate automatically in the
----------
event of its assignment, in whole or in part, by ICIFC, unless such assignment
is to a corporation, association, trust or other organization which shall
acquire the property and carry on the business of ICIFC, if at the time of such
assignment a majority of the voting stock of such assignee organization shall be
owned, directly or indirectly, by ICIFC or unless such assignment is consented
to in writing by the Manager, which consent may be unreasonably withheld in the
Manager's sole discretion. Such an assignment shall bind the assignee hereunder
in the same manner as ICIFC is bound hereunder, and, to further evidence its
obligations hereunder, the assignee shall execute and deliver a counterpart of
this Agreement. This Agreement shall not be assignable by the Manager without
the consent of ICIFC, except in the case of assignment by the Manager to a
corporation or other organization which is a successor (by merger, consolidation
or purchase of assets) to the Manager, in which case such successor organization
shall be bound hereunder by the terms of said assignment in the same manner as
the Manager is bound hereunder.
10. Default, Bankruptcy or Insolvency of ICIFC. At the option solely
------------------------------------------
of the Manager, this Agreement may be and become terminated immediately upon
written notice of termination from the Manager to ICIFC if any of the following
events shall occur:
(a) If ICIFC shall violate any provision of this Agreement and,
after notice of such violation, has not cured such default within 30 days; or
(b) There is entered an order for relief or similar decree or
order with respect to IMH or ICIFC by a court having jurisdiction in the
premises in an involuntary case under the federal bankruptcy laws as now or
hereafter constituted or under any applicable federal or state bankruptcy,
insolvency or other similar laws; or IMH (i) ceases or admits in writing its
inability to pay its debts as they become due and payable, or makes a general
assignment for the benefit of, or enters into any composition or arrangement
with, creditors; (ii) applies for, or consents (by admission of material
allegations of a petition or otherwise) to the appointment of a receiver,
trustee, assignee, custodian, liquidator or sequestrator (or other similar
official) of either IMH or ICIFC or of any substantial part of their properties
or assets, or authorizes such an application or consent, or proceeding seeking
such appointment are commenced without such authorization, consent or
application against IMH or ICIFC and continue undismissed for 30 days; (iii)
authorizes or files a voluntary petition in bankruptcy, or applies for or
consents (by admission of material allegations of a petition or otherwise) to
the application of any bankruptcy, reorganization, arrangement, readjustment of
debt, insolvency, dissolution, liquidation or other similar law of any
jurisdiction, or authorizes such application or consent, or proceedings to such
and are instituted against IMH without such authorization, application or
consent and are approved as properly instituted and remain undismissed for 30
days or result in adjudication or bankruptcy or insolvency; or (iv) permits or
suffers all or any substantial part of its properties or assets to be
sequestered or attached by court order and the order remains undismissed for 30
days.
(c) Each of IMH and ICIFC agrees that if any of the events
specified in paragraph (b) of this Section 10, shall occur, it will give prompt
written notice thereof to the board of directors of the Manager after the
happening of such event.
11. Action Upon Termination. From and after the effective date of
-----------------------
termination pursuant to Sections 8, 9 or 10 hereof, ICIFC shall not be entitled
to compensation for further services hereunder, but shall be paid all
compensation accruing to the date of termination subject to adjustments on an
annualized basis; provided, however, that if this Agreement is terminated within
three years of its effective date, then ICIFC shall be entitled to receive from
the Manager the remaining minimum amount of $500,000 per annum which would have
been paid for such year of termination. ICIFC shall forthwith upon such
termination:
(a) Pay over to the Manager all money collected and held for the
account of the Manager pursuant to this Agreement, after deducting any accrued
compensation and reimbursement for its expenses to which it is then entitled;
(b) Deliver to the Manager a full accounting, including a
statement showing all payments collected by it and a statement of all money held
by it, covering the period following the date of the last accounting furnished
to the Manager; and
<PAGE>
(c) Deliver to the Manager all property and documents of the
Manager then in custody of IMH or ICIFC.
12. Arbitration.
------------
(a) Each controversy, dispute or claim between the parties
arising out of or relating to this Agreement, which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to this Agreement gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by binding arbitration in Orange County, California in accordance with
the provisions of the Judicial Arbitration and Mediation Services, which shall
constitute the exclusive remedy for the settlement of any controversy, dispute
or claim, and the parties waive their rights to initiate any legal proceedings
against each other in any court or jurisdiction other than the Superior Court of
Orange County (the "Court"). Any decision rendered by the arbitrator and such
arbitration will be final, binding and conclusive and judgment shall be entered
pursuant to the California Code of Civil Procedure Section 644 in any court in
the State of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the
arbitrator shall determine the manner in which the proceeding is conducted,
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
proceeding. All proceedings and hearings conducted before the arbitrator, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the arbitrator. The party making such a request shall have the obligation to
arrange for any pay for the court reporter. The costs of the court reporter
shall be borne equally by the parties.
(c) The arbitrator shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the state
of California will be applicable to the reference proceeding. The arbitrator
shall be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The arbitrator shall issue a single judgment at the
close of the proceeding which shall dispose of all of the claims of the parties
that are the subject of the proceeding. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the arbitrator. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a proceeding governed under this
provision.
13. Notices. All notices, requests, demands and other communications
-------
provided for hereunder shall be in writing (including telegraphic or facsimile
communications) and shall be in mailed (return receipt requested), telegraphed,
sent by facsimile, overnight courier or hand delivered to each party at the
address set forth as follows, or at such other address as either party may
designate by notice to the others, and any such notice, request, demand or other
communication shall be effective upon receipt:
The Manager: RAI Advisors, LLC
20371 Irvine Avenue
Santa Ana Heights, CA 92707
Telephone: (714) 556-0122
Facsimile: (714) 438-2150
Attention: William S. Ashmore
President
<PAGE>
IMH: Imperial Credit Mortgage Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, CA 92707
Telephone: (714) 556-0122
Facsimile: (714) 433-2122
Attention: Joseph R. Tomkinson
Chief Executive Officer
ICIFC: ICI Funding Corporation
Telephone: (714) 556-0122
Facsimile: (714) 433-2122
Attention: Joseph R. Tomkinson
Chief Executive Officer
Either party may at any time give notice in writing to the other party
of a change of its address for the purpose of this Section 13.
14. Amendments. This Agreement shall not be amended, changed,
----------
modified, terminated or discharged in whole or in part, and the performance of
any obligation hereunder may not be waived, except by an instrument in writing
signed by both parties hereto, or their respective successors or permitted
assigns, or otherwise as provided herein; provided, however, that ICIFC agrees
to take no action further to this Section 14 without the prior written consent
of IMH evidenced by a majority vote of the directors of IMH who are not
directors of ICCC and that any action taken by ICIFC further to this Section 14
in contravention of said provision shall be null and void. The parties hereto
agree that in no event shall an oral modification of this Agreement be
enforceable or valid.
15. Successors and Assigns. This Agreement shall bind any successors
----------------------
or permitted assigns of the parties hereto as herein provided.
16. Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity of any other
provision, and all other provisions shall remain in full force and effect.
17. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties relating to the subject matter hereof, and the parties hereto have
made no agreements, representations or warranties relating to the subject matter
of this Agreement that are not set forth otherwise herein. This Agreement
supersedes any and all prior agreements, written or oral, between the parties
hereto.
18. Waiver. Any forbearance by a party to this Agreement in
------
exercising any right or remedy under this Agreement or otherwise afforded by
applicable laws shall not be a waiver of or preclude the exercise of that or any
other right or remedy.
19. Governing Law. The provisions of this Agreement shall be
-------------
governed by, construed under and interpreted in accordance with the laws of the
State of California as at the time in effect.
20. Headings and Cross References. The section headings hereof have
-----------------------------
been inserted for convenience of reference only and shall not be construed to
affect the meaning, construction or effect of this Agreement. Any reference in
this Agreement to a "Section" or "Subsection" shall be construed, respectively,
as referring to a section of this Agreement or a subsection of a section of this
Agreement.
21. Attorneys' Fees. In the event that any party shall bring an
---------------
action or proceeding in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action as determined by
the court or other body having jurisdiction shall be entitled to recover from
the losing party in such action, as determined by the court or other body having
jurisdiction, all reasonable costs and expense of litigation or arbitration,
including reasonable attorney's fees, court costs, costs of investigation and
other costs reasonably related to such proceeding.
<PAGE>
22. Execution in Counterparts. This Agreement may be executed in one
-------------------------
or more counterparts, any of which shall constitute an original as against any
party whose signature appears on it, and all of which shall together constitute
a single instrument. This Agreement shall become binding when one or more
counterparts, individually or taken together, bear the signatures of both
parties.
[The remainder of this page is intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers thereunto duly authorized as of the day and year
written above.
RAI ADVISORS, LLC
By: /s/ William S. Ashmore
---------------------------------------
Name: William S. Ashmore
Title: President
ICI FUNDING CORPORATION
By: /s/ Joseph R. Tomkinson
-------------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
By: /s/ Joseph R. Tomkinson
--------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
<PAGE>
CONTRIBUTION AGREEMENT EXHIBIT 10.5
This CONTRIBUTION AGREEMENT (this "Agreement") entered into as of August 4,
1997 to be effective as of August 8, 1997, the closing date (the "Closing Date")
of the public offering of Common Stock, $.01 par value per share, (the
"Offering") on a Form S-11 Registration Statement (the "Registration Statement")
of IMH COMMERCIAL HOLDINGS, INC., a Maryland corporation (the "Company"), is by
and between the Company and IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a Maryland
corporation ("IMH").
BACKGROUND
A. In January 1997, Imperial Commercial Capital Corporation was
incorporated under the laws of the state of California ("ICCC").
B. In February 1997, IMH purchased all of the non-voting Preferred Stock
(the "Preferred Stock") of ICCC, which represents 95% of the economic interest
in ICCC, for $500,000.
C. ICCC, through three divisions, operates as the conduit operations of
the Company by originating, purchasing, and selling or securitizing Commercial
Mortgages, as defined in the Registration Statement.
D. In furtherance of the foregoing, on the Closing Date, IMH will
contribute to the Company, and the Company will accept, 100% of the Preferred
Stock presently owned by IMH in exchange for that number of shares of the
Company's Class A Common Stock (the "Class A Stock") equal to the product of 95%
of the estimated fair value of ICCC on the Closing Date divided by the IPO Price
(as defined in the Registration Statement) of the Company's Common Stock issued
in the Offering.
E. This Agreement is intended to accomplish and memorialize the above
contribution, to provide certain agreements applicable to the relationship
between the Company and IMH, and thereby effectuate the intent of the parties
hereto.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the mutual
covenants and conditions hereof, the parties agree as follows:
1. Contribution. Subject to and upon the terms and conditions hereof, on
------------
the date hereof, (a) IMH shall contribute (the "Contribution") to the Company,
and the Company agrees to accept from IMH, free and clear of all liens, claims
and encumbrances thereon, all of the Preferred Stock of ICCC presently owned by
IMH and (b) in consideration therefor, the Company hereby covenants that on the
date hereof, the Company shall issue or cause to be issued to IMH, 95,000
validly issued, fully paid and nonassessable shares of its Class A Stock, which
number is equal to the product of 95% of the estimated fair value of ICCC on the
date hereof divided by the IPO Price of the Company's Common Stock issued in the
Offering.
2. Transfer of Stock.
-----------------
(a) On the Closing Date, IMH conveys, assigns, transfers and delivers
to the Company and the Company hereby acquires from IMH all of its rights, title
and interest in and to the Preferred Stock.
(b) The Contribution in Subsection (a) above, shall only be effective
upon the issuance by the Company to IMH of 95,000 shares of its Class A Stock,
as determined in Section 1 on the Closing Date.
(c) Following the Contribution, IMH shall take all necessary steps to
register the transfer of the Preferred Stock in the shareholder ledger of ICCC.
Any stock transfer or other taxes payable in connection with the Contribution
pursuant to this Agreement shall be paid by IMH. IMH shall also provide the
Company with such further documents as the Company may reasonably request to
effectuate the Contribution. From time to time, at the request of the Company
whether at or after the Closing Date, IMH shall execute and deliver such
instruments of conveyance
<PAGE>
of the Preferred Stock as the Company may need in order to more effectively
convey the Preferred Stock to the Company.
3. Indemnification.
---------------
(a) The Company shall indemnify and hold harmless IMH against and in
respect of any and all damages, claims, losses, liabilities and expenses
incurred by IMH which arise out of or relate to (i) any breach or violation of
this Agreement by the Company, (ii) any breach of any of the representations or
warranties made in this Agreement by the Company, and (iii) the ownership of the
Preferred Stock on or after the Closing Date.
(b) IMH shall indemnify and hold harmless the Company against and in
respect of any and all damages, claims, losses, liabilities and expenses
incurred by the Company which arise out of or relate to (i) any breach or
violation of this Agreement by IMH, (ii) any breach of any of the
representations or warranties made in this Agreement by IMH, and (iii) the
ownership of the Class A Stock on or after the Closing Date.
4. Representations and Warranties.
------------------------------
(a) IMH hereby represents and warrants to the Company as follows:
(1) Corporate Existence. IMH is duly organized, validly existing
-------------------
and in good standing under the laws of Maryland, has the corporate power to
own its assets and to transact the business in which it is now engaged and
is duly qualified as a foreign corporation and in good standing under the
laws of such jurisdictions where its ownership or lease of property or the
conduct of its business requires such qualification, except for failures to
be so qualified, authorized or licensed that could not in the aggregate have
a material adverse effect on the business operations, assets or financial
condition of IMH and its subsidiaries, taken as a whole.
(2) Corporate Power; Authorization; Enforceable Obligations. IMH
-------------------------------------------------------
has the power, authority and legal right to execute, deliver and perform this
Agreement and all obligations required hereunder and has taken all necessary
corporate action to authorize this Agreement on the terms and conditions hereof
and the execution, delivery and performance of this Agreement and all
obligations required hereunder. No consent of any other person including,
without limitation, stockholders and creditors of IMH, and no license, permit,
approval or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental authority is required
by IMH in connection with this Agreement or the execution, delivery,
performance, validity or enforceability of this Agreement and all obligations
required hereunder. This Agreement has been, and each instrument or document
required hereunder will be, executed and delivered by a duly authorized officer
of IMH and this Agreement constitutes, and each instrument or document required
hereunder when executed and delivered hereunder will constitute, the legally
valid and binding obligation of IMH enforceable against IMH in accordance with
its terms, except as such enforcement may be limited by bankruptcy, insolvency,
moratorium or similar laws now or hereafter in effect relating to the rights and
remedies of creditors generally, and general principles of equity.
(3) No Legal Bar to This Agreement. The execution, delivery and
------------------------------
performance of this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law or regulation
binding on IMH, or any order, judgment, award or decree of any court, arbitrator
or governmental authority binding IMH, or the charter or bylaws of, or any
securities issued by IMH, or of any mortgage, indenture, lease, contract, or
other agreement, instrument, undertaking or other arrangement of any character
or nature whatsoever to which IMH is a party or by which it or its assets may be
bound, the violation of which would have a material adverse effect on the
business operations, assets or financial condition of IMH and its subsidiaries,
taken as a whole, and will not result in, or require, the creation or imposition
of any lien on any of its property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
(4) Marketable Title. Upon consummation of the transaction
----------------
contemplated by this Agreement, the Company will have good and marketable title
in and to the Preferred Stock, free and clear of all liens, charges, claims,
pledges, options, security interests, encumbrances and restrictions of every
kind.
<PAGE>
(5) Issued and Outstanding Preferred Stock. The issued and
--------------------------------------
outstanding Preferred Stock of ICCC consists of 9,500 shares, of which, prior to
the Closing Date, IMH is the sole lawful record and beneficial owner. The
Preferred Stock has been duly authorized and validly issued and is free of any
pre-emptive rights and is entitled to the rights, privileges and preferences set
forth in ICCC's Articles of Incorporation attached as Exhibit "A" hereto.
(b) The Company hereby represents and warrants to IMH as follows:
(1) Corporate Existence. The Company is duly organized, validly
-------------------
existing and in good standing under the laws of Maryland, has the corporate
power to own its assets and to transact the business in which it is now engaged
and is duly qualified as a foreign corporation and in good standing under the
laws of each jurisdiction where its ownership or lease of property or the
conduct of its business requires such qualification, except for failures to be
so qualified, authorized or licensed that could not in the aggregate have a
material adverse effect on the business operations, assets or financial
condition of the Company and its subsidiaries, taken as a whole.
(2) Corporate Power; Authorization; Enforceable Obligations. The
-------------------------------------------------------
Company has the corporate power, authority and legal right to execute, deliver
and perform this Agreement and all obligations required hereunder and has taken
all necessary corporate action to authorize this Agreement on the terms and
conditions hereof and its execution, delivery and performance of this Agreement
and all obligations required hereunder. No consent of any other person
including, without limitation, stockholders and creditors of the Company, and no
license, permit, approval or authorization of, exemption by, notice or report
to, or registration, filing or declaration with, any governmental authority is
required by the Company in connection with this Agreement or the execution,
delivery, performance, validity or enforceability of this Agreement and all
obligations required hereunder. This Agreement has been, and each instrument or
document required hereunder will be, executed and delivered by a duly authorized
officer of the Company, and this Agreement constitutes, and each instrument or
document required hereunder when executed and delivered hereunder will
constitute, the legally valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.
(3) No Legal Bar to This Agreement. The execution, delivery and
------------------------------
performance of this Agreement and the documents or instruments required
hereunder, will not violate any provision of any existing law or regulation
binding on the Company, or any order, judgment, award or decree of any court,
arbitrator or governmental authority binding on the Company, or the charter or
bylaws of, or any securities issued by the Company, or of any mortgage,
indenture, lease, contract or other agreement, instrument or undertaking to
which the Company is a party or by which the Company or any of its assets may be
bound, the violation of which would have a material adverse effect on the
business operations, assets or financial condition of the Company and its
subsidiaries, taken as a whole, and will not result in, or require, the creation
or imposition of any lien on any of its property, assets or revenues pursuant to
the provision of any such mortgage, indenture, lease, contract or other
agreement, instrument or undertaking.
(4) Validly Issued. The Class A Stock has been duly authorized,
--------------
validly issued and, upon consummation of the transaction contemplated by this
Agreement, fully paid and non-assessable.
5. Arbitration.
-----------
(a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to this Agreement gives written notice to the
other that a controversy, dispute or claim exists), will be settled by binding
arbitration in Orange County, California in accordance with the provisions of
the Judicial Arbitration and Mediation Services, which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim, and
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court of Orange
County (the "Court"). Any decision rendered by the arbitrator and such
arbitration will be final, binding and conclusive and judgment shall be
<PAGE>
entered pursuant to the California Code of Civil Procedure Section 644 in any
court in the State of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the arbitrator
shall determine the manner in which the proceeding is conducted, including the
time and place of all hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the proceeding. All
proceedings and hearings conducted before the arbitrator, except for trial,
shall be conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before the
arbitrator. The party making such a request shall have the obligation to arrange
for any pay for the court reporter. The costs of the court reporter shall be
borne equally by the parties.
(c) The arbitrator shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the state
of California will be applicable to the proceeding. The arbitrator shall be
empowered to enter equitable as well as legal relief, to provide all temporary
and/or provisional remedies and to enter equitable orders that will be binding
upon the parties. The arbitrator shall issue a single judgment at the close of
the proceeding which shall dispose of all of the claims of the parties that are
the subject of the proceeding. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the arbitrator. The parties hereto expressly reserve the
right to findings of fact, conclusions of law, a written statement of decision,
and the right to move for a new trial or a different judgment, which new trial,
if granted, is also to be a proceeding governed under this provision.
6. Notices. All notices, requests, demands and other communications
-------
provided for hereunder shall be in writing (including telegraphic or facsimile
communications) and shall be in mailed (return receipt requested), telegraphed,
sent by facsimile, overnight courier or hand delivered to each party at the
address set forth as follows, or at such other address as either party may
designate by notice to the others, and any such notice, request, demand or other
communication shall be effective upon receipt:
The Company: IMH Commercial Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, CA 92707
Telephone: (714) 556-0122
Facsimile: (714) 433-2122
Attention: Joseph R. Tomkinson
Chief Executive Officer
IMH: Imperial Credit Mortgage Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, CA 92707
Telephone: (714) 556-0122
Facsimile: (714) 438-2150
Attention: William S. Ashmore
President
7. Amendments. This Agreement shall not be amended, changed, modified,
----------
terminated or discharged in whole or in part except by an instrument in writing
signed by all parties hereto, or their respective successors or assigns, or
otherwise as provided herein. The parties hereto agree that in no event shall an
oral modification of this Agreement be enforceable or valid.
8. Attorneys' Fees. In the event that any party shall bring an action or
---------------
proceeding in connection with the performance, breach or interpretation hereof,
then the prevailing party in such action as determined by the
<PAGE>
court or other body having jurisdiction shall be entitled to recover from the
losing party in such action, as determined by the court or other body having
jurisdiction, all reasonable costs and expense of litigation or arbitration,
including reasonable attorney's fees, court costs, costs of investigation and
other costs reasonably related to such proceeding.
9. Successors and Assigns. This Agreement shall become effective when it
----------------------
is executed by all parties and thereafter shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns.
10. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties relating to the subject matter hereof, and the parties hereto have made
no agreements, representations or warranties relating to the subject matter of
this Agreement that are not set forth otherwise herein. This Agreement
supersedes any and all prior agreements, written or oral, between the parties
hereto.
11. Waiver. Any forbearance by a party to this Agreement in exercising
------
any right or remedy under this Agreement or otherwise afforded by applicable law
shall not be a waiver of or preclude the exercise of that or any other right or
remedy.
12. Headings and Cross References. The section headings hereof have been
-----------------------------
inserted for convenience of reference only and shall not be construed to affect
the meaning, construction or effect of this Agreement. Any reference in this
Agreement to a "Section" or "Subsection" shall be construed, respectively, as
referring to a section of this Agreement or a subsection of a section of this
Agreement.
13. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity of any other provision, and all
other provisions shall remain in full force and effect.
14. Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California applicable to contracts made
and performed in said State, without regard to conflicts of laws principals.
15. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original, and
which taken together shall constitute one and the same instrument.
[The remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed on behalf of the parties by
duly authorized representatives as of the date first above written.
IMH COMMERCIAL HOLDINGS, INC.
By: /s/ Joseph R. Tomkinson
---------------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
By: /s/ William S. Ashmore
----------------------------------
Name: William S. Ashmore
Title: President
<PAGE>
NON-COMPETITION AGREEMENT EXHIBIT 10.6
This NON-COMPETITION AGREEMENT (this "Agreement"), entered into as of
August 4, 1997 to be effective as of August 8, 1997, the closing date (the
"Closing Date") of the public offering of Common Stock on a Form S-11
Registration Statement (No. 333-25423) (the "Registration Statement") of IMH
COMMERCIAL HOLDINGS, INC., a Maryland corporation (the "Company" or "ICH"), is
by and between IMPERIAL CREDIT MORTGAGE HOLDINGS, INC., a Maryland corporation
("IMH"), ICI Funding Corporation, a California corporation ("ICIFC"), the
Company, and Imperial Commercial Capital Corporation, a California corporation
("ICCC") with reference to the following facts:
BACKGROUND
A. The Company has filed a Registration Statement on Form S-11
pursuant to the Securities Act of 1933, as amended (the "Offering").
B. Pursuant to that certain Contribution Agreement, effective as of
the Closing Date, between the Company and IMH (the "Contribution Agreement"), in
exchange for the transfer by IMH to the Company of 100% of the non-voting
Preferred Stock of ICCC presently owned by IMH, the Company has agreed to issue
to IMH 95,000 shares of ICH Class A Common Stock (the "Shares"). The
transactions described in this paragraph are referred to herein as the
"Contribution Transaction."
C. The Company was formed for the purpose of originating, purchasing,
securitizing and selling Commercial Mortgages (as defined in the Registration
Statement) and investing in Commercial Mortgages and commercial mortgage-backed
securities ("CMBSs").
D. ICCC is the conduit operations of ICH; ICH owns 100% of the non-
voting Preferred Stock of ICCC which represents 95% of the economic interest.
ICIFC is the conduit operations of IMH; IMH owns 100% of the non-voting
Preferred Stock of ICIFC which represents 99% of the economic interest.
E. IMH and ICIFC have agreed not to compete with the Company and
ICCC in the certain businesses that are more particularly described herein, in
the geographical locations and for the term described herein.
F. IMH's trade secrets in those businesses in which it has agreed
not to compete include certain non-public, confidential information concerning
product and service marketing plans and strategy, customer needs and
peculiarities, customer lists and other detailed information (the "Trade
Secrets").
G. The Company would not enter into the Contribution Agreement
unless it was assured that IMH and ICIFC would execute this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
<PAGE>
1. Non-Competition.
---------------
(a) Except as set forth below, for a period of the earlier of nine
(9) months from the Closing Date of the Company's Offering or the date on which
the Company accumulates (for investment or sale) $300,000,000 of Commercial
Mortgages and/or CMBSs, neither IMH nor any of its affiliate companies,
including ICIFC, shall originate, purchase or otherwise acquire or sell any
Commercial Mortgages and/or CMBSs. Notwithstanding the foregoing, this Agreement
shall not preclude IMH or ICIFC from purchasing any Commercial Mortgages or
CMBSs as permitted under that certain Right of First Refusal Agreement by and
among IMH, ICIFC, the Company, ICCC and RAI Advisors, LLC, of even date
herewith, a copy of which is attached hereto as Exhibit "A." This covenant not
to compete shall be limited to those states and those counties and cities set
forth on Exhibit "B" attached hereto. The aforementioned businesses in which IMH
has agreed not to compete shall be referred to herein as the "Businesses."
(b) The parties intend that the covenant contained in this Section
1 shall be construed as a series of separate covenants, one for each county
specified in Exhibit "B" hereto. Except for geographic coverage, each such
separate covenant shall be deemed identical in terms to the covenant contained
in this Section 1. If, in any judicial proceedings, a court shall refuse to
enforce any of the separate covenants deemed included in this paragraph, then
such unenforceable covenant shall be deemed eliminated from these provisions for
the purpose of those proceedings to the extent necessary to permit the remaining
separate covenants to be enforced.
(c) Nothing contained in this Agreement shall be deemed to
preclude IMH or ICIFC from purchasing or owning, directly or beneficially, as a
passive investment, five percent (5%) or less of any class of a publicly traded
securities of any entity if it does not actively participate in or control,
directly or indirectly, any investment or other decisions with respect to such
entity.
2. Trade Secrets.
-------------
Each of IMH and ICIFC recognizes and acknowledges that the Trade
Secrets are valuable, special and unique assets of the Businesses. Each of IMH
and ICIFC shall keep all Trade Secrets confidential and not disclose such Trade
Secrets or any part thereof to any person, firm, corporation, association or
other entity for any reason or purpose whatsoever.
3. Acknowledgment.
--------------
Each of IMH and ICIFC acknowledges and agrees that the covenants
referred to in Sections 1 and 2 hereof are given in consideration of the
issuance by the Company of the Shares to IMH pursuant to the Contribution
Agreement.
4. Injunctive Relief.
-----------------
Each of IMH and ICIFC hereby acknowledges and agrees that it would
be difficult to fully compensate the Company for damages resulting from the
breach or threatened breach of Sections 1 and 2, herein and, accordingly, that
the Company shall be entitled to temporary and injunctive relief, including
temporary restraining orders, preliminary injunctions and permanent injunctions,
to enforce such Sections without the necessity of proving actual damages
therewith. This provision with respect to injunctive relief shall not, however,
diminish the Company's right to claim and recover damages or enforce any other
of its legal and/or equitable rights or defenses.
5. Severable Provisions.
--------------------
The provisions of this Agreement are severable and if any one or
more provisions may be determined to be illegal or otherwise unenforceable, in
whole or in part, the remaining provisions, and any partially unenforceable
provisions to the extent enforceable, shall nevertheless be binding and
enforceable.
<PAGE>
6. Reference Provision.
-------------------
(a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to this Agreement gives written notice to the
other that a controversy, dispute or claim exists), will be settled by binding
arbitration in Orange County, California in accordance with the provisions of
the Judicial Arbitration and Mediation Services, which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim, and
the parties waive their rights to initiate any legal proceedings against each
other in any court or jurisdiction other than the Superior Court of Orange
County (the "Court"). Any decision rendered by the arbitrator and such
arbitration will be final, binding and conclusive and judgment shall be entered
pursuant to the California Code of Civil Procedure Section 644 in any court in
the State of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the
arbitrator shall determine the manner in which the proceeding is conducted,
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
proceeding. All proceedings and hearings conducted before the arbitrator, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the arbitrator. The party making such a request shall have the obligation to
arrange for any pay for the court reporter. The costs of the court reporter
shall be borne equally by the parties.
(c) The arbitrator shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the state
of California will be applicable to the reference proceeding. The arbitrator
shall be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The arbitrator shall issue a single judgment at the
close of the proceeding which shall dispose of all of the claims of the parties
that are the subject of the proceeding. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgment entered by the arbitrator. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a proceeding governed under this
provision.
7. Binding Agreement. This Agreement shall inure to the benefit of
-----------------
and shall be binding upon the parties hereto and their successors and assigns.
8. Captions. The Section captions are inserted only as a matter of
--------
convenience and reference and in no way define, limit or describe the scope of
this Agreement or the intent of any provisions hereof.
9. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties relating to the subject matter hereof, and the parties hereto have
made no agreements, representations or warranties relating to the subject matter
of this Agreement that are not set forth otherwise herein. This Agreement
supersedes any and all prior agreements, written or oral, between the parties
hereto.
10. Amendments. This Agreement shall not be amended, changed,
----------
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by all parties hereto, or their respective successors or
assigns, or otherwise as provided herein. The parties hereto agree that in no
event shall an oral modification of this Agreement be enforceable or valid.
11. Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of California applicable to contracts made
and performed in said state, without regard to conflicts of laws principals.
<PAGE>
12. Notices. All notices and other communications under this
-------
Agreement shall be in writing (including, without limitation, telegraphic,
telex, telecopy or cable communication) and mailed, telegraphed, telexed,
telecopied, cabled or delivered by hand or by a nationally recognized courier
service guaranteeing overnight delivery to a party at the following address (or
to such other address as such party may have specified by notice given to the
other party pursuant to this provision):
If to the Company or ICCC, to:
c/o IMH Commercial Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, California 92707
Telephone: (714) 556-0122
Facsimile: (714) 438-2699
Attention: Joseph R. Tomkinson
Chief Executive Officer
If to IMH or ICIFC, to:
c/o Imperial Credit Mortgage Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, California 92702
Telephone: (714) 556-0122
Facsimile: (714) 438-2150
Attention: William S. Ashmore
President
All such notices and communications shall, when mailed, telegraphed, telexed,
telecopied, cabled or delivered, be effective three days after deposit in the
mails, delivered to the telegraph company, confirmed by telex answerback,
telecopied with confirmation of receipt, delivered to the cable company,
delivered by hand to the addressee or one day after delivery to the courier
service.
13. Waiver. Any forbearance by a party to this Agreement in
------
exercising any right or remedy under this Agreement or otherwise afforded by
applicable law shall not be a waiver of or preclude the exercise of that or any
other right or remedy.
14. Severability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity of any other
provision, and all other provisions shall remain in full force and effect.
15. Attorney's Fees. In the event that any party shall bring an
---------------
action or proceeding in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action as determined by
the court or other body having jurisdiction shall be entitled to recover from
the losing party in such action, as determined by the court or other body having
jurisdiction, all reasonable costs and expense of litigation or arbitration,
including reasonable attorney's fees, court costs, costs of investigation and
other costs reasonably related to such proceeding.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original,
and which taken together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, this Agreement is made as of the day and year
first above written.
Imperial Credit Mortgage Holdings, Inc.
a Maryland corporation
By: /s/ William S. Ashmore
--------------------------------
Name: William S. Ashmore
Title: President
ICI Funding Corporation
a California corporation
By: /s/ William S. Ashmore
--------------------------------
Name: William S. Ashmore
Title: President
IMH Commercial Holdings, Inc.
a Maryland corporation
By: /s/ Joseph R. Tomkinson
----------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
Imperial Commercial Capital Corporation
a California corporation
By: /s/ Joseph R. Tomkinson
----------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
<PAGE>
EXHIBIT "A"
-----------
RIGHT OF FIRST REFUSAL AGREEMENT
EXHIBIT "B"
-----------
The geographic areas to which the non-competition provisions of Section 1
apply are as follows:
<PAGE>
EXHIBIT 10.7
RIGHT OF FIRST REFUSAL AGREEMENT
This RIGHT OF FIRST REFUSAL AGREEMENT (THIS "AGREEMENT"), entered into
as of August 4, 1997 to be effective as of August 8, 1997, the closing date (THE
"CLOSING DATE") of the public offering of Common Stock, $.01 par value per
share, on Form S-11 Registration Statement (THE "REGISTRATION STATEMENT") of IMH
COMMERCIAL HOLDINGS, INC., a Maryland corporation ("ICH"), by and among ICH, ICI
FUNDING CORPORATION, a California corporation ("ICIFC"), IMPERIAL CREDIT
MORTGAGE HOLDINGS, INC., a Maryland corporation ("IMH"), IMPERIAL COMMERCIAL
CAPITAL CORPORATION, a California corporation ("ICCC") and RAI ADVISORS, LLC
("RAI").
BACKGROUND
A. Pursuant to that certain Contribution Agreement, effective as of
the Closing Date, between ICH and IMH, in exchange for (i) the transfer by IMH
to ICH of 100% of the non-voting Preferred Stock of ICCC presently owned by IMH,
and (ii) the execution of that certain Non-Competition Agreement, effective as
of the Closing Date, by and between ICH, ICCC, ICIFC and IMH, and this
Agreement, the Company has agreed to issue to IMH that number of shares of ICH
Class A Common Stock equal to the product of 95% of the estimated fair value of
ICCC on the Closing Date divided by the IPO Price (as defined in the
Registration Statement).
B. ICH is involved primarily in originating, purchasing,
securitizing and selling commercial mortgages and investing in Commercial
Mortgages and CMBSs (as defined below). ICCC is the conduit operations of ICH;
ICH owns all of the outstanding non-voting preferred stock of ICCC, which
represents 95% of the economic interest in ICH. IMH's primary business is
purchasing, selling, securitizing and investing in residential mortgage loans
that do not qualify for purchase by government-sponsored agencies such as the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC") ("NON-CONFORMING MORTGAGE LOANS") and such
mortgage loans and securities backed by Non-Conforming Mortgage Loans. ICIFC is
the conduit operations of IMH. IMH owns all of the outstanding non-voting
preferred stock of ICIFC which represents 99% of the economic interest in ICIFC.
On the date of this Agreement, RAI will be involved primarily in overseeing the
day-to-day operations of ICH, subject to supervision of ICH's board of
directors, including (i) asset-liability management - primarily the analysis and
oversight of the purchasing, financing and disposition of ICH assets, (ii)
capital management-the oversight of ICH's structuring, analysis, capital raising
and investor relations activities, and (iii) operations management-primarily the
oversight of ICH's operating subsidiaries, including ICCC.
C. Due to the nature of the specialty finance business and the
parties' past experience, it is likely that RAI will have opportunities to act
as the manager of other REITs, some of which may have been or will be affiliated
with ICH, ICIFC, IMH or ICCC (such REIT utilizing RAI as its manager and is a
party to this Agreement, an "AFFILIATED REIT"), and will have opportunities to
acquire and will acquire Commercial Mortgages and CMBSs on behalf of said
parties.
D. To enhance the business opportunities of each of ICH, IMH and any
Affiliated REIT, the parties have agreed it would be in their respective best
interests to utilize one another as sources to purchase Mortgage Loans (as
defined below). In that regard, RAI has agreed that any mortgage loan or
mortgage-backed security investment opportunity (AN "INVESTMENT OPPORTUNITY")
which is offered to it on behalf of either ICH, IMH or any Affiliated REIT (A
"REIT ENTITY") either directly for such REIT Entity or for such REIT Entity
through any of its operating subsidiaries, including its conduit operations or
that C corporation through which it conducts certain of its operations (each an
"OPERATING SUBSIDIARY"), will first be offered to that REIT Entity (THE
"PRINCIPAL PARTY") for exploitation either directly by such REIT Entity or
through any of its Operating Subsidiaries, whose initial primary business as
described in said Principal Party's initial public offering documentation (THE
"INITIAL PRIMARY BUSINESS") most closely aligns with such Investment
Opportunity.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter contained, the parties hereto agree as
follows:
1. Definitions.
-----------
<PAGE>
"AGENCY CERTIFICATES" means Pass-Through Certificates guaranteed by
the FNMA, FHLMC or the Government National Mortgage Association ("GNMA").
"BUSINESS DAY" means any day, other than Saturday or Sunday, that is
neither a legal holiday nor a day on which banking institutions are authorized
or required by law, regulation or executive order to close.
"CMBSs" means (1) Pass-Through Certificates and (2) REMICs.
"CMO" means an adjustable or fixed-rate debt obligation (bond) that is
collateralized by mortgage loans or mortgage certificates and issued by private
institutions.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMERCIAL MORTGAGES" means commercial mortgage assets including
condo-conversion, multi-family property and cooperative apartment mortgage loans
on commercial real property such as industrial and warehouse properties, office
buildings, retail space and shopping malls, hotels and motels, nursing homes,
hospitals, congregate care facilities and senior living centers.
"CONFORMING MORTGAGE LOANS" mean mortgage loans that qualify for
purchase by FNMA and FHLMC.
"MORTGAGE LOANS" means Conforming Mortgage Loans, Non-Conforming
Mortgage Loans, Commercial Mortgages and any financing offered by any Affiliated
REIT.
"nOTICE OF FIRST REFUSAL" means a written notice to be delivered by or
for RAI to ICH, IMH or any Affiliated REIT or by or for ICH, IMH or any
Affiliated REIT to RAI, as applicable, setting forth the option to enter into an
Investment Opportunity, provided in Section 2 hereof, which notice shall specify
in reasonable detail the price, terms and conditions of the Investment
Opportunity.
"PARTICIPANT" means any of ICH, IMH or any Affiliated REIT which is
not a Principal Party with respect to an Investment Opportunity.
"PASS-THROUGH CERTIFICATES" means securities (or interests therein)
which are Qualified REIT Assets evidencing undivided ownership interests in a
pool of Mortgage Loans, the holders of which receive a "pass-through" of the
principal and interest paid in connection with the underlying mortgage loans in
accordance with the holders' respective, undivided interests in the pool. Pass-
Through Certificates evidence interests in loans secured by multi-family or
commercial real estate properties.
"PURCHASE PRICE" means the price to be paid for loans specified in a
Notice of First Refusal.
"QUALIFIED REIT ASSETS" means Pass-Through Certificates, Mortgage
Loans, Agency Certificates and other assets of the type described in Code
Section 856(c)(6)(B).
"REMICs" means serially maturing debt securities secured by a pool of
Mortgage Loans, the payments on which bear a relationship to the debt
securities, and the issuer of which qualifies as a Real Estate Mortgage
Investment Conduit under Section 860D of the Code.
"RESPONSE" means a written letter of acceptance or rejection of a
Notice of First Refusal by either ICH, IMH or any Affiliated REIT, as
applicable, as set forth in Section 2.2 hereof.
"THIRD PARTY" means any individual, corporation, partnership,
association, limited liability company, trust or any unincorporated organization
other than ICH, IMH, RAI or any Affiliated REIT or their Operating Subsidiaries.
<PAGE>
2. RAI Offer of Investment Opportunities to ICH, IMH and any
---------------------------------------------------------
Affiliated REITs.
- ----------------
2.1 If RAI is offered an Investment Opportunity on behalf of any of
ICH, IMH or an Affiliated REIT, for exploitation either directly by such REIT
Entity or by such REIT Entity through any of its Operating Subsidiaries, RAI
agrees to first offer such Investment Opportunity to the Principal Party, for
exploitation either directly by the Principal Party or through any of its
Operating Subsidiaries whose Initial Primary Business most closely aligns with
such Investment Opportunity on terms and conditions no less favorable than as
first presented to RAI and deliver to the Principal Party a Notice of First
Refusal within 2 days of its receipt of the Investment Opportunity.
2.2 Upon receipt of a Notice of First Refusal from RAI, ICH, IMH or
any Affiliated REIT, as the case may be, shall have five (5) Business Days to
either accept or reject the Notice of First Refusal by delivering a Response to
RAI. Upon acceptance by ICH, IMH or any Affiliated REIT, as the case may be,
through a Response, the Notice of First Refusal shall constitute the binding
agreement of RAI to pursue with commercially reasonable efforts such Investment
Opportunity on the terms and subject to the conditions set forth therein, either
directly by such party or through any of its Operating Subsidiaries. Each
applicable, Operating Subsidiary agrees to take all action necessary to
effectuate the pursuit of such Investment Opportunity. If RAI does not receive a
Response from ICH, IMH or any Affiliated REIT, as the case may be, or the
Principal Party declines the Investment Opportunity within five (5) Business
Days, RAI will make an independent evaluation of which Participant's business is
more greatly enhanced by such opportunity. A similar Notice of First Refusal
shall be forwarded by RAI to such Participant and said Participant shall have
five (5) Business Days in which to respond to its Notice of First Refusal.
Should such Participant decline to pursue the Investment Opportunity, RAI, in
its discretion, shall (a) make another independent evaluation of which remaining
Participant's business is more greatly enhanced by such opportunity and (b)
deliver a Notice of First Refusal to such Participant. Such Participant shall
have five (5) Business Days to accept or reject the Notice of First Refusal by
delivering a Response to RAI. Should all Participants decline to pursue the
Investment Opportunity, then RAI shall have the right to present such Investment
Opportunity to a Third Party. The five (5) Business Day periods specified in
this Subsection 2.2 may be extended upon mutual written agreement of the
parties.
2.3 RAI may only present an Investment Opportunity contained in a
Notice of First Refusal to IMH, ICH, any Affiliated REIT or Third Party on terms
no less favorable than as first presented to RAI and then as set forth to ICH,
IMH or any Affiliated REIT, as the case may be, in said Notice of First Refusal.
3. IMH, ICH and Any Affiliated REIT Right of First Refusal.
-------------------------------------------------------
3.1 Should either of IMH, ICH or any Affiliated REIT, or any of their
Operating Subsidiaries, be offered an Investment Opportunity which falls outside
the scope of the Initial Primary Business of IMH, ICH or any Affiliated REIT or
the Initial Primary Business of the REIT Entity associated with the applicable
Operating Subsidiary, as the case may be, it will first be offered to the
Principal Party whose Initial Primary Business most closely aligns with such
Investment Opportunity on terms and conditions no less favorable as first
presented to IMH, ICH or any Affiliated REIT or any of their Operating
Subsidiaries, as the case may be, and a Notice of First Refusal shall be
delivered to the Principal Party with 2 days of the receipt of such Investment
Opportunity.
3.2 Upon receipt of a Notice of First Refusal from either of IMH, ICH
or any Affiliated REIT, as the case may be, the Principal Party shall have five
(5) Business Days to either accept or reject the Notice of First Refusal by
delivering a Response to IMH, ICH or any Affiliated REIT, as the case may be.
Upon acceptance by the Principal Party through a Response, the Notice of First
Refusal shall constitute the binding agreement of IMH, ICH or any Affiliated
REIT as the case may be, to pursue with commercially responsible efforts such
Investment Opportunity in the terms and conditions set forth therein either
directly by such party or through any of its Operating Subsidiaries. Each
applicable Operating Subsidiary agrees to take all action necessary to
effectuate the pursuit of such Investment Opportunity. If IMH, ICH or any
Affiliated REIT does not receive a Response from the Principal Party, within
five (5) Business Days, or such Principal Party declines such Notice of First
Refusal, IMH, ICH or any Affiliated REIT, as the case may be shall have the
right to pursue such Investment Opportunity, either directly or through any of
their respective Operating Subsidiaries. The five (5) Business Day period
specified in this subsection 3.2 may be extended upon mutual written agreement
of the parties.
<PAGE>
3.3 IMH, ICH or any Affiliated REIT may only pursue an Investment
Opportunity contained in a Notice of First Refusal to the Principal Party on
terms no less favorable than as presented to IMH, ICH or any Affiliated REIT, or
any of their Operating Subsidiaries, and then as set forth to the Principal
Party on said Notice of First Refusal.
4. Term. The term of this Agreement shall be ten (10) years from
----
the date hereof.
5. Affiliated REITs to be Parties. The parties hereto agree to use
------------------------------
all reasonable efforts to cause each Affiliated REIT, if any, to become parties
to this Agreement.
6. Injunctive Relief. Each of RAI, ICH, IMH and any Affiliated REIT
-----------------
hereby acknowledges and agrees that it would be difficult to fully compensate
each other for damages resulting from the breach or threatened breach of
Sections 2 and 3, as they apply to each party herein and, accordingly, that each
of RAI, ICH, IMH and any Affiliated REIT shall be entitled to temporary and
injunctive relief, including temporary restraining orders, preliminary
injunctions and permanent injunctions, to enforce such Sections without the
necessity of proving actual damages therewith. This provision with respect to
injunctive relief shall not, however, diminish each of RAI's, ICH's, IMH's and
any Affiliated REIT's right to claim and recover damages or enforce any other of
its legal and/or equitable rights or defenses.
7. Severable Provisions. The provisions of this Agreement are
--------------------
severable and if any one or more provisions may be determined to be illegal or
otherwise unenforceable, in whole or in part, the remaining provisions, and any
partially unenforceable provisions to the extent enforceable, shall nevertheless
be binding and enforceable.
8. Binding Agreement. This Agreement shall inure to the benefit of
-----------------
and shall be binding upon the parties hereto and their successors and assigns.
9. Captions. The Section captions are inserted only as a matter of
--------
convenience and reference and in no way define, limit or describe the scope of
this Agreement or the intent of any provisions hereof.
10. Entire Agreement. This Agreement contains the entire agreement
----------------
of the parties relating to the subject matter hereof, and the parties hereto
have made no agreements, representations or warranties relating to the subject
matter of this Agreement that are not set forth otherwise herein. This Agreement
supersedes any and all prior agreements, written or oral, between the parties
hereto.
11. Amendments. This Agreement shall not be amended, changed,
----------
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by all parties hereto, or their respective successors or
assigns, or otherwise as provided herein. The parties hereto agree that in no
event shall an oral modification of this Agreement be enforceable or valid.
12. Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of California applicable to contracts made
and performed in said state, without regard to conflicts of laws principles.
13. Notices.
-------
13.1 All notices and other communications under this Agreement, other
than Notices of First Refusal and Responses (which shall be governed by
subsection 13.2 below), shall be in writing (including, without limitation,
telegraphic, telex, telecopy or cable communication) and mailed, telegraphed,
telexed, telecopied, cabled or delivered by hand or by a nationally recognized
courier service guaranteeing overnight delivery to a party at the following
address (or to such other address as such party may have specified by notice
given to the other party pursuant to this provision):
If to ICH or ICCC, to:
<PAGE>
c/o IMH Commercial Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, California 92702
Telephone: (714) 556-0122
Facsimile: (714) 438-2150
Attention: Joseph R. Tomkinson
Chief Executive Officer
If to IMH or ICIFC, to:
c/o Imperial Credit Mortgage Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, California 92702
Telephone: (714) 556-0122
Facsimile: (714) 438-2150
Attention: William S. Ashmore
President
If to RAI, to:
RAI Advisors, LLC
20371 Irvine Avenue
Santa Ana Heights, California 92702
Telephone: (714) 556-0122
Facsimile: (714) 438-2150
Attention: Richard J. Johnson
Chief Financial Officer
All such notices and communications shall, when mailed, telegraphed, telexed,
telecopied, cabled or delivered, be effective three days after deposit in the
mails, delivered to the telegraph company, confirmed by telex answerback,
telecopied with confirmation of receipt, delivered to the cable company,
delivered by hand to the addressee or one day after delivery to the courier
service.
13.2 Each Notice of First Refusal and Response under this Agreement
shall be in writing and telecopied or delivered by hand during normal business
hours (i.e., 9:00 a.m. - 5:00 p.m. California time) to an officer of the party
to whom it is addressed at the address specified in subsection 13.1 above (or to
such other address as such party may have specified by notice given to the other
party pursuant to subsection 13.1), or in the case of any Affiliated REIT, to an
address specified by such Affiliated REIT. Each such Notice of First Refusal and
Response shall be effective immediately when telecopied with confirmation of
receipt or delivered by hand to the addressee.
14. Arbitration.
-----------
(a) Each controversy, dispute or claim between the parties
arising out of or relating to this Agreement, which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to this Agreement gives written
notice to the other that a controversy, dispute or claim exists), will be
settled by binding arbitration in Orange County, California in accordance with
the provisions of the Judicial Arbitration and Mediation Services, which shall
constitute the exclusive remedy for the settlement of any controversy, dispute
or claim, and the parties waive their rights to initiate any legal proceedings
against each other in any court or jurisdiction other than the Superior Court of
Orange County (the "Court"). Any decision rendered by the arbitrator and such
arbitration will be final, binding and conclusive and judgment shall be entered
pursuant to the California Code of Civil Procedure Section 644 in any court in
the State of California having jurisdiction.
<PAGE>
(b) Except as expressly set forth in this Agreement, the
arbitrator shall determine the manner in which the proceeding is conducted,
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
proceeding. All proceedings and hearings conducted before the arbitrator, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the arbitrator. The party making such a request shall have the obligation to
arrange for any pay for the court reporter. The costs of the court reporter
shall be borne equally by the parties.
(c) The arbitrator shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the state
of California will be applicable to the proceeding. The arbitrator shall be
empowered to enter equitable as well as legal relief, to provide all temporary
and/or provisional remedies and to enter equitable orders that will be binding
upon the parties. The arbitrator shall issue a single judgment at the close of
the proceeding which shall dispose of all of the claims of the parties that are
the subject of the proceeding. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the arbitrator. The parties hereto expressly reserve the
right to findings of fact, conclusions of law, a written statement of decision,
and the right to move for a new trial or a different judgment, which new trial,
if granted, is also to be a proceeding governed under this provision.
15. Attorneys' Fees. In the event that any party shall bring an
---------------
action or proceeding in connection with the performance, breach or
interpretation hereof, then the prevailing party in such action as determined by
the court or other body having jurisdiction shall be entitled to recover from
the losing party in such action, as determined by the court or other body having
jurisdiction, all reasonable costs and expense of litigation or arbitration,
including reasonable attorneys', fees, court costs, costs of investigation and
other costs reasonably related to such proceeding.
16. Waiver. Any forbearance by a party to this Agreement in
------
exercising any right or remedy under this Agreement or otherwise afforded by
applicable law shall not be a waiver of or preclude the exercise of that or any
other right or remedy.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original,
and all of which when taken together shall constitute one and the same
agreement.
[The remainder of this page intentionally left blank.]
<PAGE>
IN WITNESS WHEREOF, this Agreement is made as of the day and year
first above written.
IMH COMMERCIAL HOLDINGS, INC.,
a Maryland corporation
By: /s/ Joseph R. Tomkinson
----------------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
IMPERIAL COMMERCIAL CAPITAL CORPORATION
a California corporation
By: /s/ Joseph R. Tomkinson
--------------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.,
a Maryland corporation
By: /s/ William S. Ashmore
---------------------------------
Name: William S. Ashmore
Title: President
ICI FUNDING CORPORATION,
a California corporation
By: /s/ William S. Ashmore
----------------------------------
Name: William S. Ashmore
Title: President
RAI ADVISORS, LLC,
a California limited liability company
By: /s/ Mary C. Glass-Schannault
-------------------------------------
Name: Mary C. Glass-Schannault
Title: Senior Vice President
<PAGE>
EXHIBIT 10.10(a)
CONTRACT OF SALE
IMPAC Commercial Holdings, Inc. fdba IMH Commercial Holdings, Inc., a
Maryland corporation, herein called "Buyer" and IMPAC Mortgage Holding, Inc.
fdba Imperial Credit Mortgage Holding, Inc., a Maryland corporation, herein
called " Seller", hereby agree as follows:
RECITALS
WHEREAS, Buyer and Seller were the sole members of a California Limited
Liability Company by the name of IMH/ICH Dove Street, LLC (herein called
"Limited Liability Company") which was created on August 25, 1997;
WHEREAS, Buyer and Seller have entered into a Limited Liability Operating
Agreement dated August 25, 1997 (herein called "Operating Agreement", a copy of
which is attached hereto as Exhibit "N');
WHEREAS, Buyer and Seller have entered into an agreement to distribute from the
Limited Liability Company to the members the real property owned by the Limited
Liability Company, commonly known as 1401 Dove Street, Newport Beach.
WHEREAS, Seller and Buyer will have a fifty percent (50%) interest in the real
property previously owned by the Limited Liability Company hereinafter referred
to as "Asset".
WHEREAS, Buyer is desirous of purchasing Seller's interest in the Asset;
WHEREAS, Seller is desirous of selling Buyer's interest in the Asset.
<PAGE>
ARTICLE 1.
PURCHASE AND SALE
-----------------
OF PARTIAL INTEREST OF SELLER
-----------------------------
IN ASSET
--------
Partial Interest Being Purchased
Section 1.01. Seller shall sell to Buyer and Buyer shall purchase from
Seller on the terms specified in this contract fifty percent (50%) interest in
the Asset from Seller.
Purchase Price
Section 1.02. Buyer shall pay to Seller on October 31, 1998,
$6,000,000.00 less one half of the present principal due on the property's first
mortgage in cash in lawful money of the United States in full payment of the
purchase price.
Conditions of Sale
Section 1.03. The purchase and sale described in and covered by this
contract shall be conducted and consummated in full compliance with all the
requirements of the laws of the State of California.
ARTICLE 2
WARRANTIES BY SELLER
--------------------
Due Organization
Section 2.01. Seller warrants to Buyer that it, Seller, is a
corporation duly organized and existing under the General Corporation Law of the
State of Maryland and that its powers as a corporation have never been and are
not now suspended or limited in anyway.
Title to Assets
Section 2.02. Seller warrants it will convey good and marketable title
to Seller of the Asset covered by this contract. Seller further warrants that
its title to its interest in the Asset is free and clear of any liens,
encumbrances, or other defects except for an existing first mortgage.
Authority to Sell
Section 2.03. Seller warrants and represents it has complied with all
the requirements of the laws of the State of California relative to the sale of
its interest in the Asset described in this contract and that the principal
terms of the sale as set forth in this contract were duly approved by Seller's
board of directors on October 19, 1998. Seller shall transfer title and
interest in the Asset, including all leases, income or revenue of any nature
generated by the Asset after delivery of the Quitclaim Deed, attached hereto as
Exhibit "B".
Survival of Warranties
<PAGE>
Section 2.04. Seller agrees that all warranties made by it in this
contract shall survive the consummation of the sale.
ARTICLE 3
WARRANTIES BY BUYER
-------------------
Due Organization
Section 3.01. Buyer warrants to Seller that it, Buyer, is a
corporation duly organized and existing under the General Corporation Law of the
State of Maryland and that its power as a corporation has never been and is not
now suspended.
Authority to Buy
Section 3.02. Buyer further warrants to Seller that this contract has
been approved by its Board of Directors and that Buyer has full power and
authority to both execute and perform this contract.
Section 3.03. Buyer agrees that all warranties made by it in this
contract shall survive the consummation of the sale.
ARTICLE 4
ASSUMPTION OF LIABILITIES
-------------------------
Acknowledgment of Assumption of Liability
Section 4.01. Buyer hereby acknowledges and agrees to assume all of
the expenses and costs associated with the Asset and in the sale set forth in
this contract. This assumption of liability will be effective upon execution of
this contract. However, this shall not include the costs of completing the
current modifications and capital improvements being made to the building.
Seller shall remain responsible for 1/2 the costs of completing the exterior
modifications and the interior improvements needed to make the building ready
under the IMPAC Funding Corp. lease.
Section 4.02. All costs and expenses of the sale described in this
contract shall be borne by Buyer and Seller in equal proportions.
ARTICLE 5
MISCELLANEOUS PROVISIONS
------------------------
Indemnity Agreement
<PAGE>
Section 5.01. The Buyer shall indemnify and hold Seller free and
harmless from any and all claims, liability, loss, damage, or expense resulting
from the Buyer's ownership of the Asset , including any claim, liability, loss
or damage arising by reason of the injury to or death of any person or persons,
or the damage of any property, caused by the Buyer's use of said Asset,
including the cost of defense, for any claim arising after execution of this
contract.
Section 5.02. This instrument with its attachment constitutes the
entire agreement between Buyer and Seller respecting the sale of the Asset to
the Seller and any agreement or representation respecting said sale by Seller to
Buyer not expressly set forth in this instrument is null and void.
Notices
Section 5.03. Any and all notices or other communications-
required or permitted by this contract or by law to be served on or given to
either party hereto, Buyer or Seller, by the other party shall be, unless
otherwise required by law, in writing and deemed duly served and given when
personally delivered to the party to whom directed or any of its officers or, in
lieu of such personal service, when deposited in the United States mail, first
class postage prepaid, addressed to
Buyer at I Park Plaza, Suite 1100
Irvine, California 92614
or
Seller at 20371 Irvine Ave.
Santa Ana Heights, California 92707
Attorney's Fees
Section 5.04. Should any litigation be commenced between the
parties hereto, Buyer and Seller, concerning this contract, the sale and
purchase described in this contract or the rights and duties of either in
relation to this contract, the party Buyer or Seller, prevailing in that
litigation shall be entitled, in addition to any other relief that may be
granted, to a reasonable sum as and for its attorneys' fees in that litigation
which shall be determined by the court in that litigation or in a separate
action brought for that purpose.
Cooperation in Execution of Documents
Section 5.05 Buyer and Seller agree to execute any documents
necessary to carry out the terms of this contract, including but not limited to,
assignment of leases, assignment of deposits, change of ownership declaration,
or other documents required by any governmental agency.
Assignment
Section 5.06. Neither this contract nor any right or interest in
it may be assigned by either party to any other person or corporation without
the express written consent of the other party to this contract.
Governing Law
Section 5.07. This contract shall be governed and all rights and liabilities
under it determined in accordance with the laws of the State of California in
effect on this date.
<PAGE>
EXECUTED on October 27 , 1998, at Orange County, California.
"BUYER"
IMPAC COMMERCIAL HOLDINGS, INC.
fdba IMH COMMERCIAL HOLDINGS, INC.
by: /s/ William D. Endersen
---------------------------
William D. Endresen, President
"SELLER"
IMPAC MORTGAGE HOLDING, INC.
fdba IMPERIAL CREDIT MORTGAGE HOLDING,
INC.
by: /s/ William S. Ashmore
--------------------------
William S. Ashmore, President
<PAGE>
IMH/ICH DOVE STREET
LIMITED LIABILITY OPERATING AGREEMENT
This Operating Agreement (this "Agreement") is entered into this 25th day of
August, 1997 by and among Imperial Credit Mortgage Holdings, Inc., a Maryland
corporation and IMH Commercial Holdings, Inc., a Maryland corporation.
Explanatory Statement
The parties have agreed to organize a limited liability company in
accordance with the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms used in this Agreement have the meanings specified in this
Article or elsewhere in this Agreement and when not so defined shall have the
meanings set forth in California Corporations Code section 17001.
1.1. "Act" means the Beverly-Killea Limited Liability Company Act
(California Corporations Code (S) (S) 17000-17705), including amendments
from time to time.
1.2. "Adjusted Capital Contribution" is defined in Article IV, Section
4.6(a).
1.3. "Affiliate" of a Member means (1) any Person directly or indirectly,
through one or more intermediaries, controlling, controlled by, or under
common control with the Member. The term "control" (including the terms
"controlled by" and "funder common control with") means the possession,
direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person, whether through membership, ownership
of voting securities, by contract, or otherwise.
1.4. "Agreement" means this operating agreement, as originally executed
and as amended from time to time.
1.5. "Articles of Organization" is defined in Corporations Code section
17001(b) as applied to this Company.
1.6. "Assignee" means a person who has acquired a Member's Economic
Interest in the Company, by way of a Transfer in accordance with the terms
of this Agreement, but who has not become a Member.
1.7. "Assigning Member" means a Member who by means of a Transfer has
transferred an Economic Interest in the Company to an Assignee.
1.8. "Available Cash" means all net revenues from the Company's
operations, including net proceeds from all sales, refinancings, and other
dispositions of Company property that the Manager, in the Manager's sole
discretion, deems in excess of the amount reasonably necessary for the
operating requirements of the Company, including debt reduction and
Reserves.
1.9. "Capital Account" means, with respect to any Member, the account
reflecting the capital interest of the Member in the Company, consisting of
the Member's initial Capital Contribution maintained and adjusted in
accordance with Article III, Section 3.6.
<PAGE>
1.10. "Capital Contribution" means, with respect to any Member, the amount
of the money and the Fair Market Value of any property (other than money)
contributed to the Company (net of liabilities secured by such contributed
property that the Company is considered to assume or take "subject to"
under IRC section 752) in consideration of a Percentage Interest held by
such Member. A Capital Contribution shall not be deemed a loan.
1.11. "Capital Event" means a sale or disposition of any of the Company's
capital assets, the receipt of insurance and other proceeds derived from
the involuntary conversion of Company property, the receipt of proceeds
from a refinancing of Company property, or a similar event with respect to
Company property or assets.
1.12. "Code" or "IRC' means the Internal Revenue Code of 1986, as amended,
and any successor provision.
1.13. "Company" means the company named in Article II, Section 2.2 of this
Agreement.
1.14. "Corporations Code" ("Corp C") means the California Corporations
Code.
1.15. "Economic Interest" means a Person's right to share in the income,
gains, losses, deductions, credit or similar items of, and to receive
distributions from, the Company, but does not include any other rights of a
Member, including the right to vote or to participate in management.
1.16. "Encumber" means the act of creating or purporting to create an
Encumbrance, whether or not perfected under applicable law.
1.17. "Encumbrance" means, with respect to any Membership Interest, or any
element thereof, a mortgage, pledge, security interest, lien, proxy coupled
with an interest (other than as contemplated in this Agreement), option, or
preferential right to purchase.
1.18. "Fair Market Value" means, with respect to any item of property of
the Company, the item's adjusted basis for federal income tax purposes,
except as follows:
(a) The Fair Market Value of any property contributed by a Member to
the Company shall be the value of such property, as mutually agreed
by the contributing Member and the Company;
(b) The Fair Market Value of any item of Company property
distributed to any Member shall be the value of such item of
property on the date of distribution as mutually agreed by the
distributes Member and the Company; and
(c) The Fair Market Value for purposes of Article VIII, Section 8.7,
shall be as determined in that section.
1.19. "Initial Members" means those Persons whose names are set forth in
the first sentence of this Agreement. A reference to an "Initial Member"
means any of the Initial Members.
1.20. "Involuntary Transfer' means, with respect to any Membership
Interest, or any element thereof, any Transfer or Encumbrance, whether by
operation of law, pursuant to court order, foreclosure of a security
interest, execution of a judgment or other legal process, or otherwise,
including a purported transfer to or from a trustee in bankruptcy,
receiver, or assignee for the benefit of creditors.
1.21. "Losses. " See Article IV, Section 4.2.
1.22. "Majority of Members" means a Member or Members whose Percentage
Interests represent more
<PAGE>
than 50 percent of the Percentage Interests of all the Members.
1.23. "Manager" or "Managers" means the Person(s) named as such in Article
H or the Persons who from time to time succeed any Person as a Manager and
who, in either case, are serving at the relevant time as a Manager.
1.24. "Member" means an Initial Member or a Person who otherwise acquires
a Membership Interest, as permitted under this Agreement, and who remains a
Member.
1.25. "Membership Interest" means a Member's rights in the Company,
collectively, including the Member's Economic Interest, any right to Vote
or participate in management, and any right to information concerning the
business and affairs of the Company.
1.26. "Notice" means a written notice required or permitted under this
Agreement. A notice shall be deemed given or sent when deposited, as
certified mail or for overnight delivery, postage and fees prepaid, in the
United States mails; when delivered to Federal Express, United Parcel
Service, DHL WorldWide Express, or Airborne Express, for overnight
delivery, charges prepaid or charged to the sender's account; when
personally delivered to the recipient; when transmitted by electronic
means, and such transmission is electronically confirmed as having been
successfully transmitted; or when delivered to the home or office of a
recipient in the care of a person whom the sender has reason to believe
will promptly communicate the notice to the recipient.
1.27. "Percent of the Members" means the specified total of Percentage
Interests of all the Members.
1.28. "Percentage Interest" means a fraction, expressed as a percentage,
the numerator of which is the total of a Member's Capital Account and the
denominator of which is the total of all Capital Accounts of all Members.
1.29. "Person" means an individual, partnership, limited partnership,
trust, estate, association, corporation, limited liability company, or
other entity, whether domestic or foreign.
1.30. "Profits" and "Losses" are defined in Article IV, Section 4.2.
1.31. "Proxy" has the meaning set forth in the first paragraph of Corp C
1001(ai). A Proxy may not be transmitted orally.
1.32. "Regulations" ("Reg") means the income tax regulations promulgated
by the United States Department of the Treasury and published in the
Federal Register for the purpose of interpreting and applying the
provisions of the Code, as such Regulations may be amended from time to
time, including corresponding provisions of applicable successor
regulations.
1.33. "Reserves" means the aggregate of reserve accounts that the Manager,
in the Manager's sole discretion, deems reasonably necessary to most
accrued or contingent liabilities of the Company, reasonably anticipated
operating expenses, and working capital requirements.
1.34. "Successor in Interest" means an Assignee, a successor of a Person
by merger or otherwise by operation of law, or a transferee of all or
substantially all of the business or assets of a Person.
1.35. "Tax Item" means each item of income, gain, loss, deduction, or
credit of the Company.
1.36. "Transfer" means, with respect to a Membership Interest or any
element of a Membership interest, any sale, assignment, gift, Involuntary
Transfer, Encumbrance, or other disposition of such a Membership Interest
or any element of such Membership Interest, directly or indirectly, other
than an Encumbrance that is expressly permitted under this Agreement.
<PAGE>
1.37. "Triggering Event" is defined in Article VIII, Section 8.4.
1.38. "Vote" means a written consent or approval, a ballot cast at a
meeting, or voice vote.
1.39. "Voting Interest" means, with respect to a Member, the right to Vote
or participate in management and any right to information concerning the
business and affairs of the Company provided under the Act, except as
limited by the provisions of this Agreement. A Member's Voting Interest
shall be directly proportional to that Member's Percentage Interest.
ARTICLE II
ARTICLES OF ORGANIZATION
2.1 The Articles of Organization were filed with the California Secretary
of State on August 25, 1997, File Number 101997237028. A copy of the
Articles of Organization as filed is attached to this Agreement as Exhibit
"A".
2.2 The name of the Company is IMH/ICH Dove Street, LLC.
2.3. The principal executive office of the Company shall be at 1401 Dove
Street, Newport Beach, California, 92660, or such other place or places as
may be determined by the Manager from time to time.
2.4. The initial agent for service of process on the Company shall be
Douglas S. Smith, whose address is 5 Hutton Centre Drive, Suite 600, Santa
Ana, California 92707. The Managers may from time to time change the
Company's agent for service of process.
2.5 The Company will be formed for the purposes of engaging in the
business of managing and operating the real property owned by the Company.
2.6. The Members intend the Company to be a limited liability company
under the Act. Neither the Manager nor any Member shall take any action
inconsistent with the express intent of the parties to this Agreement.
2.7. The term of existence of the Company shall commence on the effective
date of filing of Articles of Organization with the California Secretary of
State, and shall continue until August 25, 2047 unless sooner terminated by
the provisions of this Agreement or as provided by law.
2.8. The names and addresses of the Initial Members are as follows:
Imperial Credit Mortgage Holding, Inc.
20371 Irvine Ave.
Santa Ana Heights, CA 92707
and
IMH Commercial Holdings, Inc.
20371 Irvine Ave.
Santa Ana Heights, CA 92707
2.9. The Members shall be the Managers of the Company.
<PAGE>
ARTICLE III
CAPITAL AND CAPITAL CONTRIBUTIONS
3.1. Each Member shall, contribute to the capital of the Company as the
Member's initial Capital Contribution the money and property specified in
Exhibit 'B'. If a Member fails to make the initial Capital Contributions
specified in this Section within 30 days after the effective date of this
Agreement, that Member's entire Membership Interest shall terminate, and
that Member shall indemnify and hold the Company and the other Members
harmless from any loss, cost, or expense, including reasonable attorney
fees caused by the failure to make the initial Capital Contribution.
3.2. The Manager may determine from time to time that Capital
Contributions in addition to the Members' initial Capital Contributions are
needed to enable the Company to conduct its business. On making such a
determination, the Manager shall give notice to all Members in writing at
least 90 days before the date on which such additional Capital Contribution
is due. The Notice shall set forth the amount of additional Capital
Contribution needed, the purpose for which it is needed, and the date by
which the Members shall contribute. Each Member shall be required to make
an additional Capital Contribution in an amount that bears the same
proportion to the total additional Capital Contribution that such Member's
Capital Account balance bears to the total Capital Account balances of all
Members. No Member may voluntarily make any additional Capital
Contribution.
3.3 If a Member fails to make an additional Capital Contribution required
under Section 3.2 above within 30 days after it is required to be made (a
Defaulting Member), the Manager shall within five days after said failure
notify each other Member (a Nondefaulting Member) in writing of the total
amount of Defaulting Member Capital Contributions not made (the Additional
Capital Shortfall), and shall specify a number of days within which each
Nondefaulting Member may make an additional Capital Contribution, which
shall not be less than an amount bearing the same ratio to the amount of
Additional Capital Shortfall as the Nondefaulting Member's Capital Account
balance bears to the total Capital Accounts of all Nondefaulting Members.
If the total amount of Additional Capital Shortfall is not so contributed,
the Manager may use any reasonable method to provide Members the
opportunity to make additional Capital Contributions, until the Additional
Capital Shortfall is as fully contributed as possible. Following the
Nondefaulting Members' making of such additional Capital Contributions,
each Member's Percentage Interest shall be adjusted to reflect the ratio
that the Member's Capital Account bears to the total Capital Accounts of
all of the Members.
3.4. If a Member fails for 30 days to make an additional Capital
Contribution required under Section 3.2 (a Defaulting Member): (a) The
Defaulting Member shall indemnify and hold the Company and the other
Members harmless from any loss, cost, or expense, including reasonable
attorney fees caused by the failure to make the additional Capital
Contribution. Such additional Capital Contributions that are not made by a
Defaulting Member are referred to as Additional Capital Shortfall. A
Member who makes the respective required additional Capital Contributions
(Nondefaulting Member) shall have the right, but not the obligation, to
advance an amount bearing the same ratio to the total amount of the
Additional Capital Shortfall as a Nondefaulting Member's Capital Account
bears to the total Capital Accounts of all Nondefaulting Members. A Member
advancing an additional a Defaulting Member under this Section 3.4(a)
shall: (1) be paid interest by the Defaulting Member on the amount of such
advance at an annual rate, from the date of the advance until paid, equal
to the floating rate of three percent (3%) over the prime rate charged by
Imperial Bank or the highest rate permitted by applicable law, whichever
rate is lower; and (2) receive all distributions that the Defaulting Member
would otherwise be entitled to receive under the provisions of this
Agreement as though the advances by the Nondefaulting Member were Capital
Contributions made by such Nondefaulting Member, which distributions shall
be applied first to attorneys' fees, costs,, and expenses, if any; then to
accrued and unpaid interest, and, finally, in reduction of the principal
amount of such advance. The Defaulting Member grants any Nondefaulting
Members who make advances to the Company in
<PAGE>
accordance with this Subsection 3.4(a) a security interest in the
Defaulting Member's Membership Interest to secure the Defaulting Member's
obligations under this Subsection 3.4(a). The Defaulting Member shall,
within five days of written notice, execute any documents or instruments
reasonably necessary to enable Nondefaulting Members who make advances
hereunder to perfect the foregoing security interests. Each Member
irrevocably appoints each other Member, and any one of them acting alone,
as his, her, or its attorney-in-fact for the limited purpose of executing,
on behalf of such Member, if such Member becomes a Defaulting Member, any
of the foregoing documents or instruments.
3.5 An individual Capital Account for each Member shall be maintained in
accordance with the requirements of Reg 1.704-1(b)(2)(iv) and adjusted in
accordance with the following provisions:
(a) A Member's Capital Account shall be increased by that Member's
Capital Contributions, that Member's share of Profits, and any items
in the nature of income or gain that are specially allocated to that
Member pursuant to Article IV.
(b) A Member's Capital Account shall be increased by the amount of any
Company liabilities assumed by that Member subject to and in
accordance with the provisions of Reg 1.704-1(b)(2)(iv)(c).
(c) A Member's Capital Account shall be decreased by (a) the amount of
cash distributed to that Member; (b) the Fair Market Value of any
property of the Company so distributed, net of liabilities secured by
such distributed property that the distributes Member is considered to
assume or to be subject to under IRC section 752; and (c) the amount
of any items in the nature of expenses or losses that are specially
allocated to that Member pursuant to Article IV.
(d) A Member 's Capital Account shall be reduced by the Member's share
of any expenditures of the Company described in IRC section
705(a)(2)(B) or which are treated as IRC section 705(a)(2)(B)
expenditures pursuant to Reg section 1.704l(b)(2)(iv)(i) (including
syndication expenses and losses nondeductible under IRC sections
267(a)(1) or 707(b)).
(e) If any Economic Interest (or portion thereof) is transferred, the
transferee of such Economic Interest or portion shall succeed to the
transferor's Capital Account attributable to such interest or portion.
(f) The principal amount of a promissory note that is not readily
traded on an established securities market and that is contributed to
the Company by the maker of the note shall not be included in the
Capital Account of any Person until the Company makes a taxable
disposition of the note or until (and to the extent) principal
payments are made on the note, all in accordance with Reg section
1.704-1 (b)(2)(iv)(d)(2).
(g) Each Member's Capital Account shall be increased or decreased as
necessary to reflect a revaluation of the Company's property assets in
accordance with the requirements of Reg sections 1.704-1(b)(2)(iv)(f)
and 1.704-1(b)(2)(iv)(g), including the special rules under Reg
section 1.701-1(b)(4), as applicable. The provisions of this
Agreement respecting the maintenance of Capital Accounts are intended
to comply with Reg section 1.704-1(b) and shall be interpreted and
applied in a manner consistent with those Regulations.
3.6. A Member shall not be entitled to withdraw any part of the Member's
Capital Contribution or to receive any distributions, whether of money or
property, from the Company except as provided in this Agreement.
3.7 No interest shall be paid on Capital Contributions or on the balance
of a Member's Capital Account.
3.8 A Member shall not be bound by, or be personally liable for, the
expenses, liabilities, or obligations
<PAGE>
of the Company except as otherwise provided in the Act or in this
Agreement.
3.9. Except as otherwise provided in this Agreement, no member shall have
priority over any other Member with respect to the return of a Capital
Contribution or distributions or allocations of income, gain, losses,
deductions, credits, or items thereof.
ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
4.1. The Profits and Losses of the Company and all items of Company
income, gain, loss, deduction, or credit shall be allocated, for Company
book purposes and for tax purposes, to a Member in accordance with the
Member's Percentage Interest.
4.2 As used in this Agreement, "Profits and Losses" means, for each fiscal
year or other period specified in this Agreement, an amount equal to the
Company's taxable income or loss for such year or period, determined in
accordance with IRC section 703(a), including all Tax Items required to be
stated separately pursuant to IRC section 703(a)(1), with the following
adjustments:
(a) Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses
shall be added to such taxable income or loss;
(b) Any expenditures of the Company described in IRC section
705(a)(2)(B) or treated as IRC section 705(a)(2)(8) expenditures
pursuant to Reg section 1.704-l(b)(2)(iv)(i) and not otherwise taken
into account in computing Profits or Losses shall be subtracted from
such taxable income or shall increase such loss;
4.3. In any fiscal year of the Company, Profits in excess of Losses of the
Company resulting from a Capital Event in that Fiscal Year shall be
allocated to the Members in the following order:
(a) To Members whose Adjusted Capital Contributions are in excess of
their Capital Accounts, in proportion to those excesses, until all of
those excesses have been eliminated. "Adjusted Capital Contributions"
means, with respect to each Member, the excess of such Member's
contribution to the capital of the Company over all prior
distributions to the Member that have resulted from Capital Events.
(b) Among the Members in the proportion that the Capital Contribution
of each Member bears to the total Capital Contributions of all
Members.
4.4 In any fiscal year of the Company, Losses in excess of Profits of the
Company, resulting from a Capital Event in that fiscal year, shall be
allocated to the Members with positive Capital Accounts, in proportion to
their positive Capital Account balances, until no Member has a positive
Capital Account. For this purpose, Capital Accounts shall be reduced by
the adjustments set forth in Reg sections 1.704-1(b)(2)(ii)(d)(4), (5), and
(6).
4.5. Any unrealized appreciation or unrealized depreciation in the values
of Company property distributed in kind to Members shall be deemed to be
Profits or Losses realized by the Company immediately prior to the
distribution of the property and such Profits or Losses shall be allocated
to the Capital Accounts in the same proportions as Profits are allocated
under Section 4. 1. Any property so distributed shall be treated as a
distribution to the Members to the extent of the Fair Market Value of the
property, less the amount of any liability secured by and related to the
property. Nothing contained in this Agreement is
<PAGE>
intended to treat or cause such distributions to be treated as sales for
value. For the purposes of this Section 4.5 "unrealized appreciation" or
"unrealized depreciation" shall mean the difference between the Fair Market
Value of such property and the Company's federal adjusted tax basis for
such property.
4.6. In the case of a Transfer of an Economic Interest during any fiscal
year of the Company, the Assigning Member and Assignee shall each be
allocated Profits or Losses based on the number of days each held the
Economic Interest during that fiscal year. If the Assigning Member and
Assignee agree to a different proration and advise the Manager of the
agreed proration before the date of the Transfer, Profits or Losses from a
Capital Event during that fiscal year shall be allocated to the holder of
the Interest on the day such Capital Event occurred. If an Assignee makes
a subsequent Assignment, said Assignee shall be considered an "Assigning
Member" with respect to the subsequent Assignee for purposes of the
aforesaid allocations.
4.7. It is the intent of the Members that each Member's allocated share of
Company Tax Items be determined in accordance with this Agreement to the
fullest extent permitted by IRC sections 704(b) and 704(c).
Notwithstanding anything to the contrary contained in this Agreement, if
the Company is advised that, as a result of the adoption of new or amended
regulations pursuant to IRC sections 704(b) and 704(c), or the issuance of
authorized interpretations, the allocations provided in this Agreement are
unlikely to be respected for federal income tax purposes, the Manager is
hereby granted the power to amend the allocation provisions of this
Agreement, on advice of accountants and legal counsel, to the minimum
extent necessary to cause such allocation provisions to be respected for
federal income tax purposes.
4.8. All available cash, other than revenues or proceeds from a Capital
Event or the dissolution of the Company, shall be distributed among the
Members in the same manner as Profits. The parties intend that Available
Cash shall be distributed as soon as practicable following the Manager's
determination that such cash is available for distribution. The parties
acknowledge that no assurances can be given with respect to when or whether
said cash will be available for distributions to the Members.
4.9. All Available Cash resulting from a Capital Event (as distinguished
from normal business operations or the dissolution of the Company) shall be
distributed to the Members in accordance with their respective Percentage
Interests as soon as practicable following the Manager's determination that
such cash is available for distribution.
4.10. If the proceeds from a sale or other disposition of an item of
Company property consist of property other than cash, the value of that
property shall be as determined by the Manager. If such noncash proceeds
are subsequently reduced to cash, such cash shall be taken into account by
the Manager in determining Available Cash and the Manager shall determine
whether such cash has resulted from operations or from a Capital Event.
4.11. Notwithstanding any other provisions of this Agreement to the
contrary, when there is a distribution in liquidation of the Company, or
when any Member's interest is liquidated, all items of income and loss
first shall be allocated to the Members' Capital Accounts under this
Article IV, and other credits and deductions to the Members' Capital
Accounts shall be made before the final distribution is made. The final
distribution to the Members shall be made as provided in Article IX,
Section 9.2(d) of this Agreement. The provisions of this Section 4. 11 and
Article IX, Section 9.2(d) shall be construed in accordance with the
requirements of Reg section 1.704-1(b)(2)(ii)(b)(2).
ARTICLE V
MANAGEMENT
5.1. The business of the Company shall be managed by all the Members. A
Member shall be a Manager
<PAGE>
only during the time the Member is a Member of the Company. AU decisions
concerning the management of the Company's business shall be made by the
Vote of a Majority of Members.
5.2. Each manager shall serve until the earlier of (1) the Manager's
resignation; (2) the Manager's removal by the Members; and (3) the
expiration of the Manager's term as Manager, if a term has been designated
by a Majority of Members. A new Manager shall be appointed by a Majority
of Members on the occurrence of any of the foregoing events.
5.3. Each Manager shall be appointed by a Majority of Members for (a) a
term expiring with the appointment of a successor, or (b) a term expiring
at a definite time specified by a Majority of Members in connection with
such an appointment. A Manager who is not also a Member may be removed
with or without cause at any time by action of a Majority of Members. A
Manager who is a Member may be removed only on the Vote of all other
Members and the execution and filing of a Certificate of Amendment of the
Articles of Organization of the Company in conformity with Corp C section
17054, if necessary, to provide that the Company is to be managed by
managers.
5.4. The Managers shall be the chief executive officers of the Company and
shall have the powers and duties described in Section 5.8 hereof and such
other powers and duties as may be prescribed in this Agreement or by the
Members. Notwithstanding the foregoing, the Manager shall not take any of
the following actions on behalf of the Company unless all Members has
consented to the taking of such action:
(a) Any act that would make it impossible to carry on the ordinary
business of the Company;
(b) Any confession of a judgment against the Company;
(c) The dissolution of the Company;
(d) The disposition of all or a substantial part of the Company's
assets not in the ordinary course of business;
(e) The incurring of any debt not in the ordinary course of business;
A change in the nature of the principal business of the Company;
(g) The incurring of any contractual obligation or the making of any
capital expenditure with a total cost of more than $100,000.00;
(h) The filing of a petition in bankruptcy or the entering into of an
arrangement among creditors; and
(i) The entering into, on behalf of the Company, of any transaction
constituting a "reorganization" within the meaning of Corp C 17600.
5.5. Actions of the Managers shall be taken at meetings or as otherwise
provided in this Section 5.5 by a majority. No regular meetings of the
Managers need be held. The President or any two Managers may call a meeting
of the Managers by giving Notice of the time and place of the meeting at
least 48 hours prior to the time of the holding of the meeting. The Notice
need not specify the purpose of the meeting, nor the location if the
meeting is to be held at the principal executive office of the Company.
A majority of Managers shall constitute a quorum for the transaction
of business at any meeting of the Managers. The transactions of the
Managers at any meeting, however called or noticed, or wherever held, shall
be as valid as though transacted at a meeting duly held after call and
notice if a quorum is present and if, either before or after the meeting,
each Manager not present signs a written waiver of notice or a consent to
the holding of such meeting or an approval of the minutes of such meeting.
Any action required or permitted to be taken by the Managers under
this Agreement may be taken
<PAGE>
without a meeting if a majority of the Managers individually or
collectively consent in writing to such action.
Managers may participate in the meeting through the use of a
conference telephone or similar communications equipment, provided that all
Managers participating in the meeting can hear one another.
The Managers shall keep or cause to be kept with the books and
records of the Company full and accurate minutes of all meetings, notices
and waivers of notices of meetings, and all written consents to actions of
the Managers.
5.6. It is acknowledged that the Manager has other business interests to
which the Manager devotes part of the Manager's time. The Manager shall
devote such time to the conduct of the business of the Company as the
Manager, in the Manager's own good faith and discretion, deems necessary.
5.7. The Manager shall be entitled to compensation for the Manager's
services as determined by the Members, and to reimbursement for all
expenses reasonably incurred by the Manager in the performance of the
Manager's duties.
5.8 The Company shall have a President, who shall be a Manager. The
President shall have general supervision of the business and affairs of the
Company, shall preside at all meetings of Members and of Managers, and
shall have such other powers and duties usually vested in a president. A
Majority of the Members may provide for additional officers of the Company,
may alter the powers and duties of the President, and shall establish the
powers and duties of all other officers and the compensation of all company
officers.
5.9. The Manager shall cause all assets of the Company, whether real or
personal, to be held in the name of the Company.
5.10. All funds of the Company shall be deposited in one or more accounts
with one or more recognized financial institutions in the name of the
Company, at such locations as shall be determined by the Manager.
Withdrawal from such accounts shall require only the signature of the
Manager or such other person or persons as the Manager may designate.
ARTICLE VI
ACCOUNTS AND ACCOUNTING
6.1. Complete books of account of the Company's business, in which each
Company transaction shall be fully and accurately entered, shall be kept at
the Company's principal executive office and at such other locations as the
Manager shall determine from time to time and shall be open to inspection
and copying on reasonable Notice by any Member or the Member's authorized
representatives during normal business hours. The costs of such inspection
and copying shall be borne by the Member.
6.2. Financial books and records of the Company shall be kept on the
accrual/cash method of accounting, which shall be the method of accounting
followed by the Company for federal income tax purposes. The financial
statements of the Company shall be prepared in accordance with generally
accepted accounting principles and shall be appropriate and adequate for
the Company's business and for carrying out the provisions of this
Agreement. The fiscal year of the Company shall be January 1 through
December 31.
6.3. At all times during the term of existence of the Company, and beyond
that term if the Manager deems it necessary, the Manager shall keep or
cause to be kept the books of account referred to in Section 6.2, together
with:
(a) A current list of the full name and last known business or
residence address of each
<PAGE>
Member, together with the Capital Contribution and the share in
Profits and Losses of each Member;
(b) A current list of the full name and business or residence address
of each Manager;
(c) A copy of the Articles of Organization, as amended;
(d) Copies of the Company's federal, state, and local income tax or
information returns and reports, if any, for the six most recent
taxable years;
(e) An original executed copy or counterparts of this Agreement, as
amended;
(f) Any powers of attorney under which the Articles of Organization or
any amendments to said articles were executed;
(g) Financial statements of the Company for the six most recent fiscal
years; and
(h) The books and Records of the Company as they relate to the
Company's internal affairs for the current and past four fiscal years.
If the Manager deems that any of the foregoing items shall be kept
beyond the term of existence of the Company, the repository of said items
shall be as designated by the Manager.
6.4 All Members shall receive not less frequently than at the end of each
calendar quarter, copies of such financial statements regarding the
previous calendar quarter, as may be prepared in the ordinary course of
business, by the Manager or accountants selected by the Manager. The
Manager shall deliver to each Member, within 120 days after the end of the
fiscal year of the Company, a financial statement that shall include:
(a) A balance sheet and income statement, and a statement of changes
in the financial position of the Company as of the close of the fiscal
year;
(b) A statement showing the Capital Account of each Member as of the
close of the fiscal year and the distributions, if any, made to each
Member during the fiscal year. Members representing at least 30
percent of the Members, by number, may request interim balance sheets
and income statements, and may, at their own discretion and expense,
obtain an audit of the Company books, by certified public accountants
selected by them; provided, however, that not more than one such audit
shall be made during any fiscal year of the Company.
6.5. Within 90 days after the end of each taxable year of the Company the
Manager shall send to each of the Members all information necessary for the
Members to complete their federal and state income tax or information
returns and a copy of the Company's federal, state, and local income tax or
information returns for such year.
ARTICLE VII
MEMBERSHIP MEETINGS, VOTING, INDEMNITY
7.1. There shall be only one class of membership and no Member shall have
any rights or preferences in addition to or different from those possessed
by any other Member except as specifically provided for in Article IV.
Members shall have the right and power to appoint, remove, and replace
Managers and officers
<PAGE>
of the Company and the right to Vote on all other matters with respect to
which this Agreement or the Act requires or permits such Member action.
Each Member shall Vote in proportion to the Member's Percentage Interest as
of the governing record date, determined in accordance with Section 7.2. If
a Member has assigned all or part of the Member's Economic Interest to a
person who has not been admitted as a Member, the Assigning Member shall
Vote in proportion to the Percentage Interest that the Assigning Member
would have had, if the assignment had not been made.
Without limiting the foregoing, all of the following acts shall
require the unanimous Vote of the Members:
(a) A decision to continue the business of the Company after any
event mentioned in Article IX, Section 9.1;
(b) The Transfer of a Membership Interest and the admission of the
Assignee as a Member of the Company;
(c) Any amendment of the articles of organization or this Agreement;
and
(d) A compromise of the obligation of a Member to make a Capital
Contribution under Article III.
7.2. The record date for determining the Members entitled to receive
Notice of any meeting, to Vote, to receive any distribution, or to exercise
any right in respect of any other lawful action, shall be the date set by
the Manager or by a Majority of Members; provided that such record date
shall not be more than 60, or less than ten calendar days prior to the date
of the meeting and not more than 60 calendar days prior to any other
action. In the absence of any action setting a record date, the record
date shall be determined in accordance with Corp C section 17104(k).
7.3. The Company may, but shall not be required, to issue certificates
evidencing membership Interests (Membership Interest Certificates) to
Members of the Company. Once Membership Interest Certificates have been
issued, they shall continue to be issued as necessary to reflect current
Membership Interests held by Members. Membership Interest Certificates
shall be in such form as may be approved by the Manager, shall be manually
signed by the Manager, and shall bear conspicuous legends evidencing the
restrictions on Transfer and the purchase rights of the Company and Members
set forth in Article VIII. All issuances, reissuances, exchanges, and
other transactions in Membership Interests involving Members shall be
recorded in a permanent ledger as part of the books and records of the
Company.
7.4. Meetings of the Members may be called at any time by the Manager, or
by Members representing more than 10 percent of the Interests of the
Members for the purpose of addressing any matters on which the Members may
Vote. If a meeting of the Members is called by the Members, Notice of the
call shall be delivered to the Manager. Meetings may be held at the
principal executive office of the Company or at such other location as may
be designated by the Manager. Following the call of a meeting, the Manager
shall give Notice of the meeting not less than ten, or more than 60
calendar days prior to the date of the meeting to all Members entitled to
Vote at the meeting. The Notice shall state the place, date, and hour of
the meeting and the general nature of business to be transacted. No other
business may be transacted at the meeting. A quorum at any meeting of
Members shall consist of a Majority of Members, represented in person or by
Proxy. The Members present at a duly called or held meeting at which a
quorum is present may continue to transact business until adjournment,
notwithstanding the withdrawal of a sufficient number of Members to leave
less than a quorum, if the action taken, other than adjournment, is
approved by the requisite Percentage of Members as specified in this
Agreement or the Act.
7.5. A meeting of Members at which a quorum is present may be adjourned to
another time or place and any business which might have been transacted at
the original meeting may be transacted at the adjourned meeting. If a
quorum is not present at an original meeting, that meeting may be adjourned
by the Vote of a majority of Voting Interests represented either in person
or by Proxy. Notice of the adjourned meeting need
<PAGE>
not be given to Members entitled to Notice it the time and place of the
adjourned meeting are announced at the meeting at which the adjournment is
taken, unless (a) the adjournment is for more than 45 days, or (b) after
the adjournment, a new record date is fixed for the adjourned meeting. in
the situations described in clauses (a) and (b), Notice of the adjourned
meeting shall be given to each Member of record entitled to Vote at the
adjourned meeting
7.6. The transactions of any meeting of Members, however called and
noticed, and wherever held, shall be as valid as though consummated at a
meeting duly held after regular call and notice, it (a) a quorum is present
at that meeting, either in person or by Proxy, and (b) either before or
after the meeting, each of the persons entitled to Vote, not present in
person or by Proxy, signs either a written waiver of notice, a consent to
the holding of the meeting, or an approval of the minutes of the meeting.
Attendance of a Member at a meeting shall constitute waiver of notice,
unless that Member objects, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting was not lawfully
called or convened. Attendance at a meeting is not a waiver of any right
to object to the consideration of matters required to be described in the
notice of the meeting and not so included, if the objection is expressly
made at the meeting.
7.7. At all meetings of Members, a Member may Vote in person or by Proxy.
Such Proxy shall be filed with the Manager before or at the time of the
meeting, and may be filed by facsimile transmission to the Manager at the
principal executive office of the Company or such other address as may be
given by the Manager to the Members for such purposes.
7.8. Members may participate in a meeting through use of conference
telephone or similar communications equipment, provided that all Members
participating in such meeting can hear one another. Such participation
shall be deemed attendance at the meeting.
7.9. Any action that may be taken at any meeting of the Members may be
taken without a meeting if a consent in writing, setting forth the action
so taken, is signed by Members having not less than the minimum number of
Votes that would be necessary to authorize or take that action at a meeting
at which all Members entitled to Vote thereon were present and voted. If
the Members are requested to consent to a matter without a meeting, each
Member shall be given notice of the matter to be voted upon in the manner
described in Section 7.4. Any action taken without a meeting shall be
effective when the required minimum number of Votes have been received.
Prompt Notice of the action taken shall be given to all Members who have
not consented to the action.
7.10. No Member acting solely in the capacity of a Member is an agent of
the Company, nor can any Member acting solely in the capacity of a Member
bind the Company or execute any instrument on behalf of the Company.
Accordingly, each Member shall indemnify, defend, and save harmless each
other Member and the Company from and against any and all loss, cost,
expense, liability or damage arising from or out of any claim based upon
any action by such Member in contravention of the first sentence of this
Section 7.10.
ARTICLE VIII
TRANSFERS OF MEMBERSHIP INTERESTS
8.1. A Member may withdraw from the Company at any time by giving Notice
of withdrawal to all other Members at least 180 calendar days before the
effective date of withdrawal. Withdrawal shall not release a Member from
any obligations and liabilities under this Agreement accrued or incurred
before the effective date of withdrawal. A withdrawing Member shall divest
the Member's entire Membership Interest before the effective date of
withdrawal in accordance with and subject to the provisions of this Article
VIII.
8.2. Except as expressly provided in this Agreement, a Member shall not
transfer any part of the
<PAGE>
Member's Membership Interest in the Company, whether now owned or later
acquired, unless (a) the other Members unanimously approve the transferee's
admission to the Company as a Member upon such Transfer, which approval
shall be given or withheld by each Member in its sole and absolute
discretion, and (b) the Membership Interest to be transferred, when added
to the total of all other Membership Interests transferred in the preceding
12 months, will not cause the termination of the Company under the Code. No
Member may Encumber or permit or suffer any Encumbrance of all or any part
of the Member's Membership Interest in the Company unless such Encumbrance
has been approved in writing by the Manager. Such approval may be granted
or withheld in the Manager's sole discretion. Any Transfer or Encumbrance
of a Membership Interest without such approval shall be void.
Notwithstanding any other provision of this Agreement to the contrary, a
Member who is a natural person may transfer all or any portion of his or
her Membership Interest to any revocable trust created for the benefit of
the Member, or any combination between or among the Member, the Member's
spouse, and the Member's issue; provided that the Member retains a
beneficial interest in the trust and all of the Voting Interest included in
such Membership Interest. A Transfer of a Member's beneficial interest in
such trust, or failure to retain such Voting Interest, shall be deemed a
Transfer of a Membership Interest.
8.3. If a Member wishes to transfer any or all of the Member's Membership
Interest in the Company pursuant to a Bona Fide Offer (as defined below),
the Member shall give Notice to all other Members at least 30 days in
advance of the proposed sale or Transfer, indicating the terms of the Bona
Fide Offer and the identity of the offeror. The Company and the other
Members shall have the option to purchase the Membership Interest proposed
to be transferred at the price and on the terms provided in this Agreement.
If the price for the Membership Interest is other than cash, the fair value
in dollars of the price shall be as established in good faith by the
Company. For purposes of this Agreement, "Bona Fide Offer" means an offer
in writing setting forth all relevant terms and conditions of purchase from
an offeror who is ready, willing, and able to consummate the purchase and
who is not an Affiliate of the selling Member. For 30 days after the
Notice is given, the Company shall have the right to purchase the
Membership Interest offered, on the terms stated in the Notice, for the
lesser of (a) the price stated in the Notice (or the price plus the dollar
value of noncash consideration, as the case may be) and (b) the price
determined under the appraisal procedures set forth in Section 8.8.
If the Company does not exercise the right to purchase all of the
Membership Interest, then, with respect to the portion of the Membership
Interest that the Company does not elect to purchase, that right shall be
given to the other Members for an additional 30-day period, beginning on
the day that the Company's right to purchase expires. Each of the other
Members shall have the right to purchase, on the same terms, a part of the
interest of the offering Member in the proportion that the Member's
Percentage Interest bears to the total Percentage Interests of all of the
Members who choose to participate in the purchase; provided, however, that
the Company and the participating Members may not, in the aggregate,
purchase less than the entire interest to be sold by the offering Member.
If the Company and the other Members do not exercise their rights to
purchase all of the Membership Interest, the offering Member may, within 90
days from the date the Notice is given and on the terms and conditions
stated in the Notice, sell or exchange that Membership Interest to the
offeror named in the Notice. Unless the requirements of Section 8.2 are
met, the offeror under this section shall become an Assignee, and shall be
entitled to receive only the share of Profits or other compensation by way
of income and the return of Capital Contribution to which the assigning
Member would have been entitled.
8.4. On the happening of any of the following events (Triggering Events)
with respect to a Member, the Company and the other Members shall have the
option to purchase the Membership Interest in the Company of such Member
(Selling Member) at the price and on the terms provided in Section 8.7 of
this Agreement:
(a) The bankruptcy or withdrawal of a Member, or the winding up and
dissolution of a corporate Member, or merger or other corporate
reorganization of a corporate Member as a result of which the
corporate Member does not survive as an entity; provided that the
remaining Members have elected to continue the business of the Company
as provided in Article IX, Section 9.l(a).
(b) The occurrence of any other event that is, or that would cause, a
Transfer in contravention
<PAGE>
of this Agreement.
Each member agrees to promptly give Notice of a Triggering Event to
all other Members. 8.5. On the receipt of Notice by the Manager and the
other Members as contemplated by Sections 8.1 or 8.3, and on receipt of
actual notice of any Triggering Event as determined in good faith by the
Manager, the Company shall have the option, for a period ending 30 calendar
days following the determination of the purchase price as provided in
Section 8.8, to purchase the Membership Interest in the Company to which
the option relates, at the price and on the terms set forth in Section 8.7
of this Agreement, and the other Members, pro rata in accordance with their
prior Membership Interests in the Company, shall then have the option, for
a period of 30 days thereafter, to purchase the Membership Interest in the
Company not purchased by the Company, on the same terms and conditions as
apply to the Company. If all other Members do not elect to purchase the
entire remaining Membership Interest in the Company, then the Members
electing to purchase shall have the right, pro rata in accordance with
their prior Membership Interest in the Company, to purchase the additional
Membership Interest in the Company available for purchase. The transferee
of the Membership Interest in the Company that is not purchased shall hold
such Membership Interest in the Company subject to all of the provisions of
this Agreement.
8.6 Neither the Member whose interest is subject to purchase under this
Article, nor such Member's Affiliate, shall participate in any Vote or
discussion of any matter pertaining to the disposition of the Member's
Membership Interest in the Company under this Agreement.
8.7. The purchase price of the Membership Interest that is the subject of
an option under Section 8.5 shall be the "Fair Option Price" of the
interest as determined under this Section 8.7. "Fair Option Price" means
the cash price that a willing buyer would pay to a willing seller when
neither is acting under compulsion and when both have reasonable knowledge
of the relevant facts on the date the option is first execrable (the Option
Date). Each of the selling and purchasing parties shall use his, her, or
its best efforts to mutually agree upon the Fair Option Price. If the
parties are unable to so agree within 30 days of the Option Date, the
selling party shall appoint, within 40 days of the Option Date, one
appraiser, and the purchasing party shall appoint within 40 days of the
Option Date, one appraiser. The two appraisers shall within a period of
five additional days, agree upon and appoint an additional appraiser. The
three appraisers shall, within 60 days after the appointment of the third
appraiser, determine the Fair Option Price of the Membership Interest in
writing and submit their report to all the parties.
The Fair Option Price shall be determined by disregarding the
appraiser's valuation that diverges the greatest from each of the other two
appraisers' valuations, and the arithmetic mean of the remaining two
appraisers' valuations shall be the Fair Option Price. Each purchasing
party shall pay for the services of the appraiser selected by it, plus one
half of the fee charged by the third appraiser, and one half of all other
costs relating to the determination of Fair Option Price. The Fair Option
Price as so determined shall be payable in cash.
8.8. Except as expressly permitted under Section 8.2, a prospective
transferee (other than an existing Member) of a Membership Interest may be
admitted as a Member with respect to such Membership Interest (Substituted
Member) only (a) on the unanimous Vote of the other Members in favor of the
prospective transferee's admission as a Member, which approval shall be
given or withheld by each Member in its sole and absolute discretion, and
(b) on such prospective transferee executing a counterpart of this
Agreement as a party hereto. Any prospective transferee of a Membership
Interest shall be deemed an Assignee, and, therefore, the owner of only an
Economic Interest until such prospective transferee has been admitted as a
Substituted Member. Except as otherwise permitted in the Act, any such
Assignee shall be entitled only to receive allocations and distributions
under this Agreement with respect to such Membership Interest and shall
have no right to Vote or exercise any rights of a Member until such
Assignee has been admitted as a Substituted Member. Until the Assignee
becomes a Substituted Member, the Assigning Member will continue to be a
Member and to have the power to exercise any rights and powers of a Member
under this Agreement, including the right to Vote in proportion to the
Percentage Interest that the Assigning Member would have had in the event
that the assignment had not been made.
<PAGE>
8.9 Any person admitted to the Company as a Substituted Member shall be
subject to all the provisions of this Agreement that apply to the Member
from whom the Membership Interest was assigned, provided, however, that the
assigning Member shall not be released from liabilities as a Member solely
as a result of the assignment, both with respect to obligations to the
Company and to third parties, incurred prior to the assignment.
8.10. The initial sale of Membership Interests in the Company to the
Initial Members has not been qualified or registered under the securities
laws of any state, including California, or registered under the Securities
Act of 1933, in reliance upon exemptions from the registration provisions
of those laws. Notwithstanding any other provision of this Agreement,
Membership Interests may not be Transferred unless registered or qualified
under applicable state and federal securities law unless, in the opinion of
legal counsel satisfactory to the Company, such qualification or
registration is not required. The Member who desires to transfer a
Membership Interest shall be responsible for all legal fees incurred in
connection with said opinion.
ARTICLE IX
DISSOLUTION AND WINDING UP
9.1. The Company shall be dissolved upon the first to occur of the
following events:
(a) The bankruptcy, withdrawal, or dissolution of a Member, provided,
however, that the remaining Members may by the Vote of a Majority of
Members within 90 days of the happening of that event Vote to continue
the business of the Company, in which case, the Company shall not
dissolve. If the remaining Members fail to so Vote, the remaining
Members shall wind up the Company. For purposes of this Paragraph
(a), in determining a Majority of Members, the Percentage Interest of
the Member who has died, become incapacitated, withdrawn, or who has
become bankrupt or dissolved shall not be taken into account.
(b) The expiration of the term of existence of the Company.
(c) The written agreement of all Members to dissolve the Company.
(d) The sale or other disposition of substantially all of the
Company's assets.
(e) Entry of a decree of judicial dissolution under Corp C section
17351.
9.2. On the dissolution of the Company, the Company shall engage in no
further business other than that necessary to wind up the business and
affairs of the Company. The Managers who have not wrongfully dissolved the
Company or, if there is no such Manager, the Members, shall wind up the
affairs of the Company. The Delegates winding up the affairs of the
Company shall give Notice of the commencement of winding up by mail to all
known creditors and claimants against the Company whose addresses appear in
the records of the Company. After paying or adequately providing for the
payment of all known debts of the Company (except debts owing to Members),
the remaining assets of the Company shall be distributed or applied in the
following order:
(a) To pay the expenses of liquidation.
(b) To the establishment of reasonable reserves by the Delegate for
contingent liabilities or obligations of the Company. Upon the
Delegate's determination that such reserves are no longer necessary,
said reserves shall be distributed as provided in this Section 9.2. -
<PAGE>
(c) To repay outstanding loans to Members. If there are insufficient
funds to pay such loans in full, each Member shall be repaid in the
ratio that the Member's loan, together with interest accrued and
unpaid thereon, bears to the total of all such loans from Members,
including all interest accrued and unpaid thereon. Such repayment
shall first be credited to unpaid principal and the remainder shall be
credited to accrued and unpaid interest.
(d) Among the Members with Positive Capital Account Balances as
provided in Article IV.
9.3. Each Member shall look solely to the assets of the Company for the
return of the Member's investment, and if the Company property remaining
after the payment or discharge of the debts and liabilities of the Company
is insufficient to return the investment of each Member, such Member shall
have no recourse against any other Members for indemnification,
contribution, or reimbursement, except as specifically provided in this
Agreement.
ARTICLE X
INDEMNIFICATION AND ARBITRATION
10.1. The Company shall have the power to indemnify any Person who was or
is a party, or who is threatened to be made a party, to any Proceeding by
reason of the fact that such Person was or is a Member, Manager, officer,
employee, or other agent of the Company, or was or is serving at the
request of the Company as a director, officer, employee, or other Agent of
another limited liability company, corporation, partnership, joint venture,
trust, or other enterprise, against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred by such
Person in connection with such proceeding, if such Person acted in good
faith and in a manner that such Person reasonably believed to be in the
best interests of the Company, and, in the case of a criminal proceeding,
such Person had no reasonable cause to believe that the Person's conduct
was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contenders or its
equivalent, shall not, of itself, create a presumption that the Person did
not act in good faith and in a manner that such Person reasonably believed
to be in the best interests of the Company, or that the Person had
reasonable cause to believe that the Person's conduct was unlawful. To the
extent that an agent of the Company has been successful on the merits in
defense of any Proceeding, or in defense of any claim, issue, or matter in
any such Proceeding, the agent shall be indemnified against expenses
actually and reasonably incurred in connection with the Proceeding. In all
other cases, indemnification shall be provided by the Company only if
authorized in the specific case by a Majority of Members.
"Agent," as used in this Section 10.1, shall include a trustee or
other fiduciary of a plan, trust, or other entity or arrangement described
in Corp C section 207(f).
"Proceeding," as used in this Section 10.1, means any threatened,
pending, or completed action or proceeding, whether civil, criminal,
administrative, or investigative.
Expenses of each Person indemnified under this Agreement actually and
reasonably incurred in connection with the defense or settlement of a
proceeding may be paid by the Company in advance of the final disposition
of such proceeding, as authorized by the Managers who are not seeking
indemnification or, if there are none, by a Majority of the Members, upon
receipt of an undertaking by such Person to repay such amount unless it
shall ultimately be determined that such Person is entitled to be
indemnified by the Company. "Expenses," as used in this Section 10.1,
includes, without limitation, attorney fees and expenses of establishing a
right to indemnification, if any, under this Section 10.1
10.2. Any action to enforce or interpret this Agreement, or to resolve
disputes with respect to this Agreement as between the Company and a
Member, or between or among the Members, shall be settled by arbitration in
accordance with the rules of the American Arbitration Association.
Arbitration shall be the exclusive dispute resolution process in the State
of California, but arbitration shall be a nonexclusive process
<PAGE>
elsewhere. Any party may commence arbitration by sending a written demand
for arbitration to the other parties. Such demand shall set forth the
nature of the matter to be resolved by arbitration. The Manager shall
select the place of arbitration. The substantive law of the State of
California shall be applied by the arbitrator to the resolution of the
dispute. The parties shall share equally all initial costs of arbitration.
The prevailing party shall be entitled to reimbursement of attorney fees,
costs, and expenses incurred in connection with the arbitration. AR
decisions of the arbitrator shall be final, binding, and conclusive on all
parties. Judgment may be entered upon any such decision in accordance with
applicable law in any court having jurisdiction thereof. The arbitrator (if
permitted under applicable law) or such court may issue a writ of execution
to enforce the arbitrator's decision.
ARTICLE XI
ATTORNEY-IN-FACT AND AGENT
11.1. Each Member, by execution of this Agreement, irrevocably constitutes
and appoints each Manager and any of them acting alone as such Member's
true and lawful attorney-in-fact and agent, with full power and authority
in such Member's name, place, and stead to execute, acknowledge, and
deliver, and to file or record in any appropriate public office: (a) any
certificate or other instrument that may be necessary, desirable, or
appropriate to qualify the Company as a limited liability company or to
transact business as such in any jurisdiction in which the Company conducts
business; (b) any certificate or amendment to the Company's articles of
organization or to any certificate or other instrument that may be
necessary, desirable, or appropriate to reflect an amendment approved by
the Members in accordance with the provisions of this Agreement; (c) any
certificates or instruments that may be necessary, desirable, or
appropriate to reflect the dissolution and winding up of the Company; and
(d) any certificates necessary to comply with the provisions of this
Agreement. This power of attorney will be deemed to be coupled with an
interest and 'will survive the Transfer of the Member's Economic Interest.
Notwithstanding the existence of this power of attorney, each Member agrees
to join in the execution, acknowledgment, and delivery of the instruments
referred to above if requested to do so by a Manager. This power of
attorney is a limited power of attorney and does not authorize any Manager
to act on behalf of a Member except as described in this Article XI.
ARTICLE XII
GENERAL PROVISIONS
12.1. This Agreement constitutes the whole and entire agreement of the
parties with respect to the subject matter of this Agreement, and it shall
not be modified or amended in any respect except by a written instrument
executed by all the parties. This Agreement replaces and supersedes all
prior written and oral agreements by and among the Members and Managers or
any of them.
12.2. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
12.3. This Agreement shall be construed and enforced in accordance with
the internal laws of the State of California. If any provision of this
Agreement is determined by any court of competent jurisdiction or
arbitrator to be invalid, illegal, or unenforceable to any extent, that
provision shall, if possible, be construed as though more narrowly drawn,
if a narrower construction would avoid such invalidity, illegality, or
unenforceability or, if that is not possible, such provision shall, to the
extent of such invalidity, illegality, or unenforceability, be severed, and
the remaining provisions of this Agreement shall remain in effect.
<PAGE>
12.4. This Agreement shall be binding on and inure to the benefit of the
parties and their heirs, personal representatives, and permitted successors
and assigns
12.5. Whenever used in this Agreement, the singular shall include the
plural and the plural shall include the singular, and the neuter gender
shall include the male and female as well as a trust, firm, company, or
corporation, all as the context and meaning of this Agreement may require.
12.6. The parties to this Agreement shall promptly execute and deliver any
and all additional documents, instruments, notices, and other assurances,
and shall do any and all other acts and things, reasonably necessary in
connection with the performance of their respective obligations under this
Agreement and to carry out the intent of the parties.
12.7. Except as provided in this Agreement, no provision of this Agreement
shall be construed to limit in any manner the Members in the carrying on of
their own respective businesses or activities.
12.8. Except as provided in this Agreement, no provision of this Agreement
shall be construed to constitute a Member, in the Member's capacity as
such, the agent of any other Member.
12.9. Each Member represents and warrants to the other Members that the
Member has the capacity and authority to enter into this Agreement.
12.10. The article, section, and paragraph titles and headings contained
in this Agreement are inserted as matter of convenience and for ease of
reference only and shall be disregarded for all other purposes, including
the construction or enforcement of this Agreement or any of its provisions.
12.11. This Agreement may be altered, amended, or repealed only by a
writing signed by all of the Members.
12.12. Time is of the essence of every provision of this Agreement that
specifies a time for performance.
12.13. This Agreement is made solely for the benefit of the parties to
this Agreement and their respective permitted successors and assigns, and
no other person or entity shall have or acquire any right by virtue of this
Agreement.
IN WITNESS WHEREOF, the parties have executed or caused to be executed this
Agreement on the day and year first above written.
IMPERIAL CREDIT
MORTGAGE HOLDING, INC.
by: /s/ Joseph R. Tomkinson
-------------------------------------------
JOSEPH R. TOMKINSON, CEO
IMH COMMERCIAL
HOLDINGS, INC.
by: /s/ William S. Ashmore
------------------------------------------
<PAGE>
WILLIAM S. ASHMORE, President
<PAGE>
EXHIBIT "A"
RECORDING REQUESTED BY AND
WHEN RECORDED MAIL TO:
SPACE ABOVE THIS LINE FOR RECORDER'S USE
================================================================================
State of California [SEAL]
Bill Jones
Secretary of State
SACRAMENTO
I, BILL JONES, Secretary of State of California., hereby certify:
That the annexed transcript of 1 page(s) was prepared by and in this
office from the record on file, of which it purports to be a copy,
and that it is full, true and correct.
IN WITNESS WHEREOF, I execute this
certificate and affix the Great
Seal of the State of California
[SEAL]
AUG 2 6 1997
------------------------------------
/s/ Bill Jones
Secretary of State
SEC STATE FORM LP-222A (Rev 5/95)
<PAGE>
[SEAL]
State of California
Bill Jones
Secretary of State
LLC-1
LIMITED LIABILITY COMPANY
ARTICLES OF ORGANIZATION
IMPORTANT - Read the instructions before completing the form.
---------
This document is presented for filing pursuant to Section 17050 of the
California Corporations Code.
- --------------------------------------------------------------------------------
1. Limited liability company name:
IMH/ICH DOVE STREET, LLC
-----------
- --------------------------------------------------------------------------------
2. Latest date (month/day/year) on which the limited liability company is to
dissolve:
AUGUST 25, 2047
- --------------------------------------------------------------------------------
3. The purpose of the limited liability company is to engage in any lawful act
or activity for which a limited liability company may be organized under the
Beverly-Killea Limited Liability Company Act.
- --------------------------------------------------------------------------------
4. Enter the name of initial agent for service of process and check the
appropriate provision below:
DOUG SMITH, ESQ. , which is
-----------------------------------------------
[X] an individual residing in California. Proceed to Item 5.
[_] a corporation which has filed a certificate pursuant to Section 1505
of the California Corporations Code. Skip Item 5 and proceed to Item 6.
- --------------------------------------------------------------------------------
5. If the initial agent for service of process is an individual, enter a
----------
business or residential street address in California:
Street Address: 5 HUTTON CENTRE DRIVE, STE 600
City: SANTA ANA State: CALIFORNIA Zip Code: 92707
- --------------------------------------------------------------------------------
6. The limited liability company will be managed by: (check one)
[_] one manager [_] more than one manager [X] limited liability company
members
- --------------------------------------------------------------------------------
7. If other matters are to be included in the Articles of Organization attach
one or more separate pages.
Number of pages attached, if any.
- --------------------------------------------------------------------------------
8. It is hereby declared that I am the person who ______________ For Secretary
of State Use
<PAGE>
executed this instrument, which execution is
my act and deed.
101997237028
/s/ Jeffery A. Robinson
- ---------------------------------------
Signature of organizer
FILED
In the office of the Secretary of State
Jeffery A. Robinson of the State of California
- ---------------------------------------
Type or print name of organizer AUG 25 1997
Date: August 25, 1997 /s/ Bill Jones
------------------------------
BILL JONES, Secretary Of State
- ---------------------------------------
LLC-1 Approved by the Secretary of State
Filing Fee $70 1/96
<PAGE>
EXHIBIT "B"
MEMBER CONTRIBUTION
- ------ ------------
IMPERIAL CREDIT
MORTGAGE HOLDINGS, INC. $ 3,862,500.00
IMH COMMERCIAL
HOLDINGS, INC. $ 3,862,500.00
<PAGE>
EMPLOYMENT AGREEMENT EXHIBIT 10.11
THIS EMPLOYMENT AGREEMENT is made effective as of this 8th day of
August, 1997, by and between Imperial Commercial Capital Corporation, a
California corporation ("Employer"), and William D. Endresen, an individual
("Employee"), with reference to the following facts:
R E C I T A L S
---------------
WHEREAS, Employee is knowledgeable of and skillful in Employer's
business, which includes, but is not limited to, originating, purchasing and
selling or securitizing commercial mortgages and performing operations as the
conduit operations for affiliates and/or related entities of Employer as
described in Attachment A hereto (the "Business");
WHEREAS, Employer believes that Employee will be an integral part of
its management and is and will become more knowledgeable of and be in part
responsible for developing the Business;
WHEREAS, Employee possesses extensive management experience and
knowledge regarding the Business, including confidential information concerning
service marketing plans and strategy, business plans and projections and the
formulas and models pertaining thereto, customer needs and peculiarities,
finances, operations, billing methods and customer lists and detailed
information (the "Trade Secrets");
WHEREAS, in order to induce Employer to enter into this Employment
Agreement and to perform its obligations hereunder, Employee agrees not to
compete with Employer or use any Trade Secrets or other confidential and/or
proprietary business information regarding the Business of Employer, its
affiliates and/or related entities (as more specifically described in Attachment
A) to the detriment of Employer during the term of this Agreement and
thereafter;
WHEREAS, Employer desires that Employee be employed as President of
Employer;
WHEREAS, Employee is willing to be employed by Employer and provide
services to Employer and any affiliates or related entities of Employer (as more
fully described in Attachment A) under the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
1. Employment, Services, and Duties.
--------------------------------
1.1 Employer hereby employs Employee and Employee hereby accepts such
employment full-time (subject to those exceptions, if any, set forth below) as
President of Employer, with the powers and duties consistent with such position.
Employee agrees to devote one hundred percent (100%) of all working hours to
rendering the services on behalf of Employer and/or its affiliates or related
entities (as described in Attachment A hereto). Employee shall render his
services to Employer by and subject to the instructions and directions of
Employer's Board of Directors to whom Employee shall directly report.
1.2 Employee acknowledges and agrees that Employee will be required
by Employer to devote as much time as reasonably necessary to perform functions
for Employer's related entities and/or affiliates (as set forth in Attachment A)
and that such services are to be performed pursuant to and consistent with
Employee's duties and obligations under this Agreement.
2. Term and Termination.
--------------------
2.1 Unless sooner terminated pursuant to Paragraph 2.2 hereof,
Employee's employment shall continue for a period of five (5) years from the
date of this Agreement ("Employment Date") unless extended by the mutual written
agreement of Employer and Employee.
<PAGE>
2.2 Employee's employment shall terminate prior to the expiration of
the term set forth in Section 2.1 above upon the happening of any of the
following events:
(a) Voluntary termination by Employee which is not subject to
Section 2.2(h) herein;
(b) Death of Employee;
(c) Dissolution or termination of Employer;
(d) The voluntary or involuntary bankruptcy of Employer;
(e) For cause if any of the following occurs:
(i) Employee is convicted of (or pleads nolo contendere to),
or at any time prior to employment by Employer, has been convicted of (or
pled nolo contendere to) a crime of dishonesty or breach of trust or crime
leading to incarceration of more than ninety (90) days (including, without
limitation, embezzlement or theft from Employer) or the payment of a
penalty or fine of $10,000 or more;
(ii) Employer determines that Employee's performance is not
satisfactory or that Employee has engaged in misconduct, negligence or
neglect in the performance of Employee's duties under this Agreement;
(iii) Employee has materially breached any of the terms of
this Agreement or any other material legal obligation to Employer
including, without limitation, a breach of trust or fiduciary duty owed to
Employer or a material violation of Employer's policies or procedures; or
(iv) Any determination of "cause" as used in this Section
2.2(e) shall be made only in good faith by an affirmative majority vote of
the Board of Directors (not counting Employee, if a director) of the
Employer;
(f) By mutual agreement between Employer and Employee;
(g) Upon the good faith determination of the Board of Directors
of Employer that Employee has become so physically or mentally disabled as
to be incapable of satisfactorily performing his duties hereunder for a
period of ninety (90) consecutive days, such determination based upon a
certificate as to such physical or mental disability issued by a licensed
physician and/or psychiatrist (as the case may be) employed by the
Employer;
(h) Without cause by Employer. Employee may elect by notice to
Employer to treat the following acts or omissions by Employer as a
"termination without cause":
(i) With respect to acts or omissions other than those
specifically stated in this Paragraph (h), if Employer does not
substantially comply with its payment obligations under this Agreement and
such failure is not be corrected within ten (10) business days after
delivery of notice to Employer of the facts upon which Employee basis his
claim of such non-compliance; or
(ii) A charge of material breach by Employer under Section
2.2(e) hereof which is determined by a final judgment made without adequate
basis in law or fact.
2.3 Except as set forth in Sections 4, 5, 6 and 7 herein, in the event
that Employee's employment is terminated pursuant to Sections 2.2(a), (b), (c),
(d), (e), (f) or (g) herein, neither Employer nor Employee shall have any
remaining duties or obligations hereunder, except that Employer shall pay to
Employee, or his representatives, on the date of termination of employment
("Termination Date") the following:
(a) Such compensation as is due pursuant to Section 3.1(a)
herein, prorated through the Termination Date; and
<PAGE>
(b) Any expense reimbursements due and owing to Employee as of
the Termination Date.
2.4 Except as set forth in Sections 4, 5, 6 and 7 herein, in the
event that Employee's employment is terminated pursuant to Section 2.2(h)
herein, neither Employer nor Employee shall have any remaining duties or
obligations hereunder, except that Employer shall pay to Employee, or his
representatives, on the Termination Date the following:
(a) All such compensation as is due pursuant to Section 3.1(a)
for a period of one year following the Termination Date;
(b) Any bonus or incentive compensation to which Employee is
entitled as provided for by any plan for the year of termination, prorated
through the Termination Date, provided that, if such bonus or incentive
compensation is discretionary in amount, Employee shall receive a payment
at least equal to the last previous payment made to Employee, if any, for
the previous year prorated to the Termination Date; and
(c) Any expense reimbursements due and owing to Employee as of
the Termination Date.
2.6 This Agreement shall not be terminated by any:
(a) Merger, whether or not Employer is the surviving entity; or
(b) Transfer of all or substantially all of the assets of
Employer.
2.7 In the event of any merger, transfer of assets, dissolution,
liquidation, or consolidation, the surviving corporation or transferee, as the
case may be, shall be bound by and shall have the benefits of this Agreement,
and the Employer shall take all action to ensure that such corporation or
transferee is bound by the provisions of this Agreement.
3. Compensation.
------------
3.1 As the total consideration for Employee's services rendered
hereunder, Employee shall be entitled to the following:
(a) A salary of One Hundred Twenty Thousand Dollars ($120,000)
per year ("Salary"), payable in equal installments twice monthly on those
days when Employer normally pays its employees. The Salary shall (i) be
subject to an annual review and upward adjustment or no adjustment in the
sole discretion of Employer, and (ii) be adjusted upward by at least the
minimum increase, if any, in the cost of living in an amount obtained by
multiplying the referenced salary (as adjusted, if applicable) by the
percentage by which the level of the Consumer Price Index in the Los
Angeles Metropolitan Area, as provided for the last day of such annual
period by the Bureau of Labor Statistics of the United States Department of
Labor, Bureau of Labor Statistics, Consumer Price Index, Urban Wage Earners
and Clerical Workers, Los Angeles - Long Beach - Anaheim Metropolitan Area,
All Items (1967=100) has increased over its level as of the later of: (A)
the date hereof; or (B) the date of the previous automatic adjustment
pursuant to this Section 3.1(a);
(b) Those bonuses as set forth in Attachment B hereto, said
bonuses, if any, to be paid to Employee as set forth therein;
(c) Reimbursement for reasonable and necessary business and
entertainment expenses incurred by Employee in connection with the
performance of Employee's duties hereunder. In the event that any federal,
state or local government agency or authority determines to disallow any
such expenses which are reimbursed to Employee, Employee agrees, to the
extent that such determination involves the Employee. to reimburse Employer
as follows:
(i) for all costs in disputing such action, including
reasonable attorney's fees; and
(ii) for all taxes and penalties incurred by Employer in
connection with such action.
<PAGE>
(d) Employee shall be entitled to four (4) weeks vacation time
each year without loss of compensation. Employee may be absent from his
employment only at such times as Employer shall determine from time to
time. Employee's vacation shall be governed by Employer's usual policies
applicable to all employees;
(e) Employer agrees to provide Employee with insurance coverage
and other benefits available to all employees of Employer under its group
plans; and
(f) Such other benefits as the Board of Directors of Employer, in
its sole discretion, may from time to time provide.
3.2 Employer shall have the right to deduct from the compensation due
to Employee hereunder any and all sums required for social security and
withholding taxes and for any other federal, state, or local tax or charge which
may be in effect or hereafter enacted or required as a charge on the
compensation of Employee.
4. Non-Competition.
---------------
4.1 At all times during Employee's employment hereunder, and for a
period of one (1) year from the date of the termination of Employee's
employment, if Employee's employment is terminated pursuant to Section 2.2(a) or
--
2.2(d) hereof, Employee shall not, directly or indirectly, engage or participate
in, prepare or set up, assist or have any interest in any person, partnership,
corporation, firm, association, or other business organization, entity or
enterprise (whether as an employee, officer, director, agent, security holder,
creditor, consultant or otherwise) that engages in any activity in those
geographic areas where Employer conducts the Business, which activity is the
same as, similar to, or competitive with any activity now engaged in by Employer
or its affiliates and/or related entities (see Attachment A) or in any way
relating to the Business.
4.2 Nothing contained in this Agreement shall be deemed to preclude
Employee from purchasing or owning, directly or beneficially, as a passive
investment, less than ten percent (10%) of any class of a publicly traded
securities or any corporation so long as Employee does not actively participate
in or control, directly or indirectly, any investment or other decisions with
respect to such corporation.
5. Confidentiality. Employee shall keep all Trade Secrets and other
---------------
confidential or proprietary information of Employer and its affiliates and/or
related entities and shall use such information only in the course of performing
Employee's duties hereunder. Employee shall maintain in trust all such Trade
Secret or other confidential or proprietary information, as Employer's property,
including, but not limited to, all documents concerning Employer's Business,
including Employee's work papers, telephone directories, customer information
and notes, and any and all copies thereof in Employee's possession or under
Employee's control. Upon cessation of Employee's employment with Employer, for
any reason, or upon request by Employer, Employee shall transfer to Employer all
such documents belonging to Employer, including any and all copies in Employee's
possession or under Employee's control.
6. Injunctive Relief. Employee hereby acknowledges and agrees that it
-----------------
would be difficult to fully compensate Employer for damages resulting from a
breach or threatened breach of Sections 4 and 5 of this Agreement and,
accordingly, that Employer shall be entitled to temporary and injunctive relief,
including temporary restraining orders, preliminary injunctions and permanent
injunctions, to enforce such Sections without the necessity of proving actual
damages in connection therewith. This provision with respect to injunctive
relief shall not, however, diminish Employer's right to claim and recover
damages or enforce any other of its legal and/or equitable rights or defenses.
7. Copies of Agreement. Employee authorizes Employer to send a copy of
-------------------
this Agreement to any and all future employers which Employee may have, and to
any and all persons, firms, and corporations, with whom Employee may become
affiliated in a business or commercial enterprise, and to inform any and all
such employers, persons, firms or corporations that Employer intends to exercise
its legal rights should Employee breach the terms of this Agreement or should
another party induce a breach on Employee's part.
8. Severable Provisions. The provisions of this Agreement are severable
--------------------
and if any one or more provisions is determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions, and any partially
unenforceable provisions to the extent enforceable, shall nevertheless be
binding and enforceable.
<PAGE>
9. Reference Provision.
-------------------
9.1 Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to the Agreement gives written notice to the
other that a controversy, dispute or claim exists), will be settled by binding
arbitration in Orange County, California in accordance with the provisions of
the American Arbitration Association, which shall constitute the exclusive
remedy for the settlement of any controversy, dispute or claim, and the parties
waive their rights to initiate any legal proceedings against each other in any
court or jurisdiction other than the Superior Court of Orange County (the
"Court"). Any decision rendered by the arbitrator and such arbitration will be
final, binding and conclusive and judgment shall be entered pursuant to Code of
Civil Procedure Section 644 in any court in the State of California having
jurisdiction.
9.2 Except as expressly set forth in this Agreement, the arbitrator
shall determine the manner in which the proceeding is conducted, including the
time and place of all hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the proceeding. All
proceedings and hearings conducted before the arbitrator, except for trial,
shall be conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before the
arbitrator. The party making such a request shall have the obligation to arrange
for any pay for the court reporter. The costs of the court reporter shall be
borne equally by the parties.
9.3 The arbitrator shall be required to be determine in all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The arbitrator
shall be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The arbitrator shall issue a single judgement at the
close of the proceeding which shall dispose of all of the claims of the parties
that are the subject of the proceeding. The parties hereto expressly reserve the
right to contest or appeal from the final judgment or any appealable order or
appealable judgement entered by the arbitrator. The parties hereto expressly
reserve the right to findings of fact, conclusions of law, a written statement
of decision, and the right to move for a new trial or a different judgment,
which new trial, if granted, is also to be a proceeding governed under this
provision.
10. Binding Agreement. This Agreement shall inure to the benefit of and
-----------------
shall be binding upon Employer, its successors and assigns.
11. Captions. The Section herein captions are inserted only as a matter
--------
of convenience and reference and in no way define, limit or describe the scope
of this Agreement or the intent of any provisions hereof.
12. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties relating to the subject matter hereof, and the parties hereto have made
no agreements, representations or warranties relating to the subject matter of
this Agreement that are not set forth otherwise herein. This Agreement
supersedes any and all prior agreements, written or oral, with Employer. Any
such prior agreements are hereby terminated and of no further effect and
Employee by the execution hereof agrees that any compensation provided for under
any such prior agreement(s) is specifically superseded and replaced by the
provision of this Agreement. No modification of this Agreement shall be valid
unless made in writing and signed by the parties hereto and unless such writing
is made by an executive officer of Employer. The parties hereto agree that in no
event shall an oral modification of this Agreement be enforceable or valid.
13. Governing Law. This Agreement is and shall be governed and construed
-------------
in accordance with the laws of the State of California.
14. Notice. All notices and other communications under this Agreement
------
shall be in writing (including, without limitation, telegraphic, telex, telecopy
or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or
delivered by hand or by a nationally recognized courier service guaranteeing
overnight delivery to a party at the following address (or to such other address
as such party may have specified by notice given to the other party pursuant to
this provision):
If to Employer:
<PAGE>
Imperial Commercial Capital Corporation
1 Park Plaza, Suite 430
Irvine, California 92614
Telephone: (714) 477-9100
Facsimile: (714) 477-9400
Attention: Richard J. Johnson
Chief Financial Officer
With a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard
Eighth Floor-East Tower
Beverly Hills, CA 90212
Telephone: (310) 273-1870
Facsimile: (310) 274-8293
Attention: Thomas J. Poletti, Esq.
If to Employee:
William D. Endresen
Imperial Commercial Capital Corporation
1 Park Plaza, Suite 430
Irvine, California 92614
Telephone: (714) 477-9100
Facsimile: (714) 477-9400
15. Attorney's Fees. In the event that any party shall bring an action or
---------------
proceeding in connection with the performance, breach or interpretation hereof,
then the prevailing party in such action as determined by the court or other
body having jurisdiction shall be entitled to recover from the losing party in
such action, as determined by the court or other body having jurisdiction, all
reasonable costs and expense of litigation or arbitration, including reasonable
attorney's fees, court costs, costs of investigation and other costs reasonably
related to such proceeding.
<PAGE>
IN WITNESS WHEREOF, this Agreement is executed as of the day and year first
above written.
"EMPLOYER"
IMPERIAL COMMERCIAL CAPITAL CORPORATION
a California corporation
By: /s/ William S. Ashmore
-------------------------------------
Name:
Title:
"EMPLOYEE"
/s/ William D. Endresen
-------------------------------------
William D. Endresen
<PAGE>
ATTACHMENT A
------------
EMPLOYER AFFILIATES AND/OR RELATED ENTITIES
-------------------------------------------
Employee acknowledges and understands that Employee may be requested by
Employer to devote some or all of Employee's time and effort during the term of
employment pursuant to this Agreement to the businesses of Employer's affiliates
and/or related entities pursuant to certain agreements between and among
Employer and such affiliates and/or related entities. Said affiliates or related
entities include the following:
IMH Commercial Holdings, Inc.
RAI Advisors, LLC
Imperial Credit Mortgage Holdings, Inc.
ICI Funding Corporation
Employees further understands and acknowledges that, pursuant to this
Agreement, Employee may be directed by Employer to provide services to
additional real estate investment trusts or other entities which Employer
establishes or with which Employer affiliates or becomes related and for which
there exists an agreement with Employer or any of the above entities to provide
such services.
Employee understands and acknowledges that Employee's obligations under the
Agreement, including, but not limited to, Employee's duties under Sections 4 and
5 thereof, shall apply and extend to Employee's knowledge of the business of
Employer's affiliates and/or related entities and any Trade Secret or other
confidential or proprietary information relating to same.
Acknowledged and Agreed:
Date: August 8, 1997
/s/ William D. Endresen
------------------------
William D. Endresen
<PAGE>
ATTACHMENT B
------------
BONUS SCHEDULE
--------------
1. Car Allowance: $5,000 per year
2. Annual Bonus to be determined by the Chief Executive Officer of the
Company.
<PAGE>
EXHIBIT 10.12
SERVICING AGREEMENT
Dated as of July 31, 1998
between
IMPAC COMMERCIAL HOLDINGS, INC.
and
IMPAC COMMERCIAL CAPITAL CORPORATION,
"Owner"
and
MIDLAND LOAN SERVICES, INC.,
"Servicer"
<PAGE>
TABLE OF CONTENTS
ARTICLE I.
DEFINITIONS
Section 1.01 Defined Terms................................................ 1
ARTICLE II.
RETENTION AND AUTHORITY OF SERVICER
Section 2.01 Engagement; Servicing Standard............................... 6
Section 2.02 Subservicing................................................. 7
Section 2.03 Authority of the Servicer.................................... 8
ARTICLE III.
SERVICES TO BE PERFORMED
Section 3.01 Services as Loan Servicer.................................... 8
Section 3.02 Escrow Accounts; Collection of Taxes, Assessments and
Similar Items................................................ 9
Section 3.03 Collection Accounts.......................................... 10
Section 3.03 Collection Accounts.......................................... 10
Section 3.04 Permitted Investments........................................ 10
Section 3.05 Maintenance of Insurance Policies............................ 11
Section 3.06 Delivery and Possession of Servicing Files................... 12
Section 3.07 Inspections.................................................. 12
Section 3.08 "Due-on-Sale" Clauses; Assumption Agreements................. 13
Section 3.09 Realization Upon Mortgaged Properties........................ 13
Section 3.10 Sale of Specially Serviced Mortgage Loans and REO Properties. 14
Section 3.11 Management of REO Property................................... 14
Section 3.12 Modifications, Waivers, Amendments and Consents.............. 15
ARTICLE IV.
STATEMENTS AND REPORTS
Section 4.01 Reporting by the Servicer.................................... 15
ARTICLE V.
SERVICER'S COMPENSATION AND EXPENSES
Section 5.01 Servicing Compensation....................................... 16
Section 5.02 Servicing Expenses........................................... 16
ARTICLE VI.
THE SERVICER AND THE OWNER
Section 6.01 Servicer Not to Assign; Merger or Consolidation of the
Servicer..................................................... 17
Section 6.02 Liability and Indemnification of the Servicer and the Owner.. 17
<PAGE>
ARTICLE VII.
REPRESENTATIONS AND WARRANTIES; DEFAULT
Section 7.01 Representations and Warranties............................... 17
Section 7.02 Events of Default............................................ 18
ARTICLE VIII.
TERMINATION; TRANSFER OF MORTGAGE LOANS
Section 8.01 Termination of Agreement..................................... 19
Section 8.02 Transfer of Mortgage Loans; Securitization................... 20
ARTICLE IX.
MISCELLANEOUS PROVISIONS
Section 9.01 Amendment; Waiver............................................ 21
Section 9.02 Governing Law................................................ 21
Section 9.03 Notices...................................................... 21
Section 9.04 Severability of Provisions................................... 22
Section 9.05 Inspection and Audit Rights.................................. 22
Section 9.06 Binding Effect; No Partnership; Counterparts................. 22
Section 9.07 Protection of Confidential Information; No Solicitation...... 22
Section 9.08 General Interpretive Principles.............................. 22
Section 9.09 Further Agreements........................................... 23
EXHIBIT "A" Mortgage Loan Schedule
EXHIBIT "B" Servicing File Listing
<PAGE>
THIS SERVICING AGREEMENT dated as of July 31, 1998, is between IMPAC
Commercial Holdings, Inc., a Maryland corporation, IMPAC Commercial Capital
Corporation, a California corporation, and Midland Loan Services, Inc., a
Delaware corporation.
PRELIMINARY STATEMENT
The Owner desires to engage the Servicer, and the Servicer desires to
accept the Owner's engagement, to service the Mortgage Loans that the Owner
acquires from time to time in accordance with the provisions of this Agreement.
The Servicer is an independent contractor in the business of servicing
mortgage loans, and is not an Affiliate of the Owner.
This Agreement shall become effective with respect to each Mortgage Loan,
or appropriate group or portfolio of Mortgage Loans, upon the related Servicing
Transfer Date.
NOW, THEREFORE, in consideration of the recitals in this Preliminary
Statement which are made a contractual part hereof, and of the mutual promises
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I.
----------
DEFINITIONS
Section 1.01 Defined Terms.
-------------
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
"Accepted Servicing Practices": As defined in Section 2.01.
----------------------------
"Accounts": The Escrow Accounts, REO Accounts and the Collection Accounts.
--------
"Additional Servicing Compensation": (i) amounts collected for checks or
---------------------------------
other items returned for insufficient funds, (ii) late payment charges (but not
default interest) with respect to the Mortgage Loans, (iii) to the extent the
Servicer has been engaged by the Owner under Section 3.08 or 3.12, any
modification fees, extension fees, assumption fees and similar processing fees
received from or on behalf of any Borrower, (iv) subject to Section 3.04 of the
Agreement, all income and gain realized from the investment of funds deposited
in the Accounts, and (v) any Termination Fees.
"Advance Rate": A per annum rate equal to the "Prime Rate" (as published
------------
from time to time in the "Money Rates" section of The Wall Street Journal).
"Affiliate": With respect to any specified Person, any other Person
---------
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Agreement": This Servicing Agreement, as the same may be modified,
---------
supplemented or amended from time to time.
"Best Efforts": Efforts determined to be reasonably diligent by the Owner
------------
or the Servicer, as the case may be, in its reasonable discretion, which efforts
do not require the Owner or the Servicer, as the case may be, to enter into any
litigation, arbitration or other legal or quasi-legal proceeding.
<PAGE>
"Borrower": The obligor on a Note.
--------
"Business Day": Any day other than (i) a Saturday or Sunday, or (ii) a day
------------
in which depository institutions or trust companies in the State of Missouri or
in any of the States in which the Accounts or any accounts used by the Owner for
remittance purposes are located, are authorized or obligated by law, regulation
or executive order to remain closed.
"Collection Account": As defined in Section 3.03.
------------------
"Corrected Mortgage Loan": Any Mortgage Loan which is no longer a
-----------------------
Specially Serviced Mortgage Loan pursuant to the second sentence of the
definition of "Specially Serviced Mortgage Loan".
"Determination Date": The 12th day (or if such day is not a Business Day,
------------------
the Business Day immediately preceding such day) of the month, beginning on
August 12, 1998.
"Disposition Fee": In connection with the sale of any Specially Serviced
---------------
Mortgage Loan or REO Property pursuant to Section 3.10, the fee payable to the
Servicer in amount equal to the product of (x) the related Net Liquidation
Proceeds and (y) 1.00%; provided, however, that such fee shall not exceed
-------- -------
$100,000 for each Mortgage Loan.
"Eligible Account": Either: (i) an account maintained with NationsBank,
----------------
N.A. or PNC Bank, National Association, or (ii) an account maintained with a
depository institution or trust company which has been approved by the Owner in
writing.
"Environmental Laws": Any environmental law, ordinance, rule, regulation
------------------
or order of a federal, state or local governmental authority, including, without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended (42 U.S.C. (S)(S) 9601 et seq.), the Hazardous Material
Transportation Act, as amended (49 U.S.C. (S)(S) 1801 et seq.), the Resource
Conservation and Recovery Act, as amended (42 U.S.C. (S)(S) 6901 et seq.), the
Federal Water Pollution Control Act, as amended (33 U.S.C. (S)(S) 1251 et seq.),
the Clean Air Act (42 U.S.C. (S)(S) 7401 et seq.) and the regulations
promulgated pursuant thereto.
"Escrow Account": As defined in Section 3.02.
--------------
"Escrow Payment": Any payment received by the Servicer for the account of
--------------
the Borrowers for application toward the payment of taxes, insurance premiums,
assessments, ground rents, deferred maintenance, environmental remediation,
rehabilitation costs, capital expenditures, and similar items in respect of the
related Mortgaged Property.
"Event of Default": As defined in Section 7.02.
----------------
"Loan Servicing": As defined in Section 3.01.
--------------
"Monthly Payment": With respect to any Mortgage Loan, the scheduled
---------------
monthly payment of interest or the scheduled monthly payment of principal and
interest, as the case may be, on such Mortgage Loan which is payable by a
Borrower on the due date under the related Note.
"Mortgage": With respect to each Mortgage Loan, the mortgage, deed of
--------
trust or other instrument securing the related Note, which creates a lien on the
real property securing such Note.
"Mortgage Loan": Each of the mortgage loans identified on the Mortgage
-------------
Loan Schedule.
"Mortgage Loan Documents": With respect to each Mortgage Loan, the related
-----------------------
Note, the related Mortgage and any and all other documents executed and
delivered in connection with the origination or subsequent modification of such
Mortgage Loan.
<PAGE>
"Mortgage Loan Schedule": A schedule of certain mortgage loans owned and
----------------------
held by the Owner which sets forth information with respect to such mortgage
loans, as amended from time to time by the parties. An initial Mortgage Loan
Schedule shall be attached hereto as Exhibit "A".
"Mortgaged Property": The real property and improvements thereon securing
------------------
repayment of the debt evidenced by the related Note. Such term shall also
include any REO Property.
"Net Liquidation Proceeds": The amount of proceeds received in connection
------------------------
with the liquidation or sale of any Specially Serviced Mortgage Loan or REO
Property net of the amount of any liquidation expenses (including, without
limitation, legal fees and expenses, brokerage commissions and conveyance taxes)
incurred with respect to such liquidation or sale.
"Note": With respect to any Mortgage Loan, the promissory note or other
----
evidence of indebtedness or agreements evidencing the indebtedness of a Borrower
under such Mortgage Loan.
"Owner": With respect to any Mortgage Loan, either (i) IMPAC Commercial
-----
Holdings, Inc. if such entity is the owner and holder of such Mortgage Loan, or
(ii) IMPAC Commercial Capital Corporation if such entity is the owner and holder
of such Mortgage Loan, as the same may be identified in the Mortgage Loan
Schedule.
"Permitted Investments": Any one or more of the following obligations or
---------------------
securities having at the time of purchase, or at such other time as may be
specified, the required ratings, if any, provided for in this definition:
(i) direct obligations of, or guaranteed as to timely payment of
principal and interest by, the United States of America or any agency
or instrumentality thereof provided that such obligations are backed
by the full faith and credit of the United States of America;
(ii) direct obligations of, or guaranteed as to timely payment of
principal and interest by, the Federal Home Loan Mortgage Corporation,
the Federal Home Loan Bank, the Federal National Mortgage Association
or the Federal Farm Credit System, provided that any such obligation,
at the time of purchase or contractual commitment providing for the
purchase thereof, is qualified by any Rating Agency as an investment
of funds backing securities rated "AAA" (or such comparable rating);
(iii) demand and time deposits in or certificates of deposit of, or
bankers' acceptances issued by, any bank or trust company, savings and
loan association or savings bank, provided that, in the case of
obligations that are not fully insured by the Federal Deposit
Insurance Corporation, the commercial paper and/or long-term unsecured
debt obligations of such depository institution or trust company (or
in the case of the principal depository institution in a holding
company system, the commercial paper or long-term unsecured debt
obligations of such holding company) have the highest rating available
for such securities by any Rating Agency;
(iv) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the highest
long-term debt rating available for such securities by any Rating
Agency;
(v) commercial or finance company paper (including both non-interest-
bearing discount obligations and interest-bearing obligations payable
on demand or on a specified date not more than one year after the date
of issuance thereof) that is rated by any Rating Agency in its highest
short-term unsecured debt rating category at the time of such
investment or contractual commitment providing for such investment,
and is issued by a corporation the outstanding senior long-term debt
obligations of which are then rated by any such Rating Agency in its
highest long-term unsecured debt rating category;
(vi) guaranteed reinvestment agreements issued by bank, insurance
company or other corporation rated in one of the two highest long-term
unsecured debt rating levels available to such issuers by any Rating
Agency at the time of such investment, provided that any such
agreement must by its terms provide that it is terminable by the
purchaser without penalty in the event any such rating is at any time
lower than such level;
<PAGE>
(vii) repurchase obligations with respect to any security described in
clause (i) or (ii) above entered into with a depository institution or
trust company (acting as principal) described in clause (iii) above;
(viii) securities bearing interest or sold at a discount that are
issued by any corporation incorporated under the laws of the United
States of America or any state thereof and rated by any Rating Agency
in its highest long-term unsecured rating category at the time of such
investment or contractual commitment providing for such investment;
(ix) units of taxable money market funds which funds are regulated
investment companies, seek to maintain a constant net asset value per
share and invest solely in obligations backed by the full faith and
credit of the United States, and have been approved in writing by the
Owner as Permitted Investments with respect to this definition; and
(x) such other obligations as are acceptable as Permitted Investments
to the Owner.
"Person": Any individual, corporation, limited liability company,
------
partnership, joint venture, estate, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Qualified Affiliate": Any Person (a) that is organized and doing business
-------------------
under the laws of any state of the United States or the District of Columbia,
(b) that is in the business of performing the duties of a servicer of commercial
mortgage loans, and (c) as to which 50% or greater of its outstanding voting
stock or equity ownership interest are directly or indirectly owned by the
Servicer or by any Person or Persons who directly or indirectly own equity
ownership interests in the Servicer.
"Rating Agency": Each of Standard & Poor's Ratings Services, a division of
-------------
McGraw-Hill, Inc., Moody's Investors Service, Inc., Fitch IBCA, Inc., Duff and
Phelps Credit Rating Co., or any other nationally recognized statistical rating
agency.
"Remittance Date": With respect to each Determination Date, the date which
---------------
is five (5) Business Days after such Determination Date.
"REO Account": As defined in Section 3.11(a).
-----------
"REO Mortgage Loan": A Mortgage Loan deemed for the purposes hereof to be
-----------------
outstanding with respect to each REO Property, as more particularly described in
Section 3.09(b).
"REO Property": A Mortgaged Property acquired by the Servicer on behalf of
------------
the Owner through foreclosure or by deed in lieu of foreclosure.
"Responsible Officer": Any officer or employee of the Owner or the
-------------------
Servicer, as the case may be, involved in or responsible for the administration,
supervision or management of this Agreement and whose name and specimen
signature appear on a list prepared by each party and delivered to the other
party, as such list may be amended from time to time by either party.
"Securitization": One or more transactions involving the issuance of
--------------
certificates, bonds or other equity or debt instruments which are rated by one
or more of the Rating Agencies and are collateralized by or evidence interests
in a pool of one or more commercial mortgage loans that includes any or all of
the Mortgage Loans.
"Servicer": Midland Loan Services, Inc., a Delaware corporation, or any
--------
successor Servicer as herein provided.
"Servicing Expenses": All customary, reasonable and necessary out-of-
------------------
pocket costs and expenses paid or incurred in connection with the Servicer's
obligations hereunder or in connection with any Special Services to be performed
by the Servicer pursuant to Section 3.01, including without limitation:
(a) real estate taxes, assessments and similar charges;
<PAGE>
(b) insurance premiums;
(c) any expense necessary in order to prevent or cure any
violation of applicable laws, regulations, codes, ordinances, rules,
orders, judgments, decrees, injunctions or restrictive covenants;
(d) any cost or expense necessary in order to maintain or release the
lien on each Mortgaged Property and related collateral, including any
mortgage registration taxes, release fees, or recording or filing
fees;
(e) customary expenses for the collection, enforcement or foreclosure
of the Mortgage Loans and the collection of deficiency judgments
against Borrowers and guarantors (including but not limited to the
fees and expenses of any trustee under a deed of trust, foreclosure
title searches and other lien searches);
(f) subject to Section 3.07, costs and expenses of any appraisals,
valuations, inspections, environmental assessments (including but not
limited to the fees and expenses of environmental consultants), audits
or consultations, engineers, architects, accountants, on-site property
managers, market studies, title and survey work and financial
investigating services;
(g) customary expenses for liquidation, restructuring, modification or
loan workouts, such as sales brokerage expenses and other costs of
conveyance;
(h) costs and expenses related to travel and lodging, subject to
Section 3.07 with respect to property inspections; and
(i) any other reasonable costs and expenses, including without
limitation, legal fees and expenses, incurred by the Servicer under
this Agreement in connection with the enforcement, collection,
foreclosure, disposition, condemnation or destruction of the Mortgage
Loans or related Mortgaged Properties, the maintenance, leasing,
operation, management and sale of the REO Properties, and the
performance of Loan Servicing by the Servicer under this Agreement.
Notwithstanding the foregoing, Servicing Expenses shall not be deemed to include
costs and expenses incurred by the Servicer in the performance of its Loan
Servicing obligations hereunder that are in the nature of internal costs or
fixed overhead of the Servicer (including, without limitation, costs and
expenses relating to data processing, computer and telephone systems, office
space, equipment and supplies, and employee salaries and related expenses),
which shall be borne solely by the Servicer.
"Servicing Fee": With respect to each Mortgage Loan, an amount equal to
-------------
the product of (a) the related Servicing Fee Rate and (b) the outstanding
principal balance of such Mortgage Loan, as calculated in accordance with
Section 5.01.
"Servicing Fee Rate": A rate equal to (a) 0.10% (10 basis points) for
------------------
those Mortgage Loans with an original principal balance of less than $2,000,000,
and (b) 0.05% (5 basis points) for those Mortgage Loans with an original
principal balance greater than or equal to $2,000,000, but less than or equal to
$10,000,000. Notwithstanding the foregoing, for those Mortgage Loans which have
multiple properties which are cross-collateralized and cross-defaulted with
other mortgage loans or having lockbox or cash management arrangements, or for
Mortgage Loans with an original principal balance greater than $10,000,000.00,
the Servicing Fee Rate in any such event shall be negotiated in good faith by
the parties hereto on a case-by-case basis.
"Servicing File": With respect to each Mortgage Loan, (i) all Mortgage
--------------
Loan Documents, (ii) to the extent not included as a Mortgage Loan Document, the
documents, information and records set forth in the file listing attached hereto
as Exhibit "B", and (iii) any additional documents or information related
thereto maintained or created by the Servicer.
"Servicing Transfer Date": With respect to each Mortgage Loan, the date of
-----------------------
delivery by Owner to the Servicer of the related Servicing File
"Specially Serviced Mortgage Loan": Any Mortgage Loan with respect to
--------------------------------
which:
<PAGE>
(a) the related Borrower is at least two months delinquent (without
giving effect to any grace periods permitted by the related Mortgage
Loan Documents) in the payment of a Monthly Payment;
(b) the related Borrower has expressed to the Servicer an inability to
pay or a hardship in paying the Mortgage Loan in accordance with its
terms;
(c) the Servicer has received notice that the related Borrower has
become the subject of any bankruptcy, insolvency or similar
proceeding, or has admitted in writing the inability to pay its debts
as they come due or made an assignment for the benefit of creditors;
(d) the Servicer has received notice of a foreclosure or threatened
foreclosure of any lien (other than the Mortgage Loan) on the related
Mortgaged Property;
(e) a default of which the Servicer has notice (other than a failure
by the related Borrower to pay principal or interest) and which
materially and adversely affects the interests of the Owner has
occurred and remains unremedied for the applicable grace period
specified in the Mortgage Loan; or
(f) the related Borrower has failed to make a balloon payment as and
when due and such default has not been cured within 30 days after such
due date;
provided, however, that with respect to the circumstances described in clauses
- -------- -------
(b), (d) and (e), the Servicer has received written confirmation from the Owner
that such Mortgage Loan shall be a Specially Serviced Mortgage Loan. To the
extent no other circumstances identified in clauses (a) through (f) above exist
that would cause the Mortgage Loan to continue to be characterized as a
Specially Serviced Mortgage Loan, a Mortgage Loan will cease to be a Specially
Serviced Mortgage Loan:
(i) with respect to the circumstances described in clauses (a) or (f)
above, when the related Borrower has brought the Mortgage Loan current
(or, with respect to the circumstances described in clause (f),
pursuant to any work-out of the Mortgage Loan) and thereafter made
three consecutive full and timely Monthly Payments (including pursuant
to such workout); or
(ii) with respect to the circumstances described in clauses (b), (c),
(d) and (e) above, when such circumstances cease to exist or such
default is cured, as applicable, in the good faith judgment of the
Servicer (as confirmed in writing by the Owner).
"Special Servicing Fee": With respect to each Specially Serviced Mortgage
---------------------
Loan or REO Mortgage Loan, an amount equal to the product of (a) the related
Special Servicing Fee Rate and (b) the outstanding principal balance of such
Mortgage Loan, as calculated in accordance with Section 5.01.
"Special Servicing Fee Rate": A rate equal to (a) 0.25% (25 basis points)
--------------------------
for those Specially Serviced Mortgage Loans with a current principal balance
greater than or equal to $2,000,000 and (b) 0.35% (35 basis points) for those
Specially Serviced Mortgage Loans with a current principal balance less than
$2,000,000.
"Termination Fee": Subject to Section 8.01, an amount equal to the excess
---------------
of (i) the product of (a) the Servicing Fees payable to the Servicer with
respect to the related Mortgage Loans during the month in which the effective
date of termination occurs and (b) six, over (ii) the amount of Servicing Fees
with respect to such Mortgage Loans received by the Servicer through such
effective date of termination.
"Workout Fee": In connection with the curing of any event of default under
-----------
any Specially Serviced Mortgage Loan through a modification, restructuring
or work-out of such Mortgage Loan effected by the Servicer and evidenced by a
writing executed by the related Borrower, the fee payable to the Servicer in an
amount equal to the product of (x) the outstanding principal balance of such
Mortgage Loan at the time such Mortgage Loan becomes a Corrected Mortgage Loan
and (y) 0.50%; provided, however that such fee shall not exceed $50,000 for each
-------- -------
Mortgage Loan.
<PAGE>
ARTICLE II.
-----------
RETENTION AND AUTHORITY OF SERVICER
Section 2.01 Engagement; Servicing Standard.
------------------------------
The Owner hereby engages the Servicer to perform, and the Servicer hereby
agrees to perform, Loan Servicing with respect to each of the Mortgage Loans
throughout the term of this Agreement, upon and subject to the terms, covenants
and provisions hereof.
The Servicer shall perform its services hereunder (a) in accordance with
(i) applicable laws, (ii) the terms and provisions of the Mortgage Loan
Documents, (iii) the express terms hereof, and (iv) the customary and usual
standards of practice of prudent institutional commercial mortgage loan
servicers, and (b) to the extent consistent with the foregoing requirements, in
the same manner in which the Servicer services commercial mortgage loans for
other third party portfolios of mortgage loans similar to the Mortgage Loans,
but without regard to any relationship which the Servicer or any Affiliate of
the Servicer may have with the related Borrower or any Affiliate of such
Borrower or to the Servicer's right to receive compensation for its services
hereunder. The servicing standards described in the preceding sentence are
herein referred to as "Accepted Servicing Practices".
----------------------------
Section 2.02 Subservicing.
------------
The Servicer may subservice to any Person any of its Loan Servicing
obligations hereunder only with the Owner's written consent or to the extent
necessary for the Servicer to comply with any applicable laws, regulations,
codes or ordinances relating to the Servicer's Loan Servicing obligations
hereunder; provided, however, that the Servicer shall provide oversight and
-------- -------
supervision with regard to the performance of all subcontracted services and any
subservicing agreement shall be consistent with and subject to the provisions of
this Agreement. Neither the existence of any subservicing agreement nor any of
the provisions of this Agreement relating to subservicing shall relieve the
Servicer of its obligations to the Owner hereunder. Notwithstanding any such
subservicing agreement, the Servicer shall be obligated to the same extent and
under the same terms and conditions as if the Servicer alone was servicing the
related Mortgage Loans in accordance with the terms of this Agreement. The
Servicer shall be solely liable for all fees owed by it to any subservicer,
regardless of whether the Servicer's compensation hereunder is sufficient to pay
such fees.
<PAGE>
Section 2.03 Authority of the Servicer.
-------------------------
(a) In performing its Loan Servicing obligations hereunder, the Servicer
shall, except as otherwise provided herein and subject to the terms of this
Agreement, have full power and authority, acting alone or through others, to
take any and all actions in connection with such Loan Servicing that it deems
necessary or appropriate. Without limiting the generality of the foregoing, the
Servicer is hereby authorized and empowered by the Owner when the Servicer deems
it appropriate in its best judgment, to execute and deliver, on behalf of the
Owner, (a) any and all financing statements, continuation statements and other
documents or instruments necessary to maintain the lien of each Mortgage on the
related Mortgaged Property and any other related collateral; and (b) any and all
instruments of satisfaction or cancellation, or of partial or full release or
discharge and all other comparable instruments with respect to each of the
Mortgage Loans; provided, however, that the Servicer shall notify the Owner in
-------- -------
writing prior to entering into material discussions with the related Borrower
with respect to any such instrument referred to in clause (b) above, and, except
in connection with any payment in full of any Mortgage Loan, shall proceed with
such course of action only upon receipt of the Owner's written approval thereof.
The Owner agrees to cooperate with the Servicer by either executing and
delivering to the Servicer from time to time (i) powers of attorney evidencing
the Servicer's authority and power under this Section, or (ii) such documents or
instruments deemed necessary or appropriate by the Servicer to enable the
Servicer to carry out its Loan Servicing obligations hereunder.
(b) In the performance of its Loan Servicing obligations hereunder, the
Servicer shall take any action that is directed by the Owner which relates to
the Servicer's Loan Servicing obligations under this Agreement; provided,
--------
however, that the Servicer shall not be obligated to take, or to refrain from
- -------
taking, any action which the Owner requests that the Servicer take or refrain
from taking to the extent that the Servicer determines in its reasonable and
good faith judgment that such action or inaction (i) may cause a violation of
applicable laws, regulations, codes, ordinances, court orders or restrictive
covenants with respect to any Mortgage Loan, Borrower, Mortgaged Property or REO
Property; or (ii) may cause a violation of any provision of a Mortgage Loan
Document.
ARTICLE III.
------------
SERVICES TO BE PERFORMED
Section 3.01 Services as Loan Servicer.
-------------------------
The Servicer hereby agrees to serve as the loan servicer with respect to
each of the Mortgage Loans and to perform Loan Servicing as described below and
as otherwise provided herein, upon and subject to the terms of this Agreement.
Subject to any limitation of authority under Section 2.03, "Loan Servicing"
--------------
shall mean those services pertaining to the Mortgage Loans which, applying
Accepted Servicing Practices, are required hereunder to be performed by the
Servicer, and which shall include:
(i) reviewing all available documents pertaining to the Mortgage
Loans, organizing, administering and maintaining the Servicing Files,
and inputting all relevant information into the Servicer's loan
servicing computer system;
(ii) preparing and filing or recording all financing statements,
continuation statements and other documents or instruments and taking
such other action necessary to maintain the lien of any Mortgage on
the related Mortgaged Property;
(iii) monitoring each Borrower's maintenance of insurance coverage on
each Mortgaged Property as required by the related Mortgage Loan
Documents and causing to be maintained adequate insurance coverage on
each Mortgaged Property in accordance with Section 3.05;
(iv) monitoring the status of real estate taxes, assessments and other
similar items and verifying the payment of such items for each
Mortgaged Property in accordance with Section 3.02;
(v) preparing and delivering all reports and information required
hereunder;
<PAGE>
(vi) procuring and supervising the services of third parties (other
than subservicers pursuant to Section 2.02) necessary or appropriate
in connection with the servicing of the Mortgage Loans by the
Servicer;
(vii) performing payment processing, record keeping, administration of
escrow and other accounts, interest rate adjustment, and other routine
customer service functions;
(viii) monitoring any casualty losses or condemnation proceedings and
administering any proceeds related thereto in accordance with the
related Mortgage Loan Documents;
(ix) notifying all Borrowers of the appropriate place for
communications and payments, and collecting and monitoring all
payments made with respect to the Mortgage Loans;
(x) administering any requests for assumptions of a Mortgage Loan or
transfers of ownership of or placement of subordinate financing on a
Mortgaged Property in accordance with Section 3.08;
(xi) commencing on behalf of the Owner any litigation or proceeding
relating to the foreclosure or other realization upon the collateral
under any of the Mortgage Loans, and retaining legal counsel in
connection therewith, all in accordance with Section 3.09.
(xii) selling or disposing of each Specially Serviced Mortgage Loan or
REO Property in accordance with Section 3.10;
(xiii) managing and operating each REO Property in accordance with
Section 3.11;
(xiv) administering any proposals for modifications, waivers,
amendments or consents with respect to any term of a Mortgage Loan in
accordance with Section 3.12.
Notwithstanding anything herein to the contrary, the Servicer shall not be
required to undertake any lease approvals, loan modifications, workouts or
restructuring, loan assumptions or substitutions, processing partial releases of
collateral or subordinate financing requests, provided, however, that the
-------- -------
Servicer shall be responsible for acting as the intermediary between the
Borrower and the Owner with respect to (x) processing Borrower requests for
consents to actions and (y) the administration of the terms and provisions of
the Mortgage Loan Documents, which includes, without limitation, collecting,
organizing and forwarding to the Owner any documents in the possession of the
Servicer which relate to the Servicer's obligation to act as such intermediary;
and provided, further, that, subject to the above proviso, the Owner shall be
-------- -------
responsible for taking any actions regarding such Borrower requests and,
therefore, shall be entitled to retain any modification fees, extension fees,
assumption fees, and similar processing fees received from or on behalf of any
Borrower unless and until the Owner elects to engage the Servicer to perform
such services pursuant to Sections 3.08 and 3.12.
When determined to be appropriate by the Owner in accordance with such
reasonable policies, procedures and limitations as the parties may agree upon
from time to time, all notices, correspondence and any other communication from
or by the Servicer with the Borrowers shall be in the name of the Owner,
provided, however, that the foregoing requirement shall not be applicable to any
- -------- -------
Loan Servicing duties relating to any Specially Serviced Mortgage Loan or REO
Property. The Owner shall provide the Servicer with specifications for lettering
and symbols, including letterhead, to be used in any correspondence on other
communication to be given by the Servicer in the name of the Owner as provided
for herein, subject to the proviso in the second preceding sentence. At the
written request of the Owner, the Servicer shall maintain a dedicated "800"
telephone line for exclusive use with respect to Mortgage Loans, which telephone
shall be answered in the name of the Owner.
Section 3.02 Escrow Accounts; Collection of Taxes, Assessments and Similar
-------------------------------------------------------------
Items.
-----
(a) With respect to the Mortgage Loans described in the Mortgage Loan
Schedule, and subject to and as required by the terms of the related Mortgage
Loan Documents, the Servicer shall establish and maintain one or more Eligible
Accounts (each, an "Escrow Account") into which any or all Escrow Payments shall
--------------
be deposited promptly after receipt and identification. Escrow Accounts shall be
denominated "Midland Loan Services, Inc. in Trust for IMPAC Commercial
<PAGE>
Capital Corporation and Various Borrowers" or in such other manner as the Owner
prescribes. The Servicer shall notify the Owner in writing of the location and
account number of each Escrow Account it establishes and shall notify the Owner
prior to any change thereof. Withdrawals of amounts from an Escrow Account may
be made, subject to any express provisions to the contrary herein, applicable
laws, and to the terms of the related Mortgage Loan Documents governing the use
of the Escrow Payments, only: (i) to effect payment of taxes, assessments,
insurance premiums, ground rents and other items required or permitted to be
paid from escrow; (ii) to refund to the Borrowers any sums determined to be in
excess of the amounts required to be deposited therein; (iii) to pay interest,
if required under the Mortgage Loan Documents, to the Borrowers on balances in
the Escrow Accounts; (iv) to pay to the Servicer from time to time any interest
or investment income earned on funds deposited therein pursuant to Section 3.04;
(v) to apply funds to the indebtedness of the Mortgage Loan in accordance with
the terms thereof; (vi) to reimburse the Owner for any Servicing Expense for
which Escrow Payments should have been made by the Borrowers, but only from
amounts received on the Mortgage Loan which represent late collections of Escrow
Payments thereunder; (vii) to withdraw any amount deposited in the Escrow
Accounts which was not required to be deposited therein; or (viii) to clear and
terminate the Escrow Accounts at the termination of this Agreement.
(b) The Servicer shall maintain accurate records with respect to each
Mortgaged Property reflecting the status of taxes, assessments and other similar
items that are or may become a lien thereon and the status of insurance premiums
payable with respect thereto as well as the payment of ground rents with respect
to each ground lease (to the extent such information is reasonably available).
To the extent that the related Mortgage Loan Documents require Escrow Payments
to be made by a Borrower, the Servicer shall use Best Efforts to obtain, from
time to time, all bills for the payment of such items, and shall effect payment
prior to the applicable penalty or termination date, employing for such purpose
Escrow Payments paid by the Borrower pursuant to the terms of the Mortgage Loan
and deposited in the related Escrow Account by the Servicer. To the extent that
the Mortgage Loan does not require a Borrower to make Escrow Payments, the
Servicer shall use its Best Efforts to require that any such payment be made by
the Borrowers prior to the applicable penalty or termination date. Subject to
Section 3.05 with respect to the payment of insurance premiums, if a Borrower
fails to make any such payment on a timely basis or collections from the
Borrower are insufficient to pay any such item when due, the amount of any
shortfall shall be paid by the Servicer as a Servicing Expense, provided that
the Servicer has consulted with the Owner regarding the timing for payment of
taxes, assessments and other similar items.
Section 3.03 Collection Accounts.
-------------------
(a) With respect to the Mortgage Loans, the Servicer shall establish and
maintain one or more Eligible Accounts (each, a "Collection Account") for the
------------------
benefit of the Owner for the purposes set forth herein. Collection Accounts
shall be denominated "Midland Loan Services, Inc. in Trust for IMPAC Commercial
Capital Corporation" or in such other manner as the Owner prescribes. The
Servicer shall deposit into the Collection Accounts within one (1) Business Day
after receipt all payments and collections received by it on or after the date
hereof with respect to the Mortgage Loans, other than payments and collections
with respect to any REO Property (which shall be deposited into the Collection
Account from amounts withdrawn from the related REO Account pursuant to Section
3.11(a)), Escrow Payments or payments in the nature of Additional Servicing
Compensation.
(b) The Servicer shall make withdrawals from the Collection Accounts only
as follows (the order set forth below not constituting an order of priority for
such withdrawals):
(i) to withdraw any amount deposited in the Collection Accounts which
was not required to be deposited therein;
(ii) pursuant to Section 5.01, to pay to the Servicer the Servicing
Fee, Special Servicing Fee, Workout Fee and Disposition Fee on each
Remittance Date;
(iii) pursuant to Section 5.02, to pay or reimburse the Servicer for
any Servicing Expenses;
(iv) to pay to the Servicer from time to time any interest or
investment income earned on funds deposited in the Collection Accounts
pursuant to Section 3.04;
<PAGE>
(v) to remit to the Owner on each Remittance Date, pursuant to wiring
instructions from the Owner, all amounts on deposit in the Collection
Accounts (that represent good funds) as of the close of business on
the Determination Date, net of any withdrawals from the Collection
Account pursuant to this Section; and
(vi) to clear and terminate the Collection Accounts upon the
termination of this Agreement.
Section 3.04 Permitted Investments.
---------------------
The Servicer may direct any depository institution or trust company in
which the Accounts are maintained to invest the funds held therein in one or
more Permitted Investments; provided, however, that such funds shall be either
-------- -------
(i) immediately available or (ii) available in accordance with a schedule which
will permit the Servicer to meet its payment obligations hereunder. The Servicer
shall be entitled to all income and gain realized from the investment of funds
deposited in the Accounts. The Servicer shall deposit from its own funds in the
applicable Account the amount of any loss incurred in respect of any such
investment of funds immediately upon the realization of such loss.
Notwithstanding the foregoing, the Servicer shall not direct the investment of
funds held in any Escrow Account and retain the income and gain realized
therefrom if the related Mortgage Loan Documents or applicable law permit the
Borrower to be entitled to the income and gain realized from the investment of
funds deposited therein. In such event, the Servicer shall direct the depository
institution or trust company in which such Escrow Accounts are maintained to
invest the funds held therein (1) in accordance with the Borrower's written
investment instructions, if the Mortgage Loan Documents or applicable law
require such funds to be invested in accordance with the Borrower's direction;
and (2) in accordance with the Owner's written investment instructions, if the
Mortgage Loan Documents and applicable law do not permit the Borrower to direct
the investment of such funds; provided, however, that in either event (i) such
-------- -------
funds shall be either (y) immediately available or (z) available in accordance
with a schedule which will permit the Servicer to meet the payment obligations
for which the Escrow Account was established, and (ii) the Servicer shall have
no liability for any loss in investments of such funds that are invested
pursuant to such written instructions.
Section 3.05 Maintenance of Insurance Policies.
---------------------------------
(a) The Servicer shall use its Best Efforts to cause the Borrower of each
Mortgage Loan to maintain for each Mortgage Loan such insurance as is required
to be maintained pursuant to the related Mortgage Loan Documents. If the
Borrower fails to maintain such insurance, then the Servicer shall notify the
Owner of such breach and, to the extent available at commercially reasonable
rates, cause to be maintained (i) fire and hazard insurance with extended
coverage in an amount which is at least equal to the lesser of the current
principal balance of such Mortgage Loan and the replacement cost of the
improvements which are a part of the related Mortgaged Property and (ii) to the
extent that the Mortgaged Property is located in a federally designated special
flood hazard area, flood insurance in respect thereof. Such flood insurance
shall be in an amount equal to the lesser of (y) the unpaid principal balance of
the related Mortgage Loan or (z) the maximum amount of such insurance as is
available for the related Mortgaged Property under the National Flood Insurance
Act. After notifying the Owner pursuant to the second preceding sentence, the
Servicer shall take such action as the Owner reasonably requests with respect to
the maintenance of any other forms of insurance which are required to be
maintained pursuant to the related Mortgage Loan Documents, except to the extent
that such insurance is not available at commercially reasonable rates or the
Owner, as mortgagee, does not have an insurable interest. The Servicer shall, to
the extent available at commercially reasonable rates, maintain for each REO
Property no less insurance coverage than was previously required with respect to
the related Mortgaged Property or as may be required at any time by the Owner in
writing. All such policies shall be endorsed with standard mortgagee clauses
with loss payable to the Owner, and shall be in an amount sufficient to avoid
the application of any co-insurance clause. The costs of maintaining the
insurance policies which the Servicer is required to maintain pursuant to this
Section shall be paid by the Servicer as a Servicing Expense.
(b) The Servicer may fulfill its obligation to maintain insurance, as
provided in Section 3.05(a), through a master force placed insurance policy, the
cost of which shall be paid by the Servicer as a Servicing Expense, provided
that such cost is limited to the incremental cost of such policy allocable to
such Mortgaged Property or REO Property (i.e., other than any minimum or standby
premium payable for such policy whether or not any Mortgaged Property is then
covered thereby, which shall be paid by the Servicer). Such master force placed
insurance policy may contain a deductible clause, in which case the Servicer
shall, in the event that there shall not have been maintained on the related
Mortgaged Property or REO Property a policy otherwise complying with the
provisions of Section 3.05(a), and there shall have been one or more losses
<PAGE>
which would have been covered by such a policy had it been maintained,
immediately deposit into the related Collection Account from its own funds the
amount not otherwise payable under the master force placed insurance policy
because of such deductible to the extent that such deductible exceeds the
deductible limitation required under the related Mortgage Loan Documents, or, in
the absence of such deductible limitation, the deductible limitation which is
consistent with Accepted Servicing Practices.
(c) The Servicer shall maintain at its own expense a fidelity bond in form
and amount that is consistent with Accepted Servicing Practices. In addition,
the Servicer shall keep in force, at its own expense during the term of this
Agreement, a policy or policies of insurance in form and amounts that are
consistent with Accepted Servicing Practices, covering loss occasioned by the
errors and omissions of the Servicer's officers and employees in connection with
its obligations hereunder.
Section 3.06 Delivery and Possession of Servicing Files.
------------------------------------------
On or before the related Servicing Transfer Date, the Owner shall deliver
or cause to be delivered to the Servicer (i) a Servicing File with respect to
each Mortgage Loan; and (ii) the amounts, if any, received by the Owner
representing Escrow Payments previously made by the Borrowers. The Servicer
shall promptly acknowledge receipt of the Servicing File and Escrow Payments for
the Mortgage Loans and shall promptly deposit such Escrow Payments in the Escrow
Accounts established pursuant to this Agreement. The contents of each Servicing
File delivered to the Servicer are and shall be held in trust by the Servicer
for the benefit of the Owner as the owner thereof; the Servicer's possession of
the contents of each Servicing File so delivered is for the sole purpose of
servicing the related Mortgage Loan; and such possession by the Servicer shall
be in a custodial capacity only. The Servicer shall release its custody of the
contents of any Servicing File only in accordance with written instructions from
the Owner, and upon request of the Owner, the Servicer shall deliver to the
Owner the Servicing File or a copy of any document contained therein; provided,
--------
however, that if the Servicer is unable to perform its Loan Servicing
- -------
obligations with respect to the related Mortgage Loan after any such release or
delivery of the Servicing File, then the Servicer's responsibilities for Loan
Servicing with respect to such Mortgage Loan may be terminated immediately by
the Servicer upon written notice to the Owner.
Section 3.07 Inspections.
-----------
The Servicer shall perform a physical inspection of each Mortgaged Property
or REO Property at least annually for Mortgage Loans with outstanding principal
balance of more than $1,000,000 and every other year for Mortgage Loans with an
outstanding principal balance of less than or equal to $1,000,000 or if (a) the
related Mortgage Loan becomes a Specially Serviced Mortgage Loan, (b) the Owner
requests such an inspection, or (c) the Servicer, with the approval of the
Owner, determines that it is prudent to conduct such an inspection. The Servicer
shall prepare a written report of each such inspection and shall promptly
deliver a copy of such report to the Owner. The reasonable out-of-pocket
expenses incurred by the Servicer in connection with any such inspections
(including any out-of-pocket expenses related to travel and lodging and any
charges incurred through the use of a qualified third party to perform such
services) shall be paid as a Servicing Expense; provided, however, that with
-------- -------
respect to the annual (or every other year) inspection of any Mortgaged Property
or the initial inspection of any Mortgaged property relating to any Specially
Serviced Mortgage Loan, such expenses shall be borne by the Servicer.
Section 3.08 "Due-on-Sale" Clauses; Assumption Agreements.
-------------------------------------------
When any Borrower proposes to convey or encumber all or any portion of its
interests in a Mortgaged Property, or if such conveyance or encumbrance has
actually occurred, to the extent that the Servicer has actual knowledge of such
conveyance or encumbrance, the Servicer shall immediately give notice thereof to
the Owner and take such related actions as the Owner reasonably directs,
including (i) waiving or enforcing any due-on-sale clause or due-on-encumbrance
clause contained in the related Mortgage Loan Documents, to the extent permitted
under the terms of the related Mortgage Loan Documents and applicable law, (ii)
taking or entering into an assumption or substitution agreement from or with the
Person to whom such Mortgaged Property has been or shall be conveyed, and (iii)
releasing the original Borrower from liability upon the related Mortgage Loan
and substituting the new Borrower as the obligor thereon.
To the extent the Servicer is engaged by the Owner to perform analysis,
processing and administrative functions in
<PAGE>
connection with any request by a Borrower to waive any such due-on-sale clause
or due-on-encumbrance clause and/or to enter into any such assumption or
substitution agreement, the Servicer may, as a condition to granting any such
request require (to the extent permitted by applicable law) that such Borrower
pay to it, as Additional Servicing Compensation, a reasonable and customary fee
consistent with Accepted Servicing Practices in connection with such request,
together with any related costs and expenses incurred by the Servicer; provided,
--------
however, that in the event that the Borrower fails or is unable to pay any such
- -------
costs and expenses, or the Owner directs the Servicer to waive any requirement
that the Borrower pay any such costs or expenses, the same shall be paid by the
Servicer as a Servicing Expense.
Section 3.09 Realization Upon Mortgaged Properties.
-------------------------------------
(a) Upon the failure of any Borrower to make any required payment of
principal, interest or other amounts due under a Mortgage Loan, or otherwise to
perform fully any material obligations under any of the related Mortgage Loan
Documents, in either case within any applicable grace period, the Servicer
shall, upon discovery of such failure, promptly notify the Owner in writing. As
directed in writing by the Owner in each instance, the Servicer shall issue
notices of default, declare events of default, declare due the entire
outstanding principal balance, and otherwise take all reasonable actions under
the related Mortgage Loan in preparation for the Owner to realize upon the
underlying collateral. With respect to any Specially Serviced Mortgage Loan, the
Servicer shall, as permitted under the provisions of the related Mortgage Loan
Documents, and subject to the Owner's prior written consent, foreclose upon or
otherwise comparably convert the ownership of the related Mortgaged Property. In
connection with such foreclosure or other conversion, the Servicer shall,
subject to the consent or direction of the Owner, follow such practices and
procedures as it shall deem necessary or advisable and as shall be consistent
with Accepted Servicing Practices. All costs and expenses incurred by the
Servicer in any such proceedings shall be paid by the Servicer as a Servicing
Expense.
(b) If title to any Mortgaged Property is acquired in foreclosure or by
deed in lieu of foreclosure, the deed or certificate of sale shall be taken in
the name of the Owner or its nominee, but in no event shall such deed or
certificate be taken in the name of the Servicer. Notwithstanding any such
acquisition of title and cancellation of the related Mortgage Loan, such
Mortgage Loan shall be considered to be an REO Mortgage Loan held by the Owner
until such time as the related REO Property shall be sold, transferred or
conveyed by the Owner. Consistent with the foregoing, for purposes of all
calculations hereunder, so long as such REO Mortgage Loan shall be considered to
be an outstanding Mortgage Loan, payments and collections with respect to the
related REO Property received in any month (net of related expenses) shall be
applied to amounts which would have been payable under the related Note in
accordance with the terms of such Note.
(c) Except as otherwise provided in written instructions delivered to the
Servicer by the Owner, the Servicer shall not obtain title to any Mortgaged
Property as a result or in lieu of foreclosure or otherwise, and shall not
otherwise acquire possession of, or take other action with respect to, any
Mortgaged Property, if, as a result of any such action, the Owner would be
considered to hold title to, to be a "mortgagee-in-possession" of, or to be an
"owner" or "operator" of such Mortgaged Property within the meaning of any
Environmental Law, or a "discharger" or "responsible party" thereunder, unless
the Servicer has also previously determined, based on a report prepared by a
Person who regularly conducts environmental site assessments, that:
(iii) such Mortgaged Property is in compliance with applicable
Environmental Laws or, if not, that taking such actions as are necessary to
bring such Mortgaged Property into compliance therewith is reasonably likely to
produce a greater recovery on a present value basis than not taking such
actions; and
(iv) there are no circumstances present on such Mortgaged Property
relating to the use, management or disposal of any Hazardous Materials for which
investigation, testing, monitoring, containment, clean-up or remediation could
be required under any applicable Environmental Law, or that, if any such
Hazardous Materials are present for which such action could be required, taking
such actions with respect to the affected Mortgaged Property is reasonably
likely to produce a greater recovery on a present value basis than not taking
such actions.
If the Servicer has so determined based on satisfaction of the criteria in
clauses (i) and (ii) above that it would be in the best economic interest of the
Owner to take any such actions, the Servicer shall notify the Owner of such
proposed action. The Servicer shall take such action only if authorized by the
Owner in writing. The costs of any such compliance, containment, clean-up or
remediation shall be paid by the Servicer as a Servicing Expense.
<PAGE>
If the environmental assessment first obtained by the Servicer with
respect to a Mortgaged Property indicates that such Mortgaged Property may not
be in compliance with applicable Environmental Laws or that Hazardous Materials
may be present but does not definitively establish such fact, the Servicer,
subject to the Owner's prior written consent, shall cause such further
environmental assessments to be conducted.
(d) The environmental site assessments contemplated by Section 3.09(c)
shall be prepared by any Person who is recommended by the Servicer and approved
in writing by the Owner or such other Person as directed in writing by the
Owner. The cost of preparation of any environmental assessment shall be paid by
the Servicer as a Servicing Expense.
(e) If the Servicer determines, pursuant to Section 3.09(c), that taking
such actions as are necessary to bring any Mortgaged Property into compliance
with applicable Environmental Laws, or taking such actions with respect to the
containment, clean-up, removal or remediation of hazardous substances, hazardous
materials, hazardous wastes, or petroleum-based materials affecting any such
Mortgaged Property, is not reasonably likely to produce a greater recovery on a
present value basis than not taking such actions, then the Servicer shall take
such action as directed in writing by the Owner, including, without limitation,
releasing the lien of the related Mortgage with respect to the affected
Mortgaged Property.
Section 3.10 Sale of Specially Serviced Mortgage Loans and REO Properties.
------------------------------------------------------------
(a) With respect to any Specially Serviced Mortgage Loan or REO Property,
when and if directed in writing by the Owner, the Servicer shall use its Best
Efforts to sell to any Person (other than an Affiliate of the Servicer) such
Specially Serviced Mortgage Loan or REO Property on commercially reasonable
terms which are consistent with Accepted Servicing Practices; provided, however,
-------- -------
that any such sale must be approved in writing by the Owner.
(b) Subject to Sections 3.10(a), the Servicer shall act on behalf of the
Owner in negotiating and taking any such action necessary or appropriate in
connection with the sale of any Specially Serviced Mortgage Loan or REO
Property, including the collection of all amounts payable in connection
therewith. Any sale of any Specially Serviced Mortgage Loan or REO Property
shall be without recourse to, or representation or warranty by, the Owner or the
Servicer, (except that any contract of sale and conveyance documents may contain
customary warranties of title and condition). The Net Liquidation Proceeds
(after deduction of the Disposition Fee) shall be promptly deposited by the
Servicer in the related Collection Account.
Section 3.11 Management of REO Property.
--------------------------
(a) Upon the acquisition by the Owner of any REO Property, the Servicer
shall have full power and authority, subject to the specific requirements and
prohibitions of this Agreement, to do or authorize to be done any and all things
in connection therewith as are consistent with Accepted Servicing Practices, all
on terms and for such period as the Servicer deems to be in the best economic
interest of the Owner. The Servicer shall segregate and hold all revenues
received by it with respect to any REO Property separate and apart from its own
funds and general assets and shall establish and maintain with respect to any
REO Property one or more Eligible Accounts (each, an "REO Account") for the
-----------
purposes set forth herein. REO Accounts shall be Eligible Accounts and shall be
denominated "Midland Loan Services, Inc. in Trust for IMPAC Commercial Capital
Corporation" or in such other manner as the Owner prescribes. The Servicer shall
be entitled to any interest or investment income earned on funds deposited in an
REO Account pursuant to Section 3.04. In connection therewith, the Servicer
shall deposit or cause to be deposited in the REO Account on a daily basis
within one (1) Business Day after receipt all revenues received by it with
respect to any REO Property (except for any Net Liquidation Proceeds), and shall
withdraw therefrom funds necessary for the proper maintenance, leasing,
operation, management and sale of any REO Property, including:
(i) all insurance premiums due and payable in respect of such REO
Property;
(ii) all taxes and assessments in respect of such REO Property that
could result or have resulted in the imposition of a lien thereon;
(iii) all ground rental payments, if applicable, with respect to such
REO Property; and
<PAGE>
(iv) all costs and expenses necessary to maintain, lease, operate,
manage and sell such REO Property, including the management fee
payable to the property manager engaged by Servicer pursuant to
Section 3.11(b).
To the extent that amounts on deposit in any REO Account are insufficient
for the purposes set forth above, the Servicer shall pay the amount of such
shortfall as a Servicing Expense. The Servicer shall withdraw from each REO
Account and deposit into the related Collection Account on a monthly basis on or
prior to the related Remittance Date the income, net of expenses, received or
collected from each REO Property; provided, however, that the Servicer may
-------- -------
retain in each REO Account funds sufficient for the payment of the items set
forth in clauses (i) through (iv) above, including, without limitation, the
creation of reasonable reserves for repairs, replacements, and necessary capital
improvements and other related expenses.
(b) The Servicer may contract with any Person as a property manager for
the operation and management of any REO Property; provided, however, that:
-------- -------
(i) the terms and conditions of any such contract shall not be
inconsistent herewith and the Owner has provided its written consent
(which shall not be unreasonably withheld) with respect to such
property manager;
(ii) none of the provisions of this Section relating to any such
contract or to actions taken through any such Person shall be deemed
to relieve the Servicer of any of its duties and obligations to the
Owner with respect to the operation and management of such REO
Property; and
(iii) the Servicer shall be obligated with respect thereto to the same
extent as if it alone were performing all duties and obligations in
connection with the operation and management of such REO Property.
Section 3.12 Modifications, Waivers, Amendments and Consents.
-----------------------------------------------
(a) When any Borrower proposes any modification, waiver or amendment of
any term of any Mortgage Loan or requests any consents related thereto, the
Servicer shall immediately give notice thereof to the Owner and take such
related actions as the Owner reasonably directs, except with respect to any
Borrower proposal or request which involves any required payment from the
Borrower in the nature of Additional Servicing Compensation to which the
Servicer is properly entitled. All modifications, waivers or amendments of any
Mortgage Loan or consents related thereto shall be in writing.
(b) To the extent the Servicer is engaged by the Owner to perform
analysis, processing and administrative functions in connection with any request
by a Borrower for any consent, modification, waiver or amendment the Servicer
may, as a condition to granting any such request require (to the extent
permitted by applicable law) that such Borrower pay to it, as Additional
Servicing Compensation, a reasonable and customary fee consistent with Accepted
Servicing Practices in connection with such request, together with any related
costs and expenses incurred by the Servicer; provided, however, that in the
-------- -------
event that the Borrower fails or is unable to pay any such costs and expenses,
or the Owner directs the Servicer to waive any requirement that the Borrower pay
any such costs or expenses, the same shall be paid by the Servicer as a
Servicing Expense.
ARTICLE IV.
-----------
STATEMENTS AND REPORTS
Section 4.01 Reporting by the Servicer.
-------------------------
(a) On or before each Remittance Date, the Servicer shall render to the
Owner a report reflecting activity with respect to the Mortgage Loans as of the
close of business on the preceding Determination Date (or, in the case of the
first Remittance Date, the Servicing Transfer Date) in a format and containing
such information as the Owner shall reasonably require. Such report shall be
made available in both written and electronic format.
<PAGE>
(b) Each year beginning in the calendar year which immediately succeeds
the year hereof, the Servicer shall prepare and file the reports of foreclosures
and abandonments of any Mortgaged Property and the annual information returns
with respect to each Borrower's debt service payments under the Mortgage Loans
as required by Sections 6050J and 6050H, respectively, of the Internal Revenue
Code and the rules and regulations promulgated thereunder, as amended.
(c) Not later than twenty days after each Remittance Date, the Servicer
shall forward to the Owner a statement, setting forth the status of the Accounts
as of the close of business on such Remittance Date showing, for the period from
the preceding Remittance Date (or, in the case of the first Remittance Date, the
Servicing Transfer Date) to such Remittance Date, the aggregate of deposits into
and withdrawals from the Accounts.
(d) The Servicer will provide the Owner with on-line telephone access to
all information with respect to the Mortgage Loans which is available through
the Servicer's Loan Inquiry Facility, Loans On-Line Administration System, or
Loan Portfolio Analysis System, or any successor facility or system, as
applicable, subject to such reasonable policies, procedures and limitations as
the parties may agree upon from time to time.
(e) The Servicer shall use its Best Efforts to promptly collect from each
Borrower (and forward on to the Owner) the property operating statements, rent
rolls, financial statements and other financial reports which are required to be
delivered by the Borrower pursuant to the related Mortgage Loan Documents. The
Servicer shall promptly (i) review and analyze such items as may be collected;
(ii) prepare written reports based on such analysis; and (iii) deliver copies of
such written reports to the Owner.
(f) The Servicer shall provide the Owner with any summary reports prepared
by any Rating Agency with respect to the Servicer's ranking by such Rating
Agency.
ARTICLE V.
----------
SERVICER'S COMPENSATION AND EXPENSES
Section 5.01 Servicing Compensation.
----------------------
As consideration for servicing the Mortgage Loans subject to this
Agreement, the Servicer shall be entitled to a Servicing Fee for each Mortgage
Loan remaining subject to this Agreement during any calendar month or part
thereof. Such Servicing Fee shall be payable monthly on the Remittance Date and
shall be computed on the basis of the same outstanding principal balance and for
the period with respect to which any related interest payment on the related
Mortgage Loan is computed. The Servicer may pay itself the Servicing Fee on each
Remittance Date from amounts on deposit in the related Collection Account.
As further compensation for its activities hereunder, the Servicer shall be
entitled to retain any payments or collections received by it which are in the
nature of Additional Servicing Compensation.
As compensation for its special servicing activities hereunder, the
Servicer shall be entitled to the Special Servicing Fee for each Specially
Serviced Mortgage Loan or REO Property remaining subject to this Agreement
during any calendar month or part thereof. Such Special Servicing Fee shall be
payable monthly on the Remittance Date and shall be computed on the basis of the
same outstanding principal balance and for the period with respect to which any
related interest payment on the related Mortgage Loan is computed. The Servicer
may pay itself the Special Servicing Fee on each Remittance Date from amounts on
deposit in the related Collection Account. The Servicer shall not be entitled to
the Servicing Fee for any Mortgage Loan in the event the Servicer is entitled to
receive the Special Servicing Fee for such Mortgage Loan.
In addition to the other servicing compensation provided for in this
Agreement, and not in lieu thereof, the Servicer shall be entitled to (i) the
Disposition Fee, which shall be payable out of Net Liquidation Proceeds prior to
the deposit of Net Liquidation Proceeds into the Collection Account; and (ii)
the Workout Fee, 50% of which shall be payable as an initial installment from
amounts on deposit in the related Collection Account on the date that the
related Specially Serviced Mortgage Loan becomes a Corrected Mortgage Loan, and
the remaining 50% of which shall be payable as a second installment in the same
manner after the expiration of any consecutive six month period during which the
related Mortgage
<PAGE>
Loan has not become 30 days delinquent in the payment of any Monthly Payment or
has not otherwise become a Specially Serviced Mortgage Loan. The Servicer may
earn the Workout Fee only once with respect to any Mortgage Loan.
To the extent that amounts on deposit in the Collection Account are
insufficient for the payment of the Servicing Fee, Special Servicing Fee or
Workout Fee, the Owner shall pay any such shortfall to the Servicer within ten
(10) Business Days after the Owner's receipt of an itemized invoice therefor.
The Servicer shall be required to pay all expenses incurred by it in
connection with its servicing activities hereunder and shall not be entitled to
reimbursement thereof except as specifically provided for herein.
Section 5.02 Servicing Expenses.
------------------
Notwithstanding any other provision hereof, the Servicer shall obtain the
written approval of the Owner prior to incurring any Servicing Expense that is
over $5,000.00 per item, except for any Servicing Expense which is (i) incurred
by the Servicer pursuant to Sections 3.02(b) or 3.05 or (ii) made for any
purposes other than those described in item (i) above, and is not over
$25,000.00 and is made in an emergency situation to preserve and protect the
Mortgaged Property or the safety of the public in connection with such Mortgaged
Property.
The Servicer may cause any Servicing Expenses to be paid directly from the
related Collection Account. The Servicer shall have no obligation to advance its
own funds for the payment of any Servicing Expenses. The Servicer may, at its
option, make advances from its own funds with respect to the payment of such
expenses, in which event the Servicer shall be reimbursed for such advances from
the related Collection Account. In the event that there are insufficient funds
in the related Collection Account to permit the payment of Servicing Expenses or
to permit the Servicer to reimburse itself for such advances, the Owner shall
deposit the necessary funds in the related Collection Account or reimburse the
Servicer, as the case may be, for all incurred Servicing Expenses, with interest
thereon at the Advance Rate, within ten Business Days after the Owner's receipt
of an itemized invoice therefor. If the Servicer has provided such an invoice to
the Owner, and funds are subsequently deposited into the related Collection
Account from sources other than the Owner, the Servicer may pay such expenses or
reimburse itself for such advances from the related Collection Account, in which
event the Servicer shall promptly (i) notify the Owner of such payment or
reimbursement and (ii) amend or cancel, as the case may be, such invoice.
ARTICLE VI.
-----------
THE SERVICER AND THE OWNER
Section 6.01 Servicer Not to Assign; Merger or Consolidation of the Servicer.
---------------------------------------------------------------
(a) Except as otherwise provided for in this Section or in Section 2.02,
the Servicer may not assign this Agreement or any of its rights, powers, duties
or obligations hereunder without the written consent of the Owner; provided,
--------
however, that the Servicer may assign this Agreement to a Qualified Affiliate
- -------
without the written consent of the Owner.
(b) The Servicer may be merged or consolidated with or into any Person, or
transfer all or substantially all of its assets to any Person, in which case any
Person resulting from any merger or consolidation to which it shall be a party,
or any Person succeeding to its business shall be the successor of the Servicer
hereunder, and shall be deemed to have assumed all of the liabilities of the
Servicer hereunder. The Servicer shall provide written notice to the Owner of
any such merger, consolidation, or transfer.
Section 6.02 Liability and Indemnification of the Servicer and the Owner.
-----------------------------------------------------------
Neither the Servicer nor its Affiliates nor any of the directors, officers,
employees or agents thereof shall be under any liability to the Owner or any
third party for taking or refraining from taking any action, in good faith
pursuant to or in connection with this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the Servicer or any
- -------- -------
such Person against any liability which would otherwise be imposed on the
Servicer or any such Person by reason of the Servicer's willful misfeasance, bad
faith or negligence in the performance of its duties hereunder. The Servicer
<PAGE>
and any director, officer, employee or agent thereof may rely in good faith on
any document of any kind which, prima facie, is properly executed and submitted
by any appropriate Person respecting any matters arising hereunder. The Servicer
and any director, officer, employee or agent thereof shall be indemnified and
held harmless by the Owner against any loss, liability or expense incurred,
including reasonable attorneys' fees, in connection with any claim, legal
action, investigation or proceeding relating to this Agreement, the Servicer's
performance hereunder, or any specific action which the Owner authorized or
requested the Servicer to perform pursuant to this Agreement, as such are
incurred, except for any loss, liability or expense incurred by reason of the
Servicer's willful misfeasance, bad faith, negligence or breach of the
Servicer's representations and warranties set forth in Section 7.01.
Notwithstanding the exception set forth in the preceding sentence, in the event
that the Servicer sustains any loss, liability or expense by reason of such
exception and which results from any overcharges to Borrowers under the Mortgage
Loans, to the extent that such overcharges were collected by the Servicer and
remitted to the Owner, the Owner shall promptly remit such overcharge to the
related Borrower after the Owner's receipt of written notice from the Servicer
regarding such overcharge.
The Owner and any director, officer, employee or agent thereof shall be
indemnified and held harmless by the Servicer against any loss, liability or
expense incurred, including reasonable attorneys' fees, by reason of (i) the
Servicer's willful misfeasance, bad faith or negligence in the performance of
its duties hereunder or the failure of the Servicer to perform its duties
hereunder in accordance with this Agreement or (ii) a breach of the Servicer's
representations and warranties set forth in Section 7.01.
The provisions of this Section shall survive any termination of the
rights and obligations of the Servicer hereunder.
ARTICLE VII.
------------
REPRESENTATIONS AND WARRANTIES; DEFAULT
Section 7.01 Representations and Warranties.
------------------------------
(a) The Servicer hereby makes the following representations and warranties
to the Owner:
(i) Due Organization, Qualification and Authority. The Servicer is a
---------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and is duly qualified to transact business as a
foreign corporation, in good standing and licensed in each state to the extent
necessary to ensure the enforceability of each Mortgage Loan and to perform its
duties and obligations under this Agreement in accordance with the terms of this
Agreement; the Servicer has the full power, authority and legal right to execute
and deliver this Agreement and to perform in accordance herewith; the Servicer
has duly authorized the execution, delivery and performance of this Agreement
and has duly executed and delivered this Agreement; this Agreement constitutes
the valid, legal, binding obligation of the Servicer, except as enforceability
may be limited by bankruptcy, insolvency, reorganization, receivership,
moratorium or other laws relating to or affecting the rights of creditors
generally and by general principles of equity (regardless of whether such
enforcement is considered in a proceeding in equity or at law);
(ii) No Conflicts. Neither the execution and delivery of this
------------
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement by the Servicer, will (i) conflict with or result in a breach of
any of the terms, conditions or provisions of the Servicer's certificate of
incorporation, as amended, or bylaws, as amended, or any agreement or instrument
to which the Servicer is now a party or by which it (or any of its properties)
is bound, or constitute a default or result in an acceleration under any of the
foregoing; (ii) conflict with or result in a breach of any legal restriction if
compliance therewith is necessary (a) to ensure the enforceability of any
Mortgage Loan, or (b) for the Servicer to perform its obligations under this
Agreement in accordance with the terms hereof; (iii) result in the violation of
any law, rule, regulation, order, judgment or decree to which the Servicer or
its property is subject if compliance therewith is necessary (a) to ensure the
enforceability of any Mortgage Loan, or (b) for the Servicer to perform its
obligations under this Agreement in accordance with the terms hereof; or (iv)
result in the creation or imposition of any lien, charge or encumbrance that
would have a material adverse effect upon any of its properties pursuant to the
terms of any mortgage, contract, deed of trust or other instrument, or
materially impair the ability of the Owner to realize on the Mortgage Loans;
<PAGE>
(iii) No Litigation Pending. There is no action, suit, or proceeding
---------------------
pending or to Servicer's knowledge threatened against the Servicer which, either
in any one instance or in the aggregate, would draw into question the validity
of this Agreement or the Mortgage Loans, or would be likely to impair materially
the ability of the Servicer to perform its duties and obligations under the
terms of this Agreement;
(iv) No Consent Required. No consent, approval, authorization or
-------------------
order of, or registration or filing with, or notice to, any court or
governmental agency or body having jurisdiction or regulatory authority over the
Servicer is required for (i) the Servicer's execution and delivery of, this
Agreement, or (ii) the consummation of the transactions contemplated by this
Agreement, or, to the extent required, such consent, approval, authorization,
order, registration, filing or notice has been obtained, made or given (as
applicable), except that the Servicer may not be duly qualified to transact
business as a foreign corporation or licensed in one or more states if such
qualification or licensing is not necessary (a) to ensure the enforceability of
any Mortgage Loan, or (b) for the Servicer to perform its obligations under this
Agreement in accordance with the terms hereof.
(b) The Owner hereby makes the following representations and warranties to
the Servicer:
Due Authority. The Owner has the full power, authority and legal right to
-------------
execute and deliver this Agreement and to perform in accordance herewith; the
Owner has duly authorized the execution, delivery and performance of this
Agreement and has duly executed and delivered this Agreement; the Owner is the
owner and the holder of the Mortgage Loans and has the right to authorize the
Servicer to perform the actions contemplated herein; this Agreement constitutes
the valid, legal, binding obligation of the Owner, except as enforceability may
be limited by bankruptcy, insolvency, reorganization, receivership, moratorium
or other laws relating to or affecting the rights of creditors generally and by
general principles of equity (regardless of whether such enforcement is
considered in a proceeding in equity or at law).
Section 7.02 Events of Default.
-----------------
"Event of Default", wherever used herein, means any one of the following
events:
(a) any failure by the Servicer to remit to the Owner any payment required
to be so remitted by the Servicer under the terms of this Agreement when and as
due which continues unremedied by the Servicer for a period of two (2) Business
Days after the date on which such remittance was due; or
(b) any failure on the part of the Servicer duly to observe or perform in
any material respect any other of the covenants or agreements on the part of the
Servicer contained in this Agreement, or any representation or warranty set
forth by the Servicer in Section 7.01 shall be untrue or incorrect in any
material respect, and, in either case, such failure or breach materially and
adversely affects the value of any Mortgage Loan or Mortgaged Property or the
priority of the lien on any Mortgaged Property or the interest of the Owner
therein, which in either case continues unremedied for a period of thirty (30)
days after the date on which written notice of such failure or breach, requiring
the same to be remedied, shall have been given to the Servicer by the Owner (or
such extended period of time reasonably approved by the Owner provided that the
Servicer is diligently proceeding in good faith to cure such failure or breach);
or
(c) a decree or order of a court or agency or supervisory authority having
jurisdiction in respect of the Servicer for the commencement of an involuntary
case under any present or future federal or state bankruptcy, insolvency or
similar law, for the appointment of a conservator or receiver or liquidator in
any insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding-up or liquidation of its affairs shall
have been entered against the Servicer, and such decree or order shall remain in
force undischarged or unstayed for a period of 60 days; or
(d) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings of or relating to the Servicer or
of or relating to all or substantially all of its property; or
(e) the Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable federal or state bankruptcy, insolvency or similar law, make an
assignment for the benefit of its creditors or voluntarily suspend payment of
its obligations;
<PAGE>
then, and in each and every case, so long as an Event of Default shall not have
been remedied, the Owner may, by notice in writing to the Servicer, in addition
to whatever rights the Owner may have at law or in equity, including injunctive
relief and specific performance, terminate all of the rights and obligations of
the Servicer under this Agreement and in and to the Mortgage Loans and the
proceeds thereof, without the Owner incurring any penalty or fee of any kind
whatsoever in connection therewith; provided, however, that such termination
-------- -------
shall be without prejudice to any rights of the Servicer relating to the payment
of its Servicing Fees, Special Servicing Fees, Disposition Fees, Workout Fees,
Additional Servicing Compensation and the reimbursement of any Servicing
Expenses which have been made by it under the terms of this Agreement through
and including the date of such termination. Except as otherwise expressly
provided in this Agreement, no remedy provided for by this Agreement shall be
exclusive of any other remedy, and each and every remedy shall be cumulative and
in addition to any other remedy, and no delay or omission to exercise any right
or remedy shall impair any such right or remedy or shall be deemed to be a
waiver of any Event of Default. On or after the receipt by the Servicer of such
written notice of termination from the Owner, all authority and power of the
Servicer under this Agreement, whether with respect to the Mortgage Loans or
otherwise, shall pass to and be vested in the Owner, and the Servicer agrees to
cooperate with the Owner in effecting the termination of the Servicer's
responsibilities and rights hereunder, including, without limitation, the
transfer of the Servicing Files and the funds held in the Accounts as set forth
in Section 8.01.
The Owner may waive any default by the Servicer in the performance of its
obligations hereunder and its consequences. Upon any such waiver of a past
default, such default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been remedied for every purpose of this
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereon except to the extent expressly so waived.
ARTICLE VIII.
-------------
TERMINATION; TRANSFER OF MORTGAGE LOANS
Section 8.01 Termination of Agreement.
------------------------
(a) This Agreement may be terminated by the Owner (v) without cause, upon
sixty (60) days written notice to the Servicer, provided that the effective date
of such termination shall be at least 42 months after the date hereof, (w)
without cause, upon thirty (30) days written notice to the Servicer with respect
to any Loan Servicing duties relating to any Specially Serviced Mortgage Loan or
REO Property, (x) for cause with respect to any or all of the Mortgage Loans
pursuant to Section 7.02, (y) without cause with respect to any or all of the
Mortgage Loans, within 30 days after receipt of notice from the Servicer under
Section 6.01(b) if the Owner does not approve of the successor servicer, or (z)
without cause with respect to any or all of the Mortgage Loans, if the servicer
ranking of the Servicer by any Rating Agency shall be downgraded to
"Unacceptable" or less than "Above Average", as applicable. This Agreement may
be terminated by the Servicer with respect to the Mortgage Loans, without cause,
upon ninety (90) days written notice to the Owner.
(b) Termination pursuant to this Section or as otherwise provided herein
shall be without prejudice to any rights of the Owner or the Servicer which may
have accrued through the date of termination hereunder. Upon such termination,
the Servicer shall (i) remit all funds in the related Accounts to the Owner or
such other Person designated by the Owner, net of accrued Servicing Fees,
Special Servicing Fees, Disposition Fees, Workout Fees Additional Servicing
Compensation and Servicing Expenses through the termination date to which the
Servicer would be entitled to payment or reimbursement hereunder; (ii) deliver
all related Servicing Files to the Owner or to Persons designated by the Owner;
and (iii) fully cooperate with the Owner and any new servicer to effectuate an
orderly transition of Loan Servicing of the related Mortgage Loans. Upon such
termination, any Servicing Fees, Additional Servicing Compensation and Servicing
Expenses (with interest thereon at the Advance Rate) which remain unpaid or
unreimbursed after the Servicer has netted out such amounts pursuant to the
preceding sentence shall be remitted by the Owner to the Servicer within ten
(10) Business Days after the Owner's receipt of an itemized invoice therefor.
(c) With respect to a termination of this Agreement by the Owner without
cause as to any or all of the Mortgage Loans pursuant to clause (v) of Section
8.01(a), the Owner shall pay the Termination Fee to the Servicer within ten (10)
Business Days after the effective date of such termination.
<PAGE>
Section 8.02 Transfer of Mortgage Loans; Securitization.
------------------------------------------
(a) The Servicer acknowledges that any or all of the Mortgage Loans may be
sold, transferred, assigned or otherwise conveyed by the Owner to any third
party without the consent or approval of the Servicer. Any such transfer shall
constitute a termination of this Agreement with respect to such Mortgage Loans,
subject to Section 8.02(c).
(b) Until the Servicer receives written notice from the Owner of the sale,
transfer, assignment or conveyance of one or more Mortgage Loans, the Owner
shall be presumed to be the owner and holder of such Mortgage Loans, the
Servicer shall continue to earn Servicing Fees and Additional Servicing
Compensation with respect to such Mortgage Loans and the Servicer shall continue
to remit payments and other collections in respect of such Mortgage Loans to the
Owner pursuant to the terms and provisions hereof.
(c) In the event any Mortgage Loan is sold, transferred, assigned or
otherwise conveyed by the Owner to any third party in connection with a
Securitization or other transaction, the Owner agrees to appoint or cause the
appointment of the Servicer as the master and primary servicer of the related
Mortgage Loans in accordance with a new servicing agreement to be negotiated in
good faith by the Servicer and the other parties thereto, which new servicing
agreement shall require the Servicer to perform substantially the same
performing loan duties and obligations with respect to the related Mortgage
Loans as the Servicer is required to perform hereunder; provided, however, that
-------- -------
(i) the Servicer shall be entitled to receive servicing compensation under such
new servicing agreement that is not less than the performing loan servicing
compensation that the Servicer is entitled to receive hereunder; (ii) with
respect to any Securitization, the Servicer may be required under such new
servicing agreement to make advances for delinquent Monthly Payments (but not
for any balloon payments or default interest) and Servicing Expenses, provided
that (x) the Servicer shall be reimbursed for any such advances made with
interest thereon at the "Prime Rate" (as published from time to time in the
"Money Rates" section of The Wall Street Journal), such reimbursement being
-----------------------
consistent with customary servicing reimbursement mechanisms, and (y) the
Servicer shall not be required to make any such advances to the extent the
Servicer determines that such advances shall not be recoverable from the related
Mortgage Loan; (iii) with respect to any Securitization, the timing relating to
remittance of funds and reports by the Servicer shall be revised (x) to provide
at least five Business Days between the determination and distribution dates for
a customary reporting cycle, and (y) to ensure that the determination date shall
be subsequent to the expiration date of any grace periods under the related
Mortgage Loans; (iv) with respect to any Securitization, in the event the
Servicer is responsible for funding prepayment interest shortfalls to the extent
of its monthly servicing fee, the Servicer shall be entitled to retain all
excess prepayment interest as additional servicing compensation; and (v) such
new servicing agreement may be revised further as the Servicer and the parties
thereto agree to reflect any necessary and customary changes in connection with
the Securitization or other transaction.
ARTICLE IX.
-----------
MISCELLANEOUS PROVISIONS
Section 9.01 Amendment; Waiver.
-----------------
This Agreement contains the entire agreement between the parties relating
to the subject matter hereof, and no term or provision hereof may be amended or
waived unless such amendment or waiver is in writing and signed by the party
against whom such amendment or waiver is sought to be enforced.
Section 9.02 Governing Law.
-------------
This Agreement shall be construed in accordance with the laws of the State
of Missouri, and the obligations, rights and remedies of the parties hereunder
shall be determined in accordance with such laws, without giving effect to
principles of conflicts of laws.
Section 9.03 Notices.
-------
All demands, notices and communications hereunder shall be in writing and
addressed in each case as follows:
<PAGE>
(i) if to the Owner, at:
The IMPAC Companies
20371 Irvine Avenue
Santa Ana Heights, CA 92707
Attention: Mr. Ron Morrison
Telecopy No.: (714) 438-2150
(ii) if to the Servicer, at:
Midland Loan Services, Inc.
210 West 10th Street
Kansas City, Missouri 64105
Attention: Steven W. Smith
Telecopy No.: (816) 435-2326
with a copy to:
Morrison & Hecker L.L.P.
2600 Grand Avenue
Kansas City, Missouri 64108-4606
Attention: William A. Hirsch
Telecopy No.: (816) 474-4208
Any of the above-referenced Persons may change its address for notices hereunder
by giving notice of such change to the other Persons. All notices and demands
shall be deemed to have been given at the time of the delivery at the address of
such Person for notices hereunder if personally delivered, mailed by certified
or registered mail, postage prepaid, return receipt requested, or sent by
overnight courier or telecopy; provided, however, that any notice delivered
-------- -------
after normal business hours of the recipient or on a day which is not a Business
Day shall be deemed to have been given on the next succeeding Business Day.
To the extent that any demand, notice or communication hereunder is given
to the Servicer by a Responsible Officer of the Owner, such Responsible Officer
shall be deemed to have the requisite power and authority to bind the Owner with
respect to such communication, and the Servicer may conclusively rely upon and
shall be protected in acting or refraining from acting upon any such
communication. To the extent that any demand, notice or communication hereunder
is given to the Owner by a Responsible Officer of the Servicer, such Responsible
Officer shall be deemed to have the requisite power and authority to bind the
Servicer with respect to such communication, and the Owner may conclusively rely
upon and shall be protected in acting or refraining from acting upon any such
communication.
Section 9.04 Severability of Provisions.
--------------------------
If one or more of the provisions of this Agreement shall be for any reason
whatever held invalid or unenforceable, such provisions shall be deemed
severable from the remaining covenants, agreements and provisions of this
Agreement and such invalidity or unenforceability shall in no way affect the
validity or enforceability of such remaining provisions or the rights of any
parties thereunder. To the extent permitted by law, the parties hereto hereby
waive any provision of law that renders any provision of this Agreement invalid
or unenforceable in any respect.
Section 9.05 Inspection and Audit Rights.
---------------------------
The Servicer agrees that, on reasonable prior notice, it will permit any
agent or representative of the Owner, during the Servicer's normal business
hours, to examine all the books of account, records, reports and other papers of
the Servicer relating to the Mortgage Loans, to make copies and extracts
therefrom, to cause such books to be audited by accountants selected by the
Owner, and to discuss matters relating to the Mortgage Loans with the Servicer's
officers, employees and accountants (and by this provision the Servicer hereby
authorizes such accountants to discuss with such agents or
<PAGE>
representatives such matters), all at such reasonable times and as often as may
be reasonably requested. Any expense incident to the exercise by the Owner of
any right under this Section shall be borne by the Owner.
Section 9.06 Binding Effect; No Partnership; Counterparts.
--------------------------------------------
The provisions of this Agreement shall be binding upon and inure to the
benefit of the respective successors and permitted assigns of the parties
hereto. Nothing herein contained shall be deemed or construed to create a
partnership or joint venture between the parties hereto and the services of the
Servicer shall be rendered as an independent contractor for the Owner. For the
purpose of facilitating the execution of this Agreement as herein provided and
for other purposes, this Agreement may be executed simultaneously in any number
of counterparts, each of which counterparts shall be deemed to be an original,
and such counterparts shall constitute but one and the same instrument.
Section 9.07 Protection of Confidential Information; No Solicitation.
-------------------------------------------------------
The Servicer shall keep confidential and shall not divulge to any party,
without the Owner's prior written consent, any information pertaining to the
Mortgage Loans or the Borrowers except to the extent that (a) it is appropriate
for the Servicer to do so (i) in working with legal counsel, auditors, other
advisors, taxing authorities or other governmental agencies, (ii) in accordance
with Accepted Servicing Practices or (iii) when required by any law, regulation,
ordinance, court order or subpoena or (b) the Servicer is disseminating general
statistical information relating to the mortgage loans being serviced by the
Servicer (including the Mortgage Loans) so long as the Servicer does not
identify the Owner or the Borrowers.
In addition to the foregoing, neither the Servicer nor any of its
Affiliates shall (i) provide any employee of the Servicer or its Affiliates that
is directly involved in the solicitation of borrowers in connection with the
origination of mortgage loans by the Servicer and its Affiliates access to any
reports, documents or information in respect of any Borrower, Mortgaged Property
or Mortgage Loan which the Servicer has received pursuant to its Loan Servicing
obligations hereunder, or (ii) use any such reports, documents or information in
connection with such solicitation of borrowers. Failure of the Servicer to
comply with its obligations under this Section shall result in an Event of
Default hereunder.
Section 9.08 General Interpretive Principles.
-------------------------------
For purposes of this Agreement, except as otherwise expressly provided or
unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned to
them in this Agreement and include the plural as well as the singular,
and the use of any gender herein shall be deemed to include the other
gender;
(b) accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting
principles;
(c) references herein to an "Article," "Section," or other
subdivision without reference to a document are to the designated
Article, Section or other applicable subdivision of this Agreement;
(d) reference to a Section, subsection, paragraph or other
subdivision without further reference to a specific Section is a
reference to such Section, subsection, paragraph or other subdivision,
as the case may be, as contained in the same Section in which the
reference appears;
(e) the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular provision;
(f) the term "include" or "including" shall mean without limitation
by reason of enumeration; and
(g) the Article, Section and subsection headings herein are for
convenience of reference only, and shall not limit or otherwise affect
the meaning of the provisions contained therein.
<PAGE>
Section 9.09 Further Agreements.
------------------
The Servicer and the Owner each agree to execute and deliver to the other
such additional documents, instruments or agreements as may be reasonably
requested by the other and as may be necessary or appropriate to effectuate the
purposes of this Agreement.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the Owner and the Servicer have caused this Agreement
to be duly executed by their respective officers thereunto duly authorized as of
the date first above written.
IMPAC COMMERCIAL HOLDINGS, INC.
By: ________________________________
Name: ______________________________
Title: _____________________________
IMPAC COMMERCIAL CAPITAL CORPORATION
By: ________________________________
Name: ______________________________
Title: _____________________________
("Owner")
MIDLAND LOAN SERVICES, INC.
By: ________________________________
Name: ______________________________
Title: _____________________________
("Servicer")
<PAGE>
EXHIBIT "A"
-----------
(Mortgage Loan Schedule)
<PAGE>
EXHIBIT "B"
-----------
Servicing File Listing
1) Copy of executed Note (including addendums, amendments, modifications,
etc., as they may apply), Loan Agreement and Guaranty Agreement (if
applicable).
2) Copy of executed and filed Deed of Trust/Mortgage (including addendums,
amendments, modifications, etc., as they may apply).
3) Copy of Assignment of Leases and Rents and Security Agreement, if separate
from the Deed of Trust/Mortgage.
4) Copy of any other legal document(s) referenced in the Note, Deed of
Trust/Mortgage, Security Agreement, Loan Agreement or Guaranty Agreement.
5) Copies of all filed UCC Financing Statements and Lien Searches.
6) Loan Closing Statement.
7) Borrower (and Guarantor, if applicable) financial and operating statements,
tax returns, tax identification number(s), mailing address(es), phone
number(s), and fax number(s). Also include property operating and financial
statements if prepared separately.
8) Special Reserve Agreement(s), if applicable.
9) Property Information -- paid tax receipts, insurance policy(ies),
appraisal(s), flood certificate(s), and environmental reports.
10) Underwriting File.
11) Checks/Wires for prepaid interest, tax and insurance impounds, and special
reserves.
12) Lockbox agreement(s), if applicable.
13) If special arrangements have been made with the borrower and/or guarantor
that are not noted in the legal documents, a memorandum detailing the
situation.
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
IMH/ICH Dove Street, LLC
Impac Commercial Capital Corporation (the Registrant owns 100% of the Preferred
Stock) (Impac Commercial Capital Corporation owns 100% of the Common Stock of
ICCC Secured Assets Corporation)
Impac Commercial Assets Corporation
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Impac Commercial Holdings, Inc.:
We consent to incorporation by reference in the registration statement (No. 333-
62979) on Form S-8 of Impac Commercial Holdings, Inc. of our report dated
February 3, 1999, relating to the consolidated balance sheets of Impac
Commercial Holdings, Inc. and subsidiaries as of December 31, 1998, and 1997,
and the related consolidated statements of operations and comprehensive earnings
(loss), changes in stockholders' equity, and cash flows for the year ended
December 31, 1998 and for the period from January 15, 1997 (commencement of
operations) through December 31, 1997, which report appears in the December 31,
1998 annual report on Form 10-K of Impac Commercial Holdings, Inc.
/s/ KPMG LLP
Orange County, California
February 25, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Impac Commercial Capital Corporation:
We consent to incorporation by reference in the registration statement (No. 333-
62979) on Form S-8 of Impac Commercial Holdings, Inc. of our report dated
February 3, 1999, relating to the consolidated balance sheets of Impac
Commercial Capital Corporation and subsidiary as of December 31, 1998, and 1997,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from January 15, 1997 (commencement of operations) through December 31, 1997,
which report appears in the December 31, 1998 annual report on Form 10-K of
Impac Commercial Holdings, Inc.
/s/ KPMG LLP
Orange County, California
February 25, 1999
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,161
<SECURITIES> 25,944
<RECEIVABLES> 392,100
<ALLOWANCES> (2,110)
<INVENTORY> 0
<CURRENT-ASSETS> 104,460
<PP&E> 9,710
<DEPRECIATION> (564)
<TOTAL-ASSETS> 451,219
<CURRENT-LIABILITIES> 61,693
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 103,251
<TOTAL-LIABILITY-AND-EQUITY> 451,219
<SALES> 0
<TOTAL-REVENUES> 17,347
<CGS> 0
<TOTAL-COSTS> 28,360
<OTHER-EXPENSES> 5,238
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<INTEREST-EXPENSE> 21,576
<INCOME-PRETAX> (11,013)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,013)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,013)
<EPS-PRIMARY> (1.26)
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