<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 21, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------
IMPERIAL FINANCIAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 911817448
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1840 CENTURY PARK EAST, 10TH FLOOR
LOS ANGELES, CALIFORNIA 90067
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 712-8600
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
------------------- ------------------------------
<S> <C>
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10
BY REFERENCE
CROSS REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM 1. BUSINESS
The information required by this item is contained in the sections "Summary
of Certain Information," "Introduction," "The Transactions" and "Business" of
the Information Statement (the "Information Statement").
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained in the sections "Summary
of Certain Information--Summary Historical Combined Financial Data" and "--
Summary Unaudited Pro Forma Combined Financial Data," "Capitalization,"
"Selected Combined Financial Data," "Unaudited Pro Forma Combined Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of the Information Statement.
ITEM 3. PROPERTIES
The information required by this item is contained in the section
"Business--Properties" of the Information Statement.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the sections "Security
Ownership of Certain Beneficial Owners of Common Stock" and "Executive
Compensation" of the Information Statement.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained in the section
"Management" of the Information Statement.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained in the section "Executive
Compensation" of the Information Statement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section
"Relationship and Agreements Among the Company, the Bank and Bancorp After the
Distribution" of the Information Statement.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained in the section
"Business--Legal Proceedings" of the Information Statement.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in the sections "The
Transactions--Manner of Effecting the Distribution," "Security Ownership of
Certain Beneficial Owners of Common Stock" and "Description of Capital Stock"
of the Information Statement.
2
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained in the sections
"Description of Capital Stock" and "Purposes and Effects of Certain Provisions
of the Company's Certificate of Incorporation, Bylaws and Delaware Law" of the
Information Statement.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained in the sections
"Limitation on Liability and Indemnification of Officers and Directors" and
"Purposes and Effects of Certain Provisions of the Company's Certificate of
Incorporation, Bylaws and Delaware Law" of the Information Statement.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is identified in "Index to Financial
Information" of the Information Statement.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL INFORMATION
See Index to Financial Statements on page F-1 of the Information
Statement.
(B) EXHIBITS
<TABLE>
<C> <S>
*2 Information Statement of Imperial Bancorp to be distributed to
Imperial Bancorp's shareholders (attached to this Registration
Statement as Annex A)
Form of Amended and Restated Certificate of Incorporation of Imperial
**3.1 Financial Group, Inc.
**3.2 Form of Amended and Restated Bylaws of Imperial Financial Group, Inc.
Specimen form of certificate representing Class A Common Stock of
**4 Imperial Financial Group, Inc.
*10.1 Form of Capital Contribution and Distribution Agreement to be entered
into among Imperial Bancorp, Imperial Bank, Imperial Financial Group,
Inc. and Crown American Bank
*10.2 Form of Transition Services Agreement to be entered into between
Imperial Bank and Imperial Financial Group, Inc.
*10.3 Form of Tax Sharing Agreement to be entered into between Imperial
Bancorp and Imperial Financial Group, Inc.
*10.4 Form of Imperial Financial Group, Inc. Credit Agreement among
Imperial Bank, Imperial Financial Group, Inc., each of the banks or
other lending institutions party thereto and NationsBank, N.A.
**10.5 Imperial Financial Group, Inc. 1997 Share Incentive Plan
**10.6 Form of 1998 Stock Option Plan of Imperial Financial Group, Inc.
**10.7 Form of Imperial Financial Group, Inc. Deferred Compensation Plan
*10.8 Form of Offer Letter between G. Louis Graziadio, III and the Company
*10.9 Form of Offer Letter between Robert M. Franko and the Company
Employment Agreement dated as of July 23, 1997 between Imperial Bank
**10.10 and Lewis P. Horwitz
*10.11 Consulting Agreement dated as of November 1, 1991 between Imperial
Bank and Second Southern Corp.
*11 Computation of per share earnings
**21 Subsidiaries of Imperial Financial Group, Inc.
*27 Financial Data Schedule
**99.1 Private letter ruling from the Internal Revenue Service
</TABLE>
- --------
*Filed herewith
**Previously filed
3
<PAGE>
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On March 20, 1997, Imperial Financial Group, Inc. (the "Company") issued 100
shares of its common stock, for a total consideration of $100, to Imperial
Bank, which is and will be the Company's sole stockholder until the
Distribution (as defined in the Information Statement) has been completed. The
issuance of such shares was made in a transaction exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
4
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
IMPERIAL FINANCIAL GROUP, INC.
/s/ Robert M. Franko
By:
---------------------------------
Name: Robert M. Franko
Title: President
August 21, 1998
5
<PAGE>
ANNEX A
[IMPERIAL BANCORP LETTERHEAD]
September , 1998
[DRAFT]
Dear Shareholder:
I am pleased to inform you that the Board of Directors of Imperial Bancorp
("Bancorp") has declared a distribution to Bancorp's holders of record of
Common Stock ("Bancorp Stock") on September 17, 1998 (the "Record Date") of
all of the outstanding shares of Class A Common Stock of Imperial Financial
Group, Inc. ("IFG"), a subsidiary of Bancorp. The distribution will occur on
October 1, 1998.
If you own Bancorp Stock at the close of business on the Record Date, you
will receive one share of IFG Class A Common Stock for every two shares of
Bancorp Stock that you own on that date. If such distribution would cause you
to receive a fractional share of IFG Class A Common Stock, you will instead
receive cash for such fractional share. You do not need to take any action to
receive your shares of IFG Class A Common Stock. A shareholder vote is not
required in connection with this matter and, accordingly, your proxy is not
being sought.
Stock certificates representing your shares of IFG Class A Common Stock,
together with any cash which may be owed to you in lieu of receiving
fractional shares, will be forwarded to you after the distribution.
The attached Information Statement contains important information about
IFG's organization, business and properties, including combined financial
statements and other financial information. I urge you to read it carefully.
Your Board of Directors has carefully considered the distribution of IFG and
believes the distribution is in the best interests of the shareholders of
Bancorp and will result in organizational and operational changes that should
benefit both Bancorp's businesses and IFG's businesses.
Sincerely,
George L. Graziadio, Jr.
Chairman of the Board
<PAGE>
[IMPERIAL FINANCIAL GROUP, INC. LETTERHEAD]
[DRAFT]
September , 1998
Dear Stockholder:
The enclosed Information Statement includes detailed information about
Imperial Financial Group, Inc. ("IFG"), the company of which you will soon
become a stockholder.
We would like to take this opportunity to welcome you as a stockholder and
to introduce you to our company. IFG will conduct, among other businesses, the
LHO motion picture production lending, small business lending and trust
businesses presently conducted by Imperial Bancorp ("Bancorp"). Following the
distribution of IFG's Class A Common Stock to the shareholders of Bancorp, IFG
will conduct those businesses as a separate, publicly-owned company whose
shares will trade on the New York Stock Exchange under the symbol "IFG". In
connection with the distribution, Bancorp will also contribute to IFG all of
the Imperial Credit Industries, Inc. common stock owned by Imperial Bank.
We are excited about IFG's prospects as an independent public company and
look forward to your participation in our future.
Sincerely,
G. Louis Graziadio, III
Co-Chairman and Chief
Executive Officer
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN FILED +
+WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS PRELIMINARY INFORMATION +
+STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN +
+OFFER TO BUY THESE SECURITIES. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY COPY, DATED AUGUST 21, 1998
-- FOR INFORMATION ONLY --
INFORMATION STATEMENT
OF IMPERIAL BANCORP
[LOGO]
This Information Statement is being furnished by Imperial Bancorp, a
California corporation ("Bancorp"), in connection with the distribution (the
"Distribution") by Bancorp to its shareholders of all the outstanding shares of
Class A common stock, par value $0.01 per share (the "Company Class A Common
Stock"), of Imperial Financial Group, Inc., a Delaware corporation (the
"Company"). The Company is currently a wholly-owned subsidiary of Imperial Bank
(the "Bank"), which in turn is a wholly-owned subsidiary of Bancorp. As a
result of the Distribution, each holder of record as of September 17, 1998 (the
"Distribution Record Date") of common stock, no par value, of Bancorp (the
"Bancorp Common Stock") will receive one share of Company Class A Common Stock
for every two shares of Bancorp Common Stock owned as of the Distribution
Record Date (the "Distribution Ratio").
In connection with the Distribution, the Bank will contribute to the Company
(i) all of the assets and liabilities relating to The Lewis Horwitz
Organization, a division of the Bank that provides motion picture and
television financing, (ii) all of the common stock of Crown American Bank, a
newly formed thrift and loan company that conducts, among other businesses, the
small business lending operations previously conducted by the Bank, (iii) all
of the common stock of Imperial Trust Company, a California licensed trust
company that offers a wide range of trust and investment management services,
and (iv) all of the common stock owned by the Bank (representing approximately
23.0% of all outstanding common stock as of June 30, 1998) in Imperial Credit
Industries, Inc., a publicly traded, diversified specialty finance company
("ICII"). The Company also recently entered into an agreement with another
shareholder of ICII which provides the Company with beneficial ownership of an
additional 3.0% of the outstanding common stock of ICII. Accordingly, as of
August 15, 1998, the Company beneficially owned approximately 26.0% of the
outstanding common stock of ICII.
Subject to the satisfaction of certain conditions, the Distribution will be
effective on or about October 1, 1998 (the "Distribution Date"). No
consideration will be paid by Bancorp's shareholders for Company Class A Common
Stock received by them in the Distribution, nor will they be required to
surrender or exchange Bancorp Common Stock in order to receive Company Class A
Common Stock. There is no current public market for the Company Class A Common
Stock, although it is expected that a "when-issued" trading market will develop
prior to the Distribution Date. The Company Class A Common Stock will be listed
on the New York Stock Exchange under the symbol "IFG."
-----------
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION, NO
PROXIES ARE BEING SOLICITED, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE SHARES OF CLASS A COMMON STOCK BEING DISTRIBUTED HEREBY ARE NOT SAVINGS
OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY ANY GOVERNMENTAL AUTHORITY OR
OTHER PERSON OR ENTITY.
-----------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
-----------
Shareholders of Bancorp with inquiries related to the Distribution should
contact American Stock Transfer and Trust Co., the Distribution Agent for the
Distribution. After the Distribution Date, shareholders of the Company with
inquiries relating to the Distribution or their investment should contact the
Company's Investor Relations Department.
The date of this Information Statement is , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
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<S> <C>
SUMMARY OF CERTAIN INFORMATION............................................ 1
INTRODUCTION.............................................................. 11
THE TRANSACTIONS.......................................................... 12
RISK FACTORS.............................................................. 15
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 22
LISTING AND TRADING OF THE COMMON STOCK................................... 23
DISTRIBUTION CONDITIONS AND TERMINATION................................... 24
REGULATORY APPROVALS AND CONSIDERATIONS................................... 25
RELATIONSHIP AND AGREEMENTS AMONG THE COMPANY, THE BANK AND BANCORP AFTER
THE DISTRIBUTION......................................................... 28
DIVIDEND POLICY........................................................... 30
CAPITALIZATION............................................................ 31
SELECTED COMBINED FINANCIAL DATA.......................................... 32
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA............................... 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 39
BUSINESS.................................................................. 60
MANAGEMENT................................................................ 93
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK........... 96
EXECUTIVE COMPENSATION.................................................... 97
DESCRIPTION OF CAPITAL STOCK.............................................. 104
CREDIT FACILITIES......................................................... 105
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW................................... 106
LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS..... 110
ADDITIONAL INFORMATION.................................................... 111
INDEX TO FINANCIAL INFORMATION............................................ F-1
</TABLE>
i
<PAGE>
SUMMARY OF CERTAIN INFORMATION
The following is a summary of certain information contained elsewhere in this
Information Statement. Reference is made to, and this summary is qualified by,
the more detailed information and financial statements, including the notes
thereto, set forth in this Information Statement, which should be read in its
entirety. In this Information Statement, (i) all financial information is
presented in accordance with accounting principles generally accepted in the
United States ("GAAP"); (ii) references to the activities of, and financial
information with respect to, the Company prior to the Distribution are to
historical activities and combined historical financial information of the IFG
Business (as defined herein) as if the Company existed as a stand alone entity
that owned the IFG Business during the periods presented; and (iii) all
references to the Company include Imperial Financial Group, Inc. and its
consolidated subsidiaries, unless otherwise expressly set forth herein. The
Contribution (as defined herein), the Distribution and the other transactions
contemplated thereby are sometimes collectively referred to herein as the
"Transactions."
THE COMPANY'S BUSINESS
The Company is a diversified financial services company primarily engaged in
three business segments: (i) motion picture and television production finance,
through the Company's division, The Lewis Horwitz Organization ("LHO"), (ii)
small business lending, primarily in conjunction with Small Business
Administration (the "SBA") sponsored programs, through the Company's
subsidiary, Crown American Bank ("CAB"), a newly formed thrift and loan company
(sometimes also referred to herein interchangeably as an industrial loan
company), and (iii) a wide range of trust and investment management services,
through the Company's subsidiary, Imperial Trust Company ("ITC"), a California
licensed trust company. In addition, the Company owned, as of June 30, 1998,
approximately 23.0% of the common stock of Imperial Credit Industries, Inc.
("ICII"), a publicly traded, diversified specialty finance company. The Company
also recently entered into an agreement with another shareholder of ICII which
provides the Company with beneficial ownership of an additional 3.0% of the
outstanding common stock of ICII. Accordingly, as of August 15, 1998, the
Company beneficially owned approximately 26.0% of the outstanding common stock
of ICII. See "Business--Imperial Credit Industries, Inc."
The Company's LHO division is a leading provider of senior, secured financing
for independent motion picture and television production. As of June 30, 1998
and 1997, and December 31, 1997, the aggregate principal amount of the
Company's LHO loans was approximately $108 million, $73 million and $100
million, respectively. During the six months ended June 30, 1998 and 1997, the
LHO division originated 18 loans and 28 loans, respectively, in an aggregate
principal amount of approximately $35 million and $49 million, respectively.
During the year ended December 31, 1997, the LHO division originated 59 loans
in an aggregate principal amount of approximately $98 million. During the six
months ended June 30, 1998 and 1997 , the LHO division, through Imperial Bank,
issued letters of credit totalling approximately $2.4 million and $14.0
million, respectively. During the year ended December 31, 1997, the LHO
division issued $19 million of letters of credit. Total revenue for the LHO
division for the six months ended June 30, 1998 and 1997, and the year ended
December 31, 1997 was $3.4 million, $2.5 million and $5.7 million,
respectively, representing 16.8%, 12.8% and 11.1%, respectively, of the
Company's total revenue for such periods. Net income for the LHO division for
the six months ended June 30, 1998 and 1997, and the year ended December 31,
1997 was $1.0 million, $0.2 million and $1.3 million, respectively,
representing 19.9%, 4.4% and 8.5%, respectively, of the Company's net income
for such periods.
The Company also is a provider of secured small business loans, the majority
of which are guaranteed in part by the SBA. The Company offers small business
loans to a wide variety of businesses located in California, Nevada and
Arizona, including hotels, residential care facilities, beauty salons and
restaurants. The Company's small business lending activities are conducted
through CAB, a recently formed industrial loan company. As of June 30, 1998 and
1997, and December 31, 1997, the aggregate outstanding principal amount of the
Company's
1
<PAGE>
small business loans was approximately $42 million, $40 million and $40
million, respectively. During the six months ended June 30, 1998 and 1997, CAB
originated 69 and 62 loans, respectively, in an aggregate amount of $30 million
and $28 million, respectively. During the year ended December 31, 1997, CAB
originated 116 loans in an aggregate principal amount of $49 million. Total
revenue for CAB for the six months ended June 30, 1998 and 1997, and the year
ended December 31, 1997 was $4.0 million, $2.9 million and $6.1 million,
respectively, representing 19.6%, 15.3% and 11.8%, respectively, of the
Company's total revenue for such periods. Net income for CAB for the six months
ended June 30, 1998 and 1997, and the year ended December 31, 1997 was $0.2
million, $0.2 million and $0.8 million, respectively, representing 3.7%, 5.5%
and 5.0%, respectively, of the Company's net income for such periods.
The Company, through ITC, provides a full array of investment management and
fiduciary services to individual investors, corporations, benefit plans and
foundations. These services include investment management, personal trust
services, custody services and trust administration of employee benefit plans.
Total revenue for ITC for the six months ended June 30, 1998 and 1997, and the
year ended December 31, 1997 was $4.5 million, $4.1 million and $8.4 million,
respectively, representing 22.0%, 21.3% and 16.3%, respectively, of the
Company's total revenue for such periods. Net income for ITC for the six months
ended June 30, 1998 and 1997, and the year ended December 31, 1997 was $0.6
million, $0.4 million and $1.0 million, respectively, representing 11.5%, 10.6%
and 6.3%, respectively, of the Company's net income for such periods. At June
30, 1998 and at December 31, 1997, the Company maintained total assets under
administration of approximately $9.5 billion and $8.7 billion, respectively.
ITC was the fifteenth largest licensed trust company in California at March 31,
1998 based on assets under administration.
ICII is a diversified specialty finance company and offers, principally
through its subsidiaries, financial products such as non-conforming residential
mortgage banking (non-conforming single family mortgage loans), commercial
mortgage banking (franchise loans and income property loans), business lending
(equipment leasing, asset-based financing and loan participations) and consumer
loans (sub-prime auto loans, home improvement loans and other consumer credit).
The majority of ICII's loans and leases are sold in the secondary market
through securitizations and whole loan sales. During the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997, ICII generated total
revenues of $103.1 million, $97.8 million and $309.6 million, respectively. The
Company is currently the largest shareholder of ICII. In addition, three
members of the Board of Directors of the Company (the "Company Board") are also
officers and/or directors of ICII and, as such, are in a position to
significantly influence the management and policies of ICII. Total revenue
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997 was $6.7 million, $7.8
million and $28.1 million, respectively, representing 32.9%, 40.8% and 54.6%,
respectively, of the Company's total revenue for such periods. Net income
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and for the year ended December 31, 1997 was $3.7 million,
$2.2 million and $11.5 million, respectively, representing 76.0%, 52.7% and
76.2%, respectively, of the Company's net income for such periods.
The Company's business strategy emphasizes (i) opportunistic expansion of
businesses in niche segments of the financial services industry, (ii) hiring
management experienced in a wide array of financial services businesses to
operate and grow the Company's businesses, (iii) conservative and disciplined
underwriting and credit risk management, (iv) sale in secondary markets of
Company SBA loans where the Company expects to receive a premium over the
principal amount of the loan and (v) maintaining business and financial
flexibility to take advantage of changing market conditions with respect to
specific financial services businesses.
The Company's principal executive offices are located at 1840 Century Park
East, 10th Floor, Los Angeles, California 90067, and its telephone number is
(310) 712-8600.
2
<PAGE>
THE DISTRIBUTION
Distributing Company............ Imperial Bancorp, a California
corporation ("Bancorp").
Distributed Company............. Imperial Financial Group, Inc., a
Delaware corporation (the "Company") and
currently a wholly owned subsidiary of
Imperial Bank (the "Bank"), which is in
turn a wholly owned subsidiary of
Bancorp.
Reasons for the Distribution....
The boards of directors of Bancorp and
the Bank selected the businesses of LHO,
CAB and ITC to be contributed to the
Company because (i) each business has
been operating with a separate management
structure as a stand-alone operation and
with an entrepreneurial management
philosophy, (ii) each business has
demonstrated high return on equity in
recent years and (iii) none of the three
businesses requires demand banking
deposits for its funding. In addition,
the boards of Bancorp and the Bank
believe the businesses of LHO, CAB and
ITC, as well as the business of ICII,
complement each other and that many
cross-referral opportunities exist
between such businesses, including with
respect to lending and private banking
products offered to the clients of LHO,
CAB and ITC. The boards of directors of
Bancorp and the Bank also believe that
the Transactions will provide the Company
with increased access to capital markets,
which should allow the Company to expand
its businesses. The Company intends to
initially raise capital to promote this
expansion by conducting a public or
private offering of its equity securities
that it expects to complete during the
fourth quarter of 1998. The Federal
Reserve Board has advised Bancorp that it
considers the retention by the Bank of
its shares of ICII stock to be in
violation of the Bank Holding Company Act
of 1956 (the "BHCA"). In addition, the
Federal Deposit Insurance Corporation
(the "FDIC") has advised the Bank that it
considers the retention of its shares of
ICII stock to be in violation of the
Federal Deposit Insurance Act. The boards
of Bancorp and the Bank have been
informed by the Federal Reserve Board and
the FDIC that contributing the stock of
ICII to the Company in connection with
the Transactions will satisfy these
concerns and allow Bancorp to continue to
be in compliance with the requirements of
the BHCA and the Bank to continue to be
in compliance with the Federal Deposit
Insurance Act, while the ICII stock
simultaneously will provide the Company
with additional financing flexibility to
expand its operations and operate as a
separate publicly traded company, without
any assistance from either Bancorp or the
Bank. Moreover, the Company intends to
expand the specialty lending and finance
businesses contributed to it by the Bank
by operating as a separate publicly
traded company that is not subject to the
same federal and state banking laws and
regulations applicable to Bancorp and the
Bank and their respective subsidiaries.
See "The Transactions--Background and
Reasons for the Distribution."
3
<PAGE>
Shares to be Distributed........
Approximately 19,878,335 shares of
Company Class A Common Stock (based on
39,756,670 shares of Bancorp Common Stock
outstanding on June 30, 1998). The shares
to be distributed will constitute 100% of
the outstanding shares of Company Class A
Common Stock. The Company's Amended and
Restated Certificate of Incorporation
also authorizes preferred stock and Class
B Common Stock, par value $.01 per share
(the "Company Class B Common Stock"). The
Company Class B Common Stock may only be
issued pursuant to the terms of, or upon
the exercise of, outstanding options
granted under any of the Company's
employee benefit plans, as stock
dividends to holders of Company Class B
Common Stock or in connection with shares
issued to a third party in a transaction
approved by the Company Board. Holders of
Company Class B Common Stock are entitled
to one-tenth of one vote for each share
on all matters voted on by stockholders
and will vote together as a single class
with the holders of Company Class A
Common Stock. Each share of the Company
Class B Common Stock will convert into
one share of Company Class A Common Stock
on the earlier of the fifth anniversary
of the Distribution Date and a change of
control of the Company. See "Description
of Capital Stock." No capital stock of
the Company other than the Company Class
A Common Stock will be outstanding on the
Distribution Date.
Distribution Ratio.............. One share of Company Class A Common Stock
for every two shares of Bancorp Common
Stock held on the Distribution Record
Date. See "The Transactions--Manner of
Effecting the Distribution."
Fractional Share Interests ..... Fractional share interests will not be
issued in the Distribution, but a cash
payment in lieu thereof will be
distributed to those shareholders
otherwise entitled to receive a
fractional share of Company Class A
Common Stock. The amount of such cash
payment will be based on the then
prevailing prices of the Company Class A
Common Stock. See "The Transactions--
Manner of Effecting the Distribution."
Distribution Record Date........
Close of business on September 17, 1998.
Distribution Date...............
October 1, 1998. On, or as soon as
practicable after, the Distribution Date,
the Distribution Agent will commence
mailing share certificates representing
the Company Class A Common Stock to
Bancorp shareholders. Bancorp
shareholders will not be required to make
any payment or to take any other action
to receive their Company Class A Common
Stock. See "The Transactions--Manner of
Effecting the Distribution."
Federal Income Tax Consequences
of the Distribution............
Bancorp has received a ruling (the
"Ruling") from the Internal Revenue
Service ("IRS") to the effect, among
other things, that receipt of shares of
Company Class A Common Stock will be tax-
free for federal income tax purposes to
4
<PAGE>
Bancorp and to the shareholders of
Bancorp (except with respect to cash
received in lieu of fractional shares),
and that neither Bancorp nor the Bank
will recognize income, gain or loss as a
result of the Distribution. Bancorp
shareholders are urged to consult their
own tax advisors as to the specific tax
consequences to them of the Distribution.
See "Certain Federal Income Tax
Considerations."
Financing of IFG Business.......
Prior to the Distribution, the Company's
lending activities were financed by the
Bank. In connection with the
Distribution, the Company will enter into
credit facilities with lenders not
affiliated with the Bank (the "Credit
Facilities") that will finance The Lewis
Horwitz Organization's lending activities
after the Distribution Date. The Credit
Facilities will be composed of revolving
credit facilities in the aggregate amount
of $135 million, including a letter of
credit sub-facility in the amount of $45
million. See "Risk Factors" and "Credit
Facilities."
Dividend Policy................. It is currently contemplated that the
Company will not pay cash dividends on
Company Class A Common Stock for the
immediately foreseeable future following
the Distribution. The declaration of
dividends by the Company will be at the
discretion of the Company Board and will
depend upon the Company's future
earnings, financial condition, capital
requirements and other factors, including
any limitations under then existing
credit agreements. See "Dividend Policy."
Anti-takeover Provisions........ The Company's Amended and Restated
Certificate of Incorporation, Amended and
Restated Bylaws and the Delaware General
Corporation Law (the "DGCL") contain
provisions which may have the effect of
discouraging unsolicited takeover bids
from third parties. See "Purposes and
Effects of Certain Provisions of the
Company's Certificate of Incorporation,
Bylaws and Delaware Law."
Relationship among the Company,
the Bank and Bancorp after the
Distribution...................
The Company, the Bank and Bancorp and
certain of the Company's subsidiaries
will enter into agreements to effect the
Contribution and the Distribution and to
define their ongoing relationship after
the Distribution Date. These agreements
will include a capital contribution and
distribution agreement providing for the
transfer of designated assets to, and the
assumption of designated liabilities by,
the Company and certain of its
subsidiaries and providing for the
payment of the Distribution by Bancorp
(the "Contribution Agreement") and an
interim services agreement relating to
human resources support in payroll,
recordkeeping, recruiting and other
employee benefit areas, audit services,
loan review and security services to be
provided by the Bank to the Company. In
addition, certain directors and officers
of
5
<PAGE>
Bancorp serve as directors and/or
officers of the Company. See
"Management." Other than the agreements
described above and overlapping directors
and officers, it is expected that Bancorp
and the Bank, on the one hand, and the
Company, on the other, will cease to have
any material contractual or other
material relationships with each other,
other than on an arm's-length basis. See
"Relationship and Agreements Among the
Company, the Bank and Bancorp After the
Distribution."
Trading Market and Symbol for
the Common Stock...............
Currently, there is no public trading
market for the Company Class A Common
Stock, although a "when-issued" trading
market (as described herein) is expected
to develop prior to the Distribution
Date. Subject to official notice of
issuance from the New York Stock Exchange
(the "NYSE"), the Company Class A Common
Stock will be listed on the NYSE and will
trade under the symbol "IFG." See
"Listing and Trading of the Common
Stock."
Bancorp Common Stock will continue to be
listed and traded on the NYSE after the
Distribution Date.
Distribution Agent.............. American Stock Transfer and Trust Co. The
address and telephone number of the
Distribution Agent are 40 Wall Street,
New York, New York 10005, (800) 937-5449.
Conditions to the Distribution.. The Distribution is conditioned upon,
among other things, (i) the Ruling not
having been withdrawn or modified in a
manner adverse to Bancorp, the Bank or
Bancorp's shareholders, (ii) the Company
Class A Common Stock having been approved
for listing on the NYSE subject to
official notice of issuance, (iii) the
Company's Registration Statement on Form
10, of which this Information Statement
is a part (the "Registration Statement"),
having been declared effective by the
Securities and Exchange Commission (the
"Commission"), (iv) receipt of regulatory
consents and approvals from various state
and federal banking and trust authorities
and (v) the Credit Facilities being in
place and all conditions to borrowing
thereunder having been satisfied or
waived. Any condition to the Distribution
may be waived, at any time prior to the
Distribution Date, for any reason, in the
sole discretion of the Bancorp Board of
Directors (the "Bancorp Board"). Even if
all conditions are satisfied, the Bancorp
Board has reserved the right to abandon,
defer or modify the Distribution and the
related transactions described herein at
any time prior to the Distribution Date.
See "Introduction" and "Distribution
Conditions and Termination."
Risk Factors.................... Bancorp shareholders should carefully
consider the matters discussed under
"Risk Factors" in this Information
Statement.
6
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Information Statement, including those under the
captions "Summary of Certain Information," "The Transactions," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Information Statement, the words "estimate", "project," "intend," "expect,"
"anticipate," and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are based on various factors, many
of which are beyond the Company's control, and were derived utilizing numerous
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements including, but
not limited to, the following: matters described herein under "Risk Factors";
uncertainty as to the Company's future profitability after the Distribution;
the effectiveness of the Company's growth strategy; competition in the
Company's existing and potential future lines of business; and the accuracy of
the Company's estimates of its funding requirements for the performance of
certain lending activities. Other factors and assumptions not identified above
were also involved in the derivation of these forward-looking statements, and
the failure of such other assumptions to be realized as well as other factors
may also cause actual results to differ materially from those projected. The
Company assumes no obligation to update these forward-looking statements to
reflect actual results, changes in assumptions or changes in other factors
affecting such forward-looking statements.
7
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
The summary combined income statement data for the years ended December 31,
1995, 1996 and 1997 and the summary combined balance sheet data as of December
31, 1996 and 1997 have been derived from the Company's audited combined
financial statements included herein. The summary combined income statement
data for the year ended December 31, 1994 and summary combined balance sheet
data as of December 31, 1995 have been derived from the Company's audited
combined financial statements not included herein. The summary combined income
statement data for the year ended December 31, 1993 and the summary combined
balance sheet data as of December 31, 1993 and 1994 have been derived from the
unaudited combined financial statements of the Company not included herein. The
summary combined income statement data for the six months ending June 30, 1997
and 1998 and the summary combined balance sheet data as of June 30, 1998 have
been derived from the unaudited combined financial statements of the Company
included herein and include all adjustments, consisting solely of normal
recurring accruals, which management considers necessary for a fair
presentation of such financial information for those periods. Historical
combined financial information may not be indicative of the Company's future
performance as an independent company. See also "Selected Combined Financial
Data," "Summary Unaudited Pro Forma Combined Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income
after provision for
loan losses........... $ 2,682 $ 4,103 $ 4,100 $ 7,033 $ 8,755 $ 4,122 $ 5,575
Equity in net income
of Imperial Credit
Industries, Inc.
("ICII").............. 7,898 2,388 5,652 21,444 20,260 5,005 6,699
Gain on sale of ICII
stock ................ 14,538 -- -- 25,650 4,977 -- --
Gain from sale of
stock by ICII......... -- -- -- 10,761 -- -- --
Other income........... 6,549 9,011 10,875 16,263 17,354 10,026 8,062
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue........ 31,667 15,502 20,627 81,151 51,346 19,153 20,336
---------- ---------- ---------- ---------- ---------- ---------- ----------
Personnel expense...... 3,388 4,338 4,827 6,153 9,315 4,623 6,296
Other expenses......... 4,357 4,515 5,568 10,680 18,134 7,937 5,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses....... 7,745 8,853 10,395 16,833 27,449 12,560 11,868
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes and
extraordinary item.. 23,922 6,649 10,232 64,318 23,897 6,593 8,468
Income taxes........... 10,129 2,821 4,313 25,674 8,737 2,423 3,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary item.. 13,793 3,828 5,919 38,644 15,160 4,170 4,896
Extraordinary item--
gain on
extinguishment of
ICII debt, net of
taxes................. -- 370 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........... 13,793 4,198 5,919 38,644 15,160 4,170 4,896
Other comprehensive
income(1)............. -- (40) 38 2 228 74 (418)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive income. $ 13,793 $ 4,158 $ 5,957 $ 38,646 $ 15,388 $ 4,244 $ 4,478
========== ========== ========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding(2):
Basic................ 17,301,446 17,640,080 18,224,024 18,782,675 19,398,542 19,286,025 19,767,698
Diluted.............. 17,391,309 17,738,940 18,319,842 18,914,783 19,791,712 19,673,291 20,906,698
Pro forma earnings per
share(3):
Basic................ $ 0.80 $ 0.24 $ 0.32 $ 2.06 $ 0.78 $ 0.22 $ 0.25
Diluted.............. $ 0.79 $ 0.24 $ 0.32 $ 2.04 $ 0.77 $ 0.21 $ 0.23
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------ AT JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale.... $ 2,579 $ 1,648 $ 2,648 $ 5,531 $ 3,763 $ 8,441
Loans held for
investment, net....... 36,847 26,369 75,518 72,528 134,407 139,210
Investment in stock of
ICII.................. 27,445 30,934 36,126 57,736 75,001 81,700
Total assets........... 75,456 69,650 125,030 149,348 227,983 250,616
Borrowings from
Imperial Bank......... 13,889 -- 49,897 6,184 77,934 47,225
Total liabilities...... 25,370 15,406 66,829 52,502 115,745 123,900
Stockholder's equity... 50,086 54,244 58,201 96,846 112,238 126,716
</TABLE>
- -------
(1) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income as of January 1, 1998.
(2) Share amounts are based on a distribution ratio of one share of Company
Class A Common Stock for every two shares of outstanding Bancorp Common
Stock and include retroactive adjustments to reflect the February 6, 1998
Bancorp three-for-two stock split.
(3) Based on the Company's historical net income and weighted average shares as
if the Transactions occurred at the beginning of each of the years
presented.
8
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA:
Loans originated:
LHO.................. $40,206 $25,857 $70,224 $55,951 $ 97,854 $49,139 $35,321
SBA and companion
loans............... 11,164 21,204 21,533 38,792 49,092 27,831 29,642
------- ------- ------- ------- -------- ------- -------
Total.............. $51,370 $47,061 $91,757 $94,743 $146,946 $76,970 $64,963
======= ======= ======= ======= ======== ======= =======
Trust assets under
administration (in
millions)............. $ 6,617 $ 5,704 $ 6,781 $ 7,532 $ 8,716 $ 8,386 $ 9,534
======= ======= ======= ======= ======== ======= =======
SELECTED RATIOS:
Average equity to
average assets........ 16.56% 70.74% 63.37% 56.02% 54.00% 61.05% 48.30%
Return on average
common equity......... 30.00 8.02 10.32 49.51 14.66 8.47 8.50
Return on average
assets................ 4.97 5.67 6.54 27.74 7.92 5.17 4.10
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 4.30% 3.27% 2.96% 3.42% 2.30% 1.77% 2.33%
Allowance for loan
losses as a
percentage of non-
accrual loans......... 37.48 47.79 56.89 53.42 102.54 153.77 103.65
Net charge-offs as a
percentage of average
loans held for
investment............ 0.62 0.26 1.21 0.87 0.66 0.53 0.26
</TABLE>
9
<PAGE>
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The summary unaudited pro forma combined income statement data reflect the
Transactions as if they occurred at the beginning of each of the periods
presented. The summary unaudited pro forma balance sheet data reflect the
Transactions as if they occurred at December 31, 1996 and 1997 and June 30,
1998. The summary unaudited pro forma combined financial data reflect the
expected capitalization of the Company as a result of the Distribution, the
incurrence by the Company of indebtedness under the Credit Facilities (which is
identified below as "Line of credit"), the assumed interest expense relating to
such borrowings, amortization of capitalized costs incurred in connection with
the Credit Facilities and retention of certain assets and liabilities by
Bancorp. This pro forma information does not necessarily reflect the results of
operations or financial position of the Company which would have been achieved
had the Transactions actually been consummated as of such dates. Also, this pro
forma information is not indicative of the future results of operations or
future financial position of the Company. See "Capitalization" and "Unaudited
Pro Forma Combined Financial Data."
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income
after provision for
loan losses........... $ 4,444 $ 7,175 $ 6,389 $ 2,966 $ 4,015
Equity in net income of
ICII.................. 5,652 21,444 20,260 5,005 6,699
Gain on sale of ICII
stock................. -- 25,650 4,977 -- --
Gain from sale of stock
by ICII............... -- 10,761 -- -- --
Other income........... 10,875 16,263 17,351 10,026 8,062
---------- ---------- ---------- ---------- ----------
Total revenue.......... 20,971 81,293 48,977 17,997 18,776
---------- ---------- ---------- ---------- ----------
Personnel expense...... 4,827 6,153 9,315 4,623 6,754
Other expenses......... 5,568 10,680 18,134 7,937 5,572
---------- ---------- ---------- ---------- ----------
Total expenses......... 10,395 16,833 27,449 12,560 12,326
---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 10,576 64,460 21,528 5,437 6,450
Income taxes........... 4,458 25,734 7,742 1,938 2,725
---------- ---------- ---------- ---------- ----------
Net income............. $ 6,118 $ 38,726 $ 13,786 $ 3,499 $ 3,725
========== ========== ========== ========== ==========
Weighted average number
of shares
outstanding(1):
Basic ................. 18,224,024 18,782,675 19,398,542 19,286,025 19,767,698
Diluted ............... 18,319,842 18,914,783 19,791,712 19,673,291 20,906,698
Pro forma earnings per
share:
Basic ................. $ 0.34 $ 2.06 $ 0.71 $ 0.18 $ 0.19
Diluted ............... $ 0.33 $ 2.05 $ 0.70 $ 0.18 $ 0.18
</TABLE>
<TABLE>
<CAPTION>
AT AT AT
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 5,245 $ 2,813 $ 10,448
Securities available for sale, at fair
value..................................... 1,179 6,027 3,507
Loans held for sale........................ 5,531 3,763 8,441
Loans held for investment, net............. 63,304 128,614 134,276
Investment in stock of ICII ............... 57,736 75,001 81,700
Other assets............................... 6,885 5,733 8,941
-------- -------- --------
Total assets............................... $139,880 $221,951 $247,313
======== ======== ========
Time deposits.............................. $ -- $ -- $ 37,480
Line of credit ............................ 35,382 113,512 95,231
Income taxes payable....................... 39,728 29,984 29,972
Other liabilities.......................... 5,978 7,962 7,749
-------- -------- --------
Total liabilities.......................... 81,088 151,458 170,432
Stockholder's equity....................... 58,792 70,493 76,881
-------- -------- --------
Total liabilities and stockholder's equity. $139,880 $221,951 $247,313
======== ======== ========
</TABLE>
- -------
(1) Share amounts are based on a distribution ratio of one share of Company
Class A Common Stock for every two shares of outstanding Bancorp Common
Stock and include retroactive adjustments to reflect the February 6, 1998
Bancorp three-for-two stock split.
10
<PAGE>
INTRODUCTION
On February 20, 1997, the Bancorp Board approved a plan to spin off to its
shareholders in a tax-free distribution a portion of its specialty lending and
finance businesses that focuses on the entertainment industry, loans to small
businesses (a majority of which are guaranteed in part by the SBA), and trust
services. On March 13, 1997, the Company was incorporated in Delaware to own
and operate these businesses.
These businesses will be contributed to the Company on or prior to the
Distribution Date. The Bank has contributed to CAB all of the assets relating
to the Bank's small business lending division and CAB has assumed all of the
liabilities relating thereto. The Bank will contribute to the Company (i) all
of the assets relating to LHO, a division of the Bank that provides motion
picture and television production financing, and the Company will assume all
of the liabilities relating thereto, (ii) all of the common stock of CAB,
(iii) all of the common stock of ITC, a California licensed trust company that
offers a wide range of trust and investment management services, and (iv) all
of the common stock owned by the Bank (which, as of June 30, 1998, was
8,941,106 shares, which represented approximately 23.0% of all outstanding
common stock as of such date) in ICII, a publicly traded, diversified
specialty finance company. The foregoing businesses are collectively referred
to herein as the "IFG Business" and the asset contributions and related
assumptions of liabilities are collectively referred to herein as the
"Contribution." The Company also beneficially owns an additional 1.2 million
shares (or 3.0% of the outstanding ICII common stock as of August 15, 1998)
pursuant to an agreement, dated August 3, 1998, with Bear, Stearns & Co. Inc.,
a shareholder of ICII (the "ICII Shareholders Agreement"), which grants the
Company the right to vote all of such shares and provides the Company with an
option to purchase these shares. Accordingly, as of August 15, 1998, the
Company beneficially owned approximately 26.0% of the outstanding common stock
of ICII. See "Business--Imperial Credit Industries, Inc."
Bancorp has received rulings from the IRS to the effect, among other things,
that receipt of shares of Company Class A Common Stock will be tax free for
federal income tax purposes to Bancorp and the shareholders of Bancorp (except
with respect to cash received in lieu of fractional shares), and that neither
Bancorp nor the Bank will recognize income, gain or loss as a result of the
Distribution (the "Ruling"). The Distribution is subject to, among other
things, (i) the Ruling not having been withdrawn or modified in a manner
adverse to Bancorp, the Bank or Bancorp's shareholders, (ii) the Company Class
A Common Stock being approved for listing on the NYSE subject to official
notice of issuance, (iii) the Registration Statement having been declared
effective by the Commission, (iv) receipt of regulatory consents and approvals
from various state and federal banking and trust authorities and (v) the
Credit Facilities being in place and all conditions to borrowing thereunder
having been satisfied or waived. Any condition to the Distribution may be
waived, at any time prior to the Distribution Date, for any reason, in the
sole discretion of the Bancorp Board. However, even if all the conditions to
the Distribution are satisfied, the Bancorp Board has reserved the right to
abandon, defer or modify the Contribution and the Distribution at any time
prior to the Distribution Date. See "Distribution Conditions and Termination."
References to the "Company" herein for time periods prior to the Distribution
mean the IFG Business as conducted by the Bank and, for time periods following
the Distribution, mean the Company as capitalized pursuant to the
Contribution.
The Distribution will be effected by a dividend of all of the outstanding
shares of Company Class A Common Stock to holders of record of Bancorp Common
Stock on the Distribution Record Date at a ratio of one share of Company Class
A Common Stock for every two shares of Bancorp Common Stock held by such
holders. The Distribution will occur on October 1, 1998.
NO ACTION IS REQUIRED BY BANCORP SHAREHOLDERS IN ORDER TO RECEIVE COMPANY
CLASS A COMMON STOCK TO WHICH THEY WILL BE ENTITLED IN THE DISTRIBUTION UPON
PAYMENT OF THE DIVIDEND.
Shareholders of Bancorp with inquiries related to the Distribution should
contact American Stock Transfer and Trust Co., the Distribution Agent for the
Distribution. After the Distribution Date, stockholders of the Company with
inquiries related to the Distribution or their investment should contact the
Company's Investor Relations Department.
11
<PAGE>
This Information Statement is being furnished by Bancorp solely to provide
information to holders of Bancorp Common Stock in connection with the
Contribution and the Distribution and, subject to the satisfaction of the
conditions to the Distribution, the receipt of Company Class A Common Stock
pursuant to the Distribution. This Information Statement is not, and should
not be construed as, an inducement or encouragement to buy or sell any
securities of Bancorp or the Company. The information contained in this
Information Statement is believed by Bancorp and the Company to be accurate as
of the date set forth on its front cover. Changes may occur after that date,
and neither Bancorp nor the Company will update the information except that,
after the Distribution, the Company will be subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith will file quarterly, annual and certain
other periodic reports that will contain updated information.
THE TRANSACTIONS
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Bancorp Board has determined, subject to satisfaction of certain
conditions, that it is in the best interests of Bancorp and its shareholders,
for the reasons set forth below, to distribute to Bancorp shareholders in the
Distribution the IFG Business as a separate publicly traded company to be
known as Imperial Financial Group, Inc.
Bancorp's management and the Bancorp Board have regularly looked for ways in
which to improve Bancorp's operations and thereby provide value to Bancorp's
shareholders. Beginning in the fourth quarter of 1996, as part of its regular
review process, Bancorp's management re-examined various strategies for
enhancing Bancorp's value through both internal operating initiatives and
restructuring strategies. On January 23, 1997, the Bank retained NationsBanc
Montgomery Securities LLC ("NationsBanc Montgomery") as its financial advisor
for the purpose of advising Bancorp and the Bank concerning the possible sale
of common stock in a registered public offering of a newly formed company that
would hold the IFG Business and/or the possible distribution of all of the
capital stock of such entity to the shareholders of Bancorp. On February 20,
1997, NationsBanc Montgomery presented its analysis of the benefits of such a
distribution to the Bancorp Board. The Bancorp Board unanimously determined,
after review and discussions, that the Contribution and the Distribution
provided an excellent opportunity to enhance shareholder value. The boards of
directors of Bancorp and the Bank determined not to engage in an initial
public offering of the Company's capital stock because, among other things,
the boards did not believe that adequate value would be received in a public
offering and also believed that the contribution of all of the common stock of
ICII to the Company would address the concerns of regulators and provide the
Company with operating benefits, each of which is described below.
The boards of directors of Bancorp and the Bank selected the businesses of
LHO, CAB and ITC to be contributed to the Company because (i) each business
has been operating with a separate management structure as a stand-alone
operation and with an entrepreneurial management philosophy, (ii) each
business has demonstrated high return on equity in recent years and (iii) none
of the three businesses requires demand banking deposits for its funding. In
addition, the boards of Bancorp and the Bank believe the businesses of LHO,
CAB and ITC, as well as the business of ICII, complement each other and that
many cross-referral opportunities exist between such businesses, including
with respect to lending and private banking products offered to the clients of
LHO, CAB and ITC.
The boards of directors of Bancorp and the Bank believe that the
Transactions will provide the Company with increased access to capital
markets, which should allow the Company to expand its businesses. One business
the Company is considering engaging in is the broker/dealer business, although
the Company has not determined whether it would seek to establish its own
broker/dealer or seek to acquire an existing broker/dealer. The Company
intends to initially raise capital to promote this expansion by conducting a
public or private offering of its equity securities that it expects to
complete prior to the end of 1998. There can be no assurance if this offering
will be consummated, and if the offering is consummated, there can be no
assurance in what manner the Company will attempt to expand its business with
the proceeds therefrom.
12
<PAGE>
The boards of Bancorp and the Bank believe that the ICII stock will provide
the Company with additional financing flexibility to expand its operations and
operate as a separate publicly traded company, without any assistance from
either Bancorp or the Bank, while the disposition of the ICII stock by Bancorp
will satisfy the concerns of the Federal Reserve Board and allow Bancorp to
continue to be in compliance with certain regulatory requirements described
below. Moreover, the Company will be able to expand the specialty lending and
finance businesses contributed to it by the Bank by operating as a separate
publicly traded company that is not subject to the same federal and state
banking laws and regulations applicable to Bancorp and the Bank. See
"Business--Regulatory Matters." The separation of the businesses will also
allow each of Bancorp and the Company to provide its employees with incentive
compensation linked solely to the financial performance of his or her
employer.
As the holder of all of the issued and outstanding shares of capital stock
of the Bank, Bancorp is subject to the BHCA and Regulation Y promulgated
thereunder ("Regulation Y"). The BHCA and Regulation Y provide that a bank
holding company may not acquire or retain direct or indirect ownership or
control of any company which is not a bank or bank holding company or which
engages in any nonbanking activities except such activities as are determined
by order or regulation by the Federal Reserve Board to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto
(a "closely related activity"). Certain activities which have been determined
by the Federal Reserve Board to be closely related activities are set forth in
Regulation Y. To the extent a bank holding company wishes to engage de novo in
a nonbanking activity or to acquire an entity engaged in such activity,
Regulation Y provides for prior notice to and/or approval by the Federal
Reserve Board for the conduct of such activity.
The Federal Reserve Board has advised Bancorp that it considers the
retention by the Bank of its shares of ICII stock to be in violation of the
BHCA. This position is apparently a consequence of the Federal Reserve Board's
view that ICII is engaged in activities which are not determined by regulation
to be a closely related activity and that Bancorp did not file or obtain a
notice or approval to engage in such activities in accordance with Regulation
Y. The Bank believes that the BHCA should not be interpreted to limit the
investment activities of a California-chartered non-member bank which is
subject to the regulation of the Federal Deposit Insurance Corporation
("FDIC") and not the Federal Reserve Board. However, the provisions of the
BHCA are clearly applicable to direct investments by Bancorp and accordingly
the Federal Reserve Board is likely to take the position that the retention of
such shares by Bancorp violates the BHCA absent prior approval by the Federal
Reserve Board. Bancorp believes that such approval, if sought, would not be
granted.
The FDIC does not regulate the activities of bank holding companies, and
accordingly has not taken a position on Bancorp's indirect ownership of the
shares of ICII currently held by the Bank. However, the FDIC has expressed the
view that the retention of ICII shares by the Bank is not permitted by Section
24 of the Federal Deposit Insurance Act (the "FDIA"). Section 24 of the FDIA
limits the investments of state-chartered banks, such as the Bank, to
investments which are permitted investments for national banks or are
otherwise permitted under Section 24. See "Business--Regulatory Matters." On
June 10, 1996, the Bank filed an application for approval of retention of its
ownership of ICII stock. The Bank has submitted additional information to the
FDIC in response to FDIC requests. Subsequently, the FDIC requested that the
Bank submit a divestiture plan with respect to its investment in ICII. In
response to this request, the Bank has advised the FDIC of its intention to
effect the Contribution and Distribution. The boards of Bancorp and the Bank
have been informed by the Federal Reserve Board and the FDIC that contributing
the stock of ICII to the Company in connection with the Transactions will
satisfy these concerns and allow Bancorp to continue to be in compliance with
the FDIA.
Due to the perceived existence of significant issues as to whether approval
by the Federal Reserve Board of an application to retain Bancorp's ownership
in ICII or approval of the FDIC of the application to retain the Bank's
ownership in ICII would be forthcoming, and for the additional business
reasons discussed above, the Bancorp Board has determined not to seek Federal
Reserve Board approval at this time of its ownership of ICII stock, but rather
to address these regulatory concerns through the Contribution and
Distribution. The boards of directors of Bancorp and the Bank also considered
selling the ICII stock to address these concerns but believed (i) the block of
ICII stock held by the Bank represents a "control block" which should have
value in excess of
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the market value of the stock, (ii) the value of ICII stock would increase in
the near future from current levels, (iii) the costs of selling the ICII stock
would include an underwriting fee and the proceeds of the sale would be
subject to an immediate and significant cash tax payment, (iv) the sale of
such a large block of ICII stock would likely depress the market value of such
stock, further decreasing the proceeds to be realized by the Company from the
sale, (v) the ICII stock would provide the Company with financing flexibility
as described above and herein under "Credit Facilities" and (vi) the ICII
stock would benefit the Company's earnings. See "Risk Factors--Negative Impact
on Earnings Should Ownership Level of ICII Stock be Reduced; Substantial
Dependence on ICII-Related Revenue."
MANNER OF EFFECTING THE DISTRIBUTION
Following completion of the Contribution and subject to the satisfaction of
the conditions to the Distribution, the Board of Directors of the Bank will
declare a dividend on its common stock payable in Company Class A Common Stock
to its sole shareholder, Bancorp. Immediately thereafter, the Bancorp Board
will formally authorize the Distribution by declaring a dividend on the
Bancorp Common Stock payable in Company Class A Common Stock to holders of
record of Bancorp Common Stock on the Distribution Record Date. Only
shareholders of record as of the Distribution Record Date will receive the
Company Class A Common Stock in the Distribution. No cash will be paid to
Bancorp in connection with the Transactions.
Bancorp will effect the Distribution by delivering share certificates for
Company Class A Common Stock to the Distribution Agent, for delivery to the
holders of Bancorp Common Stock at the close of business on the Distribution
Record Date, without further action by such holders. It is expected that the
Distribution Agent will begin mailing share certificates representing Company
Class A Common Stock as soon as practicable after the Distribution Date. The
Distribution will be deemed effective upon notification by Bancorp to the
Distribution Agent that the Distribution has been declared and that the
Distribution Agent is authorized to proceed with the distribution of Company
Class A Common Stock. All shares of Company Class A Common Stock to be
distributed in the Distribution will be fully paid and nonassessable. See
"Description of Capital Stock."
No holder of Bancorp Common Stock on the Distribution Record Date will be
required to pay any cash or other consideration for the shares of Company
Class A Common Stock to be received in the Distribution or to surrender or
exchange shares of Bancorp Common Stock or take any other action in order to
receive shares of Company Class A Common Stock.
No certificates or scrip representing fractional shares of Class A Common
Stock will be issued to holders of Bancorp Common Stock as part of the
Distribution. The Distribution Agent will aggregate fractional shares into
whole shares and sell them in the open market at then prevailing prices on
behalf of holders who otherwise would be entitled to receive fractional share
interests, and such persons will receive instead a cash payment in the amount
of their pro rata share of the total sale proceeds. Such sales are expected to
be made on, or as soon as practicable after, the Distribution Date. The
Company will bear the cost of commissions incurred in connection with such
sales. See "Certain Federal Income Tax Considerations."
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RISK FACTORS
Readers should be aware of the following risk factors to which the Company
has been subject in the past, is currently and may in the future be subject,
and which could materially adversely affect the performance of the Company.
LACK OF OPERATING HISTORY AS AN INDEPENDENT COMPANY
The Company does not have an operating history as an independent public
company. The historical combined and pro forma combined financial information
included herein may not necessarily reflect the results of operations,
financial condition and cash flows of the Company in the future or what the
results of operations, financial condition and cash flows would have been had
the Company been a separate, stand-alone entity during the periods presented.
There can be no assurance that the Company can be operated profitably as a
stand-alone enterprise. See "Unaudited Pro Forma Combined Financial Data,"
including the discussion of the assumptions reflected therein, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NEGATIVE IMPACT ON EARNINGS SHOULD OWNERSHIP LEVEL OF ICII STOCK BE REDUCED;
SUBSTANTIAL DEPENDENCE ON ICII-RELATED REVENUE
As of June 30, 1998, the Company owned 8,941,106 shares of common stock of
ICII, which represented approximately 23.0% of the outstanding shares as of
such date. In addition, on August 3, 1998, the Company entered into the ICII
Shareholders Agreement granting the Company the right to vote an additional
1.2 million shares of ICII common stock (or 3.0% of the outstanding ICII stock
as of August 15, 1998) and providing the Company with an option to purchase
these shares. Accordingly, as of August 15, 1998, the Company beneficially
owned approximately 26.0% of the outstanding common stock of ICII. The Company
accounts for its investment in ICII in the Company's combined financial
statements as an equity investment. This accounting treatment has allowed the
Company to include in its net income a portion of the net income generated by
ICII based upon the Company's percentage ownership of ICII stock.
During the six months ended June 30, 1998 and 1997, and the year ended
December 31, 1997, ICII generated total revenues of $103.1 million, $97.8
million and $309.6 million, respectively. Total revenue related to the
Company's ownership of ICII stock for the six months ended June 30, 1998 and
1997, and the year ended December 31, 1997 was $6.7 million, $7.8 million and
$28.1 million, respectively, representing 32.9%, 40.8% and 54.6%,
respectively, of the Company's total revenue for such periods. Net income
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997 was $3.7 million, $2.2
million and $11.5 million, respectively, representing 76.0%, 52.7% and 76.2%,
respectively, of the Company's net income for such periods.
If the Company's ownership of ICII common stock is reduced to less than 20%,
the Company may no longer be able to account for its ownership of ICII common
stock as an equity investment. In addition, if the Company's beneficial
ownership of ICII common stock is reduced to less than 25% and the Company is
not able to exceed the 25% threshold after 90 days, under certain
circumstances such reduction could cause the termination of commitments under
the Credit Facilities. This termination would have a material adverse effect
on the Company's ability to conduct its businesses. Accordingly, it is
unlikely that the Company will sell a significant amount of its ICII shares.
In addition, pursuant to a letter agreement dated June 11, 1998, ICII has
granted the Company certain rights to maintain its percentage ownership in
ICII in connection with certain proposed public offerings of ICII stock by
ICII. See "Business--Imperial Credit Industries, Inc." The ICII stock,
however, will be pledged to the lenders under the Credit Facilities to secure
the Company's obligations thereunder. If an event of default under the Credit
Facilities occurs, the lenders could seek to enforce their rights by causing a
transfer of the ICII stock. See "Credit Facilities." If the Company had not
been able to account for its ownership in ICII common stock as an equity
investment, the Company's net income for the six months ended June 30, 1998
and 1997, and the year ended December 31, 1997 would have been reduced by
approximately 88%, 77% and 86%,
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respectively. Although the Company intends to continue to own in excess of 25%
of the common stock of ICII, there can be no assurance that the Company's
ownership will not be diluted by future stock issuances by ICII (including
stock issued upon exercise of outstanding stock options), or that the Company
will not be required, due to presently unforeseen circumstances, to sell
shares of ICII common stock to raise capital. In addition, ICII-related
revenues recognized by the Company have been highly variable and may remain
variable in the future.
INVESTMENT COMPANY ACT
The Company believes that it is not an investment company as defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act"). The
Investment Company Act and the rules and regulations thereunder require the
registration of, and impose various substantive restrictions on, companies
that engage primarily in the business of investing, reinvesting or trading in
securities or engage in the business of investing, reinvesting, owning,
holding or trading in securities and own or propose to acquire investment
securities having a value in excess of 40% of a company's total assets. After
the Distribution, the Company intends to continue its financial services
businesses and conduct its operations so as not to become regulated under the
Investment Company Act. If the Commission or its staff were to take the
position that the Company was an investment company, the Company could be
subject to a number of substantive restrictions on its operations, capital
structure and management and it could result in a termination of the
commitments under the Credit Facilities. In addition, registration under the
Investment Company Act by the Company would constitute a violation of the
Credit Facilities. See "Credit Facilities."
LIMITED AVAILABILITY OF FUNDING SOURCES; NEGATIVE IMPACT SHOULD VALUE OF ICII
STOCK DECLINE
Prior to the Distribution, the Bank financed the Company's loan origination
activities. The Company has a continuing need for capital to finance its
lending activities. In connection with the Distribution, the Company will
enter into the Credit Facilities with a syndicate of banks not affiliated with
the Bank in order to finance a portion of its lending activities. See "Credit
Facilities." The Company intends to secure a portion of these borrowings with
all of the common stock of ICII owned by the Company, if the value of the ICII
stock were to be reduced, or if the Company were to dispose of ICII stock, the
amount of available funds to the Company under the Credit Facilities also
would be reduced. If the Company's available funds under the Credit Facilities
were reduced or its borrowing needs increase, there can be no assurance that
such financing will be obtainable on favorable terms. To the extent that the
Company is unable to arrange new lines of credit, the Company may have to
curtail its loan origination activities, which could have a material adverse
effect on the Company's operations and financial position. Moreover, if an
event of default under the Credit Facilities occurs, the lenders could seek to
enforce their rights by causing a transfer of the ICII stock. This transfer
could trigger a significant tax liability for the Company which could have a
material adverse effect on the Company's financial position. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business is highly dependent upon the members
of the senior management of the Company. The loss of the services of one or
more of them could have a material adverse effect upon the Company's business
and development. In addition, the Company conducts its business through
subsidiaries and divisions operated by individual management teams. In each
subsidiary and division, there are key personnel, the loss of whom may have an
adverse effect on that subsidiary or division including, with respect to the
Company's LHO division, Lewis P. Horwitz, the President and Chief Executive
Officer of LHO. Although the Company has established incentive compensation
plans and entered into employment arrangements to retain certain key
personnel, including Mr. Horwitz, no assurances can be made that key personnel
will not depart, or that their departure would not have adverse consequences
to the operations of the Company or any of its subsidiaries and divisions. See
"Executive Compensation--Employment Arrangements."
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COMPETITION AND CONFLICTS OF INTEREST BETWEEN THE COMPANY AND THE BANK
The Company's competitors include banks and other financial institutions,
many of which are substantially larger and have significantly greater
resources than the Company. A significant competitor of the Company's LHO
division is the Bank's Entertainment Industries Group. No agreement between
the Company and the Bank will exist that restricts the activities of the
Bank's Entertainment Industries Group and the Company following the
Distribution. In addition, the Bank and the Company will not be prohibited
from using confidential information of the other party for its own internal
purposes that may have been obtained prior to the Distribution. Moreover,
there recently has been a significant increase in the number of competitors
providing financing for film and television production. There can be no
assurance that the Company will be able to compete successfully with such
other companies.
The small business lending and trust services businesses are also highly
competitive and CAB and ITC compete with a variety of banks and non-bank
lending institutions, many of which are larger than the Company and have
greater financial and other resources, and, with respect to CAB, many of which
also participate in SBA sponsored programs. These other banks maintain larger
marketing and sales staff and use a wide variety of marketing strategies, some
of which may be too expensive for the Company to conduct. See "Business."
RISKS PARTICULAR TO THE COMPANY'S LOAN PORTFOLIO
The Company's lending business is subject to various risks, including, but
not limited to, the risk that borrowers will not satisfy their debt service
obligations, the risk that the value of the collateral securing a liquidated
loan is less than the principal amount of such loan and the risk of the
narrowing of the interest rate spread between the Company's yield on its loans
and the cost of the Company's borrowings. In addition, significant changes in
interest rates could accelerate the rate of loan repayments from existing
borrowers. All or any one of the foregoing lending risks could have a material
adverse effect on the Company's results of operations and financial position.
As of June 30, 1998, approximately $8.0 million in aggregate principal
amount of loans in the Company's portfolio were 30 days or more delinquent,
including $4.7 million of which were no longer accruing interest. Any increase
in delinquent loans could result in an increase in the Company's provision for
loan losses or a reduction of the Company's interest income, each of which
could have a material adverse effect on the Company's results of operations
and financial position. See "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
LHO Lending. The LHO business is dependent on the production of independent
films and television shows and series. If the number of productions were to
decline in the future, the need for financing would decrease as well. Any such
decline in these industries could have a material adverse effect on the
Company's results of operations. In addition, borrowers are generally single-
purpose corporations whose sole function is to produce a motion picture or
television film and, accordingly, have no meaningful financial assets prior to
distribution of the production. In addition, as described herein under
"Business--LHO," these loans are secured principally by the revenues to be
received from the worldwide distribution of the production. The distributors
are in many instances privately held small businesses that do not provide the
Company with financial information and have limited assets. If the
distributors fail to make the minimum guaranteed payment, the borrower could
attempt to license the distribution rights to another distributor but there
can be no assurance as to whether a new distributor would be engaged or if
such new distributor would be able to make the minimum guaranteed payment. As
a result, this could adversely affect the Company's ability to proceed against
the collateral if the borrower fails to repay the loan. In addition, the LHO
business is subject to risks relating to potential economic and political
instability in certain foreign countries where such distributors have agreed
to license production rights. An occurrence of an event such as war or
currency devaluation in such a country could cause such distributors to
default on their agreements to provide distribution revenue, which is LHO's
primary source of collateral securing repayment. This could have a material
adverse effect on the Company's results of operations and financial condition.
With regards to currency risk, all international contracts are made in U.S.
dollars, and most of the
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distributors do not hedge this risk. As a result, if the local currency falls
in value in relation to the dollar, the actual price of the film to the
distributor at time of delivery is higher than such distributor had
anticipated. This situation has occurred recently in South Korea and Thailand,
where both currencies have undergone devaluations, and it could continue to be
a threat throughout much of Asia. As a result, the Company has removed South
Korea from its list of "primary" territories, and has discounted the value of
contracts emanating from other Asian countries which the Company deems to have
unstable currency.
In addition, a substantial percentage of the Company's financings made in
the first six months of 1998 and all of 1997 and 1996 through LHO have been
"gap" financings (for a description of gap financing, see "Business--LHO--Loan
Types"), which are riskier than traditional entertainment lending because
certain rights available for distribution not sold at time of funding may not
be sold thereafter. As a result, the aggregate principal amount of such loans
may exceed the value of the collateral at time of funding. Prior to 1995, the
LHO division of the Company did not provide "gap" financing and, as a result,
many of the loans in the Company's loan portfolio have not been outstanding
for a sufficient period of time to determine whether there are material
adverse credit, delinquency, loss, prepayment or other issues associated with
"gap" loans.
CAB Lending. The Company's small business lending segment commenced
operations within the Bank in 1993. As a result, many of the loans in the
Company's small business loan portfolio have not been outstanding for a
sufficient period of time to determine whether there are material adverse
credit, delinquency, loss, prepayment or other issues associated with these
loans. There can be no assurance that the delinquency, prepayment and loss
experience of these loans will be consistent with management's assumptions and
estimates. Any material change in delinquencies, prepayments and losses from
management's assumptions and estimates may adversely affect the Company's
financial condition and results of operations. See "Business--CAB."
Moreover, with respect to loans guaranteed by the SBA, if the SBA
establishes that any loss resulting from a borrower default is attributable to
significant technical deficiencies in the manner in which the loan was
originated, documented or funded by the Company, the SBA may refuse to make
payment on its guarantee or may seek recovery from the Company of any funds
advanced by the SBA. CAB could also be subject to risk if a particular
industry in which it has developed a concentration of loans were to suffer an
economic downturn. As of June 30, 1998, approximately 40% of the Company's
small business loan portfolio consisted of loans made to owners of motels. If
the motel industry were to suffer an economic downturn, the Company's
financing to this industry likely would similarly decline.
ASSETS SUBJECT TO PREPAYMENT RISK
At June 30, 1998, the Company's combined balance sheet reflected
approximately $4.2 million in interest only strips and servicing assets
subject to prepayment risk. Realization of these assets in cash is subject to
the prepayment and loss characteristics of the underlying loans and to the
timing and ultimate realization of the stream of cash flows associated
therewith. The Company estimates future cash flows from these assets and
values them utilizing assumptions that it believes are consistent with those
that would be utilized by an unaffiliated third party purchaser. If actual
experience differs from the assumptions used in the determination of asset
value, future cash flows and earnings could be negatively impacted and the
Company could be required to write down the value of the assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DEPENDENCE OF SMALL BUSINESS LENDING OPERATIONS ON SBA PROGRAMS
During the six months ended June 30, 1998 and the year ended December 31,
1997, approximately 100% and 97%, respectively, of the SBA loan origination
activity engaged in by the Company through CAB was in connection with the SBA
Section 7(a) program. See "Business--CAB--The SBA Guaranteed Loan Program."
Discontinuation, elimination or a significant reduction of this program would
have a material adverse effect on the Company. The SBA lending program is a
federal government program, instituted through legislation. Uncertainties
exist surrounding government programs, including the SBA, due to scrutiny by
the United States Congress. There can be no assurance that the SBA lending
program will continue in its present manner.
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There have also been significant attempts in previous years to eliminate the
SBA or to curtail its activities or funding by Congress. In 1995, the SBA
temporarily ceased guaranteeing small business loans after Congress determined
that the appropriations in the federal budget for such guarantees had been
fully utilized. Although Congress later determined that it had incorrectly
calculated the amount of such appropriations and the SBA was able to continue
guaranteeing appropriate small business loans, any future utilization of such
appropriations and subsequent cessation of SBA guarantees would have a
material adverse effect on the Company's results of operations and financial
position.
In recent years, Congress has enacted legislation that reduced the maximum
amount of SBA guarantees on certain types of loans from 85% to 75%, required
the payment of a fee to the SBA by the lender equal to half of the proceeds
from the sale of a loan that exceeds 110% of the outstanding balance of the
SBA guaranteed portion of the loan and required that the SBA be paid a portion
of the annual servicing fee. There can be no assurance that additional
legislation relating to the SBA will not adversely affect the Company's
results of operations and financial position.
The SBA has the right to cease guaranteeing new loan origination by the
Company upon ten days' prior written notice. The occurrence of such an event
would have a significant adverse impact on the liquidity and earnings of the
Company but would not affect guarantees on outstanding loans. The Company's
income from the SBA lending business is materially dependent upon the premium
at which the SBA guaranteed portions of loans are sold in the secondary
market. In addition, in the event that CAB were to lose its status as a
"Preferred Lender," CAB could be materially and adversely affected. See
"Business--CAB."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 84% and 70% of the aggregate principal amount of loans
originated by the Company through LHO and CAB during the six months ended June
30, 1998 and the year ended December 31, 1997, respectively, were originated
in California and secured by assets located in California. Although the
Company anticipates further expansion in these businesses outside California
in the future, the Company's loan originations may remain concentrated in
California for the foreseeable future. Consequently, the Company's results of
operations, financial condition and business prospects are dependent on the
California economy. In the early 1990s, the California economy experienced an
economic slowdown or recession. Although the California economy has improved
over the last few years, any economic decline would adversely affect the value
of the collateral securing the loans. A decline in the value of the loan
collateral may result in the principal balances of such loans, together with
any other financing by such borrowers, equaling or exceeding the value of the
collateral. In addition, California is vulnerable to certain natural disaster
risks, such as earthquakes and floods. These disasters are not typically
covered by the standard hazard insurance policies maintained by borrowers and
may adversely impact borrowers' ability to repay loans made by the Company.
The existence of adverse economic conditions or the occurrence of such natural
disasters in California could have a material adverse effect on the Company's
results of operations, financial condition and business prospects. See
"Business--LHO" and "--CAB."
ASSUMED LIABILITIES AND OBLIGATIONS
Pursuant to the Contribution, the Company will assume responsibility for all
liabilities and obligations related to the IFG Business, whether such
liabilities and obligations arose prior to the Contribution or arise on or
after the Contribution. See "Relationship and Agreements Among the Company,
the Bank and Bancorp After the Distribution." The Company believes that it has
provided for these liabilities and obligations in accordance with GAAP. Actual
results, however, could differ from these estimates, and changes in facts and
circumstances may result in revised estimates and assumptions. For a
description of certain of these liabilities and obligations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Some assignments and transfers may require prior consent by third parties
and various filings or recordings with governmental entities. See "Business--
Regulatory Matters."
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CHANGES IN INTEREST RATES
The Company's profitability may be directly affected by the level of and
fluctuations in interest rates because they affect the Company's ability to
earn a spread between interest received on its loans and the costs of its
liabilities. While the Company monitors the interest rate environment and
employs a strategy designed to reduce the impact of changes in interest rates,
there can be no assurance that the profitability of the Company would not be
adversely affected during any period of changes in interest rates. A
substantial and sustained increase in interest rates could adversely affect
the Company's ability to originate or sell loans, reduce the average size of
loans underwritten by the Company and reduce the gains recognized by the
Company upon their sale. Fluctuating interest rates also may affect the net
income earned by the Company resulting from the difference between the yield
to the Company on loans held pending sale and funds borrowed by the Company to
finance the origination of such loans. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
CAB--Funding."
ECONOMIC SLOWDOWN OR RECESSION
The risks associated with the Company's businesses become more acute in any
economic slowdown or recession. Periods of economic slowdown or recession may
be accompanied by decreased demand for consumer or commercial credit and
declining real estate and other asset values. In the secured lending business,
any material decline in collateral values increases the loan-to-value ratios
of loans previously made by the Company, thereby weakening collateral coverage
and increasing the possibility of a loss in the event of a default.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. In addition, in an economic slowdown or recession,
the Company's servicing costs will increase. Any sustained period of increased
delinquencies, foreclosures, losses or increased costs could adversely affect
the Company's ability to sell loans and could increase the cost of selling
loans, which in either case could adversely affect the Company's financial
condition and results of operations.
ENVIRONMENTAL LIABILITY
In the course of its business, the Company may foreclose on properties
securing loans that are in default. There is a risk that hazardous or toxic
substances or petroleum constituents could be on such properties. In such
event, it is possible that the Company could be held responsible for the cost
of cleaning up or removing such waste depending upon the lender's activities,
and such cost could exceed the value of the underlying properties. In
addition, there can be no assurance that the cost of such removal would not
substantially exceed the value of the affected properties or the loans secured
by such properties, or that the Company would have adequate remedies against
the prior owners or other responsible parties, or that the Company would not
find it difficult or impossible to sell the affected real properties either
prior to or following any such removal. Moreover, in the course of the
Company's trust business, the Company, as trustee, may be considered the
record owner of property for which it acts as trustee. As a result, it would
be held responsible for the cost of cleanup or removal of any hazardous or
toxic substances on these properties.
Under the laws of certain states, contaminated property may be subject to a
lien on the property to assure payment for cleanup costs. In several states,
such a lien has priority over the lien of an existing mortgage or owner's
interest. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may be liable for cleanup of a property and adjacent
properties that are contaminated by releases from the mortgaged property if
the lender engages in certain activities. These activities include foreclosure
on the property and participation in the management or operational aspects of
such property. In 1996 CERCLA was amended to eliminate federal lender
liability under CERCLA in certain circumstances, including foreclosure if the
lender resells the property at the earliest practicable, commercially
reasonable time on commercially reasonable terms. In addition, the amendments
defined the term participation in management, which provided some guidance to
lenders about the nature of activities that would and would not give rise to
liability under CERCLA. These amendments do not apply to state Superfund laws.
Also, foreclosure and other activities on contaminated property may subject a
lender to state tort liability.
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GOVERNMENT REGULATION
The Company and its subsidiaries are subject to extensive regulation and
oversight by federal and state regulators administering applicable federal and
state laws and regulations, including, among others, the following: the Small
Business Act, the Small Business Investment Act of 1958, the California
Finance Lenders Law, the California Industrial Loan Law, the Community
Reinvestment Act, the Federal Deposit Insurance Act, portions of the
California Banking Law and the Federal Reserve Act and certain regulations of
the Federal Reserve Board. Such laws and regulations materially impact the
business operations of the Company and its subsidiaries, including, among
other areas, rate of growth, ability to pay dividends, rates payable on
deposits, permissible sources of financing, terms and structure of loans,
competition, reporting of their financial condition, operations from branches
and other locations and internal controls. See "Dividend Policy" and
"Business-- Regulatory Matters." Although management of the Company believes
that it can operate within the parameters defined by currently applicable law
and regulation, it is not possible to predict with certainty the extent or
nature of future changes to applicable law and regulation, government policies
or judicial interpretations, nor their impact, whether adverse or beneficial,
on the business operations, financial condition or prospects of the Company
and its subsidiaries.
ABSENCE OF TRADING HISTORY FOR THE COMMON STOCK
The Company Class A Common Stock will be listed and will trade on the NYSE
under the symbol "IFG." There has been no prior trading market for Company
Class A Common Stock and there can be no assurance as to the prices at which
Company Class A Common Stock will trade or the degree of volatility in the
trading price. The prices at which Company Class A Common Stock trades will be
determined in the public trading market and may be influenced by many factors,
including the depth and liquidity of the market for Company Class A Common
Stock, investor perceptions of the Company and its businesses, general
economic and market conditions and, at least in the short-term, the investment
preferences of Bancorp shareholders who will receive shares of Company Class A
Common Stock in the Distribution.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation"), Amended and Restated Bylaws (the "Bylaws")
and the DGCL contain certain provisions that may discourage other persons from
attempting to acquire control of the Company. These provisions include, but
are not limited to, a staggered Board of Directors, the authorization of the
Board to issue shares of undesignated preferred stock in one or more series
without the specific approval of the holders of Company Class A Common Stock,
the establishment of advance notice requirements for director nominations and
actions to be taken at annual meetings and the requirement that 80% of the
shareholder votes are required to approve any change to the Bylaws or certain
provisions of the Certificate of Incorporation. In addition, the Certificate
of Incorporation and the Bylaws permit special meetings of the shareholders to
be called only by the Chairman of the Board or Co-Chairman of the Board or
upon the request of a majority of the Board of Directors, and deny
shareholders the ability to call such meetings. In certain circumstances, the
fact that corporate devices are in place that will inhibit or discourage
takeover attempts could reduce the market value of Company Class A Common
Stock. See "Purposes and Effects of Certain Provisions of the Company's
Certificate of Incorporation, Bylaws and Delaware Law."
21
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Bancorp has received the Ruling from the IRS to the effect that, among other
things, the Distribution will qualify as a tax-free spin-off to Bancorp, the
Bank and Bancorp shareholders under Section 355 of the Internal Revenue Code
of 1986, as amended (the "Code"). The following is a summary of the material
federal income tax consequences to Bancorp, the Bank and Bancorp shareholders
expected to result from the Distribution:
(i) A Bancorp shareholder will not recognize any income, gain or loss as
a result of the Distribution except as described below, in connection with
the receipt of cash in lieu of fractional shares of Company Class A Common
Stock;
(ii) A Bancorp shareholder will be required to apportion the tax basis
for such shareholder's Bancorp Common Stock on which Company Class A Common
Stock is distributed between the Bancorp Common Stock and Company Class A
Common Stock received in the Distribution in proportion to the relative
fair market values of such Bancorp Common Stock and Company Class A Common
Stock on the Distribution Date;
(iii) A Bancorp shareholder's holding period for the Company Class A
Common Stock received in the Distribution will include the period during
which such shareholder held the Bancorp Common Stock on which Company Class
A Common Stock is distributed, provided that such Bancorp Common Stock is
held as a capital asset by such shareholder on the Distribution Date;
(iv) A Bancorp shareholder who receives cash in lieu of fractional shares
as a result of the sale of shares of Company Class A Common Stock by the
Distribution Agent will be treated as if such fractional share had been
received by such shareholder as part of the Distribution and then sold by
such shareholder. Accordingly, such shareholder will recognize gain or loss
equal to the difference between the cash so received and the portion of the
tax basis in Company Class A Common Stock that is allocable to such
fractional share. Such gain or loss will be capital gain or loss, provided
that such fractional share was held by such shareholder as a capital asset
at the time of the Distribution; and
(v) Neither Bancorp nor the Bank will recognize any income, gain or loss
as a result of the Distribution or the Contribution.
The continuing validity of the Ruling is subject to certain factual
representations and assumptions. Bancorp is not aware of any fact or
circumstance which would cause such representations and assumptions to be
untrue.
Current Treasury regulations require each Bancorp shareholder who receives
Company Class A Common Stock pursuant to the Distribution to attach to such
shareholder's federal income tax return for the year in which the Distribution
occurs a detailed statement setting forth such data as may be appropriate in
order to show the applicability of Section 355 of the Code to the
Distribution. Bancorp will provide the appropriate information to each
shareholder of record as of the Distribution Record Date.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO
RECEIVED THEIR SHARES OF BANCORP COMMON STOCK THROUGH THE EXERCISE OF AN
EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION OR WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL
TREATMENT UNDER THE CODE. ALL SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES AS OF THE DISTRIBUTION TO THEM,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
22
<PAGE>
LISTING AND TRADING OF THE COMMON STOCK
Subject to official notice of issuance from the NYSE, the Company Class A
Common Stock will be listed on the NYSE and will trade under the symbol "IFG."
There is no current public trading market for the Company Class A Common
Stock, although it is expected that a "when-issued" trading market will
develop prior to the Distribution Date. The term "when-issued" means trading
in shares prior to the time certificates are actually available or issued. If
the conditions to the Distribution are not satisfied and the Distribution is
not paid, any such when-issued trading will become null and void. If the
conditions to the Distribution are satisfied and the Distribution is paid on
the Distribution Date, it is expected that regular way trading in the Company
Class A Common Stock on the NYSE will commence at 9:30 a.m. (New York time) on
October 2, 1998, subject to official notice of issuance.
Bancorp Common Stock will continue to be listed and traded on the NYSE after
the Distribution.
The Company Class A Common Stock issued to shareholders of Bancorp Common
Stock will be freely transferable, except for shares received by persons who
may be deemed to be "affiliates" of the Company under the Securities Act of
1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of the Company after the Distribution generally include individuals
or entities that control, are controlled by, or are under common control with,
the Company and may include certain officers and directors of the Company.
Persons who are affiliates of the Company will be permitted to sell their
Company Class A Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, such as the exemptions afforded by Section
4(1) of the Securities Act and Rule 144 thereunder.
For a discussion of certain uncertainties that should be considered in
trading in the Company Class A Common Stock, see "Risk Factors--Absence of
Trading History for the Common Stock."
23
<PAGE>
DISTRIBUTION CONDITIONS AND TERMINATION
The consummation of the Distribution is conditioned upon fulfillment of each
of the following conditions: (i) the Ruling not having been withdrawn or
modified in a manner adverse to Bancorp, the Bank or Bancorp's shareholders;
(ii) the Contribution (including transfers of certain assets and liabilities
to the Company contemplated by the Contribution Agreement) having been
consummated (see "Relationship and Agreements Among the Company, the Bank and
Bancorp After the Distribution--Contribution Agreement"); (iii) the Company
Class A Common Stock having been approved for listing on the NYSE subject to
official notice of issuance; (iv) the Registration Statement having been
declared effective by the Commission; (v) all authorizations, consents,
approvals and clearances from all federal and state governmental agencies
required to permit the valid consummation of the transactions contemplated by
the Contribution and the Distribution having been obtained, without any
conditions being imposed that would have a material adverse effect, and all
statutory requirements for such valid consummation having been fulfilled (see
"Business--Regulatory Matters"); (vi) Bancorp having provided the NYSE with
prior written notice of the Distribution Record Date as required by the
Exchange Act, and the rules and regulations of the NYSE; (vii) no preliminary
or permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a government, regulatory or administrative agency
or commission, and no statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, being in effect preventing the
payment of the Distribution; (viii) the Credit Facilities being in place, with
all conditions to borrowing thereunder being satisfied or waived; and (ix) the
Bancorp Board being satisfied that, after giving effect to the Contribution
and the Distribution, (A) neither Bancorp nor the Company will be insolvent or
will have unreasonably small capital with which to engage in its respective
business and (B) Bancorp and the Bank will be able to make the Distribution in
accordance with applicable law.
Any condition to the Distribution may be waived at any time prior to the
Distribution Date, for any reason, in the sole discretion of the Bancorp
Board. In addition, even if all the above conditions are satisfied, the
Contribution Agreement may be amended or terminated, and the Distribution may
be abandoned, at any time prior to the Distribution Date for any reason, in
the sole discretion of the Bancorp Board.
24
<PAGE>
REGULATORY APPROVALS AND CONSIDERATIONS
FEDERAL LAWS AND REGULATIONS
Federal Deposit Insurance of Accounts. CAB satisfied all conditions imposed
by the FDIC, and on June 2, 1998, the FDIC approved the Company's Application
for Federal Deposit Insurance for CAB. CAB thereby became a member of the FDIC
and its deposit accounts became insured by the Bank Insurance Fund of the
FDIC. See "Business--Regulatory Matters--CAB--Federal Law."
The Change in Bank Control Act. California-licensed industrial loan
companies are insured depository institutions under the Federal Deposit
Insurance Act. Accordingly, such industrial loan companies and their holding
companies are subject to the Change in Bank Control Act (the "Change in Bank
Control Act") and regulations promulgated by the FDIC thereunder. The Change
in Bank Control Act provides in part that no person, acting directly or
indirectly or through or in concert with one or more persons, may acquire
control of an insured depository institution through a purchase, assignment,
transfer, pledge or other disposition of voting stock unless the appropriate
Federal banking agency has been given 60 days' prior written notice of, and
has not issued a notice disapproving, the acquisition. The FDIC is the
appropriate federal banking agency administering the Change in Bank Control
Act with respect to industrial loan companies.
The Change in Bank Control Act defines control as the power, directly or
indirectly, to direct the management or policies of the insured depository
institution or to vote 25% of any class of its voting securities. The FDIC has
established regulations that provide that an acquisition which results in the
ownership or control of, or power to vote, 10% or more of a class of voting
securities will be presumed to result in an acquisition of control if the
insured depository institution has issued any class of securities subject to
the registration requirements of Section 12 of the Exchange Act or, if
immediately after the transaction, no other person will own a greater
proportion of that class of voting securities. After giving effect to the
Distribution the Company will have, and ICII currently has, a class of
securities subject to registration under Section 12 of the Exchange Act.
As a result of the Contribution, all of the issued and outstanding shares of
CAB will be acquired by the Company, constituting an acquisition of control of
CAB by the Company. Additionally, the Contribution contemplates that the
shares of common stock of ICII currently owned by the Bank, which represented
approximately 23.0% of the issued and outstanding shares of ICII as of June
30, 1998, will likewise be transferred to the Company, which transaction will
constitute a transfer of indirect control of Southern Pacific Bank, a wholly-
owned subsidiary of ICII ("SPB"). Accordingly, the contribution of 100% of the
issued and outstanding shares of common stock of CAB to the Company and the
contribution of the shares in ICII to the Company requires notice to, and
nondisapproval of, the FDIC under the Change in Bank Control Act. The FDIC has
given such approval provided such transactions constituting the Contribution
be effected no later than October 31, 1998.
Effectiveness of Divestiture of ICII Stock. Previously effective provisions
of the BHCA, and provisions of Regulation Y promulgated thereunder, required a
determination of the Federal Reserve Board upon the divestiture by a bank
holding company of a subsidiary engaged in nonbanking activities. These
provisions have been repealed, and the Company has been advised that the
effectiveness of a divestiture of the shares of a subsidiary engaged in
nonbanking activities is now customarily determined following a divestiture as
part of the bank holding company examination process. This involves a
determination of whether Bancorp would be deemed to control the Company under
the provisions of the BHCA after the Distribution. In order to avoid the
uncertainty inherent in such an after-the-fact determination, the Company and
Bancorp sought written confirmation from the Federal Reserve Board prior to
the Distribution that, after the divestiture by the Bank of its investment in
ICII in accordance with the Distribution, Bancorp would not be deemed to
control the Company. The Federal Reserve Board has issued its opinion that,
after the Distribution, Bancorp will not be deemed to control the Company
under the provisions of the BHCA.
Safety and Soundness Considerations. The Bank and the Company have formally
advised the FDIC and the California Department of Financial Institutions (the
"DFI") of the terms and conditions of the transfer of
25
<PAGE>
the assets of the Bank's small business lending division and LHO and of the
transfer of the investment in ICII. Both the FDIC and the DFI have
responsibility over the safety and soundness of the Bank and the adequacy of
the Bank's capital in light of its business activities. In order to minimize
any uncertainty about how each of these agencies would view the effect of
these transfers on the Bank in a subsequent examination, the Bank and the
Company have obtained the non-objection of each of the foregoing regulatory
agencies to such transfers.
SBA Lender Approvals. CAB has approvals from the SBA to originate SBA loans
under the Guaranteed Participant, Certified Lender and Preferred Lender
programs.
CALIFORNIA LAWS AND REGULATIONS
The California Industrial Loan Law. The Company determined that the business
of CAB should be conducted as a California industrial loan company operating
under the California Industrial Loan Law. On June 5, 1998, the DFI issued to
CAB a license to operate as an industrial loan company in California. See
"Business--Regulatory Matters--CAB--California Law."
The California Finance Lenders Law. The California Usury Law, Article XV of
the California Constitution (the "Usury Law"), generally limits the rates of
interest lenders may charge borrowers in California. It exempts, however,
certain licensed lenders from such interest rate limitations, including a
holder of a license under the California Finance Lenders Law (a "CFL
License"). On February 13, 1998, the DOC, the administrator of the California
Finance Lenders Law, issued a CFL License to the Company. Accordingly, the
Company is exempt from the Usury Law and the LHO division may conduct its
entertainment finance business free of the interest rate restrictions of the
Usury Law, subject to the terms of the California Finance Lenders Law. The CFL
License permits the LHO division of the Company to conduct its entertainment
and motion picture finance business from its office located at 1840 Century
Park East, 10th Floor, Los Angeles, California 90067. See "Business--LHO."
Change in Ownership. CAB and SPB, as industrial loan companies, are subject
to the California Industrial Loan Law, certain provisions of which are
applicable to holding companies of industrial loan companies. The California
Industrial Loan Law provides that no person may acquire in the aggregate 10%
or more of the capital stock of an industrial loan company without the written
consent of the DFI. In addition, the California Industrial Loan Law provides
that no person may acquire in the aggregate 10% or more of the capital stock
or other securities that have voting power or control over the management of a
holding company of an industrial loan company such as ICII (or the Company
after the Contribution), without the written consent of the DFI. Accordingly,
the contribution of all of the issued and outstanding shares of common stock
of CAB to the Company requires the written consent of the DFI under the
California Industrial Loan Law. In addition, because the investment of the
Bank in ICII shares is likely to be considered by the DFI as possessing voting
power or control over the management of ICII, the acquisition of such shares
by the Company also requires the written consent of the DFI under the
California Industrial Loan Law. The DFI granted such consents provided that
such change in control occurs no later than October 31, 1998.
The California Acquisition of Control Law. ITC is considered a bank for
purposes of, and as a result is subject to, Sections 700 et seq. of the
California Financial Code (the "California Acquisition of Control Law"). The
California Acquisition of Control Law provides that no person may acquire
control of a bank organized under the laws of the state of California, or a
person who directly or indirectly controls a bank organized under the laws of
the state of California, without the approval of the DFI. Control is defined
for purposes of the California Acquisition of Control Law as the possession,
direct or indirect, of the power to vote 25% or more of any class of voting
securities or to direct or cause the direction of the management and policies
of a person, whether through the ownership of voting securities, by contract
(other than a commercial contract for goods or nonmanagement services) or
otherwise. The California Acquisition of Control Law further provides that a
person who, directly or indirectly, owns, controls, holds with power to vote,
or holds proxies representing, 10% or more of the then outstanding voting
securities issued by another person is presumed to control such other person.
The DFI has granted its approval for the change in control of ITC provided
that same occur no later than October 31, 1998.
26
<PAGE>
Restrictions on Dividends. The provisions of the California Financial Code
which are applicable to California-chartered banks, such as the Bank, restrict
its ability to make distributions to its shareholders. Generally, a
California-chartered bank may not make any distribution to the shareholder of
such bank in an amount which exceeds the lesser of (i) the retained earnings
of the bank or (ii) the net income of the bank for its last three fiscal
years, less the amount of any distributions made by the bank or by any
majority-owned subsidiary of the bank to the shareholders of the bank during
such period. However, a bank may, with the approval of the DFI, make a
distribution to its shareholder in an amount not exceeding the greatest of (i)
the retained earnings of the bank, (ii) the net income of the bank for its
last fiscal year or (iii) the current income of the bank for its current
fiscal year. It is a condition to the Distribution that the DFI approve the
Distribution. See "Distribution Conditions and Termination."
27
<PAGE>
RELATIONSHIP AND AGREEMENTS AMONG THE COMPANY,
THE BANK AND BANCORP AFTER THE DISTRIBUTION
GENERAL
In connection with the Distribution, the Company, Bancorp, the Bank and
certain subsidiaries of the Company will enter into prior to the Distribution
Date agreements for the purpose of giving effect to certain transactions
necessary for the Distribution and defining their ongoing relationship.
Certain of these agreements will not be the result of arm's-length
negotiations. The Company, Bancorp and the Bank, however, intend to negotiate
such agreements on terms at least as favorable to the Company or to Bancorp as
could have been obtained from unaffiliated third parties.
Following the Distribution, additional or modified agreements, arrangements
and transactions may be entered into by the Company, Bancorp and/or their
respective subsidiaries. Any such future agreements, arrangements and
transactions will be determined, at such time, through arm's-length
negotiations between the parties.
The following is a summary of certain agreements, arrangements and
transactions to be entered into as of the Distribution Date among the Company,
Bancorp, the Bank and certain subsidiaries of the Company. Certain of these
agreements have been filed as exhibits to the Registration Statement and,
although the following descriptions address all of the material aspects of the
exhibits, they do not purport to be complete and are qualified in their
entirety by reference to such exhibits.
CONTRIBUTION AGREEMENT
Bancorp, the Bank, the Company and CAB will enter into the Contribution
Agreement providing for, among other things, certain corporate transactions
required to effect the Contribution, the Distribution and other arrangements
between Bancorp and the Company subsequent to the Distribution as described
below.
The Contribution Agreement provides that prior to the Distribution, the Bank
will contribute to the Company the IFG Business. The Bank will contribute to
the Company (i) all of the assets relating to the LHO division (and the
Company will assume all liabilities relating thereto), (ii) all of the
outstanding capital stock of CAB and ITC and (iii) all of the common stock of
ICII owned by the Bank. In consideration for transferring the IFG Business,
the Company will assume (or cause to be assumed) all liabilities, whether
arising prior to, on or after the Distribution Date, relating to such assets.
See "Risk Factors--Assumed Liabilities and Obligations" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
assets will be transferred without any representation or warranty, "as is",
"with all faults." Bancorp, the Bank and the Company each will agree to
execute and deliver such further assignments, documents of transfer, deeds and
instruments as may be necessary for the more effective implementation of such
transfers.
The Contribution Agreement also will provide that the Bank will retain
certain loans secured by mortgages on single family residential properties
(and the Company will not assume the liabilities relating thereto) which were
retained by the Bank in connection with the formation of ICII in 1992. See
"Unaudited Pro Forma Combined Financial Data." In addition, the Company will
assume the Bank's obligations under a consulting agreement with a company
wholly owned by G. Louis Graziadio, III. See "Executive Compensation--
Employment Arrangements."
The Contribution Agreement also will provide for the consummation of certain
corporate transactions required to effect the Distribution after completion of
the Contribution. These transactions will include effecting a dividend of all
of the Company Class A Common Stock from the Bank to Bancorp, and then from
Bancorp to the Bancorp shareholders as of the Distribution Record Date. In
addition, the Contribution Agreement assigns between Bancorp and the Company
responsibility for and rights to control any litigation pending as of the
Distribution Date. The Distribution is subject to a number of conditions. See
"Distribution Conditions and Termination."
28
<PAGE>
The Company and the Bank will each make certain representations and
warranties in the Contribution Agreement with respect to, among other things,
the authority of such entities to consummate the transactions contemplated
thereby and the consents and approvals necessary to consummate such
transactions. These representations and warranties will survive after the
Distribution. The Bank and the Company also will agree in the Contribution
Agreement that the IFG Business will have a net book value, as described
therein, as of the Distribution Date of approximately $27 million plus the
after-tax book value of the ICII stock held by the Company. Immediately
following the Distribution, the Company will accrue an after tax charge of
approximately $1.3 million to reflect the termination of an obligation under a
consulting agreement that will be assumed by the Company as part of the
Distribution conditioned upon the consummation of the Distribution. As such,
following the Distribution, the net book value of the Company will be reduced
by approximately $1.3 million (see "Executive Compensation--Employment
Arrangements").
The balances that exist as of the Distribution Date under the benefit plans
established for those Bancorp employees who are becoming Company employees in
connection with the Distribution (the "Transferred Employees") will be
transferred to the Company pursuant to the Contribution Agreement. The Company
intends to establish benefit plans for the Transferred Employees that will
mirror the benefit plans such employees had as Bancorp employees. See
"Executive Compensation--Treatment of Bancorp Options and Other Benefits
Following the Distribution."
Each of the Company and the Bank will agree in the Contribution Agreement to
pay its own expenses in connection with consummating the transactions
contemplated thereby.
TAX SHARING AGREEMENT
Bancorp and the Company will enter into a tax sharing agreement (the "Tax
Sharing Agreement") that will govern the allocation between Bancorp and the
Company of federal, state, local and foreign tax liabilities for taxable
periods before and after the Distribution, and related matters such as the
preparation and filing of tax returns and the conduct of audits and other tax
proceedings. Generally, the Tax Sharing Agreement will provide that the
Company will be responsible for, and will indemnify Bancorp against, tax
liabilities relating to the IFG Business for taxable periods commencing after
the Distribution and Bancorp will be responsible for, and will indemnify the
Company against, tax liabilities relating to the IFG Business for taxable
periods prior to Distribution and for transaction taxes resulting from the
Contribution and the Distribution.
In addition, the Tax Sharing Agreement will provide that if, as a result of
any event that is within the control of the Company or any of its subsidiaries
or any other event related to the acquisition of the Company Class A Common
Stock, any taxes or other liability, costs or expenses are imposed on Bancorp
or any of its subsidiaries (other than the Company or its subsidiaries) which
in either case, arises from the Distribution or transactions related to the
Distribution, then the Company will be obligated to indemnify and hold
harmless, on an after-tax basis, Bancorp and its subsidiaries with respect to
any such taxes or other liability, costs or expenses. The Tax Sharing
Agreement also will provide that if, as a result of any event that is within
the control of the Bank, Bancorp or any of their subsidiaries (other than the
Company or its subsidiaries) or any other event related to the acquisition of
Bancorp Common Stock, any taxes or other liability, costs or expenses are
imposed on the Company or any of its subsidiaries which arise from the
Distribution or transactions related to the Distribution then the Bank and
Bancorp will be obligated to indemnify and hold harmless, on an after-tax
basis, the Company and its subsidiaries with respect to any such taxes or
other liability, costs or expenses.
OTHER AGREEMENTS
The Bank and the Company will enter into an interim services agreement under
which the Bank will provide certain services to the Company for specified fees
for a one year term beginning on the Distribution Date. The agreement will
automatically renew for an additional one-year term unless either party
delivers written notice to the other party of its intention not to renew
within 60 days prior to the first anniversary of the date of the agreement.
The principal services to be provided by the Bank to the Company will include
human resources
29
<PAGE>
support in payroll, record keeping, recruiting and other employee benefit
areas, audit services, loan review and security services. The Company will
have the right to terminate the agreement or any service provided thereunder
upon 60 days written notice to the Bank. In addition, the Company expects to
enter into certain subleases with the Bank for the use of certain of its
facilities after the Distribution Date.
RELATIONSHIP AMONG THE COMPANY, THE BANK AND BANCORP AFTER THE DISTRIBUTION
After the Contribution and Distribution, the Company and Bancorp will
operate independently of each other as separate public companies, and will
compete against each other in certain businesses. See "Risk Factors--
Competition and Conflicts of Interest Between the Company and the Bank."
Neither the Company nor Bancorp will have any beneficial stock ownership
interest in the other (although employee benefit plan trusts sponsored by the
Company and Bancorp and/or certain of their respective subsidiaries will hold
certain of the other company's shares). Each of Bancorp and the Company has an
independent Board of Directors and management with no overlaps except George
L. Graziadio, Jr., the chairman, president and chief executive officer of
Bancorp, who serves as the chairman of the Company Board; G. Louis Graziadio,
III, a director of Bancorp, who serves as chief executive officer of the
Company and as co-chairman of the Company Board; and Lee E. Mikles and Paul A.
Novelly, each of whom serves on the boards of Bancorp and/or the Bank and
serves on the Company Board. The service by directors and officers of Bancorp
and the Bank as directors and/or officers of the Company could create
conflicts of interest when those directors and officers are faced with
decisions that could have different implications for Bancorp and the Company.
The Company has not instituted any formal plan or arrangement to address
potential conflicts of interest that may arise between Bancorp and the
Company. However, under Delaware corporate law, officers and directors of the
Company owe fiduciary duties to the Company and its stockholders.
DIVIDEND POLICY
It is currently contemplated that the Company will not pay cash dividends on
Company Class A Common Stock for the immediately foreseeable future following
the Distribution. The payment and amount of future dividends will be at the
discretion of the Company Board and will depend upon the Company's future
earnings, financial condition, capital requirements and other factors,
including any limitations under then existing credit facilities. The Credit
Facilities will contain restrictions on the Company's ability to pay
dividends. See "Credit Facilities." In addition, CAB and ITC are restricted in
their ability to make dividends to the Company by applicable California law.
See "Regulatory Approvals and Considerations" and "Business--Regulatory
Matters--Federal Law--Prompt Corrective Action Requirements."
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<PAGE>
CAPITALIZATION
The following table, which is unaudited, sets forth, as of June 30, 1998,
the capitalization of the Company, as adjusted to reflect the Distribution and
the incurrence by the Company of approximately $95 million of indebtedness
under the Credit Facilities, the repayment of borrowings from the Bank and the
adjusted net book value of the Company in accordance with the Contribution
Agreement, as if such transactions occurred as of that date. This data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements and
notes thereto of the Company included elsewhere in this Information Statement.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS (2) AS ADJUSTED
-------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Time deposits............................ $ 37,480 -- $ 37,480
Credit Facilities........................ -- 95,231 95,231
Borrowings from Imperial Bank............ 47,225 (47,225) --
-------- -------- --------
Total borrowings....................... 84,705 48,006 132,711
-------- -------- --------
Stockholder's equity
Class A common stock, par value $0.01
per share, 50 million shares
authorized, approximately 19,878,335
shares issued and outstanding (as
adjusted)(1).......................... -- 199 199
Class B common stock, par value $0.01
per share, 10 million shares
authorized, no shares issued and
outstanding(1) ....................... -- -- --
Contribution by Imperial Bank.......... 11,597 (199) 11,398
Unrealized gain on securities available
for sale, net of taxes................ (187) -- (187)
Retained earnings...................... 115,306 (49,835) 65,471
-------- -------- --------
Total stockholder's equity........... 126,716 (49,835) 76,881
-------- -------- --------
Total capitalization................. $211,421 $ (1,829) $209,592
======== ======== ========
</TABLE>
- --------
(1) See "Description of Capital Stock--Authorized Capital Stock."
(2) Reflects borrowings under the proposed Credit Facilities and repayment of
borrowings from the Bank. Reduction in retained earnings represents the
amount of net book value of the IFG business reflected in the Company's
historical financial statements in excess of the Company's net book value
as of June 30, 1998 in accordance with the Contribution Agreement. See
"Relationship and Agreements Among the Company, the Bank and Bancorp After
the Distribution" and "Credit Facilities."
31
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined income statement data for the years ended December 31,
1995, 1996 and 1997 and selected combined balance sheet data as of December
31, 1996 and 1997 have been derived from the Company's audited combined
financial statements included herein. The selected combined income statement
data for the year ended December 31, 1994 and selected combined balance sheet
data as of December 31, 1995 have been derived from the Company's audited
combined financial statements not included herein. The selected combined
income statement data for the year ended December 31, 1993 and the selected
combined balance sheet data at December 31, 1993 and 1994 have been derived
from the unaudited combined financial statements of the Company not included
herein. The selected combined income statement data for the six months ended
June 30, 1997 and 1998 and the selected combined balance sheet data as of June
30, 1998 have been derived from the unaudited combined financial statements of
the Company included herein and include all adjustments, consisting solely of
normal recurring accruals, which management considers necessary for a fair
presentation of such financial information for those periods. Historical
combined financial information may not be indicative of the Company's future
performance as an independent company. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Interest on loans.... $ 4,408 $ 4,228 $ 6,726 $ 10,629 $ 14,355 $ 6,319 $ 8,955
Other interest
income.............. 102 131 153 158 235 84 187
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest
income............ 4,510 4,359 6,879 10,787 14,590 6,403 9,142
Interest expense .... 1,195 256 1,287 1,973 3,277 769 2,831
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest
income............ 3,315 4,103 5,592 8,814 11,313 5,634 6,311
Provision for loan
losses.............. 633 -- 1,492 1,781 2,558 1,512 736
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision
for loan losses... 2,682 4,103 4,100 7,033 8,755 4,122 5,575
---------- ---------- ---------- ---------- ---------- ---------- ----------
Trust fees........... 5,667 6,857 8,385 7,744 7,967 3,844 4,302
Gain on sale of SBA
loans............... 411 1,724 1,813 3,561 3,944 2,019 2,537
Equity in net income
of ICII ............ 7,898 2,388 5,652 21,444 20,260 5,005 6,699
Gain on sale of ICII
stock .............. 14,538 -- -- 25,650 4,977 -- --
Gain from sale of
stock by ICII....... -- -- -- 10,761 -- -- --
Other income......... 471 430 677 4,958 5,443 4,163 1,223
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue...... 31,667 15,502 20,627 81,151 51,346 19,153 20,336
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Personnel expense.... 3,388 4,338 4,827 6,153 9,315 4,623 6,296
Other expenses....... 4,357 4,515 5,568 10,680 18,134 7,937 5,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses..... 7,745 8,853 10,395 16,833 27,449 12,560 11,868
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
income taxes and
extraordinary
item.............. 23,922 6,649 10,232 64,318 23,897 6,593 8,468
Income taxes......... 10,129 2,821 4,313 25,674 8,737 2,423 3,572
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before
extraordinary item.. 13,793 3,828 5,919 38,644 15,160 4,170 4,896
---------- ---------- ---------- ---------- ---------- ---------- ----------
Extraordinary item--
gain on
extinguishment of
ICII debt, net of
taxes............... -- 370 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income......... 13,793 4,198 5,919 38,644 15,160 4,170 4,896
Other comprehensive
income(1)........... -- (40) 38 2 228 74 (418)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Comprehensive
income............ $ 13,793 $ 4,158 $ 5,957 $ 38,646 $ 15,388 $ 4,244 $ 4,478
========== ========== ========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding(2):
Basic................ 17,301,446 17,640,080 18,224,024 18,782,675 19,398,542 19,286,025 19,767,698
Diluted.............. 17,391,309 17,738,940 18,319,842 18,914,783 19,791,712 19,673,291 20,906,698
Pro forma earnings per
share(3):
Basic................ $ 0.80 $ 0.24 $ 0.32 $ 2.06 $ 0.78 $ 0.22 $ 0.25
Diluted.............. $ 0.79 $ 0.24 $ 0.32 $ 2.04 $ 0.77 $ 0.21 $ 0.23
</TABLE>
- -------
(1) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130 "Reporting Comprehensive Income as of January 1, 1998.
(2) Share amounts are based on a distribution ratio of one share of Company
Class A Common Stock for every two shares of outstanding Bancorp Common
Stock and include retroactive adjustments to reflect the February 6, 1998
Bancorp three-for-two stock split.
(3) Based on the Company's historical net income and weighted average shares
as if the Transactions occurred at the beginning of each of the periods
presented.
32
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------ AT JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........... $ 1,002 $ 1,896 $ 2,272 $ 5,245 $ 2,813 $ 10,448
Securities available
for sale, at fair
value................. 2,005 1,753 1,437 1,179 6,027 3,507
Receivable from
Imperial Bank......... -- 2,236 -- -- -- --
Loans held for sale.... 2,579 1,648 2,648 5,531 3,763 8,441
Loans held for
investment, net....... 36,847 26,369 75,518 72,528 134,407 139,210
Investment in stock of
ICII ................. 27,445 30,934 36,126 57,736 75,001 81,700
Other assets........... 5,578 4,814 7,029 7,129 5,972 7,310
------- ------- -------- -------- -------- --------
Total assets.......... $75,456 $69,650 $125,030 $149,348 $227,983 $250,616
======= ======= ======== ======== ======== ========
Time deposits.......... $ -- $ -- $ -- $ -- $ -- $ 37,480
Borrowings from
Imperial Bank......... 13,889 -- 49,897 6,184 77,934 47,225
Income taxes payable... 7,722 9,996 12,876 40,340 29,837 29,962
Other liabilities...... 3,759 5,410 4,056 5,978 7,974 9,233
------- ------- -------- -------- -------- --------
Total liabilities..... 25,370 15,406 66,829 52,502 115,745 123,900
Stockholder's equity... 50,086 54,244 58,201 96,846 112,238 126,716
------- ------- -------- -------- -------- --------
Total liabilities and
stockholder's equity.. $75,456 $69,650 $125,030 $149,348 $227,983 $250,616
======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA:
Loans originated:
LHO.................. $40,206 $25,857 $70,224 $55,951 $ 97,854 $49,139 $35,321
SBA and companion
loans............... 11,164 21,204 21,533 38,792 49,092 27,831 29,642
------- ------- ------- ------- -------- ------- -------
Total.............. $51,370 $47,061 $91,757 $94,743 $146,946 $76,970 $64,963
======= ======= ======= ======= ======== ======= =======
Trust assets under
administration (in
millions)............. $ 6,617 $ 5,704 $ 6,781 $ 7,532 $ 8,716 $ 8,386 $ 9,534
======= ======= ======= ======= ======== ======= =======
SELECTED RATIOS:
Average equity to
average assets........ 16.56% 70.74% 63.37% 56.02% 54.00% 61.05% 48.30%
Return on average
common equity......... 30.00 8.02 10.32 49.51 14.66 8.47 8.50
Return on average
assets................ 4.97 5.67 6.54 27.74 7.92 5.17 4.10
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 4.30% 3.27% 2.96% 3.42% 2.30% 1.77% 2.33%
Allowance for loan
losses as a
percentage of non-
accrual loans......... 37.48 47.79 56.89 53.42 102.54 153.77 103.65
Net charge-offs as a
percentage of average
loans held for
investment............ 0.62 0.26 1.21 0.87 0.66 0.53 0.26
</TABLE>
33
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
In connection with the Distribution, the Bank will contribute to the Company
(i) all of the assets and liabilities relating to LHO, a division of the Bank
that provides motion picture and television financing, (ii) all of the common
stock of CAB, a newly formed thrift and loan company that conducts, among
other businesses, the small business lending operations previously conducted
by the Bank, (iii) all of the common stock of ITC, a California licensed trust
company that offers a wide range of trust and investment management services,
and (iv) all of the common stock owned by the Bank (representing approximately
23.0% of all outstanding common stock as of June 30, 1998) in ICII, a publicly
traded, diversified specialty finance company. In addition, on August 3, 1998,
the Company entered into the ICII Shareholders Agreement granting the Company
the right to vote an additional 1.2 million shares of ICII common stock (or
3.0% of the outstanding ICII stock as of August 15, 1998) and providing the
Company with an option to purchase these shares. Accordingly, as of August 15,
1998, the Company beneficially owned approximately 26.0% of the outstanding
common stock of ICII. See "Business--Imperial Credit Industries, Inc."
No cash will be paid to Bancorp in connection with the Transactions.
The unaudited pro forma combined statements of income reflect the
Transactions as if they occurred at the beginning of each of the periods
presented. The unaudited pro forma combined balance sheets reflect the
Transactions as if they occurred at the dates indicated. The unaudited pro
forma combined financial data reflect the expected capitalization of the
Company as a result of the Distribution, the incurrence of debt by the Company
under the Credit Facilities (which is identified below as "Line of Credit"),
an assumed interest expense relating to such borrowings, amortization of
capitalized costs incurred in connection with the Credit Facilities and
retention of certain assets and liabilities by Bancorp. This pro forma
information does not necessarily reflect the results of operations or
financial position of the Company which would have been achieved had the
Transactions actually been consummated as of such dates. Also, this pro forma
financial information is not indicative of the future results of operations or
future financial position of the Company. See "Capitalization."
34
<PAGE>
PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
----------------------------------- -----------------------------------
ADJUST- ADJUST-
ACTUAL MENTS PRO FORMA ACTUAL MENTS PRO FORMA
---------- ------- ---------- ---------- ------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Interest on
loans............ $ 6,726 $(749)(1) $ 5,977 $ 10,629 $(868)(1) $ 9,761
Other interest
income........... 153 -- 153 158 -- 158
---------- ----- ---------- ---------- ----- ----------
Total interest
income......... 6,879 (749) 6,130 10,787 (868) 9,919
Interest expense.. 1,287 (649)(1)(2) 638 1,973 (436)(1)(2) 1,537
---------- ----- ---------- ---------- ----- ----------
Net interest
income......... 5,592 (100) 5,492 8,814 (432) 8,382
Provision for
loan losses...... 1,492 (444)(1) 1,048 1,781 (574)(1) 1,207
---------- ----- ---------- ---------- ----- ----------
Net interest
income after
provision for
loan losses.... 4,100 344 4,444 7,033 142 7,175
---------- ----- ---------- ---------- ----- ----------
Trust fees........ 8,385 -- 8,385 7,744 -- 7,744
Gain on sale of
SBA loans........ 1,813 -- 1,813 3,561 -- 3,561
Equity in net
income of ICII... 5,652 -- 5,652 21,444 -- 21,444
Gain on sale of
ICII stock ...... -- -- -- 25,650 -- 25,650
Gain from sale of
stock by ICII.... -- -- -- 10,761 -- 10,761
Other income...... 677 -- 677 4,958 -- 4,958
---------- ----- ---------- ---------- ----- ----------
Total other
income......... 16,527 -- 16,527 74,118 -- 74,118
---------- ----- ---------- ---------- ----- ----------
Total revenue... 20,627 344 20,971 81,151 142 81,293
---------- ----- ---------- ---------- ----- ----------
EXPENSE
Personnel
expense.......... 4,827 -- 4,827 6,153 -- 6,153
Other expenses.... 5,568 -- 5,568 10,680 -- 10,680
---------- ----- ---------- ---------- ----- ----------
Total expenses.. 10,395 -- 10,395 16,833 -- 16,833
---------- ----- ---------- ---------- ----- ----------
Income before
income taxes... 10,232 344 10,576 64,318 142 64,460
Income taxes...... 4,313 145(3) 4,458 25,674 60(3) 25,734
---------- ----- ---------- ---------- ----- ----------
Net income...... $ 5,919 $ 199 $ 6,118 $ 38,644 $ 82 $ 38,726
========== ===== ========== ========== ===== ==========
Weighted average
number of shares
outstanding(9):
Basic............. 18,224,024 18,224,024 18,782,675 18,782,675
Diluted........... 18,319,842 18,319,842 18,914,783 18,914,783
Pro forma earnings
per share:
Basic............. $ 0.32 $ 0.34(10) $ 2.06 $ 2.06(10)
========== ========== ========== ==========
Diluted........... $ 0.32 $ 0.33(10) $ 2.04 $ 2.05(10)
========== ========== ========== ==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------
ADJUST-
ACTUAL MENTS PRO FORMA
---------- -------------- --------------
<S> <C> <C> <C>
REVENUE
Interest on
loans............ $ 14,355 $ (582)(1) $ 13,773
Other interest
income........... 235 -- 235
---------- -------------- --------------
Total interest
income......... 14,590 (582) 14,008
Interest expense.. 3,277 2,099 (1)(2) 5,376
---------- -------------- --------------
Net interest
income......... 11,313 (2,681) 8,632
Provision for
loan losses...... 2,558 (315)(1) 2,243
---------- -------------- --------------
Net interest
income after
provision for
loan losses.... 8,755 (2,366) 6,389
---------- -------------- --------------
Trust fees........ 7,967 -- 7,967
Gain on sale of
SBA loans........ 3,944 -- 3,944
Equity in net
income of ICII... 20,260 -- 20,260
Gain on sale of
ICII stock ...... 4,977 -- 4,977
Gain from sale of
stock by ICII.... -- -- --
Other income...... 5,443 (3) 5,440
---------- -------------- --------------
Total other
income......... 42,591 (3) 42,588
---------- -------------- --------------
Total revenue... 51,346 (2,369) 48,977
---------- -------------- --------------
EXPENSE
Personnel
expense.......... 9,315 -- 9,315
Other expenses.... 18,134 -- 18,134
---------- -------------- --------------
Total expenses.. 27,449 -- 27,449
---------- -------------- --------------
Income before
income taxes... 23,897 (2,369) 21,528
Income taxes...... 8,737 (995)(3) 7,742
---------- -------------- --------------
Net income...... $ 15,160 $(1,374) $ 13,786
========== ============== ==============
Weighted average
number of shares
outstanding(9):
Basic............. 19,398,542 19,398,542
Diluted........... 19,791,712 19,791,712
Pro forma earnings
per share:
Basic............. $ 0.78 $ 0.71(10)
========== ==============
Diluted........... $ 0.77 $ 0.70(10)
========== ==============
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
35
<PAGE>
PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
-------------------------------------- --------------------------------------
PRO
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS FORMA
---------- ----------- ---------- ---------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Interest on loans...... $ 6,319 $ (387)(1) $ 5,932 $ 8,955 $ (256)(1) $ 8,699
Other interest income.. 84 -- 84 187 -- 187
---------- ------ ---------- ---------- ------- ----------
Total interest
income.............. 6,403 (387) 6,016 9,142 (256) 8,886
Interest expense....... 769 903 (1)(2) 1,672 2,831 1,344 (1)(2) 4,175
---------- ------ ---------- ---------- ------- ----------
Net interest income.. 5,634 (1,290) 4,344 6,311 (1,600) 4,711
Provision for loan
losses................ 1,512 (134)(1) 1,378 736 (40)(1) 696
---------- ------ ---------- ---------- ------- ----------
Net interest income
after provision for
loan losses......... 4,122 (1,156) 2,966 5,575 (1,560) 4,015
---------- ------ ---------- ---------- ------- ----------
Trust fees............. 3,844 -- 3,844 4,302 -- 4,302
Gain on sale of SBA
loans................. 2,019 -- 2,019 2,537 -- 2,537
Equity in net income
of ICII............... 5,005 -- 5,005 6,699 -- 6,699
Gain on sale of ICII
stock ................ -- -- -- -- -- --
Gain from sale of
stock by ICII......... -- -- -- -- -- --
Other income........... 4,163 -- 4,163 1,223 -- 1,223
---------- ------ ---------- ---------- ------- ----------
Total other income... 15,031 -- 15,031 14,761 -- 14,761
---------- ------ ---------- ---------- ------- ----------
Total revenue........ 19,153 (1,156) 17,997 20,336 (1,560) 18,776
---------- ------ ---------- ---------- ------- ----------
EXPENSE
Personnel expense...... 4,623 -- 4,623 6,296 458 (4) 6,754
Other expenses......... 7,937 -- 7,937 5,572 -- 5,572
---------- ------ ---------- ---------- ------- ----------
Total expenses....... 12,560 -- 12,560 11,868 458 12,326
---------- ------ ---------- ---------- ------- ----------
Income before income
taxes............... 6,593 (1,156) 5,437 8,468 (2,018) 6,450
Income taxes........... 2,423 (485)(3) 1,938 3,572 (847)(3) 2,725
---------- ------ ---------- ---------- ------- ----------
Net income........... 4,170 $ (671) $ 3,499 $ 4,896 $(1,171) $ 3,725
========== ====== ========== ========== ======= ==========
Weighted average number
of shares
outstanding(8):
Basic.................. 19,286,025 19,286,025 19,767,698 19,767,698
Diluted................ 19,673,291 19,673,291 20,906,698 20,906,698
Pro forma earnings per
share:
Basic.................. $ 0.22 $ 0.18(9) $ 0.25 $ 0.19(9)
========== ========== ========== ==========
Diluted................ $ 0.21 $ 0.18(9) $ 0.23 $ 0.18(9)
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
36
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1997 AT JUNE 30, 1998
-------------------------------- --------------------------------- ----------------------------
PRO PRO
ACTUAL ADJUSTMENTS FORMA ACTUAL ADJUSTMENTS FORMA ACTUAL ADJUSTMENTS
-------- ----------- -------- -------- ----------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents......... $ 5,245 $ -- $ 5,245 $ 2,813 $ -- $ 2,813 $ 10,448 --
Securities available
for sale, at fair
value............... 1,179 -- 1,179 6,027 -- 6,027 3,507 --
Loans held for sale.. 5,531 -- 5,531 3,763 -- 3,763 8,441 --
Loans held for
investment, net..... 72,528 (9,224)(5) 63,304 134,407 (5,793)(5) 128,614 139,210 (4,934)(5)
Investment in stock
of ICII............. 57,736 -- 57,736 75,001 -- 75,001 81,700 --
Premises and
equipment, net...... 306 -- 306 551 -- 551 1,442 --
Excess servicing fees
receivable.......... 3,294 -- 3,294 -- -- -- -- --
Loan servicing
rights.............. -- -- -- 1,914 -- 1,914 2,046 --
Other assets......... 3,529 (244)(5) 3,285 3,507 (239)(5) 3,268 3,822 1,631 (5)
-------- ------- -------- -------- -------- -------- -------- --------
Total assets........ $149,348 $(9,468) $139,880 $227,983 $ (6,032) $221,951 $250,616 $ (3,303)
======== ======= ======== ======== ======== ======== ======== ========
LIABILITIES
Time deposits under
$100,000............ $ -- $ -- $ -- $ -- $ -- $ -- $ 32,581 $ --
Time deposits
$100,000 and over... -- -- -- -- -- -- 4,899 --
Line of credit....... -- 35,382 (6) 35,382 -- 113,512 (6) 113,512 -- 95,231 (6)
Borrowings from
Imperial Bank....... 6,184 (6,184)(6) -- 77,934 (77,934)(6) -- 47,225 (47,225)(6)
Income taxes payable. 40,340 (612)(5) 39,728 29,837 147 (5) 29,984 29,962 10 (5)
Other liabilities.... 5,978 -- 5,978 7,974 (12)(5) 7,962 9,233 (1,484)(11)(4)
-------- ------- -------- -------- -------- -------- -------- --------
Total liabilities... 52,502 28,586 81,088 115,745 35,713 151,458 123,900 46,532
STOCKHOLDER'S EQUITY
Common stock......... -- 187 187 -- 196 (10) 196 -- 199 (10)
Contribution by
Imperial Bank....... 1,597 (187) 1,410 1,597 (196)(10) 1,401 11,597 (199)(10)
Unrealized gain on
securities available
for sale, net of
taxes............... (1) -- (1) 231 -- 231 (187) --
Retained earnings.... 95,250 (38,054)(7) 57,196 110,410 (41,745)(7) 68,665 115,306 (49,835)(7)(11)
-------- ------- -------- -------- -------- -------- -------- --------
Total stockholder's
equity............. 96,846 (38,054) 58,792 112,238 (41,745) 70,493 126,716 (49,835)
-------- ------- -------- -------- -------- -------- -------- --------
Total liabilities
and stockholder's
equity............. $149,348 $(9,468) $139,880 $227,983 $ (6,032) $221,951 $250,616 $ (3,303)
======== ======= ======== ======== ======== ======== ======== ========
<CAPTION>
PRO
FORMA
---------
<S> <C>
ASSETS
Cash and cash
equivalents......... $ 10,448
Securities available
for sale, at fair
value............... 3,507
Loans held for sale.. 8,441
Loans held for
investment, net..... 134,276
Investment in stock
of ICII............. 81,700
Premises and
equipment, net...... 1,442
Excess servicing fees
receivable.......... --
Loan servicing
rights.............. 2,046
Other assets......... 5,453
---------
Total assets........ $247,313
=========
LIABILITIES
Time deposits under
$100,000............ $ 32,581
Time deposits
$100,000 and over... 4,899
Line of credit....... 95,231
Borrowings from
Imperial Bank....... --
Income taxes payable. 29,972
Other liabilities.... 7,749
---------
Total liabilities... 170,432
STOCKHOLDER'S EQUITY
Common stock......... 199
Contribution by
Imperial Bank....... 11,398
Unrealized gain on
securities available
for sale, net of
taxes............... (187)
Retained earnings.... 65,471
---------
Total stockholder's
equity............. 76,881
---------
Total liabilities
and stockholder's
equity............. $247,313
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial data.
37
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The unaudited pro forma combined financial data presented reflect the
elimination of certain assets and liabilities and the related revenues and
expenses which will be retained by the Bank after the Distribution and to
which the Company will have no future rights to, or receive economic benefit
from, and to reflect an increase in interest expense as if the Company had
operated using its proposed Credit Facilities during all periods presented.
(1) Reflects the retention of ICII related mortgage loans by the Bank pursuant
to the Contribution Agreement and the impact on interest income, interest
expense and the provision for loan losses. See "Relationship and
Agreements Among the Company, the Bank and Bancorp After the
Distribution--Contribution Agreement."
(2) Reflects the inclusion of estimated additional interest expense related to
the additional borrowings and interest expense which would have been
incurred had the Company financed its borrowings on the terms of the
Credit Facilities and CAB's actual certificate of deposit rates rather
than the Bank's average 90 day certificate of deposit rate plus 100 basis
points. Assumes that the Credit Facilities will provide for an interest
rate of LIBOR (as defined herein) plus 145 basis points plus loan and
other fees. The estimated effective weighted average interest rate for the
years ended December 31, 1995, 1996 and 1997 and the six months ended June
30, 1997 and 1998 was 7.60%, 7.23%, 7.41%, 7.26% and 7.67%, respectively,
as compared to 6.93%, 6.46%, 6.48%, 6.38% and 6.52% reflected in the
historical combined financial statements for the same periods.
(3) Reflects the tax impact of pro forma adjustments to income before taxes.
(4) Reflects the establishment of miscellaneous accruals resulting from the
Distribution.
(5) Reflects the retention of certain assets, including ICII related mortgage
loans, and liabilities by the Bank pursuant to the Contribution Agreement.
See "Relationship and Agreements Among the Company, the Bank and Bancorp
After the Distribution--Contribution Agreement." At June 30, 1998 also
reflects the cost capitalized related to the ICII Shareholders Agreement.
See "Business--Imperial Credit Industries, Inc."
(6) Reflects borrowings under the proposed Credit Facilities and repayment of
borrowings from the Bank. See "Credit Facilities."
(7) Represents the amount of net book value of the IFG Business reflected in
the Company's historical financial statements in excess of the Company's
net book value as of June 30, 1998, December 31, 1997 and December 31,
1996 in accordance with the Contribution Agreement. See "Relationship and
Agreements Among the Company, the Bank and Bancorp After the
Distribution--Contribution Agreement" and "Credit Facilities."
(8) Represents the weighted average number of shares of Bancorp Common Stock
outstanding during the period and includes retroactive adjustments to
reflect the February 6, 1998 Bancorp three-for-two stock split and the
distribution ratio of one share of Company Class A Common Stock for every
two shares of outstanding Bancorp Common Stock.
(9) Reflects the Company's pro forma net income and weighted average shares as
if the Transactions occurred at the beginning of each of the years
presented.
(10) Reflects issuance of 19,878,335 shares (based on 39,756,670 shares of
Bancorp Common Stock outstanding at June 30, 1998) on the date of the
Distribution.
(11) Includes the after tax charge of approximately $1.3 million upon the
termination of an obligation under a consulting agreement that will be
assumed by the Company as part of the Distribution. See "Executive
Compensation--Employment Arrangements."
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes in trends related to
the financial condition of the Company and its results of operations. It
should be read in conjunction with the Company's Combined Financial Statements
and Notes thereto included elsewhere in this Information Statement.
The Combined Financial Statements and Notes thereto reflect the historical
operation of the Company together with all of its assets and liabilities as if
the Company existed as a stand alone entity during the periods presented.
These historical operations of the Company have been adjusted to reflect the
Company as a stand-alone company, including the adjustments to reflect the
borrowings, equity, taxes, various overhead costs related to the Company and
necessary deconsolidating entries.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Total revenues for the six months ended June 30, 1998 increased 6% to $20.3
million as compared to $19.2 million for the same period of the previous year.
Expenses for the six months ended June 30, 1998 decreased 6% to $11.9 million
as compared to $12.6 million for the same period of the previous year. Net
income for the six months ended June 30, 1998 increased 17% to $4.9 million as
compared to $4.2 million for the same period of the previous year. Net income
increased primarily due to increases in net interest income, equity in the net
income of ICII, and the gain on sale of SBA loans, and a decrease in the net
impact of donated ICII stock for the six months ended June 30, 1998 as
compared to that recorded during the six months ended June 30, 1997.
Net income for the six months ended June 30, 1998, excluding (i) gains from
the sale of ICII stock, (ii) income and expense associated with the
appreciation in value of ICII stock subsequently donated to not-for-profit
organizations and (iii) settlement of a consulting agreement ("core net
income"), decreased 1% to $4.9 million from $5.0 million for the same period
of the previous year.
The annualized return on average stockholder's equity for the six months
ended June 30, 1998 was 8.52%, an increase from 8.47% for the same period of
the previous year. The annualized return on average total assets was 4.11% for
the six months ended June 30, 1998, a decrease from 5.17% for the same period
of the previous year. Annualized core net income as a percentage of average
stockholder's equity for the six months ended June 30, 1998 was 8.52%, a
decrease from 10.13% for the same period of the previous year. Annualized core
net income as a percentage of average assets for the six months ended June 30,
1998 was 4.11%, a decrease from 6.18% for the same period of the previous
year.
The increase in interest income for the six months ended June 30, 1998 to
$9.1 million from $6.4 million for the same period of 1997 resulted primarily
from the $56 million, or 59% increase, in average loans for 1998 from 1997.
The increase in interest expense to $2.8 million in 1998 from $0.8 million in
1997 was primarily attributable to a $57 million increase in average
borrowings from the Bank in 1998.
Net interest income amounted to $6.3 million for the six months ended June
30, 1998, up from $5.6 million for the same period of 1997, an increase of
12%. This increase was primarily due to the growth in average interest-earning
assets from $96.9 million at June 30, 1997 to $155.6 million at June 30, 1998.
The Company's net interest margin for the six months ended June 30, 1998 and
1997 was 8.24% and 11.72%, respectively. The decrease in the net interest
margin was mainly due to lower yields earned on the Company's loans held for
investment portfolio during the six months ended June 30, 1998. The yield on
loans held for investment decreased from 13.84% for the six months ended June
30, 1997 to 12.22% for the same period of 1998 primarily due to increased
competition. The decrease in the net interest margin was also impacted by an
increase in the cost of borrowings from 6.38% for the six months ended June
30, 1997 to 6.63% for the six months ended June 30, 1998 and an increase in
average interest earning assets from $96.9 million at June 30, 1997 to
$155.6 million at June 30, 1998.
39
<PAGE>
The provision for loan losses for the six months ended June 30, 1998 was
$0.7 million as compared to $1.5 million for the same period of 1997. At June
30, 1998 and 1997, the allowance for loan losses as a percentage of total
loans held for investment was 3.37% and 3.22%, respectively. The allowance for
loan losses as a percentage of non-accrual loans at June 30, 1998 and 1997 was
103.65% and 153.77%, respectively.
Trust fee income amounted to $4.3 million and $3.8 million for the six
months ended June 30, 1998 and 1997, respectively, while trust assets under
administration increased 14% to $9.5 billion at June 30, 1998 from $8.4
billion at June 30, 1997. In late 1994, ITC purchased from the Federal Deposit
Insurance Corporation, in its capacity as receiver of CommerceBank, the
custody of approximately $193 million in certificates of deposit. The fees
related to the custody of these deposits have decreased since the purchase as
the certificates of deposit have matured. These fees decreased from $377,000
for the six months ended June 30, 1997 to $50,000 for the six months ended
June 30, 1998. Trust fees as a percentage of average trust assets under
administration were 0.09% and 0.10% for the six months ended June 30, 1998 and
1997, respectively.
Gain on sale of SBA loans increased 26% to $2.5 million for the six months
ended June 30, 1998 as compared to $2.0 million for the same period of the
previous year. Gain on sale of SBA loans primarily consists of the cash gains
recorded from the sale of the guaranteed portion of SBA loans and the present
value of future cash flows of loans sold over a base fee. The increase for the
six months ended June 30, 1998 compared to the same period of the previous
year was due to an increase in the volume of loans sold. During the six months
ended June 30, 1998, the Company sold $16 million of loans compared to $21
million of loans sold during the six months ended June 30, 1997.
The Company's equity in the net income of ICII for the six months ended June
30, 1998 increased to $6.7 million from $5.0 million for the six months ended
June 30, 1997. The increase in ICII's net income for the six months ended June
30, 1998 as compared to the same period of the previous year was primarily
attributable to an increase in net interest income, loan servicing income,
investment banking fees and equity in the earnings of Franchise Mortgage
Acceptance Company. These factors were partially offset by an increase in
personnel and data processing expenses.
On June 30, 1998, the fair value of ICII common stock was $23.50 per share,
representing a pre-tax unrealized gain on the Company's investment of over
$128 million. The Company currently has no plans to realize such gains in the
future.
The Company recognized $2.8 million in appreciation of donated ICII stock
for the six months ended June 30, 1997. The appreciation represents the
difference between the market value and book value of the ICII shares on the
date they were donated. The Company recorded a corresponding charitable
donation expense of $3.6 million for the six months ended June 30, 1997. There
were no such donations during the six months ended June 30, 1998.
Total expenses decreased 6% to $11.9 million for the six months ended June
30, 1998, from $12.6 million for the six months ended June 30, 1997. The table
below shows the major components of expenses for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Personnel...................................... $ 4,623 $ 6,296
Occupancy, net................................. 583 936
Data processing................................ 318 443
Donation of ICII stock......................... 3,632 --
Consulting expense............................. 716 266
Other.......................................... 2,688 3,927
------- -------
Total.......................................... $12,560 $11,868
======= =======
</TABLE>
40
<PAGE>
The primary factor for the decrease in total expenses for the six months
ended June 30, 1998 was the $3.6 million donation of ICII stock that took
place during the six months ended June 30, 1997. Excluding this donation,
total expenses for the six months ended June 30, 1998 increased by 33% from
$8.9 million for the same period of the previous year to $11.9 million.
Personnel expense increased 36% to $6.3 million for the six months ended June
30, 1998 from $4.6 million for the same period of 1997. The growth in the
number of employees to 125 at June 30, 1998 from 103 at June 30, 1997 was the
primary reason for the increase in personnel expense.
Consulting expense decreased 63% to $0.3 million for the six months ended
June 30, 1998 from $0.7 million for the same period of the previous year. The
primary reason for the decrease was due to satisfaction of the obligation
under the consulting agreement with an executive of the Bank in the fourth
quarter of 1997. As such, only the obligation related to the consulting
agreement with Second Southern Corp., an entity wholly-owned by the chief
executive officer of the Company ("Second Southern") remains with the Company
as of June 30, 1998. See "Executive Compensation--Employment Arrangements."
This agreement requires the Company to pay commissions upon the sale of ICII
shares to Second Southern equal to 2.5% of the realized pre-tax gains received
by the Company, when and if realized, from the disposition of the remaining
ICII shares held by the Company. If such sale by the Company has not occurred
prior to certain specified dates, the agreement requires that the Company will
be deemed to have sold an amount equal to 20% of any such security as of
January 1 of each year from 1997 through 2001, at a price equal to the
arithmetic average of the daily average stock price of ICII common stock as
reported by NASD during the preceding year. The agreement is being accrued
over these vesting periods and is remeasured quarterly for changes in the
average market price of ICII stock. Based on the daily average market price
for the six months ended June 30, 1998 of $22.22 per share, less Second
Southern's basis of $0.88 per share as of June 30, 1998, as adjusted for stock
splits and dividends, the total liability to be accrued for over the vesting
period approximated $4.9 million, of which $3.2 million had been accrued for
at June 30, 1998.
Other expense increased 46% to $3.9 million for the six months ended June
30, 1998, from $2.7 million for the same period of 1997, primarily due to
Distribution-related expenses. Total expenses related to the Distribution for
the six months ended June 30, 1998 were approximately $1.6 million. Of this
amount, the Bank has incurred $0.5 million and the remaining $1.1 million was
incurred by the Company.
The Company recorded income tax expense of $3.6 million for the six months
ended June 30, 1998, representing an effective tax rate of approximately
42.2%, compared to tax expense of $2.4 million for the six months ended June
30, 1997, representing an effective tax rate of approximately 36.8%. The
increase in the effective tax rate was primarily due to the exclusion of the
$2.8 million appreciation of donated stock from taxable income for the six
months ended June 30, 1997.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 decreased 37% to $51.3
million as compared to $81.2 million for the same period of the previous year.
Expenses for the year ended December 31, 1997 increased 63% to $27.4 million
as compared to $16.8 million for the same period of the previous year. Net
income for the year ended December 31, 1997 decreased 61% to $15.2 million as
compared to $38.6 million for the same period of the previous year. Total
revenues and net income decreased primarily due to a reduction in the level of
gains and income associated with the Company's stock ownership of ICII as
compared to that recorded during the year ended December 31, 1996. Partially
offsetting the decrease were increased revenues from net interest income and
gain on sale of SBA loans. Net income decreased primarily due to the
aforementioned decrease in total revenues in addition to increases in
personnel expense, consulting expense and the provision for loan losses.
Net income, excluding (i) gains from the sale of ICII stock, (ii) income
associated with the appreciation in value of ICII stock subsequently donated
to not-for-profit organizations and (iii) settlement of a consulting agreement
("core net income") for the year ended December 31, 1997 decreased to $11.4
million from $23.1 million for the same period of the previous year.
41
<PAGE>
The return on average stockholder's equity for the year ended December 31,
1997 was 14.66%, a decrease from 49.51% for the same period of the previous
year. The return on average total assets was 7.92% for the year ended December
31, 1997, a decrease from 27.74% for the same period of the previous year.
Core net income as a percentage of average stockholder's equity for the year
ended December 31, 1997 was 11.06%, a decrease from 29.58% for the same period
of the previous year. Core net income as a percentage of average assets for
the year ended December 31, 1997 was 5.97%, a decrease from 16.57% for the
same period of the previous year.
The increase in interest income for the year ended December 31, 1997 to
$14.6 million from $10.8 million for the same period of 1996 resulted
primarily from the $28.5 million, or 34% increase in average loans for 1997
from 1996. The increase in interest expense to $3.3 million in 1997 from $2.0
million in 1996 was directly related to a $20.1 million increase in average
borrowings from the Bank in 1997.
Net interest income amounted to $11.3 million for the year ended December
31, 1997, up from $8.8 million for the same period in 1996, an increase of
28%. The Company's interest rate margin for the year ended December 31, 1997
and 1996 was 9.61% and 10.11%, respectively, reflecting the Company's
relatively low level of interest-bearing liabilities compared to interest-
earning assets.
The provision for loan losses for the year ended December 31, 1997 was $2.6
million as compared to $1.8 million for the same period of 1996. The increase
in the provision for loan losses was primarily related to the growth in the
Company's loan portfolio, an increased concentration of LHO Gap Loans and an
increase in the level of criticized loans, charge-offs and delinquencies. At
December 31, 1997 and 1996, the allowance for loan losses as a percentage of
total loans held for investment was 3.23% and 3.50%, respectively. The
allowance for loan losses as a percentage of non-accrual loans at December 31,
1997 and 1996 was 102.54% and 53.42%, respectively. This increase was mainly
due to a 11% decrease in non-accrual loans from $4.9 million at December 31,
1996 to $4.4 million at December 31, 1997.
Trust fee income amounted to $8.0 million and $7.7 million for the years
ended December 31, 1997 and 1996, respectively, while trust assets under
administration increased 16% to $8.7 billion at December 31, 1997 from
$7.5 billion at December 31, 1996. Trust fees, as a percent of average
fiduciary assets under administration, were 0.10% for each of the years ended
December 31, 1997 and 1996.
Gain on sale of SBA loans increased 11% to $3.9 million for the year ended
December 31, 1997 as compared to $3.6 million for the same period of the
previous year. Gain on sale of SBA loans primarily consists of the cash gains
recorded from the sale of the guaranteed portion of SBA loans and the present
value of future cash flows of loans sold over a base fee. The increase for the
year ended December 31, 1997 compared to the same period of the previous year
was due to an increase in the volume of SBA loans sold.
The Company's equity in the net income of ICII for the year ended December
31, 1997, decreased to $20.3 million from $21.4 million for the same period of
the previous year. In the fourth quarter of 1997, Franchise Mortgage
Acceptance Company ("FMC"), a subsidiary of ICII, completed an initial public
offering of its common stock. ICII sold into FMC's initial public offering
approximately 3.6 million shares and generated a gain of $48.9 million. The
Company's net equity in this pre-tax gain realized by ICII approximated
$12.3 million and is included in the Combined Statement of Income as a
component of "Equity in net income of ICII." In 1996, ICII sold approximately
2.3 million shares of its subsidiary, Southern Pacific Funding Corporation
("SPFC"), in connection with SPFC's initial public offering. The Company's net
equity in this pretax gain realized by ICII approximated $11.8 million and is
included in the Combined Statement of Income as a component of "Equity in net
income of ICII."
During 1997, the Company sold 320,000 shares of ICII stock. A percentage of
the proceeds from the sale of certain of these shares was paid to a senior
executive of the Bank in satisfaction of the Company's obligation pursuant to
the terms of a consulting agreement with the senior executive. The sale of the
320,000 shares resulted in a gain of $5.0 million. The Company recorded a
corresponding consulting expense of $5.0 million. In April 1996, the Company
sold 1.5 million shares of ICII as a part of an offering which included the
sale of
42
<PAGE>
approximately 2.2 million new ICII shares by ICII to the public. An additional
500,000 shares were sold by ICII to the public in May 1996. The Company
recorded a $25.6 million pre-tax gain on the sale of its ICII shares. After
the sales of ICII shares, the book value of ICII common stock approximated
$8.72 per share. As such, the Company recorded a $10.8 million pre-tax gain
which approximated the excess of ICII's book value per share over the book
value of the Company's remaining investment in ICII. For further information
on ICII, see Note 8 of the Notes to the Company's Combined Financial
Statements.
The Company recognized $2.8 million in appreciation of donated ICII stock
for the year ended December 31, 1997 compared to $3.7 million for the same
period the previous year. The appreciation represents the difference between
the market value and book value of the ICII shares on the date they were
donated. The Company recorded a corresponding charitable donation expense of
$3.6 million for the year ended December 31, 1997 compared to $4.9 million for
the same period the previous year.
Total expenses increased 63% to $27.4 million for the year ended December
31, 1997, from $16.8 million for year ended December 31, 1996. The table below
shows the major components of expenses at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Personnel.......................................... $ 6,153 $ 9,315
Occupancy, net..................................... 1,024 1,198
Data processing.................................... 562 642
Donation of ICII stock............................. 4,866 3,632
Consulting expense................................. 914 6,224
Other.............................................. 3,314 6,438
------- -------
Total.............................................. $16,833 $27,449
======= =======
</TABLE>
The primary factors for the increase in total expenses for the year ended
December 31, 1997 were increased personnel and consulting expenses. Personnel
expense rose 51% to $9.3 million for the year ended December 31, 1997 from
$6.2 million for the same period of 1996. The number of employees increased
18% to 113 at the December 31, 1997 from 96 at December 31, 1996. In addition,
the Company entered into a new employment agreement with Lewis Horwitz,
president and chief executive officer of the LHO division, effective January
1, 1997, which contributed to the increase in personnel expenses. Also, the
cost of the Company's deferred compensation plans increased 453% to $1.4
million for the year ended December 31, 1997 from $0.2 million for the same
period of the previous year.
Consulting expense increased 581% to $6.2 million for the year ended
December 31, 1997 from $0.9 million for the same period of the previous year
due to the agreements described below.
In accordance with two consulting agreements, one with a senior executive of
the Bank and the second with Second Southern, the Company was obligated to pay
commissions upon the sale of ICII shares. Each consultant was entitled
thereunder to receive an incentive fee of 2.5% of the realized pre-tax gains
received by the Company, when and if realized, from the disposition of the
remaining ICII shares held by the Company. If such sale by the Company did not
occur prior to certain specified dates, the agreements required that the
Company would be considered to have sold an amount equal to 20% of any such
security as of January 1 of each year from 1997 through 2001, at a price equal
to the arithmetic average of the daily average stock price of ICII common
stock as reported by NASD during the preceding year. These agreements have
been accrued for over the vesting periods and were remeasured quarterly for
changes in the average market price of ICII stock.
In satisfaction of the Company's obligation related to the consulting
agreement with the senior executive of the Bank, the Company agreed to pay to
the executive a portion of the proceeds received from selling
43
<PAGE>
231,528 shares of ICII stock in the third and fourth quarters of 1997. As a
result of these sales and the sale of an additional 88,472 shares of ICII
stock during 1997 (for total sales of 320,000 shares during 1997), the Company
recorded gains of $5.0 million in "Gain on sale of ICII stock." Offsetting the
gain on sale was a $5.0 million consulting charge recorded in "Consulting
expense" which represented full satisfaction of the senior executive's
consulting agreement. During the year ended December 31, 1996, the Company
recorded an expense of $0.4 million relating to this agreement.
The Second Southern consulting agreement remained an obligation of the
Company as of December 31, 1997. See "Executive Compensation--Employment
Arrangements." Based on the daily average market price for the year ended
December 31, 1997 of $21.34 per share, less Second Southern's basis of $0.88
per share as of December 31, 1997, as adjusted for stock splits and dividends,
the total liability to be accrued for over the vesting period approximated
$4.7 million, of which $2.8 million had been accrued for at December 31, 1997.
The expense relating to this remaining consulting agreement is being accrued
over the vesting period and will be remeasured quarterly for changes in the
average market price. During the years ended December 31, 1997 and 1996, the
Company recorded an expense relating to this remaining agreement of $1.0
million and $0.5 million, respectively, to its combined statements of income
for this agreement.
Other expense increased 94% to $6.4 million for the year ended December 31,
1997 from $3.3 million for the same period for 1996 primarily due to
Distribution-related expenses and increased business development and allocated
expenses.
The Company recorded income tax expense of $8.7 million for the year ended
December 31, 1997 representing an effective tax rate of approximately 36.6%,
compared to tax expense of $25.7 million for the year ended December 31, 1996
representing an effective tax rate of approximately 40.0%. The decrease in the
effective tax rate was primarily due to an increase in the relative impact of
income from appreciation of donated ICII stock as a percentage of taxable
income for the year ended December 31, 1997.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Total revenues for the year ended December 31, 1996 increased 293% to $81.2
million, compared to $20.6 million for the same period of the previous year.
Expenses for the year ended December 31, 1996 increased 62% to $16.8 million,
compared to $10.4 million for the same period of the previous year. Net income
for the year ended December 31, 1996 increased 553% from $5.9 million in 1995
to $38.6 million for 1996. Net income increased primarily due to increased
revenues from net interest income, gain on sale of loans, and gains related to
the Company's stock ownership of ICII, partially offset by lower trust fee
income and increased total expenses.
Core net income for the year ended December 31, 1996 increased 290% to $23.1
million from $5.9 million for the same period of the previous year.
The return on average stockholder's equity for the year ended December 31,
1996 was 49.51%, an increase from 10.32% for the same period of the previous
year. The return on average total assets was 27.74% for the year ended
December 31, 1996, an increase from 6.54% for the same period of the previous
year. Core net income as a percentage of average stockholder's equity for the
year ended December 31, 1996 was 29.58%, an increase from 10.32% for the same
period of the previous year. Core net income as a percentage of average assets
for the year ended December 31, 1996 was 16.57%, an increase from 6.54% for
the same period of the previous year.
The increase in interest income for the year ended December 31, 1996 to
$10.8 million from $6.9 million for the same period of 1995 primarily resulted
from the $34 million, or 66% increase, in average loans, for 1996 from 1995
and was partially offset by the decline in the yield on interest-earning
assets to 12.38% in 1996 from 12.85% in 1995. The increase in interest income
was partially offset by an increase in interest expense for 1996. The increase
in interest expense from $1.3 million in 1995 to $2.0 million in 1996 was due
to a $12 million increase in average borrowings from the Bank in 1996 and was
offset by the decline in the cost of borrowings from the Bank to 6.46% for
1996 from 6.93% for 1995.
44
<PAGE>
Net interest income amounted to $8.8 million for the year ended December 31,
1996, up from $5.6 million for the same period of 1995, an increase of 58%.
The Company's net interest rate margin for the years ended December 31, 1996
and 1995 was 10.11% and 10.45%, respectively.
The provision for loan losses for the year ended December 31, 1996 was $1.8
million, compared to $1.5 million for the same period of 1995. The increase in
the loan loss provision was mainly due to an increase in nonaccrual loans to
$4.9 million at December 31, 1996, compared to $2.7 million at December 31,
1995. At December 31, 1995 and 1996, the allowance for loan losses as a
percentage of total loans held for investment was 1.99% and 3.50%,
respectively.
Trust fee income decreased 8% from $8.4 million for the year ended December
31, 1995 to $7.7 million for the year ended December 31, 1996, while trust
assets under administration increased 10% from $6.8 billion to $7.5 billion at
December 31, 1995 and 1996, respectively. The primary reasons for the decline
in trust fee income while trust assets under administration increased were a
decline in ITC's certificate of deposit custodial balances and a reduction in
fees to offer more competitive pricing. In late 1994, ITC purchased from the
Federal Deposit Insurance Corporation, in its capacity as Receiver of
CommerceBank, the custody of approximately $193 million in certificates of
deposit. The fees related to the custody of these deposits have decreased
since the purchase as the related certificates of deposit matured. These fees
decreased from $1.5 million in 1995 to $0.8 million for 1996. Trust fees, as a
percentage of average fiduciary assets managed for the year ended December 31,
1996, were 0.10% compared to 0.13% for the same period of the previous year.
Gain on sale of SBA loans increased 96% to $3.6 million for the year ended
December 31, 1996, compared to $1.8 million for the same period of the
previous year. The increase was a result of the growth in the volume of SBA
loans sold. 111 SBA loans were sold during 1996 as compared to 90 loans during
1995.
The Company realized a significant increase in equity in the net income of
ICII in 1996. In June 1996, ICII sold 2.3 million shares of SPFC in connection
with SPFC's initial public offering of 5.7 million shares. In the fourth
quarter of 1996, ICII sold an additional 1.0 million shares of SPFC to the
public. ICII's sale of its SPFC stock resulted in a pre-tax gain to ICII of
$82.7 million. The Company's net equity in this pre-tax gain realized by ICII
approximated $11.8 million and is included in the Combined Statement of Income
as "Equity in net income of Imperial Credit Industries, Inc." Excluding gains
from the SPFC transaction, the equity in net income of ICII increased $4.4
million in 1996 despite the reduction in ownership percentage to approximately
24.5%. The improvement was due to ICII's greater volume and higher
profitability on loan sales executed through securitization transactions as
well as a full year of income realized by ICII from new businesses acquired by
ICII in 1995.
In April 1996, the Company sold 1.5 million shares of ICII as a part of an
offering which included the sale of approximately 2.2 million new ICII shares
by ICII to the public. An additional 500,000 shares were sold by ICII to the
public in May 1996. The Company recorded a $25.6 million pre-tax gain on the
sale of its ICII shares. After the sales of ICII shares, the book value of
ICII common stock approximated $8.72 per share. As such, the Company recorded
a $10.8 million pre-tax gain which approximated the excess of ICII's book
value per share over the book value of the Company's remaining investment in
ICII.
The principal reason for the increase in other income for the year ended
December 31, 1996 was $3.7 million in appreciation of ICII stock which was
donated to not-for-profit organizations. The appreciation represents the
difference between the fair value and book value of the ICII shares on the
date they were donated. The Company recorded a corresponding charitable
donation expense of $4.9 million which is included in total expenses.
Excluding the gain on sale of ICII stock and the appreciation of donated
ICII stock, total revenues for the Company increased from $20.6 million for
the year ended December 31, 1995 to $51.8 million for the same period of 1996,
an increase of 151%.
45
<PAGE>
Total expenses increased 62% to $16.8 million for the year ended December
31, 1996, compared to $10.4 million for the year ended December 31, 1995. The
table below shows the major components of expenses:
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Personnel.................................................... $ 4,827 $ 6,153
Occupancy, net............................................... 887 1,024
Data processing.............................................. 518 562
Donation of ICII stock....................................... -- 4,866
Other........................................................ 4,163 4,228
------- -------
Total........................................................ $10,395 $16,833
======= =======
</TABLE>
The primary reason for the increase in total expenses for the year ended
December 31, 1996 was the donation of ICII stock to not-for-profit
organizations. Excluding the donation of ICII stock, total expenses for the
year ended December 31, 1996 increased 15% as compared to the same period of
the previous year, mainly due to increased personnel expenses. Personnel
expenses rose 27% to $6.2 million for the year ended December 31, 1996 from
$4.8 million for the same period of 1995. In addition to expanding its SBA
operations from four lending offices in 1995 to eight lending offices in 1996,
which caused net occupancy expense to increase 15% in 1996, the Company's
focus on growth has centered around an investment in its people. The number of
employees increased 12% from 86 at the end of 1995 to 96 at the end of 1996.
Also, the cost of the Company's profit sharing plan, employee stock ownership
plan, 401(k) plan and deferred compensation plans increased 109% from $0.2
million for the year ended December 31, 1995 to $0.5 million for the year
ended December 31, 1996.
Other expense, including supplies, professional services and business
development expenses, was $4.2 million for both the year ended December 31,
1996 and the year ended December 31, 1995.
The Company recorded income tax expense of $25.7 million for the year ended
December 31, 1996 representing an effective tax rate of approximately 40.0%,
compared to tax expense of $4.3 million for the year ended December 31, 1995,
representing an effective tax rate of approximately 42.1%. The decrease in the
effective tax rate was primarily due to an increase in the relative impact of
income from appreciation of donated ICII stock as a percentage of taxable
income for the year ended December 31, 1996.
46
<PAGE>
SEGMENT REPORTING
The Company operates in three principal business segments: the origination
and sale of SBA loans (CAB), the origination of entertainment loans (LHO) and
the provision of trust services (ITC). Certain financial information with
respect to these business segments, as well as such financial information
related to other operations of the Company, primarily ICII (ICII and Other),
are summarized in the following tables:
<TABLE>
<CAPTION>
ICII AND
FOR THE YEAR ENDED DECEMBER 31, 1995 CAB LHO ITC OTHER COMBINED
- ------------------------------------ ------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income................ $ 870 $ 2,821 $ 144 $ 1,757 $ 5,592
Provision for loan losses.......... (281) (767) -- (444) (1,492)
Noninterest income................. 1,932 379 8,680 5,536 16,527
------- ------- ------ ------- --------
Total revenue..................... 2,521 2,433 8,824 6,849 20,627
Noninterest expense................ 1,862 696 5,769 2,068 10,395
------- ------- ------ ------- --------
Income before income taxes........ 659 1,737 3,055 4,781 10,232
Income tax expense................. 279 736 1,302 1,996 4,313
------- ------- ------ ------- --------
Net income........................ $ 380 $ 1,001 $1,753 $ 2,785 $ 5,919
======= ======= ====== ======= ========
Average assets..................... $16,895 $24,235 $6,846 $42,551 $ 90,527
------- ------- ------ ------- --------
<CAPTION>
ICII AND
FOR THE YEAR ENDED DECEMBER 31, 1996 CAB LHO ITC OTHER COMBINED
- ------------------------------------ ------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income................ $ 1,488 $ 4,086 $ 138 $ 3,102 $ 8,814
Provision for loan losses.......... (348) (859) -- (574) (1,781)
Noninterest income................. 3,844 746 7,975 61,553 74,118
------- ------- ------ ------- --------
Total revenue..................... 4,984 3,973 8,113 64,081 81,151
Noninterest expense................ 2,851 1,776 6,258 5,948 16,833
------- ------- ------ ------- --------
Income before income taxes........ 2,133 2,197 1,855 58,133 64,318
Income tax expense................. 903 930 790 23,051 25,674
------- ------- ------ ------- --------
Net income........................ $ 1,230 $ 1,267 $1,065 $35,082 $ 38,644
======= ======= ====== ======= ========
Average assets..................... $27,593 $47,122 $7,034 $57,571 $139,320
------- ------- ------ ------- --------
<CAPTION>
ICII AND
FOR THE YEAR ENDED DECEMBER 31, 1997 CAB LHO ITC OTHER COMBINED
- ------------------------------------ ------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net interest income................ $ 1,804 $ 5,816 $ 235 $ 3,458 $ 11,313
Provision for loan losses.......... (415) (1,828) -- (315) (2,558)
Noninterest income................. 4,665 1,694 8,175 28,057 42,591
------- ------- ------ ------- --------
Total revenue..................... 6,054 5,682 8,410 31,200 51,346
Noninterest expense................ 4,749 3,467 6,765 12,468 27,449
------- ------- ------ ------- --------
Income before income taxes........ 1,305 2,215 1,645 18,732 23,897
Income tax expense................. 549 932 687 6,569 8,737
------- ------- ------ ------- --------
Net income........................ $ 756 $ 1,283 $ 958 $12,163 $ 15,160
======= ======= ====== ======= ========
Average assets..................... $39,391 $67,400 $8,498 $76,228 $191,517
------- ------- ------ ------- --------
<CAPTION>
ICII AND
CAB LHO ITC OTHER COMBINED
------- ------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30,
1997
Net interest income................ $ 895 $ 2,643 $ 85 $ 2,011 $ 5,634
Provision for loan losses.......... (330) (1,049) -- (133) (1,512)
Noninterest income................. 2,359 852 3,996 7,824 15,031
------- ------- ------ ------- --------
Total revenue..................... 2,924 2,446 4,081 9,702 19,153
Noninterest expense................ 2,530 2,129 3,316 4,585 12,560
------- ------- ------ ------- --------
Income before income taxes........ 394 317 765 5,117 6,593
Income tax expense ................ 166 133 324 1,800 2,423
------- ------- ------ ------- --------
Net income ....................... $ 228 $ 184 $ 441 $ 3,317 $ 4,170
======= ======= ====== ======= ========
Average assets..................... $34,657 $51,513 $8,093 $67,070 $161,333
------- ------- ------ ------- --------
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
ICII AND
CAB LHO ITC OTHER COMBINED
------- -------- ------ -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE SIX MONTHS ENDED JUNE 30,
1998
Net interest income............... $ 1,079 $ 3,272 $ 164 $ 1,796 $ 6,311
Provision for loan losses......... (279) (417) -- (40) (736)
Noninterest income................ 3,199 561 4,302 6,699 14,761
------- -------- ------ ------- --------
Total revenue.................... 3,999 3,416 4,466 8,455 20,336
Noninterest expense............... 3,687 1,734 3,480 2,967 11,868
------- -------- ------ ------- --------
Income before income taxes....... 312 1,682 986 5,488 8,468
Income tax expense................ 131 707 421 2,313 3,572
------- -------- ------ ------- --------
Net income....................... $ 181 $ 975 $ 565 $ 3,175 $ 4,896
======= ======== ====== ======= ========
Average assets.................... $44,093 $102,885 $8,514 $84,388 $239,880
------- -------- ------ ------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
General
The table below summarizes cash flows generated by and used in operating
activities:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING CASH INCOME
Interest received............. $ 6,553 $ 10,781 $ 14,714 $ 6,393 $ 9,352
Trust fees received........... 7,937 7,856 8,114 4,107 4,258
Other income.................. 655 1,371 4,305 5,410 975
-------- -------- -------- -------- -------
Total......................... 15,145 20,008 27,133 15,910 14,585
-------- -------- -------- -------- -------
OPERATING CASH EXPENSE
Cash operating expenses....... 10,219 11,803 23,793 8,855 11,702
Taxes paid.................... 680 -- 2,446 1,100 --
-------- -------- -------- -------- -------
Total......................... 10,899 11,803 26,239 9,955 11,702
-------- -------- -------- -------- -------
Net operating cash flow....... 4,246 8,205 894 5,955 2,883
Cash (used in) provided by
other payables and
receivables.................. (3,105) 4,918 (16,994) (20,146) 266
Cash (used in) provided by
loans held for sale.......... (1,000) (2,883) 1,768 (1,554) (4,678)
-------- -------- -------- -------- -------
Net cash provided by (used in)
operating activities......... $ 141 $ 10,240 $(14,332) $(15,745) $(1,529)
======== ======== ======== ======== =======
Net cash (used in) provided by
investing activities......... $(50,358) $ 36,446 $(59,850) $(38,098) $(4,781)
======== ======== ======== ======== =======
Net cash provided by (used in)
financing activities......... $ 50,593 $(43,713) $ 71,750 $ 54,242 $13,945
======== ======== ======== ======== =======
</TABLE>
The Company's ownership of ICII stock has not been a source of cash flow
other than through the sale of such stock. ICII has not paid any cash
dividends on shares owned by the Company and there can be no assurance that
ICII will pay cash dividends in the future.
Net operating cash flow does not include income taxes or interest paid from
divisions of the Bank which were not required to pay certain income taxes or
interest on borrowings. Interest and income taxes due to the Bank were
included in borrowings from the Bank. If the Company had been required to make
interest payments on its borrowings and pay all taxes, net operating cash flow
used would have been $5.5 million for the six months ended June 30, 1998.
After the Distribution, the Company will make tax and interest payments which
will affect its operating cash flow.
48
<PAGE>
For the six months ended June 30, 1998, the Company experienced a net cash
outflow in operating activities of $1.5 million. The Company experienced a net
cash outflow in investing activities of $4.8 million primarily to fund its
lending activity. The net outflow from operating and investing activities was
offset by the $13.9 million inflow in financing activities consisting of
borrowings from the Bank.
For the six months ended June 30, 1997, the Company experienced a net cash
outflow in operating activities of $15.7 million. The Company experienced a
net cash outflow in investing activities of $38.1 million primarily to fund
its lending activity. The net outflow from operating and investing activities
was offset by the $54.2 million inflow in financing activities consisting of
borrowings from the Bank.
For the year ended December 31, 1997, the Company experienced a net cash
outflow in operating activities of $14.3 million. The Company experienced a
net cash outflow in investing activities of $59.9 million mainly to fund its
lending activity. The net outflow in operating and investing activities was
partially offset by the $71.8 million inflow in financing activities
consisting of borrowings from the Bank.
For the year ended December 31, 1996, the Company experienced a net cash
inflow in operating activities of $10.2 million. The Company experienced a net
cash inflow in investing activities of $36.4 million, primarily due to the
proceeds from the sale of ICII stock. The net inflow in operating and
investing activities was partially offset by the $43.7 million outflow in
financing activities to reduce borrowings from the Bank.
For the year ended December 31, 1995, the Company experienced a net cash
inflow in operating activities of $0.1 million. The Company experienced a net
cash outflow in investing activities of $50.4 million, primarily to fund its
lending activity. The net outflow in operating and investing activities was
offset by the $50.6 million inflow in financing activities consisting mainly
of borrowings from the Bank.
The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
lending activity increases. The Company's primary cash requirements include
(i) the funding of loans held for investment and loans held pending their
sale, (ii) ongoing administrative and other operating expenses and (iii) the
cost of funds borrowed. Prior to the Distribution, the Company has financed
its activities exclusively through borrowings from the Bank and operating and
investing cash flows. The Company believes that the availability of borrowings
of the Credit Facilities and proceeds from a future public or private offering
of stock will be sufficient to fund the Company's liquidity requirements for
the foreseeable future. However, there can be no assurance that the Company
will have access to the capital markets in the future or that financing will
be available to satisfy the Company's operating and debt service requirements
or to fund its future growth.
Credit Facilities
On August 19, 1998, the Company entered into a credit agreement with a
syndicate of banks to provide credit facilities (the "Credit Facilities") to
finance the Company's operations other than CAB. The syndicate consists of
third party financial institutions not affiliated with the Bank. The Bank will
be the initial borrower under the Credit Facilities but immediately upon the
consummation of the Contribution the Company will assume the obligations of
the borrower and the Bank will be completely released therefrom. The Credit
Facilities provide for borrowings on a revolving basis of up to $135 million
outstanding at any one time based on a borrowing base calculation measured by
the value of the Company collateral pledged thereunder. Included within the
Credit Facilities is a sub-facility for the issuance of standby and commercial
letters of credit of up to $45 million. The Credit Facilities have an initial
term of two years and provide for an earlier termination under certain
circumstances described below. The lenders under the Credit Facilities are
granted, among other things, a first priority security interest in (a) all of
the common stock of the Company's subsidiaries, (b) the common stock of ICII
owned by the Company and (c) the LHO loans. The borrowing base will be
comprised of the sum of (x) 50% of the current market value of the Company's
investment in ICII stock up to a maximum of $100 million and (y) 85% of
eligible LHO loans. The Credit Facilities will bear interest at an annual rate
equal to 1.45% over LIBOR or at an alternative base rate which will be the
greater of the lead lender's prime rate and the Federal funds rate plus 1.45%.
The Company also will be charged loan and other fees under the Credit
Facilities.
49
<PAGE>
The commitments of the banks party to the Credit Facilities will terminate
90 days after the first to occur of the following events if such events are
not cured or otherwise cease to exist within such 90 day period: (i) the
Company fails to beneficially own at least 25% of the outstanding common stock
of ICII; (ii) the termination, amendment, alteration or assignment of the ICII
Shareholders Agreement by any party thereto without the prior approval of the
administrative agent of the Credit Facilities; (iii) any party to the ICII
Shareholders Agreement becomes the subject of a voluntary or involuntary
bankruptcy proceeding; (iv) ICII fails to comply with its obligations under a
letter agreement with the Company, dated June 11, 1998 (the "Letter
Agreement") (see "Business--Imperial Credit Industries, Inc.") or gives notice
of a dilution event that may result in the Company failing to meet the
requirements of clause (i) above; (v) there is an increase in the percentage
beneficial ownership of voting securities of ICII required to be owned or
controlled by the Company to entitle the Company to the presumption of control
under Section 2(a) (9) of the Investment Company Act of 1940 and the Company
fails to own or control such increased percentage of ICII voting securities;
(vi) either the Company or ICII is required to register as an "investment
company" within the meaning of the Investment Company Act of 1940; or (vii)
the Commission notifies the Company or ICII that it is challenging or
instituting any action to challenge the exemption from registration under the
Investment Company Act of 1940 of the Company, ICII or any subsidiary of the
Company or ICII or otherwise asserts that the Company, ICII or any such
subsidiary is not in compliance with the Investment Company Act.
The Credit Facilities also include financial covenants such as maintenance
of a minimum tangible net worth, minimum adjusted tangible net worth and
minimum interest coverage ratio, and limitations on the maximum leverage ratio
for the Company, the maximum exposure under "gap" loans made by LHO and the
maximum exposure to distributors whose contracts and undertakings support the
eligible LHO loans. The Credit Facilities also require the Company to make
customary representations and warranties as of the initial funding date and
prior to each borrowing and include customary affirmative and negative
operating covenants such as a limitation on the incurrence of debt and liens
and on investments and limitations on the Company's ability to engage in
additional lines of business. Customary events of default include a change
under certain circumstances in ownership of more than 20% of the Company's
outstanding shares and in the composition of the Company's board of directors.
See "Credit Facilities."
Prior to the Distribution, the Bank will borrow approximately $95 million
(as determined at June 30, 1998) under the Credit Facilities in order to
replace certain deposit liabilities used to fund loans made through LHO. In
connection with the Contribution, these loans, along with the other assets of
the IFG Business, will be transferred to the Company, the Bank will be
released from all liabilities under the Credit Facilities and the Company will
remain responsible for all liabilities under the Credit Facilities.
Sales of Loans
The Company currently sells all of the guaranteed portion of loans
originated by CAB to institutional investors while retaining the unguaranteed
portion for investment. CAB then services the loans on behalf of the
institutional investors, passing on principal and interest received from the
borrowers less a servicing fee. Accordingly, adverse changes in the market for
these loans or the ability to obtain the SBA guarantees could impair the
Company's ability to originate and sell loans on a favorable or timely basis.
Any such impairment could have an adverse effect upon the Company's business
and results of operations. Also, any delay in the sale of loans could cause
the Company's earnings to fluctuate from quarter to quarter. Finally, the
Company may be required to repurchase loans that do not conform to the
representations and warranties made by the Company in loan sale or servicing
agreements entered into with institutional investors. See "Risk Factors--CAB
Lending" and "--Dependence of Small Business Lending Operations on SBA
Programs."
The Company recognizes loan servicing rights receivable and interest only
strips as a result of the sale of SBA loans. Loan servicing rights receivable
on the sale of SBA loans are determined by computing the present value of the
excess of the portion of the contractually specified servicing fee that
exceeds the fee that a substitute servicer would demand to assume the
servicing. The present value of any cash flow expected to be received in
excess of the contractually specified servicing fees is recorded as an
interest only strip.
50
<PAGE>
INFLATION
The Combined 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. Inflation affects the Company as follows:
(i) The impact of inflation is reflected in the increased cost of the
Company's operations.
(ii) To the extent that inflation influences the stock and bond markets,
ITC's trust fees are based, in part, on the market values of its customers'
accounts under administration. Normally, the stock market values and bond
values decrease during periods of high inflation and increase during
periods of low inflation.
(iii) Most of the Company's assets and liabilities are monetary in
nature. As a result, interest rates have a greater impact on their
performance than do the effects of general levels of inflation. However,
inflation affects the Company and its LHO and SBA lending operations, as
well as its ownership of ICII, 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 high inflation,
higher interest rate costs may dissuade borrowers from obtaining new loans,
reducing loan production and positively impacting the value of any loan
servicing assets. During periods of low inflation more borrowers can afford
to borrow and refinance higher cost debt, increasing loan production and
negatively impacting the value of any loan servicing assets.
51
<PAGE>
ASSET QUALITY
Loans Held for Investment. Loans held for investment generally have included
loans originated by LHO, the unguaranteed portions of loans originated and
sold by CAB (CAB sells the guaranteed portion of its originations while
retaining the unguaranteed portion for investment), and ICII related mortgage
loans. As part of the Contribution Agreement, the Bank will retain the ICII
related mortgage loans. The amounts outstanding and related allowances for
loan losses by type are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
-------------------------- JUNE 30,
1995 1996 1997 1998
------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans held for investment by type:
LHO.................................... $47,691 $44,906 $ 98,313 $107,135
CAB.................................... 18,259 20,277 34,032 31,251
ICII related mortgage loans (1)........ 11,104 9,974 6,548 5,679
------- ------- -------- --------
Total (2)............................ 77,054 75,157 138,893 144,065
------- ------- -------- --------
Allowance for loan losses by type:
LHO.................................... (727) (1,163) (2,656) (3,098)
CAB.................................... (420) (716) (1,075) (1,012)
ICII related mortgage loans (1)........ (389) (750) (755) (745)
------- ------- -------- --------
Total................................ (1,536) (2,629) (4,486) (4,855)
------- ------- -------- --------
Net loans held for investment by type:
LHO.................................... 46,964 43,743 95,657 104,037
CAB.................................... 17,839 19,561 32,957 30,239
ICII related mortgage loans (1)........ 10,715 9,224 5,793 4,934
------- ------- -------- --------
Net loans held for investment........ $75,518 $72,528 $134,407 $139,210
======= ======= ======== ========
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
(2) Amounts are net of deferred loan fees and costs.
Although the Company generally evaluates the adequacy of its allowance on an
overall basis rather than by specific categories of loans, the following table
reflects the Company's allocation of the allowance for loan losses by loan
category and the ratio of each loan category to total loans for the periods
presented.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------------------- JUNE 30,
1995 1996 1997 1998
---------- ---------- ---------- ----------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ --- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Entertainment loans..... $ 727 62% $1,163 60% $2,656 71% $3,098 74%
Small business loans.... 420 24 716 27 1,075 24 1,012 22
Residential mortgage
loans(1)............... 389 14 750 13 755 5 745 4
------ --- ------ --- ------ --- ------ ---
Total................. $1,536 100% $2,629 100% $4,486 100% $4,855 100%
====== === ====== === ====== === ====== ===
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
52
<PAGE>
The following table presents the contractual maturities of the Company's
loan portfolio as of December 31, 1997, including SBA loans held for sale.
Expected maturities will differ from contractual maturities because borrowers
may have the right to prepay obligations without prepayment penalties. As of
December 31, 1997, substantially all of the Company's loans with a maturity of
more than one year were tied to interest rate indices (e.g., Prime or LIBOR).
<TABLE>
<CAPTION>
DUE AFTER
DUE IN ONE ONE THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS
------------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Entertainment loans......................... $ 98,622 $1,032 $ --
Small business loans........................ 2,539 69 33,347
ICII related mortgage loans (1)............. 363 96 6,089
-------- ------ -------
Total..................................... $101,524 $1,197 $39,436
======== ====== =======
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreements. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2)
the observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized
by recording a valuation allowance with a corresponding charge to the
provision for loan losses.
At June 30, 1998, the recorded investment in loans which were deemed to be
impaired totaled $4.7 million, all of which was on nonaccrual status. The
impaired loans were secured by real estate and film distribution rights. The
$4.7 million of impaired loans did not require a specific allowance for
potential losses. Impaired loans averaged $4.9 million for the six months
ended June 30, 1998.
At December 31, 1997, the recorded investment in loans which were deemed to
be impaired totaled $4.4 million, all of which was on nonaccrual status. All
of the impaired loans were secured by real estate. The $4.4 million of
impaired loans did not require a specific allowance for potential losses.
Impaired loans averaged $3.0 million in 1997.
At December 31, 1996, the recorded investment in loans which were deemed to
be impaired totaled $4.9 million, all of which was on nonaccrual status. $3.7
million of the impaired loans were secured by real estate. Of the $4.9 million
of impaired loans, $1.0 million required a specific allowance of $175,000.
Impaired loans averaged $3.6 million in 1996.
During the six months ended June 30, 1998 and 1997 and the years ended
December 31, 1997, 1996 and 1995, approximately $95,000, $37,000, $167,000,
$203,000 and $56,000 of interest income, respectively, was recognized on
impaired loans.
At June 30, 1998 and December 31, 1997 and 1996, there were no restructured
loans.
Nonaccrual loans totaled $4.7 million, $4.4 million and $4.9 million at June
30, 1998 and December 31, 1997 and 1996, respectively. There was no recorded
interest receivable on nonaccrual loans at June 30, 1998, December 31, 1997
and 1996. Interest income foregone on nonaccrual loans approximated $152,000,
$68,000, $296,000 and $375,000 for the six months ended June 30, 1998 and 1997
and the years ended December 31, 1997 and 1996, respectively.
At June 30, 1998 and December 31, 1997 and 1996, approximately 74%, 71% and
60%, respectively, of the Company's loan portfolio was issued to customers in
the movie production industry.
53
<PAGE>
At June 30, 1998 and December 31, 1997 and 1996, a majority of the Company's
loan portfolio consisted of borrowers geographically located in California.
Detailed information regarding nonaccrual loans and real estate and other
assets owned, net is presented below:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT
---------------------- JUNE 30,
1995 1996 1997 1998
------ ------ ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual loans:
LHO......................................... $ 488 $1,193 $ -- $1,400
CAB......................................... -- 914 3,571 2,585
ICII related mortgage loans (1)............. 2,212 2,814 804 699
------ ------ ------ ------
Total nonaccrual loans.................... 2,700 4,921 4,375 4,684
------ ------ ------ ------
Real estate and other assets owned:
LHO......................................... -- -- 666 539
CAB......................................... 57 -- 45 556
ICII related mortgage loans (1)............. 1,083 187 162 59
------ ------ ------ ------
Less: valuation allowance..................... (145) -- -- --
------ ------ ------ ------
Real estate and other assets owned, net....... 995 187 873 1,154
------ ------ ------ ------
Total nonperforming assets.................... $3,695 $5,108 $5,248 $5,838
====== ====== ====== ======
Allowance for loan losses as a percentage of
total nonaccrual loans....................... 56.89% 53.42% 102.54% 103.65%
Total nonaccrual loans as a percentage of
loans held for investment.................... 3.50 6.55 3.15 3.25
Total nonperforming assets as a percentage of
total assets................................. 2.96 3.42 2.30 2.33
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
The allowance for loan losses is maintained at a level considered
appropriate by management and is based on an ongoing assessment of the risks
inherent in the loan portfolio. The allowance for loan losses is increased by
the provision for loan losses which is charged against current period
operating results, and is decreased by the amount of net charge-offs during
the period. The Company's determination of the level of the allowance for loan
losses and, correspondingly, the provision for loan losses, rests upon various
judgments and assumptions, including general economic conditions (especially
in California), loan portfolio composition and concentrations, prior loan loss
experience, collateral value, identification of problem and potential problem
loans and other relevant data to identify the risks in the loan portfolio.
While management believes that the allowance for loan losses is adequate at
June 30, 1998, future additions to the allowance will be subject to continuing
evaluation of inherent risk in the loan portfolio.
54
<PAGE>
The following table summarizes changes in the allowance for loan losses at
the dates indicated:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED JUNE
DECEMBER 31, 30,
---------------------- --------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year............. $ 626 $1,536 $2,629 $2,629 $4,486
Loans charged off:
LHO.................................. 209 561 359 359 --
CAB.................................. -- 60 132 69 352
ICII related mortgage loans (1)...... 404 212 359 151 50
------ ------ ------ ------ ------
Total loans charged off............ 613 833 850 579 402
------ ------ ------ ------ ------
Recoveries of loans previously charged
off:
LHO.................................. 8 137 25 -- 26
CAB.................................. 1 8 75 50 9
ICII related mortgage loans (1)...... 22 -- 49 35 --
------ ------ ------ ------ ------
Total loan recoveries.............. 31 145 149 85 35
------ ------ ------ ------ ------
Net loans charged off.................. 582 688 701 494 367
------ ------ ------ ------ ------
Provision for loan losses:
LHO.................................. 767 859 1,828 1,049 417
CAB.................................. 281 348 415 330 279
ICII related mortgage loans (1)...... 444 574 315 133 40
------ ------ ------ ------ ------
Total provision for loan losses.... 1,492 1,781 2,558 1,512 736
------ ------ ------ ------ ------
Balance, end of year................... $1,536 $2,629 $4,486 $3,647 $4,855
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans held for investment............. 1.21% 0.87% 0.66% 0.53% 0.26%
Ratio of allowance for loan losses to
loans held for investment............. 1.99 3.50 3.23 3.22 3.37
Ratio of provision for loan losses to
net charge-offs....................... 256.36 258.87 364.91 306.07 200.41
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
Loans Held for Sale. Loans held for sale are carried at the lower of
aggregate cost or fair value. The amount of loans held for sale at June 30,
1998 and December 31, 1997 and 1996 was $8.4 million, $3.8 million and $5.5
million, respectively.
ASSET/LIABILITY MANAGEMENT
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 the 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
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 that at which its interest-bearing
liabilities reprice.
55
<PAGE>
The primary objective of the asset/liability management process is to manage
the Company's exposure to interest rate fluctuations while maintaining
adequate levels of liquidity and capital. In order to manage its interest rate
sensitivity, the Company has adopted policies which attempt to limit the
change in pretax net interest income assuming various interest rate scenarios.
This is accomplished by adjusting the repricing characteristics of the
Company's assets and liabilities as interest rates fluctuate. The Company's
Asset/Liability Committee chooses strategies in conformance with its policies
to achieve an appropriate trade off between interest rate sensitivity and the
volatility of pretax net interest income and net interest margin. Each month,
the Company assesses its overall exposure to potential changes in interest
rates and the impact such changes may have on net interest income and net
interest margin.
The Company has managed interest rate risk through the marketing and funding
of primarily adjustable rate loans generally indexed to the Prime Rate. Since
the Company's borrowing costs have been tied to the Bank's 90-day certificate
of deposit rate plus 1%, an adjustable borrowing cost, the Company's interest-
earning asset pricing generally matches the increases and decreases in the
pricing of its borrowing costs and therefore maintains a positive gap
position. However, there can be no assurances that the Company will be able to
maintain its positive gap position or that its strategies will not result in a
negative gap position in the future. The level of the movement of interest
rates, up or down, is an uncertainty and could have a negative impact on the
earnings of the Company. The Company expects that its future funding costs
will be tied to LIBOR. See "Credit Facilities."
Hedging. The SBA loans originated and held for sale and loans held for
investment are primarily adjustable rate loans indexed to the Prime Rate. As
such, there is minimal risk of increasing or decreasing interest rates between
the time the Company commits to fund a loan and the time the loan is sold or
paid-off. Therefore, the Company does not enter into interest rate hedging
vehicles or speculative trading activities, such as forward commitments,
options, futures, derivatives or synthetic instruments.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending activities. The Company's net interest margin is
sensitive to sudden changes in interest rates. In addition, the Company's
interest-earnings assets, primarily its loans, are tied to the Prime Rate, an
index which tends to react more slowly to changes in market rates than other
money market indices such as LIBOR. The rates paid for the Company's interest-
bearing liabilities correlate with LIBOR. This mismatch creates a spread
relationship risk between the Company's Prime based assets and LIBOR
correlated liabilities.
The Company's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Company's net
interest income and capital, while structuring the Company's asset-liability
structure to obtain the maximum yield-cost spread on that structure. The
Company continually evaluates interest rate risk management opportunities,
including the possible use of derivative financial instruments.
56
<PAGE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at December 31, 1997.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE DECEMBER 31,
---------------------------------------------------- FAIR
1998 1999 2000 2001 2002 THEREAFTER BALANCE VALUE
-------- ------ ------ ------ ------ ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST SENSITIVE
ASSETS:
U.S. Treasury and
federal agency
securities............. $ 2,249 $1,083 $ -- $ -- $ -- $ -- $ 3,332 $ 3,338
Average interest rate.. 5.47% 6.26% -- -- -- -- 5.73%
Servicing assets........ 257 471 619 738 896 1,230 4,211 4,603
Average interest
rate(1)............... -- -- -- -- -- -- 11.16%
Loans:
SBA companion.......... 3,826 588 621 701 1,368 10,638 17,742 18,809
Average interest rate.. 10.32% 10.42% 10.53% 10.73% 10.54% 10.73% 10.42%
SBA.................... 1,297 2,287 3,076 3,756 4,373 7,187 21,976 22,407
Average interest rate.. 11.16% 11.15% 11.18% 11.18% 11.14% 11.14% 11.16%
LHO.................... 99,654 -- -- -- -- -- 99,654 97,122
Average interest rate.. 13.90% -- -- -- -- -- 13.90%
ICII related(2)........ 735 680 895 1,163 1,295 1,780 6,548 5,793
Average interest
rate(2)............... 9.98% 9.37% 9.69% 9.16% 9.37% 9.45% 9.51%
-------- ------ ------ ------ ------ ------- -------- --------
Total interest-earning
assets................. $108,018 $5,109 $5,211 $6,358 $7,932 $20,835 $153,463 $152,072
======== ====== ====== ====== ====== ======= ======== ========
INTEREST SENSITIVE
LIABILITIES:
Borrowings from
Imperial Bank......... $ 77,934 $ -- $ -- $ -- $ -- $ -- $ 77,934 $ 77,934
Average interest rate.. 6.48% -- -- -- -- -- 6.48%
-------- ------ ------ ------ ------ ------- -------- --------
Total interest-bearing
liabilities............ $ 77,394 $ -- $ -- $ -- $ -- $ -- $ 77,934 $ 77,934
======== ====== ====== ====== ====== ======= ======== ========
</TABLE>
- --------
(1) Represents the discount rate used to calculate the fair value of the
asset.
(2) Loans will be retained by the Bank pursuant to the Contribution Agreement.
Expected maturities are contractual maturities adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair value and
expected maturities. For assets, expected maturities are based upon
contractual maturity, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Company's historical
experience. The actual maturities of these instruments could vary
substantially if future prepayments differ from the Company's historical
experience. The borrowings from the Bank will be paid off in 1998 and the ICII
related mortgage loans will be retained by the Bank pursuant to the
Contribution Agreement.
At June 30, 1998, as compared to December 31, 1997, there have been no
significant changes in the relative composition of the Company's financial
instruments that are sensitive to changes in interest rates.
57
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company
for the years ended December 31, 1995, 1996 and 1997. The yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods shown except where noted otherwise.
Average balances are derived from average month-end balances. Management does
not believe that the use of average monthly balances instead of average daily
balances has caused any material differences in the information presented for
any of these periods. The average balance of loans receivable includes loans
on which the Company has discontinued accruing interest. The yields and costs
include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------- ---------------------------- ----------------------------
INTEREST YIELD/ INTEREST YIELD/ INTEREST YIELD/
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE COST BALANCE EXPENSE COST BALANCE EXPENSE COST
------- -------- ------- -------- -------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans held for
investment(2)......... $48,118 $6,459(1) 13.42% $ 79,202 $10,116(1) 12.77% $106,084 $13,657(1) 12.87%
Loans held for sale.... 2,316 267 11.53 4,708 513 10.90 6,339 698 11.01
Securities available
for sale.............. 3,084 153 4.96 3,229 158 4.89 5,330 235 4.41
------- ------ ------ -------- ------- ------ -------- ------- ------
Total interest-
earning assets...... 53,518 6,879 12.85 87,139 10,787 12.38 117,753 14,590 12.39
------- ------ ------ -------- ------- ------ -------- ------- ------
Non-interest-earning
assets................. 37,009 52,181 73,764
------- -------- --------
Total assets......... $90,527 $139,320 $191,517
======= ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY:
Interest-bearing
liabilities:
Borrowings from
Imperial Bank......... 18,571 1,287 6.93 30,542 1,973 6.46 50,603 3,277 6.48
------- ------ ------ -------- ------- ------ -------- ------- ------
Total interest-
bearing liabilities. 18,571 1,287 6.93 30,542 1,973 6.46 50,603 3,277 6.48
------- ------ ------ -------- ------- ------ -------- ------- ------
Non-interest-bearing
liabilities............ 14,591 30,728 37,488
Stockholder's equity.... 57,365 78,050 103,426
------- -------- --------
Total liabilities and
stockholder's
equity.............. $90,527 $139,320 $191,517
======= ======== ========
Net interest rate
spread................. $5,592 5.92 $ 8,814 5.92 $11,313 5.91
====== ======= =======
Net interest margin..... 10.45 10.11 9.61
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 288.18 285.31 232.70
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1998
--------------------------- ---------------------------
INTEREST YIELD/ INTEREST YIELD/
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE COST BALANCE EXPENSE COST
-------- -------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PERCENTAGES AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Loans held for
investment............ $ 86,737 $5,954(1) 13.84% $141,565 $8,577(1) 12.22%
Loans held for sale.... 6,823 365 10.79 7,558 401 10.71
Securities available
for sale.............. 3,362 84 5.04 6,440 164 5.14
-------- ------ ------ -------- ------ ------
Total interest-
earning assets...... 96,922 6,403 13.32 155,563 9,142 11.85
-------- ------ ------ -------- ------ ------
Non-interest-earning
assets................. 64,411 85,069
-------- --------
Total assets......... $161,333 $240,632
======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY:
Interest-bearing
liabilities:
Time deposits.......... -- -- -- 3,142 92 5.90
Line of credit--CAB.... -- -- -- 2,149 121 11.35
Borrowings from
Imperial Bank......... 24,121 769 6.38 80,788 2,618 6.52
-------- ------ ------ -------- ------ ------
Total interest-
bearing liabilities. 24,121 769 6.38 86,079 2,831 6.63
-------- ------ ------ -------- ------ ------
Non-interest-bearing
liabilities............ 38,720 38,700
Stockholder's equity.... 98,492 115,853
-------- --------
Total liabilities and
stockholder's
equity.............. $161,333 $240,632
======== ========
Net interest rate
spread................. $5,634 6.94 $6,311 5.22
====== ======
Net interest margin..... 11.72 8.18
Ratio of average
interest-earning assets
to average interest-
bearing liabilities.... 401.82 180.72
</TABLE>
- --------
(1) Includes amortization of net loan fees amounting to $1.3 million, $1.6
million, $2.6 million, $0.5 million and $1.5 million for the years ended
December 31, 1995, 1996, and 1997, and for the six months ended June 30,
1997 and 1998, respectively.
(2) Average balance includes nonaccrual loans.
RECENT ACCOUNTING PRONOUNCEMENTS
For recent accounting pronouncements, please refer to Note 4 of the notes to
the combined financial statements.
YEAR 2000
To fulfill the Company's fiduciary responsibility and ensure compliance with
regulatory requirements, the Company has established a year 2000 project team
(the "Team"). The Team has conducted a comprehensive review of the Company's
computer systems and has developed a plan to ensure that date-sensitive data
continues to be processed correctly. The plan provides for the conversion
efforts to be completed by the end of 1998. The year 2000 issue is the result
of computer programs being written using two digits rather than four to define
the applicable year. The total cost of the project is estimated to be $100,000
and is being funded through operating cash flows. The Company is expensing all
costs associated with these system changes as the costs are incurred.
59
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The following description, unless otherwise
provided, assumes the completion of the Contribution. The Company's actual
results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Risk Factors" and elsewhere in this Information Statement. See "Summary
of Certain Information--Forward-Looking Statements."
GENERAL
The Company is a diversified financial services company primarily engaged in
three business segments: (i) motion picture and television production finance,
through the Company's division, The Lewis Horwitz Organization ("LHO"), (ii)
small business lending, primarily in conjunction with SBA sponsored programs,
through the Company's subsidiary, Crown American Bank ("CAB"), a recently
formed industrial loan company, and (iii) a wide range of trust and investment
management services, through the Company's subsidiary, Imperial Trust Company
("ITC"), a California licensed trust company. In addition, the Company owned,
as of June 30, 1998, approximately 23.0% of the common stock of Imperial
Credit Industries, Inc. ("ICII"). The Company beneficially owns an additional
1.2 million shares (or 3.0% of the outstanding ICII common stock as of August
15, 1998) pursuant to the ICII Shareholders Agreement, which grants the
Company the right to vote all of such shares and provides the Company with an
option to purchase these shares. Accordingly, as of August 15, 1998, the
Company beneficially owned approximately 26.0% of the outstanding common stock
of ICII. See "--Imperial Credit Industries, Inc."
For the six months ended June 30, 1998 and 1997, and the year ended December
31, 1997, LHO originated $35 million, $49 million and $98 million in loans,
respectively. During the six months ended June 30, 1998 and 1997, LHO, through
the Bank, issued letters of credit totalling $2.4 million and $14.0 million,
respectively. During the year ended December 31, 1997, LHO issued $19 million
of letters of credit. For the six months ended June 30, 1998 and 1997, and the
year ended December 31, 1997, CAB originated $30 million, $28 million and $49
million in loans, respectively; and at June 30, 1998 and December 31, 1997,
ITC had trust assets under administration of $9.5 billion and $8.7 billion,
respectively.
The Company's business strategy emphasizes (i) opportunistic expansion of
businesses in niche segments of the financial services industry, (ii) hiring
management experienced in a wide array of financial services businesses to
operate and grow the Company's businesses, (iii) conservative and disciplined
underwriting and credit risk management, (iv) sale in secondary markets of
Company SBA loans where the Company expects to receive a premium over the
principal amount of the loan and (v) maintaining business and financial
flexibility to take advantage of changing market conditions with respect to
specific financial services businesses.
LHO
GENERAL
The Company's LHO division, formed in 1980 by Lewis P. Horwitz, the
division's President and Chief Executive Officer, was acquired by the Bank in
1989. The LHO division is a leading provider of senior, secured financing for
independent motion picture and television production. As of June 30, 1998 and
1997, and December 31, 1997, the aggregate principal amount of the Company's
LHO loans was approximately $108 million, $73 million, and $100 million,
respectively. During the six months ended June 30, 1998 and 1997, the LHO
division originated 18 loans and 28 loans, respectively, in an aggregate
principal amount of approximately $35 million and $49 million, respectively.
During the year ended December 31, 1997, the LHO division originated 59 loans
in an aggregate principal amount of approximately $98 million. During the six
months ended June 30, 1998 and 1997, the LHO division, through Imperial Bank,
issued letters of credit totalling approximately $2.4 million and $14.0
million, respectively. During the year ended December 31, 1997, the LHO
division issued $19 million of letters of credit. Total revenue for the LHO
division for the six months ended
60
<PAGE>
June 30, 1998 and 1997, and the year ended December 31, 1997 was $3.4 million,
$2.5 million and $5.7 million, respectively, representing 16.8%, 12.8% and
11.1%, respectively, of the Company's total revenue for such periods. Net
income for the LHO division for the six months ended June 30, 1998 and 1997,
and the year ended December 31, 1997 was $1.0 million, $0.2 million and $1.3
million, respectively, representing 19.9%, 4.4% and 8.5%, respectively, of the
Company's net income for such periods.
The Company seeks to provide loans (with a typical term of 12 to 18 months)
and letters of credit for the production of motion pictures and television
shows or series that have a predictable market worldwide, and therefore, a
predictable level of payments arising from selling the production distribution
rights. The LHO division is guided by Mr. Horwitz, a widely-recognized leader
in film financing with nearly 30 years of experience. Each of LHO's lending
officers has at least five years of entertainment financing experience,
including LHO's Executive Vice President Arthur Stribley, who has over 25
years of experience. The Company believes that its experience has enabled it
to have a competitive advantage due to its extensive worldwide contacts among
sales agents, distributors and independent producers in an industry where name
recognition and personal contacts are crucial to success. The Company also
believes that this experience has allowed it to rapidly adapt to changing
industry standards in order to maintain its competitive position. See "--Loan
Types" below.
The Company lends to "independent" producers of film and television, the
majority of which are located in California. The Company considers
"independent" producers to be those producers that do not have captive
distribution outlets for their product and need outside financing. Large film
and television studios generally maintain their own distribution outlets and
finance their projects with internally generated financing.
Several risks are inherent in the type of lending conducted by LHO,
including the noncompletion of the production, poor box office appeal of the
finished product, failure to perform on the part of the distributors and
political and currency risks. The Company attempts to mitigate these risks in
various ways. To hedge against the risk of film incompletion, the Company
obtains completion bonds from established completion bonding companies for
each loan and insists on direct recourse to the re-insurers, who are major
insurance companies, in the event the completion bonding company defaults
under its obligation. See "--Completion Bonds." In order to avoid incurring
risk as a result of poor box office receipts, the Company bases its credit
decisions on the credit-worthiness of the distributors who have signed pre-
sold contracts. In the event existing pre-sales do not cover the amount of the
loan (see "--Loan Types"), the Company considers the sales, the reputation of
the cast, the director, the genre and the overall budget of the film in
question. See "--Underwriting." LHO maintains credit and other information on
most distributors in the major worldwide territories, and this information is
supplemented by credit reports obtained through the American Film Marketing
Association, an association of 120 Sales Agents (defined below) throughout the
world that license film and television rights ("AFMA"). Should a distributor
fail to perform its obligations, it would be prohibited from participating in
future AFMA events, where most new releases are exhibited and sold. See "--
Underwriting." In the event of non-performance by the distributor, the
borrower has the right to replace the distributor and make another sale in
that territory. In addition, the initial distributor would forfeit its deposit
(generally 20% of the contract price). The Company attempts to lessen
political risk by only relying on distribution contracts from politically
stable territories. See "--Loan Types." With regards to currency risk, all
international contracts are made in U.S. dollars, and most of the distributors
do not hedge this risk. As a result, if the local currency falls in value in
relation to the dollar, the actual price of the film to the distributor at
time of delivery is higher than such distributor had anticipated. This
situation has occurred recently in South Korea and Thailand, where both
currencies have undergone devaluations, and it could continue to be a threat
throughout much of Asia. As a result, the Company has removed South Korea from
its list of "primary" territories, and has discounted the value of contracts
emanating from other Asian countries which the Company deems to have unstable
currency. See "Risk Factors--Risks Particular to Company's Loan Portfolio."
Distribution Revenue. The revenue received by independent producers from
licensing distribution rights are critical to the financial success of a
production and can include licensing rights relating to any form of
distribution of the product, including film, television and video
distribution. Producers engage a sales agent ("Sales Agent") to arrange for
the distribution of their product throughout the world by various
distributors.
61
<PAGE>
The Sales Agent receives from the producer a commission for their services,
customarily ranging from 5-25% of the revenues generated from distribution.
Distributors generally are independent, privately-held entities and, in some
territories (principally with respect to television production), may have
affiliations with the local government. Under the contract entered into with
producers, distributors agree to provide a producer with a minimum guarantee
on the revenue anticipated to be generated by distributing the production. In
many instances, distributors provide downpayments of 20% of this minimum
guarantee to the producer at the time of execution of the contract entered
into with respect to such distribution and the balance of the minimum
guarantee is paid upon notice to the distributor that the production is
available for delivery to the distributor. The Company's loans are secured by,
among other assets, a first priority lien on the revenue received by the
producers from the global distribution of the production by its distributors.
Completion Bonds. It is customary in the entertainment industry for bonding
companies to issue to the production lender a completion guaranty to ensure
the completion and delivery of a television show or series or motion picture.
A completion guaranty ensures that the film or television show or series will
be completed and delivered based on a pre-approved script, with, in certain
instances, specific actors, and by a certain date, and that the film will be
suitable for worldwide distribution by industry technical standards. The
completion bond does not guarantee the repayment of the Company's loan but
rather it guarantees the delivery of the film, on time, on budget and pursuant
to the production's distribution contracts. The bond is not effective until a
lender, such as the Company, funds the entire loan. Bonding companies
customarily employ experts in film and television production to audit the cost
reports they receive and receive a fee based on the approved budget of the
production. The bonding company closely monitors production and is entitled,
under the terms of most bonding guaranties, to take corrective action where
the film goes over budget or falls behind schedule, including replacing
personnel and taking over production. The bonding guaranty provides that the
lender of the production will receive notice of any such action. If the
bonding company elects to abandon production, it will reimburse the lender for
its outstanding loan. The Company has made only one claim against a bonding
company in its history as a result of termination of production and the loan
relating to such claim was repaid in full by the bonding company.
STRATEGY
The Company's growth strategy in the entertainment lending industry is based
on the following key elements:
Expansion of borrower base. The Company believes that significant expansion
in the independent film industry within the United States and abroad will
allow the Company to expand its borrower base. According to data gathered by
AFMA, worldwide sales of independent film productions, other than in the
United States, rose from approximately $375 million in 1984 to approximately
$1.6 billion in 1996. The Company has developed significant contacts in
California with independent producers and Sales Agents, and plans to continue
its expansion within the state. The Company also intends to expand its
presence in New York City, the second largest U.S. metropolitan area in terms
of revenue for film and television production, and in Canada and England. The
Company believes that the expertise and contacts it has developed in
entertainment lending in California will be invaluable in soliciting clients
in these other markets. In order to implement this strategy, the Company
intends to open additional sales offices in these areas and, with respect to
its expansion in England, seek strategic alliances with European lenders that
have developed a local presence in the independent film and television
production industry.
Increase loans to television producers. Although the Company historically
has provided the majority of its loans to motion picture producers, it intends
to actively seek to expand its lending to additional television producers. The
television production industry, previously predominantly located in the United
States and other well-developed industrialized countries, has changed
dramatically in recent years. Television recently has become more prevalent in
several countries not previously exposed to it on a country-wide basis. In
addition, the advent of digital programming and the rapidly expanding cable
industry in the United States has resulted in a significant increase in the
number of channels, which results in a significant increase in programming
needs for
62
<PAGE>
these new channels. As a result, the Company anticipates that the demand for
new television shows and series will increase, which will result in a
corresponding need for television financing. The Company has participated in
several recent television festivals, increased its efforts to locate top Sales
Agents in television production and increased advertising in television trade
publications.
Entertainment fund. The Company intends to diversify its presence in
entertainment finance by forming a limited partnership fund that will provide
equity or debt financing of a type not historically provided by LHO. The
Company believes this will increase its margins and add a new client base to
grow LHO's business. These transactions may include:
. ""Pay or Play" financings, where an actor is advanced monies for
performance prior to the financing of the production, the borrowed funds
are attributed to the production entity and the Company receives a fee
or a portion of gross distribution proceeds of the production, or both;
. Super GapSM transactions, which involve lending against the "gap" in
unsold distribution rights at a level in excess of LHO's lending
policies; and
. library purchases, where rights to copyright and distribute a film in
all territories are acquired.
It is contemplated that the fund would initially raise $1 to $5 million on a
private placement basis. If the fund is satisfied with its financial results
after a period of time following this initial capital infusion, the fund
intends to increase the fund's capital to $100 million. The Company
anticipates that a subsidiary would manage the fund, receive a management fee
therefor, and retain a carried equity interest of approximately 20% of the
fund's profits.
Strategic acquisitions. The Company intends to make selective acquisitions
of businesses that would be complementary to LHO's business. The Company has
no current agreement to effect such an acquisition and there can be no
assurance that suitable acquisition candidates will be located or that the
Company will be able to finance such acquisitions.
LOAN TYPES
The Company believes that its significant experience in the entertainment
lending industry has enabled it to provide superior customer service through
the creation of flexible lending products designed to meet the changing needs
of the industry. The Company currently provides two different types of loans,
traditional ("Traditional Loans") and gap ("Gap Loans"). With Traditional
Loans, the Company requires that the anticipated revenue to be received under
existing contracts from approved distributors in "primary" territories ("Pre-
sold Primary Contracts") at the time of funding exceed the entire amount of
the loan (net of withholding taxes), including loan fees, interest charges and
legal costs. "Primary" territories include countries such as the United
States, Canada, Germany, France and the United Kingdom. Distribution contracts
from outside the Primary Territories ("Pre-sold Secondary Contracts" and,
collectively, with Pre-sold Primary Contracts, "Pre-sold Contracts"), which
generally represent between 15% and 20% of a production's total distribution
revenues, are not considered by the Company in determining whether to provide
the loan, but do serve as additional collateral underlying the loan.
The primary distinction between Traditional Loans and GAP Loans is the
amount of the Pre-sold Primary Contracts required by the Company to have been
sold prior to the funding of the loan. Gap Loans have become a popular method
of lending in today's competitive financing environment. With Gap Loans, the
amount of revenue to be received from the Pre-sold Primary Contracts at the
time of funding is less than 100% of the entire loan amount. The difference
between the amount of Pre-sold Primary Contracts and the loan amount is the
"gap" that future sales of distribution rights must fill in order for the loan
to become fully collateralized. From a producer's perspective, Gap Loans have
an advantage over Traditional Loans because a producer can arrange financing
prior to licensing all of the production's distribution rights. This has
allowed producers to determine the time to commence production with more
precision and, if the production is perceived favorably after
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<PAGE>
completion but prior to distribution, the producer may be able to generate
higher distribution revenues. In connection with evaluating Gap Loans, the
Company, after consulting with the applicable Sales Agent, determines what it
believes to be the conservative value of the unsold distribution rights in
Primary Territories, which generally must exceed the amount of the Gap Loans
by 175-200%. As with Traditional Loans, Pre-sold Secondary Contracts relating
to Gap Loans are not given any credit by the Company in determining whether to
provide a loan, but are used to provide additional collateral.
The average principal amount of loans made through LHO during the six months
ended June 30, 1998 and the year ended December 31, 1997 was approximately
$1.96 million and $1.66 million, respectively.
In addition to the Company's traditional entertainment lending, the Company
also enters into a joint lending agreement in certain instances with a large
European bank. In a typical transaction of this type, the Company agrees to
provide the loan to a borrower, but the European bank agrees to participate in
50% of the loan, and provides the full amount of the loan at funding. The
Company agrees with this bank to buy back 50% of the loan at its maturity and
arrange for the issuance of a letter of credit to the bank to support the
Company's obligation. The lending bank remits a standby commitment fee to the
Company, as well as a percentage of the loan origination fees, interest
received on the loan and other fees relating to the Company's 50% interest in
the loan.
The Company also arranges in certain instances for the issuance of letters
of credit to third-party lenders located outside the United States. Such
letters of credit are secured by, among other assets, rights under the
borrowers' Pre-sold Contracts and any unsold distribution rights. The Company
receives letter of credit fees and other fees in these transactions. Prior to
the Distribution, the Bank issued these letters of credit on behalf of LHO.
After the Distribution, these letters of credit are expected to be issued
under the Credit Facilities.
The following sets forth by type of loan the number of loans made by, and
letters of credits issued on behalf of, the Company, the aggregate principal
amount of such loans at origination and the percentage of gap at origination
for such loans, in LHO's portfolio during the years ended December 31, 1996
and December 31, 1997 and the six months ended June 30, 1997 and June 30,
1998.
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF
PRINCIPAL GAP AT
NUMBER AMOUNT ORIGINATION
OF LOANS AT ORIGINATION DATE
-------- -------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Traditional Loans
Year ended December 31, 1996........... 18 $20,216 N/A
Year ended December 31, 1997........... 23 24,830 N/A
Six months ended June 30, 1997......... 9 12,225 N/A
Six months ended June 30, 1998......... 4 9,635 N/A
Gap Loans
Year ended December 31, 1996........... 21 $35,735 35.7%
Year ended December 31, 1997........... 36 73,024 45.7
Six months ended June 30, 1997......... 19 36,914 44.9
Six months ended June 30, 1998......... 14 25,686 46.1
Letters of Credit for Traditional Loans
Year ended December 31, 1996........... 4 $ 2,194 N/A
Year ended December 31, 1997........... 1 1,254 N/A
Six months ended June 30, 1997......... 1 1,254 N/A
Six months ended June 30, 1998......... -- -- N/A
Letters of Credit for Gap Loans
Year ended December 31, 1996........... 9 $36,965 30.2%
Year ended December 31, 1997........... 8 17,816 39.5
Six months ended June 30, 1997......... 5 12,708 28.5
Six months ended June 30, 1998......... 2 2,350 45.5
</TABLE>
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<PAGE>
The interest rate charged on most loans made through LHO are variable rates
tied to published prime rates. The Company generally does not impose different
interest rates for Traditional Loans and Gap Loans. See "--Fees" below. In
certain instances at the request of a borrower, the interest rate is fixed.
The average yield on outstanding loans originated through LHO for the years
ended December 31, 1996 and 1997 and the six months ended June 30, 1998 was
14.2%, 14.2% and 12.2%, respectively.
FEES
At the time of closing of a loan, the Company is paid a fee by the borrower
based on the amount of the loan. For the year ended December 31, 1997, the
average origination fee on Traditional Loans and Gap Loans was 2.2% and 4.7%,
respectively, of the aggregate principal amount of such loans. For the six
months ended June 30, 1998, the average origination fee on Traditional Loans
and Gap Loans was 1.1% and 4.4%, respectively, of the aggregate principal
amount of such loans. In certain transactions where extraordinary effort or
special creative expertise is required, additional fees are collected from the
borrower based on all revenues generated by the particular film or television
series. For accounting purposes, fees, net of direct origination costs, are
deferred and the resulting revenue is recorded over the life of the loan.
Where a transaction includes the issuance of a letter of credit, the borrower
is charged an additional fee.
UNDERWRITING
The Company's Traditional Loans are based on Pre-sold Primary Contracts from
approved distributors in Primary Territories. Primary Territories are
principally North American and European industrialized countries, where
distributors in such countries have historically complied with the terms of
the Pre-sold Primary Contracts. The Company generally lends against 100% of
the value of the Pre-sold Primary Contracts and none of the value from Pre-
sold Secondary Contracts. Each distributor is also rated on a primary and
secondary basis based upon the same criteria used for determining territory
status. With respect to Gap Loans, the Company also evaluates the ability of
the Sales Agent to sell the borrower's production to distributors.
The Company's five loan officers, with an aggregate of approximately 65
years of experience in entertainment lending, utilize a variety of criteria to
determine whether to make a loan to a potential borrower. The Company does not
consider the anticipated success of the production or, for the reasons
described below, the creditworthiness of the borrower. Its officers primarily
evaluate the risks relating to the ability of the Sales Agent to sell the
borrower's product to distributors and the ability of distributors to pay the
minimum guarantees relating to distribution rights. The success of the Sales
Agents' marketing efforts will ultimately determine the value of the
distribution rights through arranging for the execution of the Pre-sold
Primary Contracts and the Pre-sold Secondary Contracts. Accordingly, the Sales
Agents have a significant influence on the amount of revenue generated from
licensing the production and it is this cash flow stream that the Company
primarily focuses on when making its lending decision. Sales Agents are
particularly important for Gap Loans because Sales Agents work in conjunction
with the Company to determine the value of unsold distribution rights. Sales
Agents provide the Company with the Pre-sold Primary Contracts prior to
execution of loan documentation. The Company's officers examine these
contracts in order to ensure that the contract will be sufficient to grant to
the Company a first priority security interest with respect to the borrower's
rights thereunder, review the payment history to the Company of distributors
identified, review the Credit Watch publication of AFMA and its own databases
to confirm creditworthiness of the distributor and discuss the selection of
the distributors with other Sales Agents. In order to encourage Sales Agents
to continue to provide marketing efforts until completion of distribution and
to protect the value of the Company's collateral, the Company's loan
documentation typically prohibits the payment of any commissions or
reimbursements of expenses to the Sales Agents until the Company's loan is
repaid in full.
The Company requires each borrower to produce certain information in
determining whether to make a loan. The borrower is typically required to
provide the Company, among other things, with (i) a budget identifying all
known expenses and costs necessary for production, including salaries of
production executives and actors and the cost of the completion bond (which
ensures completion of production and licensing rights), (ii) the name of
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<PAGE>
the bonding company, (iii) a drawdown schedule, which describes the
production's monetary needs on a weekly basis from pre-production through
principal photography, post-production and delivery of the completed product,
(iv) the name of the Sales Agent, (v) copies of all existing domestic and
international Pre-sold Primary Contracts and Pre-sold Secondary Contracts,
(vi) with respect to Gap Loans, the Sales Agent's estimates for all unsold
rights and the names of the actors, directors and genre of the production in
order to help determine the salability of the production and (vii) the
organizational documents of the borrower. The Company typically requires that
a borrower be a newly formed corporation established for the sole purpose of
producing and distributing a single production in order to limit the potential
existing liabilities of such entity and mitigate the circumstances under which
the borrower's assets could be combined with an affiliate's assets in the
event of a bankruptcy of such other entity. Prior to funding of any loan, the
Company requires that a completion guaranty be issued in its favor by the
bonding company. See "--General--Completion Bonds."
The Company does not obtain financial information of the borrower because,
as described above, the borrower is a special purpose entity created for
production of a particular project. In addition, except with respect to
certain U.S. distributors and publicly traded distributors, consistent with
customary industry practice, no financial information is obtained with respect
to the distributors. The Company attempts to minimize the risk relating to the
financial stability of the distributor by providing in its loan documentation
that rights to distribute a production are not granted in favor of a
distributor until the rights are fully paid for. Accordingly, if a distributor
fails to pay to LHO on behalf of the borrower the minimum guarantee of the
distribution revenue, any down-payment made by the distributor may be retained
by the Company as a loan repayment and the production may be licensed to
another distributor approved by the Company in the same territory. In
addition, if the distributor defaults on payment and the Company obtains an
arbitration ruling to that effect, the distributor will not be allowed to
participate in the American Film Market for two years, one of the largest
sales markets for motion pictures in the world.
The Company generally approves loans within 75 days from initial contact
with the borrower. All potential loans in excess of $250,000 are submitted to
the Loan Administration Committee of the Company for final approval. Loans are
initially funded after the loan is approved in approximately one month
following completion of loan documentation. Thereafter, loans are funded
pursuant to agreed-upon schedules.
COLLATERAL
As security for the loan, the borrower grants the Company, among other
rights, a first priority security interest in and to the copyright and
distribution rights to the film or television production, all rights and
property pertaining thereto, all trademarks and trade names, all accounts
relating to the production, all cash and cash equivalents derived from or
relating to the production and all general intangibles, including all rights
under the account receivables on global distributions rights to Primary
Territories and Secondary Territories, whether under Pre-sold Contracts or
unsold distribution rights. If the Company determines that such collateral is
insufficient, the Company may also require additional collateral such as
certificates of deposit or require that a letter of credit be issued in its
favor. The Company also requires third-party guarantees in limited instances.
In certain jurisdictions, in lieu of a loan, the Company arranges for the
issuance of a letter of credit in favor of a third-party lender. This letter
of credit is similarly secured by, among other assets, Pre-sold Contracts.
Security interests are perfected by, among other actions, (i) recording with
the U.S. Copyright Office and any applicable international jurisdiction
mortgages of Copyright and Security Agreements with respect to the underlying
literary, musical and dramatic material upon which the production is based
and, upon completion of production, the production itself, (ii) filing
financing statements in the appropriate jurisdiction, (iii) obtaining notices
of assignment and acceptance from account debtors and licensees of the
production, including distributors, and (iv) taking possession of certain
collateral, such as letters of credit or money.
All loans are made pursuant to written loan and security agreements. The
typical loan and security agreement includes covenants with respect to (i) the
establishment of certain reserves for payments to be made to the borrower or
third parties, such as the completion bonding company, (ii) restrictions on
the use of loan
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proceeds, (iii) the grant of first priority security interest in and to the
assets described above, (iv) the grant to the Company of the right to take
over the production of the film or television production and renegotiate
distribution agreements upon the occurrence of an event of default, (v)
obtaining by a specified date subsequent distribution agreements with
acceptable distributors, (vi) restrictions on asset sales, (vii) maintaining
proper books and records and (viii) providing the Company with notice of
litigation or claims against the borrower.
If the borrower has debt from other third-party lenders, the Company enters
into an intercreditor agreement with such lender which sets forth the relative
priority of the lenders to the borrower's assets under certain circumstances
and the priority of loan repayment.
Pursuant to the collective bargaining agreements of the Screen Actors Guild
and Directors Guild of America, security interests in the film and its
proceeds are customarily granted in the guild's favor to secure the employer's
obligations thereunder, including the obligation to make residual payments
based on film revenues derived from the designated media. The guilds typically
agree to subordinate their liens to the security interests granted to the
Company. In addition, if the borrower has pre-existing obligations to third-
party creditors which are secured by the assets of the borrower that are being
pledged to the Company, the Company obtains a subordination agreement pursuant
to which the third-party creditor agrees to subordinate its rights and
security interests in the shared collateral to the Company's rights and to not
take any action that would interfere with the rights of the Company.
LOAN SERVICING AND MONITORING
The Company's lending officers generally review every advance requested on a
weekly basis to ensure that the Company is not advancing ahead of the agreed-
upon cash flow schedule. The bonding company generally reviews and approves
every advance as well. The applicable lending officer also periodically speaks
with the producer, bonding company and Sales Agent regarding the progress of
the film. The Company's loan documents provide that the Company is not
obligated to fund if agreed upon progress on the production has not been
achieved by the borrower.
The Company's officers perform extensive follow-up on every Gap Loan to
ensure that the gap is filled (i.e., distribution contracts are generated by
the Sales Agent) prior to delivery of the film or television production.
Generally, a lending officer will speak to the Sales Agent at least monthly
regarding the agent's progress on covering the gap. The loan documentation
grants the Company the right to impose certain penalties on the borrower and
exercise certain other rights, including replacing the Sales Agent, if sales
are not consummated within the appropriate time.
Loans are repaid principally from revenue received from distribution
contracts. In many instances, the distribution contracts provide for multiple
payments payable at certain milestones (such as execution of contract,
commencement of principal photography or completion of principal photography).
The maturity date of the loan generally is three to four months after
production in order to permit all payments from distributors to be received
within the maturity of the loan. Delivery of the completed production is made
to the various distributors that provide minimum guarantees within a short
period of time after completion of the production but only after the minimum
guarantees have been paid in full.
MARKETING
In addition to Mr. Horwitz, five other lending officers of the Company seek
new business opportunities. The Company primarily markets its services by
soliciting Sales Agents and responding to inquiries from Sales Agents and
producers. A significant source of business has been generated from attending
film festivals, including three major festivals--the Cannes Film Festival, the
Milan Film Festival and the American Film Market, a sales conference sponsored
by the AFMA. Representatives of the Company have attended these festivals for
the last 16 years. The Company also obtains business from referrals from
accountants, lawyers and other professionals in the entertainment industry,
advertisement in trade publications and calls to producers and Sales Agents.
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<PAGE>
COMPETITION
The Company faces significant competition in the business of originating
entertainment production loans. A significant competitor of the Company's LHO
division is the Bank's Entertainment Industries Group. No agreement between
the Bank and the Company will exist that restricts the activities of the
Bank's Entertainment Industries Group and the Company following the
Distribution. In addition, the Bank and the Company will not be prohibited
from using confidential information of the other party for its own internal
purposes that may have been obtained prior to the Distribution. Several
international banks, including Paribas, Films Limited and Coutts Bank, also
compete against the Company. Many of these competitors are substantially
larger and have considerably greater financial resources than the Company.
Competition among industry participants can take many forms, including
convenience in obtaining a loan, customer service, marketing and distribution
channels, amount and term of the loan, loan origination fees and interest
rates.
DELINQUENCY AND LOSS
Loans made through LHO typically provide for periodic repayment at specified
intervals throughout the life of a loan. A principal source of repayment is
the amounts received under the Pre-sold Contracts, and, as a result, the
Company periodically monitors the status of each Pre-sold Contract prior to
the maturity of the loan.
The Company maintains a standard procedure for the collection of the amounts
under Pre-sold Contracts. Each lending officer is required to keep a separate
file with the standard credit file containing information regarding each Pre-
sold Contract, correspondence thereto and any other information necessary for
follow-up on the contract's status. Two employees assigned to assist the
lending officer use this information to send notices and make telephone calls
to obtain payment. If a payment from a particular Pre-sold Contract is late, a
lending officer contacts the distributor. If the Company remains in dispute
with the distributor, it is subrogated to the rights of the borrower to
receive distribution payments and can arbitrate the dispute. If the Company
receives a favorable judgment, as mentioned above in "--Underwriting," the
distributor would not be permitted to participate at the American Film Market
for a period of two years. If necessary for collection, an action to enforce
an arbitrator's judgment is to be brought in the country in which the
distributor resides.
The following table sets forth information relating to delinquency levels,
charge-off experience and loan loss allowances of LHO with respect to its loan
portfolio for the periods indicated below:
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED AS OF AND FOR THE
DECEMBER 31, SIX MONTHS
------------------------- ENDED JUNE 30,
1995 1996 1997 1998
------- ------- ------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
30-59 days past due............ $ -- $ 538 $ 747 $ 617
60-89 days past due............ 10 -- -- 1,400
90 or more days past due....... 488 1,193 -- --
Gross loans outstanding at pe-
riod end...................... 48,461 45,608 99,654 108,140
Average loans outstanding for
the period.................... 24,469 47,716 69,594 105,675
Loans charged-off (recoveries),
net........................... 201 424 334 (26)
Allowance for loan losses...... 727 1,163 2,656 3,098
Ratio of loans charged-off
(recoveries), net, to average
loans outstanding............. 0.82% 0.89% 0.48% (0.02%)
Ratio of allowance for loan
losses to gross loans
outstanding at period end..... 1.50% 2.55% 2.67% 2.86%
</TABLE>
The amount of delinquent loans as of June 30, 1998 increased to $2.0 million
from $0.7 million as of December 31, 1997. This increase was primarily
attributable to four loans becoming past due as of June 30, 1998. Of these
four loans, the past due amounts for two loans became current in July 1998 and
the remaining loans were placed on nonaccrual in June 1998.
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Until 1995, the Company made no Gap Loans. During the year ended December
31, 1997 and the six months ended June 30, 1998, approximately 75% and 73%,
respectively, of loans made by the Company were Gap Loans. As a result of this
continuing change in the type of loan primarily made by the LHO division of
the Company, the above historical information may not be indicative of future
loan loss experience. See "Risk Factors--LHO Lending."
CAB
GENERAL
The Company is a provider of secured small business loans, the majority of
which are guaranteed in part by the Small Business Administration (the "SBA").
The Company offers small business loans to a wide variety of businesses
located in California, Nevada and Arizona, including hotels, residential care
facilities, beauty salons and restaurants. The Company's small business
lending activities are conducted through CAB, a recently formed industrial
loan company. As of June 30, 1998 and December 31, 1997, the aggregate
outstanding principal amount of the Company's small business loans was
approximately $42 million and $40 million, respectively. The aggregate
principal amount of loans originated for the six months ended June 30, 1998
and 1997, and the year ended December 31, 1997 was approximately $30 million,
$28 million and $49 million, respectively. CAB's lending activities were
previously conducted through the Small Business Lending Division of the Bank,
which division began operating in 1993. See "--The SBA Guaranteed Loan
Program" below.
Total revenue for CAB for the six months ended June 30, 1998 and 1997, and
the year ended December 31, 1997 was $4.0 million, $2.9 million and $6.1
million, respectively, representing 19.6%, 15.3% and 11.8%, respectively, of
the Company's total revenue for such periods. Net income for CAB for the six
months ended June 30, 1998 and 1997, and the year ended December 31, 1997 was
$0.2 million, $0.2 million and $0.8 million, respectively, representing 3.7%,
5.5% and 5.0%, respectively, of the Company's net income for such periods.
Of loans originated by the Company during the six months ended June 30,
1998, $20.4 million in aggregate principal amount (69%) consisted of loans
guaranteed by the SBA that have been or will be sold in the secondary market,
and $9.2 million in aggregate principal amount (31%) consisted of the
unguaranteed portion of loans maintained by CAB for its own account. Of these
unguaranteed portions, $2.4 million are "companion loans." "Companion loans"
are loans made by CAB in conjunction with SBA loans. The companion loans are
secured by a first lien on the borrower's assets while the SBA-guaranteed
portion of the loan is secured by a second lien on the borrower's assets. As
of June 30, 1998, a substantial majority of the Company's SBA and companion
loans are secured by a first or second mortgage on the real property relating
to such loans. Similar to SBA loans, there is an active market for companion
loans and, from time to time, the Company sells its companion loans for a
premium in those markets. For the six months ended June 30, 1998, the
principal amount of loans originated by CAB ranged from $60,000 to $1,250,000,
the average principal amount was approximately $430,000, and the maturities
ranged from 6 months to 25 years. The interest rates of these loans are
typically adjustable at some fixed percentage over the prime rate. The
annualized weighted average yield for CAB's loans for the six months ended
June 30, 1998 was 12.44%. The increase in the annualized weighted average
yield for the six months ended June 30, 1998, as compared to 11.79% for the
year ended December 31, 1997 was mainly due to the collection and income
recognition of approximately $170,000 of past due interest on nonaccrual loans
and the receipt of a $47,000 prepayment penalty during the six months ended
June 30, 1998.
Of loans originated by the Company during the year ended December 31, 1997,
$29.7 million in aggregate principal amount (61%) consisted of the loans
guaranteed by the SBA that have been sold in the secondary market, and $19.4
million in aggregate principal amount (39%) consisted of the unguaranteed
portion of loans maintained by CAB for its own account. Of these unguaranteed
portions of loans, $10.8 million are companion loans. For the year ended
December 31, 1997, the principal amount of loans originated by CAB ranged from
$30,000 to $1,460,000, the average principal amount was approximately
$425,000, and the maturities ranged from seven years to 25 years. The weighted
average yield of CAB's loans for the year ended December 31, 1997 was 11.79%.
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STRATEGY
The principal element in the Company's small business lending strategy is to
increase the amount of loan originations by continuing to market itself as a
leading provider of SBA loans on an expedited basis. The Company also plans to
expand its SBA lending business outside of the three states in which it
currently operates
to additional states with growing economies by establishing additional lending
offices in these new states. The Company seeks to notify small business
borrowers of its lending decision within two days of receipt of a completed
loan application. The Company believes that, in a highly competitive small
business lending industry, its efficient and expedited approval process will
distinguish the Company from some of its competitors and has attracted
referrals from mortgage brokers and others that participate in this industry.
Despite its expedited review process, the Company maintains strict
underwriting guidelines designed to ensure that potential borrowers are
eligible under SBA guidelines and meet the Company's credit approval
guidelines. See "--Underwriting."
The Company also believes that significant cross-marketing opportunities
exist with clients of ITC and intends to build a private banking business with
these clients. The Company intends to offer investment products and expand its
non-SBA lending business by offering loans and equity lines to clients of ITC
(typically high net worth individuals) secured by the equity in their
residences or secured by certain securities held in custody by ITC.
COMPETITION
The small business lending business is highly competitive and CAB competes
with a variety of banks and non-bank lending institutions, many of which are
larger than the Company and have greater financial and other resources, and
many of which also participate in SBA-sponsored programs. These other banks
and non-bank lending institutions maintain larger marketing and sales staff
and use a wide variety of marketing strategies, some of which may be too
expensive for the Company to conduct. These banks and non-bank lending
institutions also compete by offering lower interest rates than CAB and by
offering additional credit facilities to small business borrowers, which
tactics the Company may not be able to use. CAB will also face significant
competition in its private banking business, which may impede its ability to
profitably engage in such activities.
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LOAN INFORMATION
The following table sets forth certain information relating to small
business and companion loans originated by the Company during the years ended
December 31, 1996 and December 31, 1997 and the six months ended June 30, 1997
and June 30, 1998:
<TABLE>
<CAPTION>
AVERAGE
AGGREGATE AMOUNT
NUMBER PRINCIPAL PER
OF LOANS AMOUNT LOAN
-------- --------- -------
(IN THOUSANDS EXCEPT
FOR NUMBER OF LOANS)
<S> <C> <C> <C>
SBA Loans:
"7A" Loans (1)
Year ended December 31, 1996.................... 110 $30,280 $275
Year ended December 31, 1997.................... 97 36,696 378
Six months ended June 30, 1997.................. 53 20,608 389
Six months ended June 30, 1998.................. 66 27,258 413
"504" Loans (1)
Year ended December 31, 1996.................... 1 $ 700 $700
Year ended December 31, 1997.................... 3 1,588 529
Six months ended June 30, 1997.................. -- -- --
Six months ended June 30, 1998.................. -- -- --
Companion Loans
Year ended December 31, 1996.................... 10 $ 7,812 $781
Year ended December 31, 1997.................... 16 10,808 676
Six months ended June 30, 1997.................. 9 7,223 803
Six months ended June 30, 1998.................. 3 2,384 795
</TABLE>
- --------
(1) See "--The SBA Guaranteed Loan Program" below for a description of "7A"
and "504" Loans.
SALES IN THE SECONDARY MARKET
CAB sells the guaranteed portion of all of its SBA loans to financial
institutions or broker-dealers for their investment or resale. CAB generally
retains the unguaranteed portion of the SBA loans, including its companion
loans. SBA guidelines also require that the Company maintain at least 10% in
aggregate principal amount of SBA loans, although, with SBA approval, the
Company may be permitted to maintain 5% of the aggregate principal amount of
SBA Loans. During 1996, 1997 and 1998, of the SBA loans sold, the Company sold
100% of the guaranteed portion of such loans. Investors in the guaranteed and
unguaranteed portions of SBA loans and CAB (with respect to the unguaranteed
portion retained) share ratably in all principal collected from the borrowers
with respect to the loans. In order to facilitate the sale of the guaranteed
portions of the SBA loans, the SBA has contracted with Colson Services Corp.
to serve as the exclusive Fiscal and Transfer Agent (the "FTA") for the
guaranteed portion of SBA Loans sold in the secondary market. The guaranteed
portions of SBA loans are converted by the FTA to registered government-
guaranteed certificates and the certificates are sold by CAB to investors to
yield a variable rate that adjusts relative to the prime rate. CAB collects
payments from borrowers and remits to the FTA amounts due to investors. The
FTA then remits such amounts to the investors and administers the transfer of
SBA-guaranteed interests of SBA Loans from one investor to another.
CAB is generally able to sell the SBA-guaranteed portions of its loans at a
premium due to the term of the underlying loan and the normally superior rate
of return as compared to other investment paper backed by the full faith and
credit of the United States Government. The amount of the premium obtained by
CAB is based upon the interest rate and term of the loan, and the service fee
to be received by CAB from the purchaser. Because CAB typically charges
different interest rates based on competitive market forces and the quality of
the borrower and, historically, has received a 1% servicing fee, the amount of
the premium obtained by CAB can vary significantly. The secondary market for
the SBA-guaranteed portion of loans is active and provides an
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<PAGE>
immediate source of funding for CAB's loan origination activities. Normally,
within 30 days of closing and fully funding a loan, CAB solicits bids from
several investors who create and maintain the secondary market. There are
numerous investors in this market and CAB's ability to sell in the secondary
market is not dependent on any one or several of such investors. The SBA-
guaranteed portions of CAB's loans are generally sold within 30 days following
the closing of a loan. For the six months ended June 30, 1998 and the year
ended December 31, 1997, CAB has obtained an average premium of approximately
9% upon the sale of the SBA-guaranteed portion of their loans. CAB is required
under the SBA guidelines to pay to the SBA one-half of any premium in excess
of 10% upon the sale of the SBA-guaranteed portion of the loans. The premium
received in connection with the sale of loans is deemed completely earned once
the borrower has made its first three monthly payments. Subsequent default
and/or liquidation of the loan would not require CAB to return to the
purchaser any premium paid. The premium paid on loans that default or prepay
prior to the third monthly payment must be repaid to the purchaser of the loan
and cannot be recouped from the liquidation proceeds of the defaulted loan.
After CAB sells the SBA-guaranteed portion of the loan in the secondary
market, CAB generally services the SBA-guaranteed portion of the loan for an
annual fee. Although the fee is subject to negotiation, the typical fee
received by CAB for servicing these loans is equal to 1% of the principal
amount of the SBA-guaranteed portion of the loan. CAB is required to pay to
the SBA, until such time as it sells a loan, a portion of the servicing fee it
receives equal to 50 basis points of the guaranteed portion of the loan.
FUNDING
The primary source of funding for CAB's lending operations and any other
investments is expected to be CAB investment certificates, which are insured
by the FDIC to the extent permitted by law, and are hereinafter referred to as
"deposits." CAB intends to obtain the majority of its deposits in the form of
term investment certificates (functionally equivalent to certificates of
deposit) that pay fixed rates of interest for periods ranging from three
months to five years. CAB intends to emphasize certificates with terms of
three months to one year as part of its asset liability management efforts.
The rates a depository institution must pay for the acquisition of deposit
accounts generally are affected by prevailing interest rates and economic
conditions, and by competitive forces applicable to banks and other depository
institutions as well as nondepository financial institutions such as stock
brokerage firms. Deposit accounts reprice on a frequent basis; however,
certificates of deposit, because they are issued for a fixed term, reprice
less frequently than many other deposit accounts. Nevertheless, the
certificates of deposit and other deposit accounts issued by the Company
through CAB may be more interest-rate sensitive than the Company's assets.
Because of the high level of competition between banks and other depository
institutions for deposit accounts, including certificates of deposit, these
funding sources are considered volatile funding sources. When interest-bearing
liabilities such as deposit accounts reprice more quickly than interest-
earning assets, a significant increase in market rates of interest could
result in a corresponding decline in the Company's net interest income. CAB
will also offer variable rate savings accounts. CAB's strategy with all
deposit accounts will be to offer rates above those customarily offered by
competing banks and savings and loans. CAB expects to initially build its
deposit base by participating in deposit rate surveys which list the higher
rate paying insured institutions, periodically advertising in various local
market newspapers and other media, and selectively using a limited network of
deposit brokers. In addition to these strategies, CAB expects to maintain and
expand its deposits by relying on renewals of term accounts by existing
depositors as it builds its deposit base. CAB intends to open few branches and
will not provide demand checking accounts, ATM service, safe deposit boxes,
money orders, trust services and various other retail banking services. CAB
believes that the higher cost associated with increased interest rates on its
products will be offset by the reduced staffing and overhead costs resulting
from maintaining fewer branches and offering fewer products and services than
the majority of competing depository institutions. CAB believes that
implementation of this deposit-gathering strategy will produce a stable and
reliable funding source, and that the costs of funds resulting from CAB's
deposit-gathering strategy will be comparable to those of other industrial
loan companies pursuing a similar strategy. CAB expects, however, to compete
for deposits primarily on the basis of rates and, accordingly, CAB could
experience difficulties in attracting deposits if it could not continue to
offer deposit rates at levels above those of competing banks and savings
institutions.
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<PAGE>
CAB also expects to use advances from the Federal Home Loan Bank of San
Francisco ("FHLB") and other lines of credit as funding sources. CAB is a
member of the FHLB System and is approved to borrow from the FHLB pursuant to
a secured line of credit subject to FHLB regulations.
UNDERWRITING
The lending process typically includes five stages: (i) CAB analyzes and
approves or denies a loan application, (ii) if the loan is to be made under
the SBA's Certified Lender program, the loan application is forwarded by CAB
to the SBA, (iii) the loan is closed, (iv) with respect to SBA loans, the SBA-
guaranteed portion of the loan is sold in the secondary market by CAB while
the unguaranteed portion of the loan generally is retained by CAB and (v) CAB
services the loan for its stated duration unless the loan is paid in full or
foreclosed at an earlier date.
CAB's business is generally developed through the individual marketing
efforts of its personnel and referrals from mortgage brokers and real estate
agents. Generally, the loan application process begins with an initial
telephone call or meeting between the potential borrower and a CAB officer.
The potential borrower is preliminarily screened for eligibility and
creditworthiness. If the loan officer determines that the potential borrower
possesses certain minimum criteria, a detailed application is submitted by the
applicant and reviewed on an expedited basis by CAB. In most instances, the
applicant is informed of the lending decision within two days of receipt of
the application. The Company believes that this expedited review process
provides it with a competitive advantage over other SBA lenders. After
acceptance of the application, a loan officer is assigned to perform an
underwriting analysis of the loan and a field visit is arranged. Depending on
the size of the loan, it may then be reviewed by a second loan officer for
approval. If approved, a commitment letter is issued to the applicant. If the
loan is made under the SBA's Preferred Lender program, CAB does not need to
seek SBA approval. If the loan is made under the SBA's Certified Lender
program, the potential loan is forwarded to the SBA for its approval. A loan
guaranty authorization and certain closing documents, including the form of
note and SBA guaranty, are forwarded to the SBA by CAB for their review prior
to funding.
After the SBA has issued its loan guaranty authorization, relevant loan
materials are prepared and the closing is scheduled. Loan documents include
all appropriate security instruments, including deeds of trusts, and contain
affirmative covenants that require submission to CAB of periodic financial
information of the borrower and negative covenants that impose limitations on
certain activities of the borrower (i.e., asset sales, debt incurrence,
dividends).
SERVICING
CAB services all of the SBA loans it originates. Servicing includes
collecting payments from borrowers, conducting site visits, tracking
insurance, financial statements and other required documents and remitting
payments to investors including, with respect to the guaranteed interests, to
the FTA (after deducting applicable servicing fees), accounting for principal
and interest, contacting delinquent borrowers and supervising loan
liquidations. CAB's loan operation center in Inglewood, California processes
all loan collections. CAB's quality control staff members review loan files to
confirm that the loans are originated and maintained in accordance with its
requirements and applicable SBA regulations.
Prior to an SBA-guaranteed loan becoming more than 120 days past due, CAB
typically will repurchase such loan. Otherwise, the FTA, on behalf of the
purchasers of the SBA-guaranteed portion of the loan, serves notice on the SBA
to purchase from the holders the SBA-guaranteed portion of such loan.
Thereafter, the SBA may elect to service the loan for its own account or, more
typically, will elect to continue to retain CAB to service the loan, usually
at a service fee less than that received by CAB from the purchaser in the
secondary market. If CAB repurchases the loan, it will continue servicing the
loan and will develop a plan of collection that will be sent to the SBA. Upon
receiving the approval of the SBA, CAB will continue to work out the loan
through the final collection process.
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<PAGE>
The following table sets forth certain information relating to SBA loans
serviced by CAB:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------ AT JUNE 30,
1995 1996 1997 1998
------- ------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Number of loans serviced............... 198 293 384 405
Total principal amount of Company's
loan portfolio........................ $22,563 $28,084 $ 39,718 $ 29,779
Total principal amount of loans sold... $36,005 $57,362 $ 81,109 $ 16,006
Total principal amount of loans serv-
iced.................................. $58,568 $85,446 $120,964 $122,604
</TABLE>
DELINQUENCY, LOSS AND PREPAYMENTS
If payment is not received within ten days of the due date, the Company
sends a delinquency notice. Servicing personnel begin contacting delinquent
borrowers approximately 30 days after the due date, depending on the size, age
and past history of the loan. Loans that are chronically delinquent receive
additional attention, either with multiple telephone calls or in-person
communication. When the loan becomes approximately 60 days past due, the
Company sends a demand notice requiring payment in full within ten days of the
date of such notice. When the loan becomes 90 days past due or prior to that
time if loan officers so determine, the loan file is transferred to a loan
collection/workout specialist. This specialist reviews the Company's
collateral and updates appraisals, credit reports and property profiles to
determine, among other things, if there are lenders junior to the Company and
to prepare a workout strategy. If possible, this specialist will work out a
payment program with the borrower and/or restructure the loan. The workout
plan is reviewed by the SBA prior to proceeding. Prior to the loan becoming
120 days past due, CAB purchases the guaranteed portion back from the
investor. The Company commences foreclosure proceedings as a last resort. In
these proceedings, collateral is repossessed and sold, and a claim is made to
the SBA for any shortfall.
The SBA will pay the guaranteed portion of the principal balance, together
with accrued interest covering a period generally not to exceed 120 days. The
liquidation of a defaulted loan is governed by an agreement among the SBA, CAB
and the borrower. The proceeds of any liquidation of collateral securing the
loan or other collections made on the loan are shared by the SBA and CAB in
accordance with their respective interest in the loan. With the approval of
the SBA, CAB normally proceeds to liquidate the loan, and the SBA and CAB bear
the costs of collection efforts in accordance with their respective interests
in the loan.
The following table sets forth information relating to delinquency levels,
charge-off experience and loan loss allowance of CAB with respect to its loans
held for investment for the periods indicated (1):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS AS OF AND FOR
ENDED DECEMBER 31, THE SIX MONTHS
-------------------------- ENDED JUNE 30,
1995 1996 1997 1998
------- ------- ------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
30-59 days past due............. $ 1,731 $ 1,369 $ 413 $ 933
60-89 days past due............. 336 350 168 73
90-119 days past due (2)........ 223 -- 151 621
120 days or more past due (2)... -- 914 3,571 2,585
Gross loans held for investment
at year end.................... 19,915 22,553 35,955 33,829
Average loans held for invest-
ment........................... 13,649 21,632 31,018 32,906
Allowance for loan losses....... 420 716 1,075 1,012
Loans charged-off (recoveries),
net............................ (1) 52 57 343
Ratio of net charge-offs to
average loans held for
investment..................... (0.01)% 0.24% 0.18% 1.04%
Ratio of allowance for loan
losses to gross loans held for
investment at period end ...... 2.11 % 3.17% 2.99% 2.99%
</TABLE>
- --------
(1) Because the Company's small business lending segment commenced operations
within the Bank in 1993, many of the loans in the Company's small business
loan portfolio have not been outstanding for a sufficient
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<PAGE>
period of time to determine whether there are material adverse credit,
delinquency, loss, prepayment or other issues associated with these loans.
See "Risk Factors--CAB Lending."
(2) The Company discontinues accruing interest on loans, other than SBA
guaranteed loans, whenever the payment of interest or principal thereof is
90 days past due or earlier if such interest is deemed uncollectible. The
Company discontinues accruing interest on SBA guaranteed loans whenever
the payment of interest or principal thereof is 120 days past due or
earlier if such interest is deemed uncollectible.
Loans that were 30-59 days past due increased to $0.9 million at June 30,
1998 from $0.4 million at December 31, 1997. The increase was primarily
attributable to five SBA loans becoming past due at June 30, 1998.
Loans that were 90-119 days past due increased to $0.6 million at June 30,
1998 from $0.2 million at December 31, 1997. The increase was primarily due to
one companion loan becoming past due during the six months ended June 30,
1998.
Loans that were 120 days or more past due decreased to $2.6 million at
June 30, 1998 from $3.6 million at December 31, 1997. The decrease was
primarily due to two loans made to the same borrower totaling approximately $2
million that became current and were placed on accrual status during the six
months ended June 30, 1998. The borrower sold its business to a buyer who has
assumed the borrower's indebtedness to the Company and has paid all past due
interest on both loans.
Due to a variety of circumstances relating to the borrower's business or
personal matters, certain loans made by CAB are repaid, in part or in their
entirety, on an accelerated basis. These prepayments generally arise from
refinancing at lower interest rates, excess cash generated by the borrower's
operations, cash from the proceeds of the sale of the borrower's business or
personal real estate or the liquidation of other business assets. During the
six months ended June 30, 1998 and the year ended December 31, 1997, CAB
collected approximately $5.3 million and $7.3 million respectively, in partial
or complete loan prepayments, which approximates the normal rate of historical
prepayments that CAB has experienced in recent years.
THE SBA GUARANTEED LOAN PROGRAM
The SBA, headquartered in Washington, D.C. and operating through 10 regions
throughout the United States, offers financial assistance to eligible small
businesses in the form of partial government guarantees on loans made to such
businesses by qualified participating lenders such as CAB under the SBA's
guaranteed loan program. In order to be eligible for an SBA loan, a business
generally must be operated for profit and, depending on the industry of the
potential borrower, must maintain specified limitations on numbers of
employees or annual revenues.
The SBA administers three levels of lender participation in its general
business loan program, pursuant to Section 7(a) of the Small Business Act of
1953, as amended, and the rules and regulations promulgated thereunder. Under
the first level of "Section 7(a)" lender participation, commonly known as the
Guaranteed Participant Program, the lender gathers and processes data from
applicants and forwards it, along with its request for the SBA's guaranty, to
the local SBA office. The SBA then completes an independent analysis, and
makes its decision on the loan application. SBA turnaround time on such
applications can vary greatly, depending on its backlog of loan applications.
Under the second level of lender participation, known as the Certified
Lender Program, the "Certified Lender" gathers and processes the application
and makes its request to the SBA, as in the Guaranteed Participant Program
procedure. The SBA then performs a review of the lender's credit analysis on
an expedited basis, which review is generally completed within three working
days. The SBA generally requires that lenders originate loans meeting certain
portfolio quality and volume criteria before authorizing lenders to
participate as Certified Lenders. Authorization is granted on an SBA district-
by-district basis.
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<PAGE>
Under the third level of lender participation, known as the Preferred Lender
Program, the lender has the authority to approve a loan and to obligate the
SBA to guarantee the loan without submitting an application to the SBA for
credit review. The lender is required to notify the SBA of the approved loan,
along with the submission of pertinent SBA documents. The standards
established for participants in the Preferred Lender Program, the SBA's
highest designation, are more stringent than those for participants in the
Certified Lender Program. CAB has been named a Preferred Lender by the SBA in
all of the SBA loan markets in which it competes. Most of CAB's SBA Loans are
currently originated under the Preferred Lender Program. The Company, however,
is required by SBA guidelines to originate loans made to certain borrowers,
including loans being used to finance a nursing home, under the Certified
Lender program.
With respect to loans made prior to October 12, 1995, under the Guaranteed
Participant and the Certified Lender Programs, the SBA guaranteed loans of
$155,000 or less up to 90%, and loans in excess of $155,000 with terms of less
than 10 years up to 85%. For loans in excess of $155,000 with terms greater
than 10 years, the maximum guaranty was 75%. Under the Preferred Lender
Program, the maximum guaranty was 70%. With respect to loans made on or after
October 12, 1995, under the Guaranteed Participant and the Certified Lender
Programs, the SBA guarantees loans of $100,000 or less up to 80% and all other
loans have a maximum guaranty of 75%. The SBA's maximum guaranty per borrower
under all three programs is $750,000, with certain exceptions. In the event of
a default by the borrower, any losses resulting therefrom are shared pari
passu between CAB and the SBA. If the SBA establishes that any resulting loss
is attributable to substantial deficiencies in the manner in which the loan
was originated, documented or funded by CAB, the SBA may seek recovery of
funds from CAB.
Approximately 100% and 97%, respectively, of SBA loans originated by CAB
during the six months ended June 30, 1998 and the year ended December 31, 1997
were "7A" loans for purposes of the SBA programs described above. The
remaining SBA loans made by CAB were "504" loans for purposes of SBA
guidelines. "504" loans are loans made for fixed-asset projects, such as
purchasing land and improvements, construction, modernizing or converting
existing facilities and purchasing machinery and equipment. Loans under this
program cannot be used for working capital or inventory or repaying debt. The
borrower must provide at least 10% of the equity for the financing. Under a
typical "504" loan, CAB makes a loan for 50% of the principal amount, which is
secured by, among other assets, a first priority mortgage on the underlying
property (the "Base Loan") and the remaining amount of the loan is provided by
CAB as a short-term loan with a maturity of up to 90 days (the "Bridge Loan").
The Bridge Loan is typically repaid by the borrower with proceeds received
from a bond issuance by a certified development company, a not-for-profit
corporation established to create and issue debt securities that are fully
guaranteed by the SBA. The debt securities are sold to institutional
investors. CAB generally sells Base Loans to institutional investors in
private transactions. Those loans may be sold in their entirety with servicing
released, or they may be sold with servicing retained by CAB.
SBA loans are written at variable rates of interest which generally are
limited by SBA guidelines. With respect to loans with maturities under seven
years, the maximum rate is 225 basis points over the lowest prime lending rate
published in The Wall Street Journal, and with respect to loans with
maturities in excess of seven years, the maximum rate is 275 basis points over
the lowest prime lending rate published in The Wall Street Journal, in each
case as adjusted on the first day of each calendar quarter. In general, SBA
loans made by CAB adjust on a quarterly basis.
GOVERNMENT REGULATIONS
The level of SBA funding for the Guaranteed Loan Program is subject to the
Federal budgeting process for each fiscal year ending September 30 ("Federal
Fiscal Year"). Accordingly, the availability of funds for SBA guarantees could
increase or decrease each year. The actual usage of funds for the fiscal year
ended September 30, 1997 was $9.5 billion for the Preferred Lender Program in
which CAB principally participates as compared to $7.3 billion and $7.8
billion of actual usage of funds for the Federal Fiscal Years ended September
30, 1996 and 1995, respectively. In 1995, SBA funding was temporarily halted
after Congress failed to approve a new federal budget. See "Risk Factors--
Dependence of Small Business Lending Operations on SBA Programs."
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<PAGE>
The qualification of a lender to participate in the SBA Preferred Lender
Program is subject to termination by the SBA based on objective criteria, at
its election, on ten days' notice. Management of CAB has no reason to believe
that its license to participate in the program will be terminated.
See "--Regulatory Matters" below for additional information relating to
state and federal regulations applicable to CAB's operations.
TRUST SERVICES
GENERAL
The Company, through ITC, provides a full array of investment management and
fiduciary services to individual investors, corporations, benefit plans and
foundations. These services include investment management, personal trust
services, custody services and trust administration of employee benefit plans.
At June 30, 1998 and at December 31, 1997, the Company maintained total assets
under administration of approximately $9.5 billion and $8.7 billion,
respectively. ITC was the fifteenth largest licensed trust company in
California at March 31, 1998 based on assets under administration. ITC is
headquartered in Los Angeles and maintains branch offices in Costa Mesa,
Century City, and San Francisco. Total revenue for ITC for the six months
ended June 30, 1998 and 1997, and the year ended December 31, 1997 was $4.5
million, $4.1 million and $8.4 million, respectively, representing 22.0%,
21.3% and 16.3%, respectively, of the Company's total revenue for such
periods. Net income for the six months ended June 30, 1998 and 1997, and the
year ended December 31, 1997 was $0.6 million, $0.4 million and $1.0 million,
respectively, representing 11.5%, 10.6% and 6.3%, respectively, of the
Company's net income for such periods.
The Bank purchased ITC's trust business in 1981 and formerly operated under
the name "Trust Company of California." Since 1986, the Company's assets under
administration have increased from $790 million at December 31, 1986 to $9.5
billion at June 30, 1998. The Company's growth has been derived primarily from
the development of long-term relationships with clients and increasing
referrals from attorneys and financial advisors specializing in trust
services, as well as selective acquisitions.
The following table sets forth certain financial and asset information
relating to ITC's trust businesses:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
GROSS REVENUE GROSS REVENUE % GROSS REVENUE GROSS REVENUE %
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Custodial............... $ 3,069 39% $ 1,750 41%
Multi-Employer.......... 1,475 19 870 20
Employee Benefit........ 1,506 19 884 21
Personal Trusts......... 1,213 16 748 17
CD Custodial............ 704 7 50 1
---------- --- ---------- ---
Total................... $ 7,967 100% $ 4,302 100%
========== === ========== ===
<CAPTION>
AT DECEMBER 31, 1997 AT JUNE 30, 1998
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
ASSETS UNDER ASSETS UNDER
ADMINISTRATION ASSET % ADMINISTRATION ASSET %
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Custodial............... $3,521,000 41% $4,108,000 43%
Multi-Employer.......... 4,013,000 46 3,926,000 41
Employee Benefit........ 687,000 8 974,000 10
Personal Trusts......... 473,000 5 506,000 5
CD Custodial............ 22,000 -- 20,000 1
---------- --- ---------- ---
Total................... $8,716,000 100% $9,534,000 100%
========== === ========== ===
</TABLE>
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<PAGE>
STRATEGY
The principal element of the Company's growth strategy for its trust
business is to increase market share by identifying and developing
competencies in market niches, such as targeting "middle market" money
managers that manage assets in the $50 million to $1 billion range. The
Company believes that its size relative to some of its larger competitors
allows it to provide a high level of customer service by tailoring accounts to
individual needs, and this added flexibility allows it to readily adapt to new
market niches. In addition, this high level of customer service has enabled it
to develop strong, long-term relationships with its clients.
The Company typically solicits clients who fall in a "middle-market"
category. The Company believes the assets of these clients generally are too
small to be serviced properly by the large trust companies, but too large for
mutual funds and other providers of limited investment services. The Company
also intends to develop business by targeting potential clients that
frequently require an independent third party, such as clients that use escrow
agents and shareholder recordkeeping services.
The Company also intends to expand significantly its personal trust area,
which provides private banking and trust services to high net-worth
individuals in rapidly growing areas of wealth concentration. The Company
believes that there is a significant untapped market among aging baby boomers
and their parents who, following significant wealth-accumulation during the
1990's, are in need of estate planning and asset management services. The
Company intends to solicit these potential clients by organizing a new
California chartered trust company to be named the Crown Private Trust Company
("CPT") that will act principally as a marketing arm to develop trust
accounts. The Company intends to have the staff members of CPT develop
relationships by actively soliciting potential clients and their advisors,
such as attorneys and accountants. The Company expects that CPT will employ
asset managers that will provide asset management services for a fee based on
the amount of assets managed. The Company also intends to offer CPT's clients
private banking services in conjunction with CAB.
In addition to internal growth as described above, the Company intends to
make selective acquisitions that would complement the Company's existing trust
services and provide additional profit opportunities and support services. The
Company has no current arrangements for such an acquisition and there can be
no assurance that suitable acquisition candidates will be located or that
financing for such acquisitions will be available.
CUSTODIAL SERVICES AND EMPLOYEE BENEFIT TRUST SERVICES
The Company provides custodial services to individual clients of money
managers by holding their securities and cash and performing administrative
services relating thereto, including wire transfer and settlement procedures
for securities transactions. Most of the Company's clients are located in
California and include trustees of personal trusts, foundations, IRA holders
and escrow parties. These clients are typically referred to the Company by
money management institutions whose assets range from less than $100 million
to over $2.5 billion in assets under management. Due to regulatory
constraints, money managers typically do not maintain custody of their
client's securities. The Company and the money manager each generate separate
periodic reports to the client.
The Company also provides trust and custody services to labor unions and
employee stock ownership plans ("ESOPs") and employee benefit plans. Account
sizes of these clients are typically larger than individual clients. The
average account size for union clients and employee benefit plan clients as of
June 30, 1998 was approximately $27 million and $2.3 million, respectively.
Although the margin for custodial services to labor unions is lower than the
margin for custodial services for individuals, the Company's operating and
processing systems are well-suited for handling larger-sized accounts at a
small incremental cost, which allows the Company to profitably compete for
this business. In addition to the services described above, services provided
to employee benefit plans include issuing checks to employees representing
distributions from the plan accounts and acting as fiduciaries for ESOPs.
The Company typically charges custodial service clients annual fees based on
the market value of the assets under administration and a fee per security
transaction processed on their behalf. These fees generally are
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<PAGE>
deducted from the client's account on a quarterly basis. Union clients
generally receive a guarantee from the Company not to raise its fees for a
specified period of years.
The Company also provides certificate of deposit ("CD") custody services for
a variety of clients of CD brokers. The Company purchased this business under
very favorable terms in 1994 from the FDIC. A CD broker acts on behalf of
credit unions, trustees of IRAs and individuals and attempts to locate the
most favorable CD interest rates then available at financial institutions
throughout the United States. A CD broker then aggregates monies invested by
its clients and purchases a jumbo CD on their behalf. The Company receives a
fee of between 1% and 2% of the return on the CD. The Company does not intend
to expand this line of business and does not accept new accounts.
The Company believes that its processing systems enable it to provide a high
quality and extremely reliable product. The Company uses a processing system
and several additional optional modules that have been customized by SEI
Investments for the Company's trust services business. The system interfaces
include the Depository Trust Company, a securities clearing agency,
correspondent banks for foreign securities settlements and several pricing
vendors and portfolio management systems.
PERSONAL TRUST SERVICES
The Company's personal trust business includes general trust services,
private banking, estate administration and asset management. The Company also
provides certain other demand services to its clients, such as the preparation
of trust tax returns. Clients typically engage the Company as trustee for an
inter vivos (living) trust, as agent for managing their individual portfolios,
as executor of estates or as escrow agent. In addition, the Company may be
engaged as trustee or asset manager for various types of assets, including
real estate and life insurance policies.
The Company offers a variety of accounts tailored to the needs of its
clients. These accounts include managed account services, which are full
service trust accounts with investment discretion, directed trust accounts,
where the Company has no investment discretion and acts only upon the
direction of the client, investment management agency accounts, where the
Company acts only in agency capacity, and distribution trust accounts, where
the Company distributes assets of inter vivos trusts to beneficiaries upon the
death of the grantor of the trust. For each of the accounts, the Company
charges annual fees based on the amount of assets under administration. For
its real estate management services, the Company receives a monthly fee. The
Company also charges a fee for certain ancillary services, including
securities transactions, purchases of insurance and wire transfers.
MARKETING
The Company generates most of ITC's business through referrals from existing
clients, attorneys, money managers, investment consultants and personnel of
the Bank. The Company pays a referral fee to the Bank and to other referral
sources based on a percentage of the new client's fees to ITC.
COMPETITION
There are a significant number of competitors in each of the principal trust
service areas engaged in by the Company. Competitors include regional and
national banks and brokerage houses, many of which are larger organizations
than the Company and have greater resources. As described above, the Company
attempts to gain a competitive advantage over its larger competitors by
providing high-quality customer service and customizing services for
individual relationships.
IMPERIAL CREDIT INDUSTRIES, INC.
As of August 15, 1998, the Company beneficially owned approximately 26.0% of
the common stock of ICII, a diversified specialty finance company whose
businesses complement those of the Company. ICII offers,
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principally through its subsidiaries, financial products such as non-
conforming residential mortgage banking (non-conforming single family mortgage
loans), commercial mortgage banking (franchise loans and income property
loans), business lending (equipment leasing, asset-based financing and loan
participations) and consumer loans (sub-prime auto loans, home improvement
loans and other consumer credit). The majority of ICII's loans and leases are
sold in the secondary market through securitizations and whole loan sales.
During the six months ended June 30, 1998 and 1997, and the year ended
December 31, 1997, ICII generated total revenues of $103.1 million,
$97.8 million and $309.6 million, respectively. Total revenue related to the
Company's ownership of ICII stock for the six months ended June 30, 1998 and
1997, and the year ended December 31, 1997 was $6.7 million, $7.8 million and
$28.1 million, respectively, representing 32.9%, 40.8% and 54.6%,
respectively, of the Company's total revenue for such periods. Net income
related to the Company's ownership of ICII stock for the six months ended June
30, 1998 and 1997, and the year ended December 31, 1997 was $3.7 million,
$2.2 million and $11.5 million, respectively, representing 76.0%, 52.7% and
76.2%, respectively, of the Company's net income for such periods.
ICII was capitalized in January 1992 when the Bank contributed to ICII the
assets and certain liabilities of its mortgage banking division and all of the
outstanding stock of Southern Pacific Bank ("SPB"), formerly known as Southern
Pacific Thrift and Loan Association. In May 1992, ICII completed an initial
public offering of its common stock, thereby reducing the Bank's ownership of
ICII common stock from 100% to 72.4%. As a result of public and private
dispositions of ICII common stock by the Bank, an underwritten primary
offering by ICII of additional shares of its common stock and the exercise of
ICII employee stock options, the Bank's ownership interest in ICII was reduced
to approximately 23.0% of the outstanding ICII common stock as of June 30,
1998. In addition, the Company additionally owned approximately 3.0% (or 1.2
million shares of ICII common stock as of August 15, 1998 (the "Shares"))
pursuant to the ICII Shareholders Agreement. The ICII Shareholders Agreement,
among other things, grants the Company the right to direct the voting of, and
provides the Company with an irrevocable proxy to vote, the Shares until the
earliest of (a) the written instructions of the Company and the administrative
agent for the Credit Facilities, (b) February 7, 2001, (c) the date of
settlement of the purchase of the Shares by the Company following the exercise
of its option to purchase the Shares as described below and (d) upon the
written instructions of Bear, Stearns & Co. Inc. after (I) approval by the
ICII shareholders of a merger or similar business combination resulting in a
cancellation, reclassification or similar change with respect to all shares of
ICII common stock or (II) the date beginning five trading days prior to the
scheduled expiration date of a tender offer or similar offer by any person to
purchase more than 10% of Company's liquidity and its ability to conduct its
businesses. See "Credit Facilities", "Risk Factors--Negative Impact on
Earnings Should Ownership Level of ICII Stock Be Reduced; Substantial
Dependence on ICII-Related Revenue" and Note 8 to the Company's Historical
Combined Financial Statements included elsewhere in this Information
Statement. According to ICII's 1998 proxy statement, no other shareholder
beneficially owns in excess of 11.3% of the ICII common stock.
Three members of the Company Board are also officers and/or directors of
ICII and, as such, are in a position to significantly influence the management
and policies of ICII. H. Wayne Snavely is the Chairman of the Board, President
and Chief Executive Officer of ICII. Mr. Snavely was associated with Bancorp
and the Bank from 1975 through 1992 in a variety of senior management
positions and served as a director of the Bank and Bancorp until February
1998. G. Louis Graziadio, III, the Co-Chairman of the Company Board, Chief
Executive Officer of the Company and a director of Bancorp, and Perry Lerner
have been directors of ICII since 1992. See "Management."
The Company acquired its ownership interest in ICII as a capital
contribution from the Bank. The Bank contributed the ICII stock to the Company
in order to address concerns expressed by the Federal Reserve Board with
respect to the permissibility of Bancorp's continued ownership of such stock
under the BHCA (see "--Regulatory Matters" and "The Transactions--Background
and Reasons for the Distribution") and to provide the Company with financing
flexibility for its ongoing operations. The Company believes its ownership of
the ICII common stock will provide the Company with financing flexibility by
enabling the Company to obtain financing at attractive rates that would not
otherwise be available to the Company. The Company intends to pledge its ICII
shares as collateral for margin loans under the Credit Facilities. The Company
intends to use the
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proceeds of such loans for working capital purposes. See "Credit Facilities"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
ICII has not historically paid, and has publicly reported that it does not
anticipate paying, cash dividends on ICII common stock. Accordingly, the
Company does not, and does not expect to, derive any dividend income from its
ownership interest in ICII.
Potential Applicability of the Bank Holding Company Act. ICII has advised
the Company that the business operations of SPB are such that it is not a bank
for purposes of the BHCA. The Company, however, does not control the business
operations of SPB. In the event of changes in the business operations of SPB,
such as the issuance by SPB of demand deposit accounts, the Company could
become a bank holding company subject to the BHCA. In the event the Company
were determined to be a bank holding company, it would be prohibited by the
BHCA, except in certain statutorily prescribed instances, from retaining or
acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company that is not a bank or bank holding
company, and from engaging directly or indirectly in activities other than
those of banking, managing or controlling banks or furnishing services to its
subsidiaries. The Company, subject to the prior approval of the Federal
Reserve Board, would be permitted to engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board
to be so closely related to banking or managing or controlling banks as to be
a proper incident thereto. In making any such determination, the Federal
Reserve Board would be required to consider whether the performance of such
activities by the Company or its affiliate could reasonably be expected to
produce benefits to the public, such as greater convenience, increased
competition or gains in efficiency, that outweigh possible adverse effects,
such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal Reserve Board
is also empowered to differentiate between activities commenced de novo and
activities commenced by acquisition, in whole or in part, of a going concern.
The Federal Reserve Board may require that a bank holding company terminate
an activity or terminate control of or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate certain provisions of certain
bank holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company
would be required to file written notice and obtain approval from the Federal
Reserve Board prior to purchasing or redeeming its equity securities. Further,
the Company would be required by the Federal Reserve Board to maintain certain
levels of capital.
Under Federal Reserve Board regulations, a bank holding company is required
to serve as a source of financial and managerial strength to its subsidiaries,
including, when necessary, the use of its resources to assist its subsidiary
banks, and may not conduct its operations in an unsafe or unsound manner. A
bank holding company's failure to meet the foregoing obligations may be
considered an unsafe and unsound banking practice or a violation of the
Federal Reserve Board's regulations or both.
REGULATORY MATTERS
LHO
The California Usury Law. The Usury Law limits the rate of interest at which
loans may be made. However, the Usury Law also identifies a number of persons
who, by virtue of licensing by federal or state authorities, are exempt from
its interest rate limitations. Such exempt lenders include, among others,
commercial banks, industrial loan companies and certain other licensed persons
designated by state law. The CFL Law expressly states that it is the intent of
the legislature that CFL licensees be included within the class of lenders
exempt from the Usury Law. As a CFL licensee, the Company, acting through the
LHO division, is exempt from the application of the Usury Law, subject to the
CFL Law.
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California Finance Lender License. CFL licensees are lenders who are
commonly known as "finance companies." Their sources of funds to conduct
lending activities generally come from their own capital and earnings and from
lines of credit and other borrowings. CFL licensees do not take deposits or
sell or issue insured or guaranteed debt instruments, such as certificates of
deposit or thrift certificates.
Under the CFL Law, "charges" include the aggregate interest, fees, bonuses,
commissions, brokerage, discounts, expenses and other forms of costs charged,
contracted for, or received by a CFL licensee or any other person in
connection with the investigating, arranging, negotiating, procuring,
guaranteeing, making, servicing, collecting and enforcing of a loan. The CFL
Law imposes no limits on the "charges" that a licensee may receive on
commercial purpose loans, provided that the loan is in the amount of $5,000 or
more and further provided that the terms of the loan are not otherwise
unconscionable. All of the loans made through LHO will be commercial purpose
loans in excess of $5,000 and the Company expects that all of such loans will
be made at interest rates and on terms which are competitive and permissible
under the CFL Law. The CFL Law does not attempt to restrict or regulate the
structure or terms of commercial loans, such as rate of amortization, duration
or term of the loan, interest rates, loan fees or collateral. The CFL Law
provides that commercial loans may be secured by either real or personal
property, or both, or they may be unsecured. Moreover, because the loans made
through LHO are commercial purpose loans in excess of $5,000, several
provisions of the CFL Law and the regulations of the DOC thereunder will not
be applicable to the lending operations of LHO. Commercial purpose loans are
not subject to many consumer-protection oriented laws and regulations, such as
the federal Truth in Lending Act and Regulation Z of the Federal Reserve Board
promulgated thereunder.
CFL licensees are expressly permitted to sell the loans they make and any
loans they may purchase from other CFL licensees to institutional investors,
which include governmental entities and instrumentalities, banks, trust
companies, savings and loan associations, industrial loan companies, finance
companies, insurance companies, pension and profit-sharing funds, any
corporation with outstanding securities registered under Section 12 of the
Exchange Act or any wholly owned subsidiary thereof and any syndication or
combination of the foregoing organized to purchase such loans. Any of such
institutional investors may also establish a trust or other business entity
for the purpose of issuing undivided interests in, the right to receive
payments from, or that are payable primarily from, a pool of financial assets
held by the trust, subject to certain requirements.
Pursuant to broad regulatory powers granted under the CFL Law, the DOC
periodically conducts on-site examinations of CFL licensees' books, records
and operations to insure continuing compliance with the CFL Law and
regulations. The DOC also has powers to investigate possible violations of the
CFL Law and enforcement powers to ensure compliance with the CFL Law,
including the power to revoke or suspend licenses, issue cease and desist
orders and take other remedial actions against CFL licensees and others
violating the CFL Law. Certain proposed changes subsequent to the issuance of
the CFL license, such as changes in management personnel and ownership, may
require the prior consent of or notice to the DOC. The cost of regular or
special examinations by the DOC are charged to the licensee. The overall costs
of the DOC to administer the CFL Law are charged to the industry through an
annual assessment which is proportionally charged to each licensee based on
volume of business.
CAB
GENERAL
CAB is subject to supervision and regulation by the DFI and, as a federally
insured depository institution, by the FDIC. CAB is not regulated or
supervised by the Office of Thrift Supervision, which regulates savings and
loan institutions, the Office of the Comptroller of the Currency, which
regulates national banks, or the Federal Reserve Board, which regulates member
banks of the Federal Reserve System and bank holding companies.
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CALIFORNIA LAW
The thrift and loan business conducted by CAB is governed by the California
Industrial Loan Law and the rules and regulations of the DFI which, among
other things, regulate the issuance of certain thrift deposits as well as the
collateral requirements, maximum maturities and other loan terms of the
various type of loans that are permitted to be made by California-chartered
industrial loan companies (also known as "thrift and loan companies").
Subject to restrictions imposed by applicable California law, CAB is
permitted to make secured and unsecured business and consumer loans. The
maximum term for repayment for loans made by thrift and loan companies ranges
up to 40 years and 30 days depending upon the type of collateral and priority
of secured position, if any. Although nonconsumer secured loans of fewer than
10 years may generally be repaid in unequal periodic payments, consumer loans
must generally be repaid in substantially equal periodic payments. California
law limits lending activities outside of California by thrift and loan
companies to no more than 20% of total assets, or up to 40% of total assets
with DFI approval. CAB has been granted permission to hold up to 40% of its
total assets in obligations from non-residents.
California law contains extensive requirements for the diversification of
the loan portfolios of thrift and loan companies. A thrift and loan company
with outstanding investment certificates may not, among other things, place
more than 25% of its loans or other obligations in loans or obligations which
are secured only partially, but not primarily, by real property; may not make
any one loan secured primarily by improved real property which exceeds 20% of
its paid-up and unimpaired capital stock and surplus not available for
dividends (5% for unimproved property); may not lend an amount in excess of 5%
of its paid-up and unimpaired capital stock and surplus not available for
dividends upon the security of the stock of any one corporation; may not make
loans to, or hold the obligations of, any one person as primary obligor in an
aggregate principal amount exceeding 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends (50% if the loans are
unsecured); may not have outstanding leases which exceed 20% of the thrift's
aggregate receivables; and may have no more than 70% of its total assets in
loans which have remaining terms to maturity in excess of seven years and are
secured solely or primarily by real property. CAB currently satisfies all of
such requirements. Management believes that CAB will be able to maintain
compliance with such regulatory requirements by managing the mix of its assets
and loans without any material adverse impact on earnings or liquidity.
A thrift and loan company generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DFL. A thrift and loan company also may not make any loan
to, or hold any obligation of, any of its shareholders or any shareholder of
its holding company or affiliates, except that this prohibition does not apply
to persons who own less than 10% of the stock of a holding company or
affiliates which are listed on a national securities exchange. A thrift and
loan company may not make a loan to, or hold any obligation of, any person in
which any of its directors, officers or shareholders has a financial interest,
directly or indirectly. Any person who wishes to acquire 10% or more of the
capital stock or capital of a California thrift and loan company or 10% or
more of the voting capital stock or other securities giving control over
management of its parent company must obtain the prior written approval of the
DFI.
Under the Industrial Loan Law, a thrift and loan company is subject to
certain leverage limitations which are different than those applicable to
commercial banks or savings and loan associations. In particular, thrift and
loan companies may not have outstanding at any time investment certificates
that exceed 20 times their paid-up and unimpaired capital and surplus. Under
California law, thrift and loan companies that desire to increase their
leverage (or deposit-to-capital ratio) must meet specified minimum standards
for liquidity reserves in cash, loan loss reserves, minimum capital stock
levels and minimum unimpaired paid-in surplus levels. For example, in order
for a thrift and loan company to increase its deposits to more than 15 times
the aggregate amount of its paid-up and unimpaired capital and unimpaired
surplus not available for dividends, the thrift must, among other things,
maintain a liquidity reserve in cash or cash equivalents equal to 12% of its
total deposits outstanding and maintain a special allowance for losses as
required by the DFI.
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As a newly chartered thrift and loan company, CAB is not permitted to
operate immediately at such levels of leverage on its capital and surplus. The
Industrial Loan Law permits newly chartered companies to accept up to six
times their capital and surplus during the first 12 months of operations.
Subject to DFI approval, after 12 months and for the next 12 months of
operation, a thrift and loan company may accept thrift deposits in amounts up
to eight times its capital and surplus. After 24 months of operation and for
the next 24 months, thrift and loan companies may increase their acceptance of
deposits to amounts up to 12 times their capital and surplus, again subject to
DFI approval. However, after 36 months of operation, a thrift and loan company
may apply to the DFI for permission to have its leverage requirements governed
by the FDIC capital-adequacy requirements. As a practical matter, although the
Industrial Loan Law permits thrift and loan companies to leverage their
deposits in amounts of up to 15-20 times capital and surplus, the concurrent
requirements of the FDIC capital-adequacy regulations discourage, if not
prohibit in some circumstances, leveraging to such an extent. See "--Federal
Law--Regulatory Capital Requirements."
Thrift and loan companies are not permitted to borrow, except by the sale of
investment or thrift certificates, in an amount exceeding 300% of tangible net
worth, surplus and undivided profits, without the DFI's prior consent. All
sums borrowed in excess of 150% of tangible net worth, surplus and undivided
profits must be unsecured borrowings or, if secured, approved in advance by
the DFI, and be included as investment or thrift certificates for purposes of
computing the maximum amount of certificates a thrift and loan may issue.
However, collateralized Federal Home Loan Bank advances are excluded for this
test of secured borrowings and are not specifically limited by California law.
Thrift and loan companies are generally limited to investments, other than
loans, that are legal investments for commercial banks. California commercial
banks are prohibited from investing an amount exceeding 15% of shareholders'
equity in the securities of any one issuer, except for specified obligations
of the United States, California, and local governments and agencies thereof.
A thrift and loan company may acquire real property only in satisfaction of
debts previously contracted, pursuant to certain foreclosure transactions or
as may be necessary for the transaction of its business, in which case such
investment is limited to one-third of a thrift and loan's paid-in capital
stock and surplus not available for dividends. CAB is in compliance with these
requirements.
The California Industrial Loan Law allows a thrift and loan company to
increase its secondary capital by issuing interest bearing capital notes in
the form of subordinated notes and debentures. Such notes are not deposits and
are not insured by the FDIC or any other governmental agency, generally are
required to have a maturity of at least seven years, and are subordinated to
deposit holders, general creditors and secured creditors of the issuing thrift
and loan company.
Although investment authority and other activities that may be engaged in by
CAB generally are prescribed under the California Industrial Loan Law, certain
provisions of the FDIA may limit CAB's ability to engage in certain activities
that otherwise are authorized under the California Industrial Loan Law. See
"--Federal Law--Restrictions on CAB's Activities and Investments."
A thrift and loan company is not permitted to declare dividends with respect
to its capital stock unless it has at least $750,000 of unimpaired capital
plus additional capital of $50,000 for each branch office maintained. In
addition, as with all California corporations, no distribution of dividends is
permitted unless: (i) such distribution would not exceed a thrift and loan
company's retained earnings, or (ii) in the alternative, after giving effect
to the distributions the sum of a thrift and loan company's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would not be less than 125% of its liabilities (net of deferred taxes, income
and other credits).
A thrift and loan company is likewise prohibited from paying dividends from
that portion of capital that has been restricted for dividend payment purposes
by its bylaws or by resolution of its board of directors. The amount of
restricted capital maintained by a thrift and loan company provides the basis
for establishing the maximum amount that a thrift and loan company may lend to
one single borrower and the aggregate volume of thrift
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deposits that may be accepted. Accordingly, a thrift and loan company
typically restricts as much capital as necessary to achieve its desired loan
to one borrower limit and its maximum leverage ratio, which in turn restricts
the funds available for the payment of dividends. CAB's bylaws contain a
provision restricting all of its capital, paid-in surplus, earned surplus and
retained earnings for dividend payment purposes, subject to a resolution of
the board releasing a specific amount of capital for the payment of dividends.
DFI regulations require that a thrift and loan company set aside loan loss
reserves and other reserves in accordance with GAAP.
Industrial loan companies are permitted to establish one or more branch
offices within California, subject to approval of the DFI and the FDIC. In
determining whether to approve an application for a branch, the DFI evaluates
whether the proposed branch makes banking more convenient for the public and
any other public advantage served by such proposed branch, whether the
applicant has the additional $50,000 in paid-in capital as required by the
Industrial Loan Law, whether the applicant has acceptable branch operational
controls and whether the overall financial condition of the applicant
justifies the branch office. CAB operates from two branches: the main branch
located at 2121 Rosecrans Avenue, Suite 1350, El Segundo, California, and an
additional branch located at 9920 South La Cienega, Fifth Floor, Inglewood,
California 90301. CAB may exercise all powers available to it as an industrial
loan company from each of its branches.
In addition to branches, thrift and loan companies may, subject to
regulatory approval, open and operate loan production offices ("LPOs"). LPOs
are limited service locations, which may be located in California and outside
of California, from which licensees may solicit and make loans and acquire
receivable obligations. However, a licensee may not accept deposits at an LPO,
nor may a licensee pay on instruments, such as checks, at an LPO. In order to
establish an LPO, a licensee must submit an application disclosing the address
of the LPO, the plan of business for such LPO, the identity and qualifications
of the management to be located at the LPO and, if the LPO is located outside
of California, certain information regarding the laws, regulations and state
agency regulating the LPO in such jurisdiction. CAB operates with LPOs located
in Phoenix, Arizona, Sacramento, California, Costa Mesa, California,
Emeryville, California, Encino, California, Stockton, California, Riverside,
California and Carlsbad, California.
FEDERAL LAW
CAB's deposits are insured by the Bank Insurance Fund (the "BIF") of the
FDIC, to the full extent permissible by law and in the same manner as
commercial banks. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions to which it provides deposit insurance. The
FDIC is also the federal agency charged with regulating state-chartered banks
that are not members of the Federal Reserve System. For this purpose, CAB is
considered to be a state-chartered nonmember bank. CAB is subject to the rules
and regulations of the FDIC to the same extent as FDIC-insured state-chartered
commercial banks. The approval of the FDIC is required prior to any merger,
consolidation or acquisition of control of CAB, and prior to the establishment
or relocation of a branch office facility of CAB. An acquiror may be deemed to
control CAB if it holds, directly or indirectly or acting in concert with
others, 25% or more of a class of voting stock of CAB. This supervision and
regulation is intended primarily for the protection of depositors. Any person
who wishes to acquire such control must obtain the consent of the FDIC.
Regulatory Capital Requirements. Federally insured, state-chartered
depository institutions, including thrift and loan companies such as CAB, will
be required to maintain minimum levels of regulatory capital. The FDIC also is
authorized to impose capital requirements in excess of these standards on
individual banks on a case-by-case basis.
CAB is required to comply with three separate minimum capital requirements:
a "Tier 1 capital ratio" or Leverage Ratio and two "risk-based" capital
requirements. "Tier 1 capital" generally includes common shareholders' equity
(including retained earnings), qualifying noncumulative perpetual preferred
stock and any related surplus, and minority interest in the equity accounts of
fully consolidated subsidiaries, minus intangible assets, other than properly
valued purchased loan servicing rights up to certain specified limits and
minus net deferred tax assets in excess of certain specified limits.
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Tier 1 Capital Ratio (Leverage Ratio). FDIC regulations establish a minimum
3.0% ratio of Tier 1 capital to total average quarterly assets for the most
highly-rated state-chartered, FDIC-supervised banks, with an additional
cushion of at least 100 to 200 basis points for all other state-chartered,
FDIC-supervised banks, which effectively imposes a minimum Tier 1 capital
ratio for such other banks of between 4.0% to 5.0%. Under FDIC regulations,
highly-rated banks are those that the FDIC determines are not anticipating or
experiencing significant growth and have well diversified risk, including no
undue interest rate risk exposure, excellent asset quality, high liquidity and
good earnings. CAB's Leverage Ratio as of June 30, 1998 was 18.29%.
Risk-Based Capital Requirements. The risk-based capital requirements
contained in FDIC regulations generally require CAB to maintain a ratio of
Tier 1 capital to risk-weighted assets ("Tier 1 Risk-Based Ratio") of at least
4.00% and a ratio of total risk-based capital to risk-weighted assets ("Total
Capital Ratio") of at least 8.00%. To calculate the amount of capital
required, assets are placed in one of four categories and given a percentage
weight (0%, 20%, 50% or 100%) based on the relative risk of the category. For
example, U.S. Treasury Bills and GNMA securities are placed in the 0% risk
category. FNMA and FHLMC securities are placed in the 20% risk category, loans
secured by one-to-four family residential properties and certain privately
issued mortgage-backed securities are generally placed in the 50% risk
category, and commercial and consumer loans and other assets are generally
placed in the 100% risk category. In addition, certain off-balance sheet items
are converted to balance sheet credit equivalent amounts and each amount is
then assigned to one of the four categories.
For purposes of the risk-based capital requirements, "total capital" means
Tier 1 capital plus supplementary or Tier 2 capital, so long as the amount of
supplementary or Tier 2 capital that is used to satisfy the requirement does
not exceed the amount of Tier 1 capital. Supplementary or Tier 2 capital
includes, among other things, so-called permanent capital instruments
(cumulative or other perpetual preferred stock, mandatory convertible
subordinated debt and perpetual subordinated debt), so-called maturing capital
instruments (mandatory redeemable preferred stock, intermediate-term preferred
stock, mandatory convertible subordinated debt and subordinated debt), and the
allowance for loan losses up to a maximum of 1.25% of risk-weighted assets.
The federal banking agencies also adopted final regulations specifying that
the agencies will include, in their evaluations of a bank's capital adequacy,
an assessment of the exposure to declines in the economic value of the bank's
capital due to changes in interest rates. The final regulations, however, do
not include a measurement framework for assessing the level of a bank's
exposure to interest rate risk, which is the subject of a policy statement
issued by the federal banking agencies in June 1996. This policy statement
suggests that management measure interest rate risk in relation to the effect
of a probable range of potential interest rate changes on the economic value
of the bank. Banks with high levels of exposure or weak management systems
generally will be required to hold additional capital for interest rate risk.
The specific amount of capital that may be needed and the adequacy of a bank's
interest rate risk management program will be determined on a case-by-base
basis by the examiner and the appropriate federal banking agency. CAB
currently is unable to predict the impact of the policy statement on CAB
because of the number of variables which may be considered by a bank examiner.
The FDIC and the other federal banking agencies have also promulgated final
amendments to their respective risk-based capital requirements which would
explicitly identify concentration of credit risk and certain risks arising
from nontraditional activities, and the management of such risk, as important
factors to consider in assessing an institution's overall capital adequacy.
The FDIC may now require higher minimum capital ratios based on certain
circumstances, including where the institution has significant risks from
concentration of credit or certain risks arising from nontraditional
activities.
The federal banking agencies have adopted for regulatory purposes Statement
of Financial Accounting Standards No. 115, which among other things, generally
adds a new element to shareholders' equity under GAAP by including net
unrealized gains and losses on certain securities. In December 1994, the FDIC
issued final amendments to its regulatory capital requirements which require
that the net amount of unrealized losses from available for sale equity
securities with readily determinable fair values be deducted for purposes of
calculating the Tier 1 capital ratio. All other net unrealized holding gains
(losses) on available for sale securities are excluded from the definition of
Tier 1 capital. CAB does not have available for sale any equity securities in
its investment portfolio.
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Prompt Corrective Action Requirements. The FDIC has implemented a system
requiring regulatory sanctions against state-chartered banks that are not
adequately capitalized, with the sanctions growing more severe depending the
institution's reduced capital. The FDIC has established specific capital
ratios for five separate capital categories: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized".
An institution is treated as well capitalized if its ratio of Total Capital
Ratio is 10.0% or more, its Tier 1 Risk-Based Ratio is 6.0% or more, its
Leverage Ratio is 5.0% or greater, and it is not subject to any order or
directive by the FDIC to meet a specific capital level. An institution will be
undercapitalized if its Total Capital Ratio is less than 8.0%, Tier 1 Risk-
Based Ratio is less than 4.0%, or if its Leverage Ratio is less than 4.0%
(3.0% if the institution receives the highest rating on the MACRO financial
institutions rating system). An institution whose capital falls between the
well capitalized and undercapitalized levels will be treated as adequately
capitalized. An institution will be treated as significantly undercapitalized
if the above capital ratios are less than 6.0%, 3.0%, or 3.0%, respectively.
An institution will be treated as critically undercapitalized if its ratio of
tangible equity (Tier 1 capital plus cumulative preferred stock minus
intangible assets other than purchased loan servicing rights) to adjusted
total assets is equal to or less than 2.0%. CAB's capital qualified it for the
well capitalized category as of June 30, 1998.
The FDIC is authorized and, under certain circumstances required, to take
certain actions against institutions that fail to meet their capital
requirements. The FDIC is generally required to take action to restrict the
activities of an "undercapitalized institution". Any such institution must
submit a capital restoration plan and until such plan is approved by the FDIC
may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The FDIC is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized institutions.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized institution must agree that it will enter into
a limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements.
Any institution that fails to comply with its capital plan or is
"significantly undercapitalized" must be made subject to one or more of
additional specified actions and operating restrictions which may cover all
aspects of its operations and include a forced merger or acquisition of the
institution. A "critically undercapitalized" institution is subject to further
mandatory restrictions on its activities in addition to those applicable to
significantly undercapitalized associations. In addition, the FDIC must
appoint a receiver or conservator for an institution, with certain limited
exceptions, within 90 days after it becomes critically undercapitalized. Any
undercapitalized institution is also subject to the general enforcement
authority of the FDIC, including the appointment of a conservator or a
receiver.
The FDIC is also generally authorized to reclassify a supervised institution
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition.
The imposition by the FDIC of any of these prompt corrective action measures
on an insured institution, if and when warranted, may have a substantial
adverse effect on such insured institution's operations and profitability.
Safety and Soundness Standards. On August 9, 1995, the federal banking
agencies adopted final guidelines establishing standards for safety and
soundness. The guidelines set forth operational and managerial standards
relating to internal controls, information systems and internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. Guidelines for asset quality and earnings
standards will be adopted in the future. The guidelines establish the safety
and soundness standards that the agencies will use to identify and address
problems at insured depository institutions before capital becomes impaired.
If an institution fails to comply with a safety and soundness standard, the
appropriate
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federal banking agency may require the institution to submit a compliance
plan. Failure to submit a compliance plan or to implement an accepted plan may
result in enforcement action.
Internal Controls Adequacy. Each depository institution with assets greater
than $500 million must prepare an annual report, signed by the chief executive
officer and the chief financial officer, on the effectiveness of the
institution's internal control structures and procedures for financial
reporting, and on the institution's compliance with laws and regulations
relating to safety and soundness. The institution's independent auditors must
attest to, and report separately on, management's assertions in the annual
report. The report and the attestation, along with financial statements and
such other disclosure requirements as the FDIC may prescribe, must be
submitted to the FDIC and will be available to the public. Every such
institution must also have an audit committee of its Board of Directors made
up entirely of directors who are independent of the management of the
institution. CAB complies with substantially all of such requirements.
FDIC Insurance Assessments. The FDIC assesses deposit insurance premiums
under a risk-based assessment system, which is based on the probability that
the deposit insurance fund will incur a loss with respect to the institution,
the likely amount of any such loss, and the revenue needs of the deposit
insurance fund. Under the risk-based assessment system, a BIF member
institution such as CAB is categorized into one of three capital categories
(well capitalized, adequately capitalized, and undercapitalized) and one of
three categories based on supervisory evaluations by its primary federal
regulator (in CAB's case, the FDIC).
As long as the BIF's reserve ratio is less than a specified "designated
reserve ratio," 1.25%, the total amount raised from BIF members by the risk-
based assessment system may not be less than the amount that would be raised
if the assessment rate for all BIF members were 0.23% of deposits. The FDIC
determined that the designated reserve ratio of 1.25% was achieved as of May
31, 1995. Accordingly, on August 16, 1995, the FDIC published final
regulations adopting an assessment rate schedule for BIF members of four to 31
basis points that became effective as of June 1, 1995. In addition, effective
January 1996, the schedule was further revised to provide a range of zero to
27 basis points with a minimum annual assessment of $2,000. As a result of
these changes, CAB's assessment is expected to be the minimum.
Restrictions on CAB's Activities and Investments. Under the FDIA, a state-
chartered bank (which includes CAB) and its subsidiaries may not engage as
principal in any activities that are not permissible for national banks and
their subsidiaries unless (1) the bank meets the applicable FDIC capital
standards described above, and (2) the FDIC has determined that the activity
would pose no significant risk to the BIF. With limited exceptions, the FDIC
may not use this authority to permit a state-chartered bank to engage in
equity investments (other than investments in subsidiaries to the extent
permissible under California law) or in insurance underwriting. CAB's
projected activities, including business finance and real property lending,
have been stated by the Office of the Comptroller of the Currency to be
permissible activities for national banks.
The FDIC regulations which implement the FDIA limitation on state bank
activities require a state bank to abide by any conditions or restrictions
applicable to national banks if the state bank wishes to conduct the activity
without first obtaining the FDIC's consent. These regulations could limit
CAB's ability to expand into new activities that might otherwise be available
under California law, or to invest in equity securities of corporations, which
is permissible under certain circumstances for California-chartered commercial
banks but not for national banks.
CAB will be prohibited from engaging in certain tying arrangements in
connection with an extension of credit, sale or lease of property or provision
of services. For example, with certain exceptions, CAB may not require a
customer to obtain other services provided by CAB, and may not require the
customer to promise not to obtain other services from a competitor, as a
condition to an extension of credit or reduced consideration for credit to the
customer.
In addition, federal law imposes restrictions on transactions between CAB
and its affiliates. All such transactions, including leases and service
contracts, must be on terms and under circumstances that are
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substantially the same, or at least as favorable to CAB, as those prevailing
at the time for comparable transactions involving nonaffiliated companies. In
the absence of comparable transactions, the affiliate transaction must be on
terms and under circumstances that in good faith would be offered by CAB to
nonaffiliated companies. Extensions of credit by CAB to an affiliate must be
fully collateralized or over collateralized, depending on the type of
collateral. CAB may not extend credit to any one affiliate in an amount that
exceeds 10% of its capital (20% for all affiliates in the aggregate). Any
purchase of assets by CAB from an affiliate is also subject to these limits,
as are certain other transactions, including any guarantee of an affiliate's
obligations or any investment in securities issued by an affiliate. As
discussed above, the California Industrial Loan Law also applies certain
restrictions on transactions with affiliates, including CAB's directors,
officers and shareholders. Moreover, federal law also places limitations on
loans by CAB to its directors, officers and controlling persons. Among other
things, such loans, if and when permitted, generally must be made on terms
substantially the same as for loans to unaffiliated persons.
The FDIC has enforcement authority over CAB with respect to the restrictions
on tying arrangements and affiliate transactions but the FRB, as well as the
FDIC, has interpretive and exemptive authority.
Limitations on Dividends. In policy statements, the FDIC has advised insured
institutions that the payment of cash dividends in excess of current earnings
from operations is inappropriate and may be cause for supervisory action. As a
result of this policy, CAB may find it difficult to pay dividends out of
retained earnings from historical periods prior to the most recent fiscal year
or to take advantage of earnings generated by extraordinary items. The FDIC
has authority to prohibit financial institutions from engaging in business
practices which are considered to be unsafe or unsound. It is possible,
depending upon the financial condition of CAB and other factors, that such
regulators could in some circumstances assert that the payment of dividends
constitutes an unsafe or unsound practice and could prohibit payment of
dividends even though such payment is otherwise permissible. In addition,
federal law prohibits any insured institution from paying dividends if after
such payment the institution would be undercapitalized. CAB currently expects
to retain its earnings and not to make dividends to the Company. See "--Prompt
Corrective Action Requirements."
Community Reinvestment Act and Fair Lending Developments. CAB is subject to
certain fair lending requirements and reporting obligations involving home
mortgage lending operations and Community Reinvestment Act ("CRA") activities.
The CRA generally requires the federal banking agencies to evaluate the record
of financial institutions in meeting the credit needs of their local
communities, including low and moderate income neighborhoods. In addition to
substantial penalties and corrective measures that may be required for a
violation of certain fair lending laws, the federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities. CAB is in compliance with its CRA requirements due to the
nature of its projected lending activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-based evaluation system
which bases CRA ratings on an institution's actual lending service and
investment performance rather than the extent to which the institution
conducts needs assessments, documents community outreach or complies with
other procedural requirements. In March 1994, the Federal Interagency Task
Force on Fair Lending issued a policy statement on discrimination in lending.
The policy statement describes the three methods that federal agencies will
use to prove discrimination: overt evidence of discrimination, evidence of
disparate treatment and evidence of disparate impact.
POTENTIAL ENFORCEMENT ACTIONS
Insured depository institutions, such as CAB and their affiliates, may be
subject to potential enforcement actions by the FDIC and the DFI for unsafe or
unsound practices in conducting their business or for violations of any law,
rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of
deposits, the imposition of civil
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money penalties, the issuance of directives to increase capital, the issuance
of formal and informal agreements, the issuance of removal and prohibition
orders against institution-affiliated parties, and the imposition of
restrictions and sanctions under the FDIC's prompt corrective action
provisions. Management knows of no pending or threatened enforcement actions
against or relating to CAB.
HOLDING COMPANY REGULATION
The BHCA generally provides that companies which own or control banks must
register as bank holding companies. Bank holding companies are subject to
regulation by the Federal Reserve Board and to limitations on their operating
activities and holdings. While the Competitive Equality Banking Act of 1987
("CEBA") subjected certain types of previously unregulated companies to the
BHCA, it also contained a specific exemption from the definition of "bank" for
industrial loan companies which meet certain criteria relating to size, the
offering of demand deposits, the nature of activities conducted and the
occurrence of a change of control.
Based on its size and the activities to be conducted, upon its licensing as
an industrial loan company, CAB will be exempt from the definition of "bank"
and therefore the Company will not be a bank holding company subject to the
BHCA. CAB has no plans to operate in any way that would cause it to lose the
exemption from the definition of "bank" under CEBA or the current rules,
regulations and interpretations thereunder of the Federal Reserve Board.
Although the Company is not aware of any proposed changes to or amendment of
such law, rules and regulations and interpretations, changes or amendments may
occur in the future and CAB and the Company may be limited in their ability to
influence the extent or nature of any such changes or amendments. Even though
the Company will not be subject to the BHCA, the Company and its affiliates
will be subject to certain Federal Reserve Board regulations and federal law
by virtue of CAB being a federally insured depository institution, including
Sections 23A and 23B of the Federal Reserve Act, governing transactions with
affiliates, and Section 4(h) of the BHCA relating to anti-tying restrictions.
ITC
Regulation of ITC. ITC operates as a trust company under a charter granted
by the DFI pursuant to authority of the California Financial Code. As such,
ITC is subject to regulation and supervision by the DFI. ITC does not issue
insured deposits, and therefore it is not considered an insured bank and
accordingly will not be regulated by the Federal Deposit Insurance Corporation
or the Federal Reserve Board.
Examination and Reporting. California-chartered trust companies are subject
to examination by the DFI. Applicable law requires that the DFI must examine a
California trust company's court trust business every two years and must
examine such company's private trust fund business as often as the DFI deems
necessary.
Every California-chartered trust company must make and file with the DFI
periodic reports showing the trust company's financial condition and such
other information as the DFI requires. Periodic reports are required to be
filed at least three times per year. In addition, the DFI may require a trust
company to file special reports with the DFI from time to time. At the time of
the filing of each periodic report, each trust company is required to publish
a condensed financial statement in a newspaper of record at least one time.
Minimum Capital Requirements. California-chartered trust companies must
adhere to minimum capital requirements established by the DFI. The DFI is
empowered to determine the required minimum capital for a California trust
company based on various considerations, including the following: (1) the
nature and volume of its business; (2) the amount, nature, quality and
liquidity of its assets; (3) the amount and nature of its liabilities
(including but not limited to any capital notes or debentures in any
contingent liabilities); (4) the amount and nature of its fixed charges; (5)
the history of, and prospects for, the trust company to earn and retain
income; (6) the quality of its operations; (7) the quality of its management;
and (8) the nature and quality of its ownership.
As a California-chartered trust company, ITC may not make any distributions
to its shareholder in any amount that exceeds the lesser of (i) its retained
earnings, or (ii) its net income for its last three fiscal years, less the
amount of any distributions made by ITC or any majority-owned subsidiary of
ITC to its shareholder during
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such period. A California-chartered trust company may, however, with the
approval of the DFI, make a distribution to its shareholder in an amount not
exceeding the greatest of (i) its retained earnings, (ii) its net income for
its last fiscal year or (iii) its income for its current fiscal year.
Whenever it appears that the capital of a California-chartered trust company
is impaired, the DFI is required to order the company to correct such
impairment within 60 days. The trust company to which such an order is issued
is required to levy and collect an assessment upon its common shares as
permitted under the California Corporations Code, unless the deficiency is
otherwise corrected.
Permitted Investments. The California Banking Law provides for certain
limitations on investments of contributed capital by California-chartered
trust companies. Generally, trust companies are limited to investment in
securities and loans in which a California-chartered commercial bank is
permitted to invest. In addition, California-chartered trust companies are
permitted to invest in certain other investments which are permitted
investments for trusts under the California Probate Code. Notwithstanding the
foregoing, California trust companies are permitted to deposit funds awaiting
investment with a state or national bank which is independent of the trust
company.
Deposit with State Treasurer. California-chartered trust companies are
required to deposit with the California State Treasurer money or securities in
a minimum amount of $100,000 if the trust company maintains any court trusts,
and an additional $100,000 if the trust company maintains private trusts. In
addition, if the trust company receives trust funds or property, other than
real property, for court trusts in excess of $1,000,000, the trust company is
required to provide 30 days written notice to the DFI and must, within a
specified time thereafter, deposit an additional $50,000 of money and/or
securities. Each additional $500,000 of deposits requires a similar notice and
the deposit with the California State Treasurer of an additional $25,000 of
money and/or securities until the total deposit value reaches $500,000.
The types of securities permitted to be deposited include notes or
obligations of the United States or those for which the full faith and credit
of the United States is pledged for the payment of principal and interest,
bonds of the state of California or those for which the faith and credit of
the State of California is pledged for the payment the principal and interest
thereof, bonds and revenue securities of political subdivisions of the State
of California, bonds of any state of the United States that are legal
investments for commercial banks, and loans secured by first liens on real
estate that are permitted investments for California-chartered commercial
banks, as well as certain other similar obligations.
LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation. From time
to time, however, the Company is involved in routine litigation incidental to
its business.
EMPLOYEES
As of June 30, 1998, the Company employed 125 full-time employees. Of these
employees, approximately 12 were employed by LHO, 56 were employed by ITC, 9
were employed at the Corporate headquarters and 48 were employed by CAB. The
Company believes that its relations with its employees are good.
PROPERTIES
The Company does not own any of its facilities. The Company leases its
principal executive offices at 1840 Century Park East, Los Angeles,
California, currently consisting of 9,210 square feet. The initial lease term
expires in November 2002 with one five-year extension at the Company's option.
The Company's offices devoted to the LHO division are located at the Company's
executive offices. CAB's administrative offices are at 9920 South La Cienega,
Fifth Floor, Inglewood, California 90301. The lease is on a month-to-month
basis. CAB's initial deposit branch is located at 2121 Rosecrans Avenue, El
Segundo, California, and consists of 671 square feet. The lease expires August
31, 2007, with two five-year extensions at the Company's option. CAB
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also operates eight business development offices for its SBA lending business
in Sacramento, California; Stockton, California; Costa Mesa, California;
Emeryville, California; Encino, California; Riverside, California; Carlsbad,
California; and Phoenix, Arizona, all of which are leased. ITC's principal
office is located at 201 N. Figueroa Street, Los Angeles, California, and
occupies 13,462 square feet. The lease expires October 31, 2007, with one
five-year Company option to extend. ITC also has branch offices in Costa Mesa,
California, Century City, California and San Francisco, California, all of
which are leased. The principal office of ICII is located in Torrance,
California, and is leased.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company Board consists of nine persons. Upon completion of the
Distribution, the members will be divided into three equal classes with each
class serving a three-year term after an initial transitional period. The
following table sets forth information as to the directors and executive
officers of the Company.
<TABLE>
<CAPTION>
INITIAL
TERM
NAME AGE EXPIRES POSITION
---- --- ------- --------
<C> <C> <C> <S>
George L. Graziadio, Jr. 78 1999 Chairman of the Board of Directors
G. Louis Graziadio, III 48 2001 Co-Chairman of the Board of Directors and
Chief Executive Officer
Lee E. Mikles 42 1999 Director
Paul A. Novelly 54 1999 Director
H. Wayne Snavely 57 2001 Director
Robert M. Franko 50 2001 President and Director
Perry A. Lerner 54 2000 Director
Robert L. Harris II 39 2000 Director
Lewis P. Horwitz 62 2000 President and Chief Executive Officer of
LHO and Director
Brian W. Nocco 46 N/A Executive Vice President and Chief
Financial Officer
Clinton W. Bliss 63 N/A Senior Vice President and Chief Credit
Officer
John Getzelman 55 N/A President of CAB
</TABLE>
George L. Graziadio, Jr. Mr. Graziadio is chairman of the Company Board. Mr.
Graziadio is also chairman of the board, president and chief executive officer
of Bancorp and has been a member of the Bancorp Board since 1969. Mr.
Graziadio is also chairman of the board of the Bank and a director of various
other subsidiaries of Bancorp. In addition, he is engaged as an owner or
partner in many other business activities, primarily in the real estate
industry. He is also a director of Coastcast Corp., a company manufacturing
metal-casted products. Mr. Graziadio is the father of G. Louis Graziadio, III
and the uncle of Lee E. Mikles.
G. Louis Graziadio, III. Mr. Graziadio is co-chairman of the Company Board
and has been chief executive officer since October 1997. Mr. Graziadio is also
a director of Bancorp, ITC and ICII. He has been a member of the Bancorp Board
since 1984. Mr. Graziadio is president of Ginarra Holdings, Inc. and its
subsidiaries, a California corporation engaged in investments. He is also
chairman of the board of Lynx Golf, Inc., a golf club manufacturer, which on
July 27, 1998 filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code with the United States Bankruptcy Court for the
Southern District of California. He is also the chairman of the board of Vista
2000, Inc., a manufacturer of gloves, balloons and pet products and a director
of Franchise Mortgage Acceptance Company, a specialty lender to franchise
businesses. He has been engaged in and has extensive experience with real
estate development and construction, with which he has been involved since
1972. He is the son of George L. Graziadio, Jr., chairman of the Company
Board.
Lee E. Mikles. Mr. Mikles is a director of the Company. Mr. Mikles has been
a director of Bancorp since 1996 and of the Bank since 1994. Mr. Mikles is a
principal of Mikles/Miller Management Inc., an investment advisor. He is also
a director of Coastcast Corp. and Vista 2000, Inc. Mr. Mikles is the nephew of
George L. Graziadio, Jr., chairman of the Company Board.
Paul A. Novelly. Mr. Novelly is a director of the Company and has been a
director of the Bank since April 1996. Since 1979, Mr. Novelly has been the
president and chief executive officer of Apex Holding Co. and its
subsidiaries, a wholesale marketer and storer of petroleum products. Mr.
Novelly is a director and/or officer of numerous other corporations, including
Coastcast Corp. and Vista 2000, Inc.
H. Wayne Snavely. Mr. Snavely is a director of the Company. He is also
chairman, chief executive officer and a director of ICII. Mr. Snavely also
serves as a director of Franchise Mortgage Acceptance Company, Impac
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Mortgage Holdings, a real estate investment trust, Southern Pacific Funding
Corporation, a mortgage lender, and Imperial Credit Commercial Mortgage
Investment Corporation, a real estate investment trust.
Robert M. Franko. Mr. Franko has been president of the Company since its
formation and is also a director of the Company. From 1995 and until April
1997, Mr. Franko was an executive vice president and chief financial officer
of Bancorp. Before joining Bancorp in 1995, he was president and chief
executive officer of Springfield Bank & Trust Limited, a commercial bank. Mr.
Franko is also chairman of the board of ITC, a principal of Imperial
Securities Corporation, an NASD-registered broker/dealer, and a director of
Monarch Mutual Funds, a registered investment company.
Perry A. Lerner. Mr. Lerner is a director of the Company and has been a
director of ICII since 1992. He is also a principal in Crown Capital Group,
Inc., an investment firm. Mr. Lerner was associated with the law firm of
O'Melveny & Myers from 1982 through 1996. Mr. Lerner was an Attorney-Advisor
of the International Tax Counsel of the United States Treasury Department from
1973 to 1976. Mr. Lerner is also a director of Vista 2000, Inc., and Franchise
Mortgage Acceptance Company.
Robert L. Harris II. Mr. Harris is a director of the Company. Since
September 1992, Mr. Harris has been the senior vice president, International
Business Development, for AMC Entertainment Inc., an operator of motion
picture theaters. He is also the president and a director of Entertainment
Properties Trust, a publicly traded real estate investment trust. Mr. Harris
is also a member of the American Film Institute.
Lewis P. Horwitz. Mr. Horwitz is a director of the Company and has been the
president and chief executive officer of the LHO division of the Company since
the Bank acquired LHO in 1989. Mr. Horwitz founded The Lewis Horwitz
Organization in 1980. Mr. Horwitz has over 38 years of banking experience and
27 years of experience in entertainment-related finance. He is a member of the
Board of Directors of AFMA, the Chairman of The Affiliated Financial
Institutions Committee of AFMA, a past member of the Independent Film Industry
Export Finance Task Force, an advisor to Banco Popular (Puerto Rico) on film
production loans and an adviser to the Film Fund Management Corporation.
Brian W. Nocco. Mr. Nocco has been executive vice president and chief
financial officer of the Company since May 1998. Prior to joining the Company,
Mr. Nocco was a Senior Vice President of The Chubb Corporation since November
1994. Prior to joining The Chubb Corporation, Mr. Nocco was Treasurer of
Continental Bank Corporation in Chicago, Illinois, where he began his career
as a commercial lender. From 1983 to 1986, Mr. Nocco held positions of
Treasurer of CFS Continental, Inc. and Assistant Treasurer of Staley
Continental, Inc.
Clinton W. Bliss. Mr. Bliss has been a senior vice president and chief
credit officer of the Company since April 1997. He is also chief credit
officer of CAB. Prior to April 1997, he was a senior vice president and
manager for Commercial Loan Administration for the Bank and was employed in
various positions by the Bank since 1980. Prior to joining the Bank, Mr. Bliss
was a vice president and commercial loan officer for Union Bank and he held a
variety of management positions with Morris Plan Co. of California, which was
an industrial loan company.
John Getzelman. Mr. Getzelman has been president of CAB since August 1998.
Prior to joining the Company, he was the president and chief executive officer
of Community Bank in Pasadena, California since 1992. Prior to 1992, he was
employed for over 21 years in various positions by Security Pacific Bank,
including as president and chief executive officer of Rainier National Bank in
Seattle, Washington, chairman and chief executive officer of Security Pacific
Bancorporation Northwest and head of operations for the Asia/Australia
Territory of Security Pacific Bank's banking operations. He is also a director
of Aames Financial Corporation, a mortgage origination company based in Los
Angeles.
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DIRECTORS' MEETINGS, COMMITTEES AND FEES
The Company Board has established a Compensation Committee and, following
the Distribution, the Company Board is also expected to maintain an Audit
Committee. Directors who are also officers or employees of the Company will
not be permitted to serve on any of these committees. The current members of
the Compensation Committee are Messrs. Mikles and Lerner. The functions of
these committees will be as follows:
AUDIT COMMITTEE. The Audit Committee will assist the Company Board in
fulfilling its responsibilities concerning the Company's accounting and
financial reporting practices and the ethical conduct of the Company and
its employees. This committee will make recommendations to the Company
Board regarding the selection, retention or termination of the Company's
independent accountants and review the professional services, proposed fees
and independence of such accountants. This committee also will review with
management and the independent accountants both the controls established to
protect the integrity of the quarterly reporting process and the Company's
annual financial statements.
COMPENSATION COMMITTEE. The Compensation Committee will assist the
Company Board in the establishment of appropriate compensation and benefits
for the Company's directors, officers and employees. This committee's
general responsibilities will include advising the Company Board on certain
compensation matters, evaluating and approving the chief executive
officer's compensation, reporting to shareholders on executive
compensation, and evaluating new and existing executive compensation and
benefit programs. This committee will also review and make recommendations
concerning outside director compensation and administer annual incentives
for key employees and the Company's long-term incentive plans. All of the
members of the Compensation Committee are, and after the Distribution will
be, "disinterested" within the meaning of Rule 16b-3 under the Exchange Act
and "outside directors" within the meaning of Section 162(m) of the Code.
DIRECTOR COMPENSATION
Each director of the Company, other than those directors that are also
executive officers, receives annual compensation of $12,000 and is paid $1,000
for each meeting attended. Each member of a committee of the Board receives
additional annual compensation of $3,000 and is paid $500 per meeting
attended. Directors who are also executive officers receive no additional
compensation for being a director of the Company.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK
The following table sets forth the projected beneficial ownership of Company
Class A Common Stock immediately following the Distribution Date by (i) each
of the Company's directors, (ii) the Company's chief executive officer and
other officers identified under "Executive Compensation" below, (iii) all
directors and executive officers as a group and (iv) those persons that will
own more than 5% of the Company Class A Common Stock, in each case based upon
information available to Bancorp concerning ownership of shares of Bancorp
Common Stock at June 30, 1998 and after giving effect to the February 6, 1998
Bancorp three-for-two stock split. The projections do not take into account
any shares of Company Common Stock (as defined herein) that may be issued
pursuant to the exercise of options granted under the Imperial Financial
Group, Inc. 1997 Share Incentive Plan or the 1998 Imperial Financial Group,
Inc. Stock Option Plan or otherwise. The information regarding the projected
5% owners has been obtained by Bancorp's records and reviews of statements
filed with the Commission pursuant to Sections 13(d) and 13(g) of the Exchange
Act. See "Executive Compensation."
<TABLE>
<CAPTION>
NUMBER OF SHARES PROJECTED % OF SHARES
NAME(1) TO BE BENEFICIALLY OWNED(4) OUTSTANDING
- ------- --------------------------- -----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS(3)
George L. Graziadio, Jr. 2,236,405 (2)(6)(7) 11.25
G. Louis Graziadio, III 252,522 (5)(6)(7) 1.27
Robert M. Franko 3,828 *
Robert L. Harris II 0 --
Perry A. Lerner 0 --
Lee E. Mikles 33,625 (2) *
Paul A. Novelly 142,698 *
H. Wayne Snavely 1,002 *
Clinton W. Bliss 16,606 *
Lewis P. Horwitz 10,036 *
Brian W. Nocco 0 --
John Getzelman 0 --
--------- -----
All directors and executive officers
as a group (10 persons) 2,696,722 13.57
5% OWNERS
Imperial Trust Company, as trustee
for Bancorp Profit Sharing Plan,
Employee Stock Ownership Plan and
401(k) Plans 1,129,123 5.67%
Graziadio Family Trust 1,007,504 5.06%
</TABLE>
- -------
* Less than 1%.
(1) The address of each of the beneficial owners is c/o the Company, 1840
Century Park East, 10th Floor, Los Angeles, California 90067.
(2) George L. Graziadio, Jr. and Lee E. Mikles serve as members of Bancorp's
Salary Investment, Profit Sharing and Employee Stock Ownership Plans
Administrative Committee (the "Committee"), which is a committee of the
Bancorp Board. The Committee has the power, pursuant to Bancorp's Salary
Investment, Profit Sharing and Employee Stock Ownership Plans, to direct
the Plan Trustee as to the manner in which it shall vote the shares of
common stock held by the Trustee, other than allocated shares held in the
Employee Stock Ownership Plan. The Committee acts by a majority vote. The
Bancorp Board also has the right to act as a committee of the entirety.
The shares held by the Trustee for others are not included in the number
of shares shown to be beneficially held by each of Messrs. George L.
Graziadio, Jr. and Lee E. Mikles and each of them disclaims beneficial
ownership of the shares so held.
(3) Pursuant to California law, personal property held in the name of a
married person may be community property as to which either spouse has the
power and ability to manage and control in its entirety. The Company has
no information pertaining to whether these shares are or are not community
property or whether any arrangement exists between the spouses pertaining
to voting or disposing of these shares and has thus assumed that, in the
absence of information to the contrary, married persons share investment
and voting power with their spouse.
(4) Holdings attributable to multiple parties have been adjusted to avoid
duplications.
(5) Includes 51,820 shares held by G. Louis Graziadio, III, as
custodian/trustee for his children, which are reported in his total, as to
which Mr. Graziadio disclaims beneficial ownership.
(6) The Graziadio Investment Co. ("GIC") is a limited partnership of which the
Graziadio Investment Corp. ("GI Corp.") is the General Partner. George L.
Graziadio, Jr. is the controlling shareholder of GI Corp. and a Class A
Limited Partner of GIC. The other limited partners of GIC include the
George L. & Reva M. Graziadio Grandchildren's Trust No. 1 ("Trust No. 1")
and George & Reva Graziadio Trust (the "Trust"). G. Louis Graziadio, III
is a trustee of Trust No. 1 and trustee and beneficiary of the Trust and
disclaims beneficial ownership except as to his beneficial interest,
4.058% of GIC.
(7) Includes currently exercisable options to purchase 925,847 shares of
Bancorp Common Stock in the case of George L. Graziadio, Jr., and 41,230
shares of Bancorp Common Stock in the case of G. Louis Graziadio, III. If
not exercised prior to the Distribution, these options will not become
options to purchase shares of Company Class A Common Stock, but will
remain options to purchase shares of Bancorp Common Stock.
96
<PAGE>
EXECUTIVE COMPENSATION
HISTORICAL COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's chief executive officer and
the Company's other executive officers for fiscal 1997 and 1996. During the
periods presented, the individuals were compensated by and in accordance with
Bancorp's plans and policies, other than with respect to stock options in
1997. References in the following table to stock options in 1996 relate to
awards of options to purchase shares of Bancorp Common Stock. References in
the following table to stock options in 1997 relate to awards of options to
purchase shares of Company Class B Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- ----------------------------------
AWARDS PAYOUTS
------ -----------
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($)(1) AWARD(S) OPTIONS (#) PAYOUTS ($) COMPENSATION ($)(3)
- ------------------ ---- ---------- --------- ------------------ ---------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
G. Louis Graziadio,
III................ 1997 0 0 0 0 575,000 0 21,465
--Chief Executive
Officer 1996 0 0 0 0 11,000 0 966,814(2)
Robert M. Franko.... 1997 200,000 205,020 97,001 0 525,000 0 13,012
--President 1996 185,000 192,475 92,160 0 0 0 12,218
Clinton W. Bliss.... 1997 147,000 75,000 40,453 0 5,000 0 17,762
--Senior Vice 1996 140,000 60,000 37,484 0 8,250 0 15,770
President and Chief
Credit Officer
Lewis P. Horwitz.... 1997 250,000 504,614 129,764 0 600,000 0 17,762
--President, LHO 1996 250,607 295,328 49,146 0 11,550 0 16,968
</TABLE>
- --------
(1) Includes automobile allowances, life insurance, tax services, employer
contributions to deferred compensation plans and below market interest on
loans.
(2) Represents consulting fees paid to Second Southern Corp. under consulting
agreement with the Bank. See "--Employment Agreements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
(3) Except for Mr. Graziadio, these amounts represent contributions to
Bancorp's Profit Sharing Plan, 401(k) Plan and Employee Stock Ownership
Plan.
OPTION GRANTS IN FISCAL 1997
The following table sets forth information with respect to option grants to
purchase Company Class B Common Stock (other than for Mr. Bliss, who has
options to purchase Company Class A Common Stock) made during fiscal 1997 to
the individuals named in the Summary Compensation Table pursuant to the
Company's plans. The number of options granted and exercise prices have been
adjusted to reflect Bancorp's February 6, 1998 stock split and the
distribution ratio of one share of the Company's Common Stock for every two
shares of outstanding Bancorp Common Stock. No options to purchase Bancorp
Common Stock were granted to these individuals during fiscal 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
% OF TOTAL APPRECIATION FOR
NUMBER OF OPTIONS GRANTED EXERCISE OPTION TERM ($)
OPTIONS TO EMPLOYEES PRICE ---------------------
NAME GRANTED IN 1997 PER SHARE EXPIRATION DATE 5% 10%
- ---- --------- --------------- ----------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
G. Louis Graziadio,
III(1)................. 575,000 20.9% $6.48/$9.63 4/22/07 / 9/21/07 257,175 514,350
Robert M. Franko(1)..... 525,000 19.1% $6.48/$9.63 4/22/07 / 9/21/07 233,100 466,200
Clinton W. Bliss........ 5,000 0.2% $9.63 9/21/07 2,408 4,815
Lewis P. Horwitz........ 600,000 21.9% $5.18 4/22/07 974,400 1,168,800
</TABLE>
- --------
(1) Options granted in April 1997 have an exercise price of $6.48 and expire
in April 2007. Options granted in September 1997 have an exercise price of
$9.63 and expire in September 2007.
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<PAGE>
OPTION EXERCISES IN FISCAL 1997
The following table sets forth the number of shares of Bancorp Common Stock
covered by both exercisable and unexercisable stock options held by each of
the individuals named in the Summary Compensation Table on December 31, 1997.
Also reported are the values for "in-the-money" options, calculated as the
excess of the value of shares of Bancorp Common Stock as of December 31, 1997
over the respective exercise prices of outstanding stock options. All of the
options described below are currently exercisable in whole or in part. The
options granted to G. Louis Graziadio, III expire five years from date of
grant. All other options described below expire 10 years from date of grant.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
BANCORP OPTIONS AT IN-THE-MONEY BANCORP
SHARES VALUE 12/31/97 (#) OPTIONS AT 12/31/97 ($)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
G. Louis Graziadio, III. 24,752 363,022 31,230 0 796,702 0
Robert M. Franko........ 55,499 927,977 630 56,130 17,905 1,595,287
Clinton W. Bliss........ 33,618 593,918 8,250 14,439 226,747 374,571
Lewis P. Horwitz........ 4,331 139,478 0 12,995 0 310,374
</TABLE>
No options to purchase Company Common Stock were available for exercise at
June 30, 1998 by the individuals included in the Summary Compensation Table.
COMPANY COMPENSATION AND BENEFIT PLANS
It is anticipated that total compensation for the Company's executive
officers after the Distribution will include base salary, annual incentives
and other benefits as described below. The Company's executive compensation
program is expected to be a performance and rewards compensation system that
pays executives for the achievement of levels of performance designed to
increase the shareholder value of the Company and that enables the Company to
hire, retain and motivate high-quality executives who meet the immediate
business challenges and improve the long-term performance of the Company. It
is anticipated that base salaries and total compensation opportunities will be
competitive as measured against industry norms.
Set forth below is a summary of the components of executive compensation
following the Distribution that will be made to those individuals who will be
executive officers or directors of the Company following the Distribution.
Base Salary. Each executive's performance will be evaluated annually, and it
is anticipated that any base salary adjustments will be based on an evaluation
of competitive market adjustments and the individual's performance and
contribution.
1997 Share Incentive Plan. The Company has adopted the Imperial Financial
Group, Inc. 1997 Share Incentive Plan (the "1997 Plan") in order to provide
incentives to attract, retain and motivate highly competent persons as
executive management, employees and directors of the Company and of any
affiliate thereof (other than Bancorp or the Bank). The 1997 Plan which is,
and will be after the Distribution, administered by the Compensation
Committee, provides such persons with opportunities to acquire shares of
Company Class A Common Stock or Company Class B Common Stock, or to receive
monetary payments based on the value of such shares pursuant to certain
Benefits (as defined below). Benefits under the 1997 Plan may be granted in
any one or a combination of stock options, stock appreciation rights, stock
awards, performance awards and stock units (collectively, the "Benefits"). The
Company has authorized 1 million shares of Company Class A Common Stock and
3.7 million shares of Company Class B Common Stock that may be granted under
the 1997 Plan, subject to certain adjustments under certain circumstances.
98
<PAGE>
1998 Stock Option Plan. The Company has adopted the 1998 Stock Option Plan
of Imperial Financial Group, Inc. (the "1998 Plan") in order to provide
incentives to attract, retain and motivate highly competent persons as
executive management, key employees and directors of the Company and of any
affiliate thereof (other than Bancorp or the Bank). The 1998 Plan, which is
and will be administered by the Company Board, provides such persons with
opportunities to acquire shares of Company Class A Common Stock or Company
Class B Common Stock, or to receive monetary payments in lieu of such shares.
The Company has authorized 500,000 shares of Company Common Stock that may be
granted under 1998 Plan, subject to certain adjustments under certain
circumstances.
Deferred Compensation Plan. The Company plans to adopt after the
Distribution a non-qualified deferred compensation plan for management and
highly compensated employees ("Deferred Compensation Plan") that will mirror
the 1996 Deferred Compensation Plan for Bancorp employees. Participation in
the Deferred Compensation Plan will be restricted to employees with the title
of Senior Vice President and above, and will be voluntary. Participants may
elect to defer up to 100% of their annual base salary and/or bonus. The
Company will match participant contributions to their plan. The matched amount
will depend on the Company's return on equity performance for that year and
the amount contributed by the participant. The matched amount will not exceed
20% of a participant's base salary and bonus. Participants are fully vested at
all times with respect to the amounts they have personally contributed and
interest thereon. Participants are vested with respect to Company
contributions at the end of the year after the year for which the Company
contribution was made.
Qualified Retirement Plans. The Company plans to establish after the
Distribution two qualified defined contribution retirement plans which will
mirror current retirement plans maintained by Bancorp. See "--Treatment of
Bancorp Options and Other Benefits Following the Distribution."
Other Compensation Arrangements. It is anticipated that the Company may from
time to time enter into employment contracts or other compensation
arrangements with executives when appropriate for competitive or other
business reasons, for example, in connection with attracting new executives.
See "--Employment Agreements."
TREATMENT OF BANCORP OPTIONS AND OTHER BENEFITS FOLLOWING THE DISTRIBUTION
Set forth below is a summary of adjustments of the compensation and benefit
plans of the Transferred Employees following the Distribution.
Stock Options.
Conversion of Bancorp Options. Upon consummation of the Distribution,
certain employees of the Bank will cease to be employees of the Bank and will
become employees of the Company. To the extent any of these Transferred
Employees hold nonqualified stock options or incentive stock options to
purchase Bancorp Common Stock immediately prior to the Distribution, all
options held by such Transferred Employees will be automatically converted
into options to purchase Company Class A Common Stock. In connection with this
conversion of options to purchase Bancorp Common Stock (the "Bancorp Options")
for options to purchase Company Class A Common Stock (the "Company Options"),
the number of shares that were formerly underlying the Bancorp Options and/or
the exercise price of such options will be appropriately adjusted to allow
Transferred Employees to retain an equivalent economic position in Company
Common Stock following the Distribution. The Company will attempt to establish
the terms of the Company Options of these Transferred Employees by applying
the following analyses: (i) the excess of (a) the aggregate fair market value
of Company Class A Common Stock subject to the Company Options (determined
immediately after the proposed transaction based on the average closing price
of Company Class A Common Stock for a period of five trading days after the
Distribution Date), over (b) the aggregate exercise price of such options,
will not be greater than the excess of (a) the aggregate fair market value of
Bancorp Common Stock subject to the Bancorp Options (determined immediately
before the proposed transaction based on the average closing price of Bancorp
Common Stock for a period of five trading days before and including the
Distribution Date), over (b) the aggregate exercise price of such options; and
(ii) the ratio of (A) the option exercise price of the Company Options
immediately following
99
<PAGE>
the exchange to (B) the fair market value of the Company Class A Common Stock
immediately following the Distribution will not be more favorable to the
optionee on a share by share comparison than the ratio of the option exercise
price of the Bancorp Options immediately prior to the exchange to the fair
market value of Bancorp Common Stock immediately preceding the Distribution.
Tax Consequences. The substitution of Company Options for Bancorp Options
for Transferred Employees will not result in the recognition of income, gain
or loss to the Company or to an optionee. The Company will be entitled to a
tax deduction upon the exercise of a non-qualified stock option to acquire
Company Class A Common Stock, or a disqualifying disposition of an incentive
stock option, in an amount equal to the amount of ordinary income recognized
by the optionee upon the exercise or disqualifying disposition, as applicable.
Deferred Compensation. The benefits of Transferred Employees in the deferred
compensation plans of Bancorp will not be transferred to any deferred
compensation plan adopted by the Company and will be paid in accordance with
the terms of the Bancorp plans.
Qualified Retirement Plans.
General. The Company will establish for its employees two qualified defined
contribution retirement plans (the "Company Qualified Plans"): (i) a 401(k)
plan and (ii) a profit sharing plan. See "--Plan Provisions." A portion of the
profit sharing plan will constitute an employee stock ownership plan. Both
plans will mirror the comparable plans currently maintained by the Bank. The
entire account balance of each Transferred Employee who is a participant in
the Bank qualified plans will be transferred to the respective Company
Qualified Plan. Within a reasonable period of time following the Distribution,
Bancorp Common Stock held by the Company Qualified Plans will be exchanged for
securities of an equivalent value (the "Exchange"), unless the participant has
separately elected to establish a self-directed brokerage account within the
Company Qualified Plans to hold Bancorp Common Stock.
Tax Consequences. No gain or loss will be recognized by any participant in
either of the Company Qualified Plans, and no gain or loss will be recognized
by either of the Company Qualified Plans in connection with the Exchange. The
Exchange will not adversely affect the status of the Company Qualified Plans
as qualified within the meaning of Section 401(a) of the Code and that part of
the Company profit sharing plan that is an employee stock ownership plan will
satisfy the requirements of Section 4975(e) of the Code.
Plan Provisions. The following is a current description of the material
terms of each plan. These provisions are subject to change at any time.
SALARY INVESTMENT PLAN OF IMPERIAL FINANCIAL GROUP. The Salary Investment
Plan of Imperial Financial Group (the "401(k) Plan") is a qualified defined
contribution plan with a cash or deferred arrangement under Section 401(k)
of the Code. The 401(k) Plan operates on a calendar year. Employees are
eligible to participate in the 401(k) Plan upon the completion of 183 days
(six months) of service. Entry into the plan will occur on the January 1 or
July 1 next following the date the eligibility requirements are first met
provided the participant is employed on such date. Generally, all Company
employees are eligible to participate in the plan other than employees
covered by a collective bargaining agreement and nonresident aliens. Under
the plan, a participant may elect to defer (in whole percentages) from 2%
to 14% of a portion of his or her compensation for each pay period. A
participant may cease deferrals as of any business day or may change the
amount of his deferral election as of the first day of any quarter. The
Company will make matching contributions to the 401(k) Plan equal to 50% of
the deferral made by a participant up to the first 8% of a participant's
deferral. Only active employees at December 31 of any given year are
eligible to receive matching contributions for the year. Employer matching
contributions will be invested in Company Class A Common Stock. At all
times, a participant's deferrals and employer matching contributions are
100% vested. A participant may self-direct the investment of his or her
account, except that all matching contributions will be invested in Company
Class A Common Stock. Changes in the investment elections may be made
daily. All distributions will be made in a single lump sum. Participant
loans and hardship withdrawals are permitted within the limits prescribed
by the Code. Additionally, in-service distributions upon the attainment of
age 59 1/2 are also permitted.
100
<PAGE>
PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN OF IMPERIAL FINANCIAL
GROUP. The Profit Sharing Plan and Employee Stock Ownership Plan (the
"PSP/ESOP") combines two types of plans, a profit sharing plan and a stock
bonus plan. Employees may participate upon completion of 183 days (6
months) of service during the year. Entry to the PSP/ESOP occurs on the
January 1 following the date the eligibility requirements are first met
provided the participant is employed on such date. Profit sharing
contributions and ESOP contributions by the Company are determined by the
Company Board, in its sole discretion, on an annual basis. Contributions by
the Company under the PSP/ESOP are allocated to the individual profit
sharing or ESOP account of each participant who has completed 1,000 hours
of service and is an employee on the last day of the plan year and is
allocated in proportion to compensation. Both the profit sharing
contributions and the ESOP contributions are subject to a vesting schedule
which provides for full vesting upon the completion of five years of
service, the attainment of age 65, disability or death. A year of service
for vesting purposes will occur upon the completion of 1,000 hours of
service during a plan year. Unvested amounts are forfeited upon
distribution and the resulting forfeitures are reallocated to the remaining
plan participants who have completed 1,000 hours of service and are
employees on the last day of the plan year. A participant may direct that
his or her account balance, except contributions by the Company to the
participant's ESOP account, may be invested in only Company Class A Common
Stock. Permitted changes in the investment elections may be made daily.
EMPLOYMENT ARRANGEMENTS
Agreements with G. Louis Graziadio, III. The Company and G. Louis Graziadio,
III intend to enter into an offer letter (the "Graziadio Offer Letter"),
pursuant to which Mr. Graziadio will serve as co-chairman and chief executive
officer of the Company and the term of his employment will be "at will".
Pursuant to the Graziadio Offer Letter, Mr. Graziadio will receive annual base
compensation of $100,000 and will be entitled to an annual incentive bonus
based on the performance of the Company. As described above, Mr. Graziadio
previously was granted options to purchase 575,000 shares of Company Class B
Common Stock, which vest over a 10-year period. These stock options will
automatically vest upon a change of control of the Company. Mr. Graziadio is
also eligible to receive additional options on shares of Company Common Stock
if granted by the Compensation Committee. In addition, he receives a monthly
car allowance.
Pursuant to the Graziadio Offer Letter, upon Mr. Graziadio's involuntary
termination on or prior to the first anniversary of the date of the Graziadio
Offer Letter for any reason other than good cause, he will receive a severance
payment equal to 24 months of his base salary. Upon Mr. Graziadio's
involuntary termination at any time after the first anniversary of the date of
the Offer Letter for any reason other than good cause, he will receive a
severance payment equal to two months of his base salary for each month
employed by the Company. Upon the termination of Mr. Graziadio for good cause,
he will be paid salary and benefits through the date of termination. Upon Mr.
Graziadio's termination due to the Company's merger with or acquisition by a
third party, he will receive, among other things, a severance payment equal to
three years of his salary, which may be paid in a lump sum at termination
date, and three years of his current target bonus paid in a lump sum at
termination date.
Under that certain consulting agreement dated November 1, 1991 between the
Bank and Second Southern, a company wholly owned by G. Louis Graziadio, III,
Second Southern provided the Bank with an analysis of information, preparation
of marketing materials and coordination of appropriate professionals in
connection with possible securities offerings on behalf of the Bank. Second
Southern was entitled thereunder to receive an incentive fee of 2.5% of the
realized pre-tax gains received by the Company, when and if realized, from the
disposition of the remaining ICII shares held by the Company. The liability
relating to this consulting agreement approximated $4.9 million as of June 30,
1998, of which $3.2 million had been accrued for as of June 30, 1998.
The Bank, the Company and Second Southern have agreed that, in connection
with and prior to the Distribution, the consulting agreement will be amended
to provide that it will be assumed by the Company and the Bank will be
released from its obligations thereunder. In addition, the parties have agreed
that, immediately following the Distribution, the consulting agreement (and
the related rights and obligations thereunder) will be terminated and in
consideration therefor, the Company will issue to Second Southern a
combination of cash and
101
<PAGE>
warrants to acquire Company Class A Common Stock in an aggregate amount equal
to the total liability owed to Second Southern under the consulting agreement
at the time of such amendment. In accordance with the terms of the consulting
agreement, this liability will be approximately $5.4 million. The warrants
will not be exercisable for two years and the confirmation of the value of the
warrants at the time of issuance will be determined by an independent
appraiser selected by the Company. The settlement of the total liability owed
to Second Southern will result in a one-time after tax charge to the Company's
earnings immediately following the distribution of approximately $1.3 million.
See "Unaudited Pro Forma Combined Financial Data." The effectiveness of the
amendment of the consulting agreement is conditioned upon the consummation of
the Distribution.
In connection with the distribution, the Company will be assigned a lease of
office space located in Palos Verdes, California by Ginarra Holdings Inc.
("Ginarra"), a private investment and holding company of which G. Louis
Graziadio, III is chairman and chief executive officer. The Company intends to
sublease a portion of the space under such lease back to Ginarra on terms
substantially similar to those of the lease. The Company also intends to
reimburse Ginarra for approximately $135,000 of leasehold improvements made by
Ginarra to the space. The base rent for Ginarra will be $300 per month and the
terms of the lease and the sublease are scheduled to expire on April 14, 1999.
Agreement with Robert Franko. The Company and Robert Franko intend to enter
into a proposed offer letter (the "Franko Offer Letter"), pursuant to which
Mr. Franko will serve as president of the Company and the term of his
employment will be "at will". Pursuant to the Franko Offer Letter, Mr. Franko
will receive annual base compensation of $200,000 and will be entitled to an
annual incentive bonus of up to 100% of his annual base salary, or an
additional $200,000, based on the performance of the Company. As described
above, Mr. Franko previously was granted options to purchase 525,000 shares of
Company Class B Common Stock, which vest over a 10-year period. These stock
options will automatically vest upon a change of control of the Company and
will convert to options to purchase Company Class A Common Stock. Mr. Franko
is also eligible to receive additional options on shares of Class B Common
Stock if granted by the Compensation Committee. In addition, he receives a
monthly car allowance.
Pursuant to the Franko Offer Letter, upon Mr. Franko's involuntary
termination for any reason other than good cause on or prior to December 31,
1999, he will receive a severance payment equal to 12 months of his base
salary plus his target bonus pro-rated through the date of termination to the
extent performance goals have been attained. Upon Mr. Franko's involuntary
termination at any time after December 31, 1999 for any reason other than good
cause, he will receive a severance payment equal to six months of his base
salary plus his target bonus pro-rated through the date of termination to the
extent performance goals have been attained. Upon the termination of Mr.
Franko for good cause, he will be paid salary and benefits through the date of
termination. Upon Mr. Franko's termination due to the Company's merger with or
acquisition by a third party, he will receive, among other things, a severance
payment equal to three years of his salary, which may be paid in a lump sum at
termination date, and three years of his current target bonus paid in a lump
sum at termination date. Based on Mr. Franko's current base salary, this
amount could equal up to $1.2 million.
Agreement with Lewis Horwitz. The Bank and Lewis Horwitz entered into an
Employment Agreement, dated as of July 23, 1997 (the "Horwitz Agreement"),
which will be assigned from the Bank to the Company as part of the
Contribution, pursuant to which Mr. Horwitz serves as president and chief
executive officer of LHO. The initial term of the Horwitz Agreement expires on
December 31, 2001, subject to early termination at Mr. Horwitz's option after
December 31, 1999.
Pursuant to the Horwitz Agreement, Mr. Horwitz receives a base salary of
$250,000 and a guaranteed annual bonus of $500,000 and is entitled to an
annual incentive bonus based on the pre-tax earnings of LHO. Mr. Horwitz also
receives a monthly car allowance and is entitled to additional payments
aggregating $60,000 payable between 1997 and 2001. Mr. Horwitz was also
granted options to purchase up to three percent of the outstanding Company
Common Stock as of April 23, 1997 at an exercise price equal to 80% of the
fair value per share as determined in a report by NationsBanc Montgomery dated
as of April 23, 1997. Based on these terms, the Company will accrue
compensation expense of $194,000 per year over the vesting period. These
options vest after five years, subject to earlier vesting in certain
circumstances.
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<PAGE>
The Horwitz Agreement provides that Mr. Horwitz may be terminated for
permanent disability or cause. Upon such termination, he would be entitled to
receive all accrued compensation and bonuses described above, except that no
incentive bonus will be paid upon termination for cause. Mr. Horwitz is also
entitled to a severance payment on termination (in lieu of receiving a signing
bonus at the time of execution of the Horwitz Agreement) of up to $1,250,000,
which amount will be reduced annually by 50% of the guaranteed bonus paid
prior to such termination.
The Horwitz Agreement also provides that, following the initial term, Mr.
Horwitz will provide consulting services for the Company for an additional
three years for annual compensation of $200,000 (or an additional two years if
he retires prior to December 31, 2001). The Horwitz Agreement also contains a
non-compete provision that provides that during the term of employment and for
two years following termination, Mr. Horwitz will not solicit employees or
customers of the Company or any of its affiliates and he may not work in a
business directly or indirectly in competition with LHO.
103
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under the Certificate of Incorporation that will be in effect on the
Distribution Date, the Company will have authority to issue a total of 70
million shares of all classes of stock, of which 10 million may be shares of
preferred stock ("Preferred Stock"), 50 million may be shares of Company Class
A Common Stock, and 10 million may be shares of Company Class B Common Stock.
Company Class A Common Stock and Company Class B Common Stock are collectively
referred to herein as "Company Common Stock."
Based on the number of shares of Bancorp Common Stock outstanding as of June
30, 1998 and the Distribution Ratio, it is expected that approximately
19,878,335 shares of Company Class A Common Stock will be distributed to
Bancorp Shareholders in the Distribution. All the shares of Company Class A
Common Stock to be distributed to Bancorp Shareholders in the Distribution
will be fully paid and non-assessable. The Company Class A Common Stock to be
distributed will constitute all the shares of capital stock of the Company
that will be outstanding immediately after the Distribution.
COMPANY CLASS A COMMON STOCK
Holders of Company Class A Common Stock are entitled to one vote for each
share on all matters voted on by shareholders. Holders of Company Class A
Common Stock do not have cumulative voting rights in the election of
directors. The first annual meeting of shareholders is expected to be held
during 1999.
Holders of Company Class A Common Stock do not have subscription, redemption
or conversion privileges. Subject to the preferences or other rights of any
Preferred Stock that may be issued from time to time, holders of Company Class
A Common Stock are entitled to participate ratably in dividends on the Company
Class A Common Stock as declared by the Company Board. Holders of Company
Class A Common Stock are entitled to share ratably in all assets available for
distribution to shareholders in the event of liquidation or dissolution of the
Company, subject to distribution of the preferential amount, if any, to be
distributed to holders of Preferred Stock.
COMPANY CLASS B COMMON STOCK
Company Class B Common Stock may only be issued pursuant to the terms of, or
upon the exercise of outstanding options granted under any of, the Company's
employee benefit plans as stock dividends to holders of Company Class B Common
Stock or in connection with shares issued to a third party in a transaction
approved by the Company Board. Holders of Company Class B Common Stock are
entitled to one-tenth of one vote for each share on all matters voted on by
stockholders and will vote together as a single class with holders of Company
Class A Common Stock.
Each share of Company Class B Common Stock will automatically be converted
into one share of Company Class A Common Stock, subject to customary anti-
dilution adjustments, on the earlier of the fifth anniversary of the
Distribution Date and a Change of Control (as defined in the Certificate of
Incorporation) (the "Conversion Date"). All shares of Company Class B Common
Stock that were transferred or assigned prior to the Conversion Date will
automatically convert into an equivalent number of shares of Company Class A
Common Stock on the Conversion Date. No holder of Company Class B Common Stock
has the right to convert his or her shares into Company Class A Common Stock
except in the event of an automatic conversion under the circumstances
described above.
In all other respects, the rights of the holders of Company Class B Common
Stock will be identical to the rights of holders of Company Class A Common
Stock.
PREFERRED STOCK
The Certificate of Incorporation that will be in effect on the Distribution
Date will authorize the Company Board, without any vote or action by the
holders of Company Class A Common Stock or Company Class B
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Common Stock, to issue up to 10 million shares of Preferred Stock from time to
time in one or more series. The Company Board is authorized to determine the
number of shares and designation of any series of Preferred Stock and the
dividend rights, dividend rate, conversion rights and terms, voting rights
(full or limited, if any), redemption rights and terms, liquidation
preferences and sinking fund terms of any series of Preferred Stock. Issuances
of Preferred Stock would be subject to the applicable rules of the NYSE or
other organizations on whose systems the stock of the Company may then be
quoted or listed. Depending upon the terms of Preferred Stock established by
the Company Board, any or all series of Preferred Stock could have preference
over the Company Class A Common Stock with respect to dividends and other
distributions and upon liquidation of the Company. Issuance of any such shares
with voting powers, or issuance of additional shares of Company Class A Common
Stock, would dilute the voting power of the outstanding Company Class A Common
Stock. The Company has no present plans to issue any Preferred Stock.
NO PREEMPTIVE RIGHTS
No holder of any capital stock of the Company authorized at the Distribution
Date will have any preemptive right to subscribe for or purchase any
securities of any class or kind of the Company.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Co. will be the transfer agent and registrar
for the Company Class A Common Stock commencing upon the Distribution Date.
CREDIT FACILITIES
On August 19, 1998, the Company entered into a credit agreement with a
syndicate of banks to provide credit facilities (the "Credit Facilities") to
finance the Company's operations other than CAB. The syndicate consists of
third party financial institutions not affiliated with the Bank. The Bank will
be the initial borrower under the Credit Facilities but immediately upon the
consummation of the Contribution the Company will assume the obligations of
the borrower and the Bank will be completely released therefrom. The Credit
Facilities provide for borrowings on a revolving basis of up to $135 million
outstanding at any one time based on a borrowing base calculation measured by
the value of the Company's collateral pledged thereunder. Included within the
Credit Facilities is a sub-facility for the issuance of standby and commercial
letters of credit of up to $45 million. The Credit Facilities have an initial
term of two years and provide for an earlier termination under certain
circumstances described below. The lenders under the Credit Facilities are
granted, among other things, a first priority security interest in (a) all of
the common stock of the Company's subsidiaries, (b) the common stock of ICII
owned by the Company and (c) the LHO loans. The borrowing base will be
comprised of the sum of (x) 50% of the current market value of the Company's
investment in ICII stock up to a maximum of $100 million and (y) 85% of
eligible LHO loans. The Credit Facilities will bear interest at an annual rate
equal to 1.45% over LIBOR or at an alternative base rate which will be the
greater of the lead lender's prime rate and the Federal funds rate plus 1.45%.
The Company also will be charged loan and other fees under the Credit
Facilities.
The commitments of the banks party to the Credit Facilities will terminate
90 days after the first to occur of the following events if such events are
not cured or otherwise cease to exist within such 90 day period: (i) the
Company fails to beneficially own at least 25% of the outstanding common stock
of ICII; (ii) the termination, amendment, alteration or assignment of the ICII
Shareholders Agreement by any party thereto without the prior approval of the
administrative agent of the Credit Facilities; (iii) any party to the ICII
Shareholders Agreement becomes the subject of a voluntary or involuntary
bankruptcy proceeding; (iv) ICII fails to comply with its obligations under
the Letter Agreement or gives notice of a dilution event that may result in
the Company failing to meet the requirements of clause (i) above; (v) there is
an increase in the percentage beneficial ownership of voting securities of
ICII required to be owned or controlled by the Company to entitle the Company
to the presumption of control under Section 2(a) (9) of the Investment Company
Act of 1940 and the Company fails to own or control such increased percentage
of ICII voting securities; (vi) either the Company or ICII is required to
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register as an "investment company" within the meaning of the Investment
Company Act of 1940; or (vii) the Commission notifies the Company or ICII that
it is challenging or instituting any action to challenge the exemption from
registration under the Investment Company Act of 1940 of the Company, ICII or
any subsidiary of the Company or ICII or otherwise asserts that the Company,
ICII or any such subsidiary is not in compliance with the Investment Company
Act.
The Credit Facilities also include financial covenants such as maintenance
of a minimum tangible net worth, minimum adjusted tangible net worth and
minimum interest coverage ratio, and limitations on the maximum leverage ratio
for the Company, the maximum exposure under "gap" loans made by LHO and the
maximum exposure to distributors whose contracts and undertakings support the
eligible LHO loans. The Credit Facilities also require the Company to make
customary representations and warranties as of the initial funding date and
prior to each borrowing and include customary affirmative and negative
operating covenants such as limitation on the incurrence of debt and liens and
on investments and limitations on the Company's ability to engage in
additional lines of business. Customary events of default include a change
under certain circumstances in ownership of more than 20% of the Company's
outstanding shares and in the composition of the Company's board of directors.
Prior to the Distribution, the Bank will borrow approximately $93 million
(as determined at June 30, 1998) under the Credit Facilities in order to
replace certain deposit liabilities used to fund loans made through LHO. In
connection with the Contribution, these loans, along with the other assets of
the IFG Business, will be transferred to the Company, the Bank will be
released from all liabilities under the Credit Facilities and the Company will
remain responsible for all liabilities under the Credit Facilities.
For a description of all of the Company's financing arrangements, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S
CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
GENERAL
The provisions of the Certificate of Incorporation, the Company's Bylaws and
Delaware statutory law described in this section may delay or make more
difficult acquisitions or changes of control of the Company not approved by
the Company Board. Such provisions could have the effect of discouraging third
parties from making proposals involving an acquisition or change of control of
the Company, although such proposals, if made, might be considered desirable
by a majority of the Company's shareholders. Such provisions may also have the
effect of making it more difficult for third parties to cause the replacement
of the current management of the Company without the concurrence of the
Company Board. See "Relationship and Agreements Among the Company, the Bank
and Bancorp After the Distribution--Contribution Agreement."
Copies of the Certificate of Incorporation and Bylaws have been filed as
exhibits to the Registration Statement, of which this Information Statement is
a part. The following description of certain provisions of the Certificate of
Incorporation and the Bylaws does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Certificate of
Incorporation and the Bylaws.
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation provides for the Company Board, effective
upon completion of the Distribution, to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-
third of the Company Board will be elected each year. See "Management--
Directors and Executive Officers."
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The Company believes that a classified board will help to assure the
continuity and stability of the Company Board, and its business strategies and
policies as determined by the Company Board, because a majority of the
directors at any given time will have prior experience as directors of the
Company. This provision should also help to ensure that the Company Board, if
confronted with an unsolicited proposal from a third party that has acquired a
block of Company Class A Common Stock, will have sufficient time to review the
proposal, to consider appropriate alternatives and to seek the best available
result for all shareholders.
This provision could prevent a party who acquires control of a majority of
the outstanding Company Class A Common Stock from obtaining control of the
Company Board until the second annual stockholders' meeting following the date
the acquiror obtains the controlling stock interest, could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company and could thus increase the
likelihood that incumbent directors will retain their positions.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
The Certificate of Incorporation and the Bylaws provide that the number of
directors shall not be less than three and shall be determined from time to
time exclusively by a vote of a majority of the Company Board then in office.
The Certificate of Incorporation also provides that the Company Board shall
have the exclusive right to fill vacancies, including vacancies created by
expansion of the Company Board. Furthermore, except as may be provided in a
resolution or resolutions of the Company Board providing for any class or
series of Preferred Stock with respect to any directors elected by the holders
of such class or series, directors may be removed by shareholders for cause
and only by the affirmative vote of at least 80% of the voting power of all of
the shares of the Company's capital stock then entitled to vote generally in
the election of directors, voting together as a single class. These
provisions, in conjunction with the provision of the Certificate of
Incorporation authorizing the Company Board to fill vacant directorships,
could prevent shareholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation provides that, except as may be provided in
a resolution or resolutions of the Company Board providing for any class or
series of Preferred Stock, stockholder action can be taken only at an annual
or special meeting of shareholders and cannot be taken by written consent in
lieu of a meeting. The Certificate of Incorporation also provides that special
meetings of the shareholders can only be called pursuant to a resolution
approved by a majority of the Company Board then in office. Shareholders of
the Company are not permitted to call a special meeting of shareholders.
ADVANCE NOTICE FOR RAISING BUSINESS OR MAKING NOMINATIONS AT MEETINGS
The Bylaws establish an advance notice procedure for stockholder proposals
to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an
annual meeting or a special meeting at which directors are to be elected.
Subject to any other applicable requirements, including, without limitation,
Rule 14a-8 under the Exchange Act, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Company Board, or by a stockholder who has given to the
Secretary of the Company timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The
presiding officer at such meeting has the authority to make such
determinations. Only persons who are nominated by, or at the direction of, the
Company Board, or who are nominated by a stockholder who has given timely
written notice, in proper form, to the Secretary prior to a meeting at which
directors are to be elected will be eligible for election as directors of the
Company.
To be timely, notice of nominations or other business to be brought before
an annual meeting must be received by the Secretary of the Company at the
principal executive office of the Company no later than 90 days prior to the
date of such annual meeting. Similarly, notice of nominations or other
business to be brought before
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a special meeting must be delivered to the Secretary at the principal
executive office of the Company no later than the close of business on the
10th day following the day on which notice of the date of a special meeting of
shareholders was given.
The notice of any nomination for election as a director must set forth the
name, date of birth, business and residence address of the person or persons
to be nominated; the business experience during the past five years of such
person or persons; whether such person or persons are or have ever been at any
time directors, officers or owners of 5% or more of any class of capital
stock, partnership interest or other equity interest of any corporation,
partnership or other entity; any directorships held by such person or persons
in any company with a class of securities registered pursuant to Section 12 of
the Exchange Act or subject to the requirements of Section 15(d) of such Act
or any company registered as an investment company under the Investment
Company Act of 1940, as amended; and whether in the last five years, such
person or persons are or have been convicted in a criminal proceeding or have
been subject to a judgment, order, finding or decree of any federal, state or
other governmental entity, concerning any violation of federal, state or other
law, or any proceeding in bankruptcy, which conviction, order, finding, decree
or proceeding may be material to an evaluation of the ability or integrity of
the nominee; and the consent of each such person to serve as a director if
elected. The person submitting the notice of nomination, and any person acting
in concert with such person, must provide their name and business addresses,
the name and address under which they appear on the Company's books (if they
so appear), and the class and number of shares of the Company's capital stock
that are beneficially owned by them.
AMENDMENTS TO BYLAWS
The Certificate of Incorporation provides that the Company Board or the
holders of at least 80% of the voting power of all shares of the Company's
capital stock then entitled to vote generally in the election of directors,
voting together as a single class, have the power to amend or repeal the
Company's Bylaws.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
Any proposal to amend, alter, change or repeal any provision of the
Certificate of Incorporation except as may be provided in a resolution or
resolutions of the Company Board providing for any class or series of
Preferred Stock and which relate to such class or series of Preferred Stock,
requires approval by the affirmative vote of both a majority of the members of
the Company Board then in office and a majority vote of the voting power of
all of the shares of the company's capital stock entitled to vote generally in
the election of directors, voting together as a single class. Notwithstanding
the foregoing, any proposal to amend, alter, change or repeal the provisions
of the Certificate of Incorporation relating to (i) the classification of the
Company Board, (ii) removal of Directors, (iii) the prohibition of stockholder
action by written consent or stockholder calls for special meetings, (iv)
amendment of Bylaws, or (v) amendment of the Certificate of Incorporation
requires approval by the affirmative vote of 80% of the voting power of all of
the shares of the Company's capital stock entitled to vote generally in the
election of directors, voting together as a single class.
PREFERRED STOCK AND ADDITIONAL COMMON STOCK
Under the Certificate of Incorporation, the Company Board will have the
authority to provide by Board resolution for the issuance of shares of one or
more series of Preferred Stock. The Company Board is authorized to fix by
resolution the terms and conditions of each such other series. See
"Description of Capital Stock--Preferred Stock."
The Company believes that the availability of the Company's Preferred Stock,
in each case issuable in series, and additional shares of Common Stock could
facilitate certain financings and acquisitions and provide a means for meeting
other corporate needs which might arise. The authorized shares of the
Company's Preferred Stock, as well as authorized but unissued shares of
Company Class A Common Stock and Company Class B Common Stock, will be
available for issuance without further action by the Company's stockholders,
unless stockholder action is required by applicable law or the rules of any
stock exchange on which any series of the Company's capital stock may then be
listed.
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These provisions give the Company Board the power to approve the issuance of
a series of Preferred Stock, or an additional series of Company Class A Common
Stock or Company Class B Common Stock, of the Company that could, depending on
its terms, either impede or facilitate the completion of a merger, tender
offer or other takeover attempt. For example, the issuance of new shares of
Preferred Stock might impede a business combination if the terms of those
shares include voting rights which would enable a holder to block business
combinations and the issuance of new shares might facilitate a business
combination if those shares have general voting rights sufficient to cause an
applicable percentage vote requirement to be satisfied.
DELAWARE TAKEOVER STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested stockholder" for a three-year period following the time
that such stockholder becomes an interested stockholder unless (1) prior to
such time, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (2) upon consummation of the transaction
which resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares), or (3) on or subsequent to such time, the business
combination is approved by the board of directors of the corporation and by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as specified in Section 203
of the DGCL, an interested stockholder is defined to include (a) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at
any time within three years immediately prior to the relevant date and (b) the
affiliates and associates of any such person.
Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
shareholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation does not exclude the Company from
the restrictions imposed under Section 203 of the DGCL. It is anticipated that
the provisions of Section 203 of the DGCL may encourage companies interested
in acquiring the Company to negotiate in advance with the Company Board, since
the stockholder approval requirement would be avoided if a majority of the
directors then in office approve either the business combination or the
transaction which results in the stockholder becoming an interested
stockholder.
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LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Certain provisions of the DGCL and the Company's Certificate of
Incorporation and Bylaws relate to the limitation of liability and
indemnification of directors and officers of the Company. These various
provisions are described below.
The Certificate of Incorporation provides that the Company's directors are
not personally liable to the Company or its shareholders for monetary damages
for breach of their fiduciary duties as a director to the fullest extent
permitted by Delaware law. Under existing Delaware law, directors would not be
personally liable to the Company or its shareholders for monetary damages for
breach of their fiduciary duties as a director, except for (i) any breach of
the director's duty of loyalty to the Company or its shareholders, (ii) acts
or omissions not in good faith or involving intentional misconduct or a
knowing violation of law, (iii) any transaction from which the director
derived improper personal benefit or (iv) the unlawful payment of dividends or
unlawful stock repurchases or redemptions. This indemnification provision may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter shareholders or the Company from
bringing a lawsuit against directors of the Company for breach of their
fiduciary duties as directors. However, the provision does not affect the
availability of equitable remedies such as an injunction or rescission.
The Certificate of Incorporation also provides that each person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed civil or criminal action or proceeding by reason of the fact that
such person is or was a director of the Company or is or was serving at the
request of the Company as a director of another corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified and held
harmless by the Corporation to the fullest extent permitted by Delaware law.
This right to indemnification shall also include the right to be paid by the
Company the expenses incurred in connection with any such proceeding in
advance of its final disposition to the fullest extent authorized by Delaware
law. This right to indemnification shall be a contract right. The Company may,
by action of the Company Board, provide indemnification to such of the
officers, employees and agents of the Company to such extent and to such
effect as the Company Board determines to be appropriate and authorized by
Delaware law.
The Company's Bylaws authorize the Company to purchase insurance for
directors, officers and employees of the Company, and persons who serve at the
request of the Company as directors, officers, members, employees, fiduciaries
or agents of other enterprises, against any expense, liability or loss
incurred in such capacity, whether or not the Company would have the power to
indemnify such persons against such expense or liability under the Bylaws. The
Company intends to maintain insurance coverage for its officers and directors
as well as insurance coverage to reimburse the Company for potential costs of
its corporate indemnification of directors and officers.
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ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement under
the Exchange Act with respect to the Company Class A Common Stock being
received by the shareholders of Bancorp Common Stock in the Distribution. This
Information Statement does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, to which reference is hereby
made. Statements made in this Information Statement as to the contents of any
contract, agreement or other documents referred to herein are not necessarily
complete. With respect to each such contract, agreement or other documents
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto filed by the Company with the
Commission may be inspected at the public reference facilities of the
Commission listed below.
After the Distribution, the Company will be subject to the information
requirements of the Exchange Act, and in accordance therewith, will file
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at its principal
offices at 450 Fifth Street, N.W., Washington, D.C. 10549, and at its regional
offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may be obtained at prescribed rates from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
Application has been made to list the shares of Company Class A Common Stock
on the NYSE and, if and when such shares of Company Class A Common Stock
commence trading on the NYSE, such reports, proxy statements and other
information concerning the Company will be available for inspection at the
NYSE, 20 Broad Street, New York, New York 10005.
----------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by independent
accountants.
----------------
NO PERSON IS AUTHORIZED BY BANCORP, THE BANK OR THE COMPANY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
INFORMATION STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
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INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Imperial Financial Group, Inc.
Independent Auditors' Report............................................. F-2
Combined Balance Sheets.................................................. F-3
Combined Statements of Income............................................ F-4
Combined Statements of Changes in Stockholder's Equity................... F-5
Combined Statements of Cash Flows........................................ F-6
Notes to Combined Financial Statements................................... F-7
Imperial Credit Industries, Inc.
Index to Consolidated Financial Statements of ICII as of and
for the Six Months Ended June 30, 1998 and 1997......................... F-33
Index to Consolidated Financial Statements of ICII as of and
for the Year Ended December 31, 1997.................................... F-70
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Financial Group, Inc.
We have audited the accompanying combined balance sheets of Imperial Financial
Group, Inc. as of December 31, 1996 and 1997, and the related combined
statements of income, changes in stockholder's equity and cash flows for each
of the years in the three-year period ended December 31, 1997. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined 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 overall financial
statement presentation. We believe our audits provide a reasonable basis for
our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Imperial Financial
Group, Inc. as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Los Angeles, California
March 6, 1998
F-2
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30,
DECEMBER 31, DECEMBER 31, 1998 1998
1996 1997 (UNAUDITED) (UNAUDITED)
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.... $ 5,245 $ 2,813 $ 10,448 $ 10,448
Securities available for
sale, at fair value......... 1,179 6,027 3,507 3,507
Loans held for sale.......... 5,531 3,763 8,441 8,441
Loans held for investment,
net......................... 72,528 134,407 139,210 134,276
Investment in stock of Impe-
rial Credit Industries, Inc.
("ICII").................... 57,736 75,001 81,700 81,700
Premises and equipment, net.. 306 551 1,442 1,442
Excess servicing fees receiv-
able........................ 3,294 -- -- --
Loan servicing rights........ -- 1,914 2,046 2,046
Other assets................. 3,529 3,507 3,822 5,453
-------- -------- -------- --------
$149,348 $227,983 $250,616 $247,313
======== ======== ======== ========
LIABILITIES
Time deposits under $100,000. $ -- $ -- $ 32,581 $ 32,581
Time deposits $100,000 and
over........................ -- -- 4,899 4,899
Borrowings from Imperial
Bank........................ 6,184 77,934 47,225 --
Line of credit............... -- -- -- 95,231
Income taxes payable......... 40,340 29,837 29,962 29,972
Other liabilities............ 5,978 7,974 9,233 7,749
-------- -------- -------- --------
52,502 115,745 123,900 170,432
-------- -------- -------- --------
STOCKHOLDER'S EQUITY
Class A common stock--$.01
par, 1,000 shares autho-
rized; 100 shares issued and
outstanding at June 30,
1998........................ -- -- -- 199
Contribution by Imperial
Bank........................ 1,597 1,597 11,597 11,398
Unrealized (loss) gain on se-
curities available for sale,
net of taxes................ (1) 231 (187) (187)
Retained earnings............ 95,250 110,410 115,306 65,471
-------- -------- -------- --------
Total stockholder's equity... 96,846 112,238 126,716 76,881
-------- -------- -------- --------
Total liabilities and stock-
holder's equity............. $149,348 $227,983 $250,616 $247,313
======== ======== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA SIX MONTHS SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, JUNE 30,
------------------------ 1997 1997 1998 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------- ------- ------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Interest on loans....... $ 6,726 $10,629 $14,355 $13,773 $ 6,319 $ 8,955 $ 8,699
Other interest income... 153 158 235 235 84 187 187
------- ------- ------- ------- ------- ------- -------
Total interest income... 6,879 10,787 14,590 14,008 6,403 9,142 8,886
Interest expense........ 1,287 1,973 3,277 5,376 769 2,831 4,175
------- ------- ------- ------- ------- ------- -------
Net interest income..... 5,592 8,814 11,313 8,632 5,634 6,311 4,711
Provision for loan
losses................. 1,492 1,781 2,558 2,243 1,512 736 696
------- ------- ------- ------- ------- ------- -------
Net interest income
after provision for
loan losses............ 4,100 7,033 8,755 6,389 4,122 5,575 4,015
------- ------- ------- ------- ------- ------- -------
Trust fees.............. 8,385 7,744 7,967 7,967 3,844 4,302 4,302
Gain on sale of SBA
loans.................. 1,813 3,561 3,944 3,944 2,019 2,537 2,537
Equity in net income of
ICII................... 5,652 21,444 20,260 20,260 5,005 6,699 6,699
Gain on sale of ICII
stock.................. -- 25,650 4,977 4,977 -- -- --
Gain from sale of stock
by ICII................ -- 10,761 -- -- -- -- --
Appreciation on donated
ICII stock............. -- 3,698 2,816 2,816 2,816 -- --
Other income............ 677 1,260 2,627 2,624 1,347 1,223 1,223
------- ------- ------- ------- ------- ------- -------
TOTAL REVENUE........... 20,627 81,151 51,346 48,977 19,153 20,336 18,776
------- ------- ------- ------- ------- ------- -------
EXPENSES
Personnel............... 4,827 6,153 9,315 9,315 4,623 6,296 6,754
Occupancy, net.......... 887 1,024 1,198 1,198 583 936 936
Data processing......... 518 562 642 642 318 443 443
Other................... 3,748 3,325 5,381 5,381 2,688 2,806 2,806
------- ------- ------- ------- ------- ------- -------
TOTAL GENERAL AND
ADMINISTRATIVE
EXPENSES............... 9,980 11,064 16,536 16,536 8,212 10,481 10,939
Real estate owned
expenses (income), net. 129 (11) 138 138 -- (7) (7)
Donation of ICII stock.. -- 4,866 3,632 3,632 3,632 -- --
Distribution related
expenses............... -- -- 919 919 -- 1,128 1,128
Consulting expense...... 286 914 6,224 6,224 716 266 266
------- ------- ------- ------- ------- ------- -------
TOTAL EXPENSES.......... 10,395 16,833 27,449 27,449 12,560 11,868 12,326
------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 10,232 64,318 23,897 21,528 6,593 8,468 6,450
Income taxes............ 4,313 25,674 8,737 7,742 2,423 3,572 2,725
------- ------- ------- ------- ------- ------- -------
NET INCOME.............. $ 5,919 $38,644 $15,160 $13,786 $ 4,170 $ 4,896 $ 3,725
======= ======= ======= ======= ======= ======= =======
Pro Forma Earnings Per
Share:
Basic................. $ 0.32 $ 2.06 $ 0.78 $ 0.71 $ 0.22 $ 0.25 $ 0.19
Diluted............... $ 0.32 $ 2.04 $ 0.77 $ 0.70 $ 0.21 $ 0.23 $ 0.18
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
SECURITIES
AVAILABLE
CONTRIBUTION FOR SALE, TOTAL
COMMON BY IMPERIAL NET OF RETAINED STOCKHOLDER'S
STOCK BANK TAXES EARNINGS EQUITY
------ ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $ -- $ 1,597 $ (40) $ 52,687 $ 54,244
----- ------- ----- -------- --------
Net income, 1995........ -- -- -- 5,919 5,919
Dividend to Imperial
Bank................... -- -- -- (2,000) (2,000)
Net change in unrealized
loss on securities
available for sale, net
of taxes .............. -- -- 38 -- 38
----- ------- ----- -------- --------
Balance, December 31,
1995................... -- 1,597 (2) 56,606 58,201
----- ------- ----- -------- --------
Net income, 1996........ -- -- -- 38,644 38,644
Net change in unrealized
loss on securities
available for sale, net
of taxes .............. -- -- 1 -- 1
----- ------- ----- -------- --------
Balance, December 31,
1996................... -- 1,597 (1) 95,250 96,846
----- ------- ----- -------- --------
Net income, 1997........ -- -- -- 15,160 15,160
Net change in unrealized
gain on securities
available for sale, net
of taxes............... -- -- 232 -- 232
----- ------- ----- -------- --------
Balance, December 31,
1997................... $ -- $ 1,597 $ 231 $110,410 $112,238
----- ------- ----- -------- --------
Net income, six months
ended June 30, 1998
(unaudited)............ -- -- -- 4,896 4,896
Contribution by Imperial
Bank (unaudited)....... -- 10,000 -- -- 10,000
Net change in unrealized
loss on securities
available for sale, net
of taxes (unaudited)... -- -- (418) -- (418)
----- ------- ----- -------- --------
Balance, June 30, 1998
(unaudited)............ $ -- $11,597 $(187) $115,306 $126,716
===== ======= ===== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX SIX
YEAR ENDED DECEMBER 31, MONTHS ENDED MONTHS ENDED
---------------------------- JUNE 30, 1997 JUNE 30, 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED)
-------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income.............. $ 5,919 $ 38,644 $ 15,160 $ 4,170 $ 4,896
Adjustments for non-cash
items:
Depreciation and
amortization.......... 176 164 112 76 166
Accretion of discounts,
net................... (26) (9) (77) (3) --
Provision for loan
losses................ 1,492 1,781 2,558 1,512 736
Equity in net income of
ICII.................. (5,652) (21,444) (20,260) (5,005) (6,699)
Gains--ICII stock...... -- (36,411) (4,977) -- --
Appreciation of donated
ICII stock............ -- (3,698) (2,816) (2,816) --
Donated ICII stock..... -- 4,866 3,632 3,632 --
Provision for deferred
taxes................. 1,985 8,310 6,239 75 2,363
Net (increase) decrease
in loans held for
sale.................. (1,000) (2,883) 1,768 (1,554) (4,678)
Net increase (decrease)
in income taxes
payable............... 867 19,156 (16,742) (15,252) 875
Net (increase) decrease
in excess servicing
fees receivable....... (522) (1,887) 3,294 1,466 --
Net increase in loan
servicing rights...... -- -- (1,914) -- (132)
Net increase in other
assets................ (1,744) (2,843) (2,305) (181) (315)
Net (decrease) increase
in other liabilities.. (1,354) 6,494 1,996 (1,865) 1,259
-------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. 141 10,240 (14,332) (15,745) (1,529)
-------- -------- -------- -------- --------
Cash flows from
investing activities:
Proceeds from maturity
of securities
available for sale.... 408 800 1,873 478 2,000
Purchase of securities
available for sale.... -- (533) (4,051) -- --
Net increase in SBA
interest only strips.. -- -- -- -- (200)
Net (increase) decrease
in loans held for
investment............ (50,641) 1,209 (64,437) (38,426) (5,539)
Proceeds from sale of
ICII common stock..... -- 35,079 7,156 -- --
Purchase of premises
and equipment......... (125) (109) (391) (150) (1,042)
-------- -------- -------- -------- --------
Net cash (used in)
provided by investing
activities............. (50,358) 36,446 (59,850) (38,098) (4,781)
-------- -------- -------- -------- --------
Cash flow from financing
activities:
Net increase (decrease)
in borrowings from
Imperial Bank......... 52,593 (43,713) 71,750 54,242 (33,535)
Contribution from
Imperial Bank......... -- -- -- -- 10,000
Net increase in time
deposits.............. -- -- -- -- 37,480
Dividend to Imperial
Bank.................. (2,000) -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by
(used in) financing
activities............. 50,593 (43,713) 71,750 54,242 13,945
Net increase in cash and
cash equivalents....... 376 2,973 (2,432) 399 7,635
Cash and cash
equivalents at
beginning of period.... 1,896 2,272 5,245 5,245 2,813
-------- -------- -------- -------- --------
Cash and cash
equivalents at end of
period................. $ 2,272 $ 5,245 $ 2,813 $ 5,644 $ 10,448
======== ======== ======== ======== ========
Supplementary
Information:
Interest paid.......... $ -- $ -- $ -- $ -- $ --
Taxes paid............. 680 -- 2,446 1,100 --
Reclassification of
interest only strip to
securities available
for sale from other
assets................ -- -- 2,297 -- --
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997, AND JUNE 30, 1997 (UNAUDITED) AND 1998
(UNAUDITED)
NOTE 1. ORGANIZATION
Imperial Financial Group, Inc. (the "Company"), incorporated in the State of
Delaware in 1997, is a wholly-owned subsidiary of Imperial Bank (the "Bank"),
which is itself a wholly owned subsidiary of Imperial Bancorp, a diversified
financial services organization. On February 20, 1997, the Board of Directors
of Imperial Bancorp approved a plan to spin off to its shareholders in a tax-
free distribution the shares of the Company's Class A Common Stock (the
"Distribution"). After consummation of the Distribution, the Company will be
comprised of The Lewis Horwitz Organization ("LHO"), currently a division of
the Bank specializing in entertainment industry lending; Crown American Bank
("CAB"), a thrift and loan company that will be comprised of, among other
businesses, the Bank's small business lending group that specializes in
originating and selling Small Business Administration ("SBA") government
guaranteed loans; Imperial Trust Company ("ITC"), a wholly owned subsidiary of
the Bank, which is a California-licensed trust company and provides investment
management and fiduciary services to individual investors, corporations and
foundations; and its investment in Imperial Credit Industries, Inc. ("ICII"),
a diversified finance company which as of December 31, 1997 and June 30, 1998
(unaudited) totalled approximately 8.9 million shares of stock.
The Company, the Bank and Imperial Bancorp have entered into the
Contribution Agreement in connection with the Distribution, pursuant to which
the Bank will contribute to the Company (i) all of the assets and liabilities
relating to LHO, (ii) all of the common stock of ITC, (iii) all of the common
stock of CAB and (iv) all of the ICII common stock owned by the Bank
(representing approximately 23.0% of all outstanding common stock as of
December 31, 1997 and June 30, 1998 (unaudited) (the "Contribution"). The Bank
and the Company have agreed that the Company will have a net book value as of
the Distribution Date of approximately $27 million (unaudited) plus the after-
tax book value of the ICII stock of approximately $51 million (unaudited).
Immediately following the Distribution, the Company will accrue an after tax
charge of approximately $1.3 million (unaudited) to reflect the termination of
an obligation under a consulting agreement that will be assumed by the Company
as part of the Distribution conditioned upon the consummation of the
Distribution. As such, following the Distribution, the net book value of the
Company will be reduced by approximately $1.3 million (unaudited). See Note 8
to the Combined Financial Statements.
The Contribution Agreement also provides that the Bank will retain certain
loans secured by mortgages on single family residential properties (and the
Company will not assume the liabilities relating thereto) which were
transferred to the Bank in connection with the initial public offering of ICII
in 1992. In addition, the Company will assume the Bank's obligations under a
consulting agreement with an entity wholly-owned by the chief executive
officer of the Company.
The Company received a private letter ruling dated February 27, 1998 from
the Internal Revenue Service to the effect that the receipt of shares of
Company Class A Common Stock will be tax-free for federal income tax purposes
to Imperial Bancorp and to shareholders of Imperial Bancorp and that neither
Imperial Bancorp nor the Bank will recognize income, gain or loss as a result
of the Distribution. It is anticipated that the Distribution will occur in the
second half of 1998.
Total expenses related to the Distribution for the year ended December 31,
1997 and the six months ended June 30, 1998 (unaudited) were approximately
$1.6 million and $1.6 million, respectively. Of the cumulative total of $3.2
million, the Bank has incurred $1.2 million and the remaining $2.0 million was
incurred by the Company, and is included in "Other Expenses" on the
accompanying combined statements of income.
NOTE 2. BASIS OF PRESENTATION
The operations of the divisions, companies and investment that will make up
the Company after the Distribution have been combined in the accompanying
combined financial statements and notes, reflecting the historical operations
for those years presented as if the Company existed as a stand alone entity
during such years. All material intercompany transactions have been
eliminated. Certain adjustments, as described below, have been made to
historical operations in order to provide fair presentation of the financial
operations of the combined entity.
F-7
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The combined financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the combined financial
statements, management has made a number of estimates and assumptions that
affect the reported amounts of assets and liabilities as of the dates of the
balance sheets and the results of operations for the years presented. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the allowance for loan losses. While management
believes that the allowance is currently adequate, future additions may be
necessary based on changes in economic conditions.
BORROWING COST
Historical operations of the Company have been adjusted to reflect the
funding of net assets by the Bank. The adjustments have been disclosed in the
accompanying combined financial statements as "Borrowings from Imperial Bank".
Additionally, the historical operations of the Company have been adjusted to
reflect the estimated interest charges on these borrowings. In order to
reflect all costs of doing business in the combined financial statements,
interest charges have been allocated to the Company in the accompanying
combined statements of income.
The interest charges allocated are based upon estimated average borrowing
balances and Imperial Bank's average interest rates for short-term
certificates of deposit plus one hundred basis points in order to approximate
the cost of funds management believes is representative of the cost the
Company would have had to pay in the past as a "stand alone" company. The
estimated average borrowings from the Bank and estimated interest rates used
to determine the estimated interest expense recorded for the periods indicated
are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, (UNAUDITED)
------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Estimated average borrowings....... $18,571 $30,542 $50,603 $24,121 $80,788
Estimated interest rate............ 6.93% 6.46% 6.48% 6.38% 6.52%
Estimated interest expense......... $ 1,287 $ 1,973 $ 3,277 $ 769 $ 2,618
</TABLE>
INCOME TAXES
The SBA and LHO divisions did not record income taxes in their historical
operations. Additionally, no income taxes have historically been recorded on
the Company's investment in ICII. Consistent with a tax sharing agreement with
Imperial Bancorp, the combined financial statements reflect income taxes for
the Company as if it had been a subsidiary of the Bank for all periods
presented.
NOTE 3. PRO FORMA INFORMATION (UNAUDITED)
The unaudited pro forma combined statements of income reflect the
Contribution and the Distribution as if they occurred at the beginning of the
period presented. The unaudited pro forma combined balance sheet reflects the
Contribution and the Distribution as if they occurred at June 30, 1998. The
unaudited pro forma information reflects the expected capitalization of the
Company as a result of the Distribution, the incurrence by the Company of
approximately $95 million of indebtedness under the Credit Facilities,
interest expense relating to such borrowings, amortization of capitalized
costs incurred in connection with the Credit Facilities and retention of
certain assets and liabilities by Imperial Bancorp. This unaudited pro forma
information does not necessarily reflect the results of operations or
financial position of the Company which would have been achieved had the
Contribution and Distribution actually been consummated as of such dates.
Also, this unaudited pro forma information is not indicative of the future
results of operations or future financial position of the Company.
F-8
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Company are summarized below.
(A) PRINCIPLES OF CONSOLIDATION
The combined financial statements include the accounts of the Company. All
material intercompany balances and transactions have been eliminated.
At December 31, 1996, December 31, 1997, and June 30, 1998 (unaudited)
respectively, the Company owned approximately 9.4 million, 8.9 million and 8.9
million shares of ICII at a book value per share of $6.16, $8.39 and $9.14
representing approximately 25%, 23%, and 23% of all outstanding ICII shares.
As of August 15, 1998 (unaudited), the Company entered into an agreement with
another shareholder of ICII, which provides the Company with beneficial
ownership of additional 3% of the outstanding common shares of ICII. The
Company exercises significant influence over the operating and financial
policies of ICII, and therefore, the results of ICII operations are accounted
for in the Company's combined financial statements as an equity investment.
The results of operations of ICII are reflected as "Equity in net income of
ICII" in the combined statements of income.
(B) CASH AND CASH EQUIVALENTS
For purposes of the combined statements of cash flows, the Company considers
all investments having a maturity of three months or less at the date of
purchase to be cash equivalents.
(C) SECURITIES AVAILABLE FOR SALE
The Company holds certain securities, primarily U.S. Treasury and federal
agency securities, to manage its overall liquidity. These securities are
carried at fair value. Unrealized gains and losses are excluded from income
and reported as a separate component of stockholder's equity, net of taxes.
Fair value impairment that is determined to be other than temporary is
recorded as an unrealized loss in the combined statements of income. Purchases
and sales of securities available for sale are recorded on the trade date.
Amortization of premiums and accretion of discounts are recognized in other
interest income in the combined statements of income using the interest
method. Realized gains and losses on securities available for sale are
computed using the specific identification method.
The Company also classifies, as securities available for sale, the interest
only strips recognized on the sale of SBA loans. The interest only strips are
determined by computing the present value of the future cash flows expected to
be received in excess of contractually specified servicing fees. Interest only
strips are amortized over the expected life of the associated loan using a
method that approximates the interest method. Prepayment assumptions are based
on market prepayment rates.
(D) TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
On January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," ("FAS 125") which establishes accounting
for transfers and servicing of financial assets and extinguishment of
liabilities. FAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
and is to be applied prospectively. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a financial-
components approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
F-9
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Small Business Administration lending group for CAB provides loans to
small businesses, sells the guaranteed portion of the loans, and retains the
servicing rights and interest-only strips relating to those loans. Under FAS
125, the portion of the contractually specified servicing fee that exceeds the
fee that a substitute servicer would demand to assume the servicing (which
industry practice has deemed to be 40 basis points based on a National
Association for Government Guaranteed Loans survey), on SBA loans sold after
January 1, 1997, should be recorded as a servicing asset and amortized in
proportion to and over the period of the servicing income. Any cash flow
expected to be received in excess of the contractually specified servicing
fees should be recorded as an interest-only strip receivable at its allocated
carrying amount and subsequently measured at fair value as an available for
sale security under SFAS No. 115. At January 1, 1997, as a result of the
adoption of SFAS 125, approximately $1.7 million representing the value of the
interest-only strip was reclassified from excess servicing fees receivable to
securities available for sale. Additionally, approximately $1.5 million was
reclassified as loan servicing rights on January 1, 1997.
Prior to the adoption of SFAS No. 125 on January 1, 1997, the Company
created excess servicing fees receivable as a result of the sale of SBA loans.
Excess servicing fees receivable on the sale of SBA loans are determined by
computing the present value of the future cash flows of loans sold over a base
fee (0.40%) for the servicing of the loan. The excess servicing fees
receivable is amortized over the expected life of the loan using an approach
that approximates the interest method. Prepayment assumptions are based on
market prepayment rates.
(E) LOANS HELD FOR SALE
The Company currently designates its SBA loans originated as held for sale.
These loans are carried at the lower of aggregate cost or fair value.
Origination fees on loans held for sale, net of certain costs of processing
and closing the loans, are deferred until the time of sale and are included in
the computation of the gain or loss from the sale of the related loans. The
gains or losses on the sale of SBA loans are recorded as "Gain on sale of SBA
loans" in the combined statements of income.
(F) LOANS HELD FOR INVESTMENT, NET
Loans held for investment are stated at the amount of principal outstanding.
Non-refundable loan fees and related direct costs associated with the
origination or purchase of loans are deferred and netted against outstanding
loan balances. The net deferred fees and costs are recognized into interest
income over the loan term using the interest method.
Interest income on loans is accrued as earned. Interest accruals on
commercial and real estate loans are generally discontinued whenever the
payment of interest or principal is 90 days past due. When a loan is placed on
nonaccrual status, the accrued and unpaid interest is charged against current
income and recognition of net deferred fees and costs into income is
discontinued. Future collections of interest are included in interest income
or applied to the loan balance based on an assessment of the likelihood that
the principal will be collected.
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (1) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (2)
the observable market price of the impaired loan or (3) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized
by recording a valuation allowance with a corresponding charge to the
provision for loan losses.
Loans deemed by management to be uncollectible are charged to the allowance
for loan losses. Recoveries on loans previously charged off are credited to
the allowance. Provisions for loan losses are charged to expense
F-10
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
and added to the allowance in amounts deemed appropriate by management. In
evaluating the adequacy of the allowance, management considers numerous
factors including economic conditions, loan portfolio composition and risk,
loan loss experience, ongoing review of specific loans and the review by the
Company's regulators. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in the aforementioned factors.
(G) PREMISES AND EQUIPMENT, NET
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation on equipment is calculated using the straight-line method over
the estimated useful lives of the assets (five to seven years). Leasehold
improvements are amortized using the straight-line method over the terms of
the respective leases or the estimated useful lives of the leasehold
improvements, whichever is shorter.
(H) INCOME TAXES
The Company is currently included in the consolidated tax returns of
Imperial Bancorp. The Company accounts for income taxes as though they file
taxes on a separate company basis using an asset and liability method.
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
bases and operating loss and tax credit carryforwards. 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.
(I) TRUST FEE INCOME
Trust fees include fees received for investment and management services,
custodial services, and trust services and are recognized on an accrual basis
as earned.
(J) SALE OF INVESTMENT IN EQUITY INVESTEE
The sale of shares of the Company's equity investment in ICII to the public
is recorded as "Gain on sale of ICII stock" in the combined statements of
income. This gain represents actual proceeds from the sale of stock reduced by
the Company's recorded investment in those shares and expenses related to the
stock sale.
(K) GAIN RESULTING FROM SALE OF STOCK BY EQUITY INVESTEE
The impact on the Company's investment in ICII for the sales of previously
unissued stock by ICII to the public is recorded as "Gain from sale of stock
by ICII" in the combined statements of income. This gain results from ICII's
sales of previously unissued stock in a public offering at a per share
offering price that exceeds the Company's per share carrying amount for its
equity investment in the common stock of ICII.
(L) STOCK BASED COMPENSATION
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
As such, compensation expense would be recorded on the date of grant only if
the current market price of the underlying stock exceeded the exercise price.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the
F-11
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
date of grant. Alternatively, SFAS 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in
SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
(M) EARNINGS PER SHARE
The Company adopted SFAS 128, "Earnings Per Share," ("SFAS 128") for the
fiscal year ended December 31, 1997. SFAS 128 simplifies the standards for
computing and presenting earnings per share as previously prescribed by APB
Opinion No. 15, "Earnings per Share." SFAS 128 replaces primary EPS with basic
EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted from issuance of common stock that then share in earnings. SFAS
128 also requires dual presentation of basic and diluted EPS on the face of
the income statement and a reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and denominator of the diluted EPS
computation. All prior earnings per share amounts have been restated to
reflect the adoption of SFAS 128.
(N) COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS 130
establishes standards for reporting comprehensive income and its components in
the consolidated financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Comprehensive income for the six months
ended June 30, 1998 (unaudited) and 1997 (unaudited) totaled $4.5 million and
$4.2 million, respectively. The Company's other comprehensive income is
comprised of the unrealized (loss) gain on securities available for sale, net
for all periods reported. Accumulated other comprehensive income at June 30,
1998 (unaudited) and December 31, 1997 totaled $(0.2) million and $0.2 million
respectively.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 131--DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION--The FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. It amends FASB Statement No. 94, "Consolidation of All
Majority-Owned Subsidiaries," to remove the special disclosure requirements
for previously unconsolidated subsidiaries.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
F-12
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
SFAS 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose
financial statements. It requires that all public business enterprises report
information about the revenues derived from the enterprise's products or
services (or groups of similar products and services), about the countries in
which the enterprise earns revenues and holds assets, and about major
customers regardless of whether that information is used in making operating
decisions. However, SFAS 131 does not require an enterprise to report
information that is not prepared for internal use if reporting it would be
impracticable.
SFAS 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
The Company operates in three principal business segments: the origination
and sale of small business loans (CAB), the origination of entertainment loans
(LHO) and the provision of trust services (ITC). The Company adopted SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information" as of
January 1, 1998. SFAS 131 is effective for the Company for its December 31,
1998 consolidated financial statements with comparative information for
earlier years to be restated. Management has determined that the
implementation of SFAS 131 will not have a material impact on the Company's
financial condition or results of operations.
SFAS 132--EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS--The FASB issued SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits," which revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, "Employers Accounting for Pensions",
No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits", and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", were issued. SFAS
132 suggests combined formats for presentation of pension and other
postretirement benefit disclosures.
The Company adopted SFAS 132, "Employer's Disclosures about Pensions and
Other Postretirement Benefits" as of January 1, 1998. SFAS 132 is effective
for the Company for its December 31, 1998 consolidated financial statements
with comparative information for earlier years to be restated.
SFAS 133--Accounting for Derivative Instruments and Hedging Activities--SFAS
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 recognize all derivatives as either assets or
liabilities in the balance sheet and measure 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 foreign-
currency denominated forecasted transaction. The accounting for changes in
fair value of a derivative (that is, gains and losses) depends on the intended
use of the derivative and the resulting designation.
SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS 133 must be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must
F-13
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
be designated anew and documented pursuant to the provisions of SFAS 133. SFAS
133 is not to be applied retroactively to financial statements of prior
periods. Management does not believe that there will be a material adverse
impact on the financial position or results of operations of the Company upon
adoption of SFAS 133.
NOTE 5. SECURITIES AVAILABLE FOR SALE
The following is a summary of securities available for sale.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1996 U.S. Treasury securi-
ties................................... $1,180 $ 2 $ (3) $1,179
====== ==== ===== ======
December 31, 1997
U.S. Treasury and federal agency
securities........................... $3,332 $ 6 $ -- $3,338
SBA Interest only strips.............. 2,296 393 -- 2,689
------ ---- ----- ------
Total................................. $5,628 $399 $ -- $6,027
====== ==== ===== ======
June 30, 1998 (unaudited)
U.S. Treasury and federal agency
securities........................... $1,332 $ 4 $ -- $1,336
SBA Interest only strips.............. 2,497 -- (326) 2,171
------ ---- ----- ------
Total................................. $3,829 $ 4 $(326) $3,507
====== ==== ===== ======
</TABLE>
The Company is required to pledge money or securities for the California
State Treasurer for the faithful performance and execution of court and
private trusts accepted by the Company. The fair value amounts of the pledged
securities included in "Securities available for sale" are $336,000, $369,000
and $380,000 at December 31, 1996, December 31, 1997 and June 30, 1998
(unaudited), respectively. There were no gross realized gains or gross
realized losses for the years ended December 31, 1996, and 1997 or for the six
months ended June 30, 1997 (unaudited) and 1998 (unaudited).
The amortized cost and fair value of securities available for sale, by
contractual maturity, are shown below for the periods presented.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30, 1998
1997 (UNAUDITED)
---------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------ --------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in one year or less.................... $2,249 $2,249 $1,081 $1,085
Due in one year through five years......... 1,083 1,089 251 251
Due after five years....................... 2,296 2,689 2,497 2,171
------ ------ ------ ------
Total...................................... $5,628 $6,027 $3,829 $3,507
====== ====== ====== ======
</TABLE>
NOTE 6. LOANS HELD FOR INVESTMENT, NET
The carrying amount of loans, net of unearned income, deferred loan fees and
costs and the allowance for loan losses, consisted of the following:
<TABLE>
<CAPTION>
AT AT AT JUNE 30,
DECEMBER 31, DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Entertainment loans................... $44,906 $ 98,313 $107,135
Small business loans.................. 20,277 34,032 31,251
Residential loans secured by real es-
tate................................. 9,974 6,548 5,679
------- -------- --------
Total loans........................... 75,157 138,893 144,065
Less allowance for loan losses........ (2,629) (4,486) (4,855)
------- -------- --------
Total loans held for investment,
net................................ $72,528 $134,407 $139,210
======= ======== ========
</TABLE>
F-14
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Net deferred loan fees and costs, included in total loans, approximated $0.7
million, $1.3 million and $1.5 million at December 31, 1996 and 1997 and June
30, 1998 (unaudited), respectively.
At December 31, 1996, the recorded investment in loans which were deemed to
be impaired totaled $4.9 million, all of which were on nonaccrual status. $3.7
million of the impaired loans were secured by real estate. Of the $4.9 million
of impaired loans, $1.0 million required a specific allowance of $175,000. At
December 31, 1997 the recorded investment in loans which were deemed to be
impaired totaled $4.4 million. All such loans were on nonaccrual status as of
that date. All of the impaired loans were secured by real estate. The
$4.4 million of impaired loans did not require a specific allowance for
impairment. At June 30, 1998 (unaudited), the recorded investment in loans
which were deemed to be impaired totaled $4.7 million. All such loans were on
nonaccrual status as of that date. All of the impaired loans were secured by
real estate. The $4.7 million of impaired loans did not require a specific
allowance for impairment. Impaired loans averaged $3.6 million, $3.0 million
and $4.9 million, respectively for the years ended December 31, 1996 and 1997
and for the six months ended June 30, 1998 (unaudited). During the years ended
December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1997
(unaudited) and 1998 (unaudited), approximately $56,000, $203,000, $167,000,
$37,000 and $95,000 of interest income, respectively, was recognized on the
impaired loans.
At December 31, 1996 and 1997 and June 30, 1998 (unaudited), there were no
restructured loans.
Nonaccrual loans totaled $4.9 million, $4.4 million and $4.7 million at
December 31, 1996, 1997 and June 30, 1998 (unaudited), respectively. During
the years ended December 31, 1995, 1996 and 1997, and for the six months ended
June 30, 1997 (unaudited) and 1998 (unaudited) approximately $56,000,
$203,000, $167,000, $37,000 and $95,000 of interest income, respectively, was
recognized on nonaccrual loans. Interest income foregone on nonaccrual loans
approximated $232,000, $375,000, $296,000, $68,000 and $152,000 for the years
ended December 31, 1995, 1996 and 1997 and for the six months ended June 30,
1997 (unaudited) and 1998 (unaudited), respectively.
At December 31, 1996 and 1997, and June 30, 1998 (unaudited), approximately
60%, 71% and 74%, respectively, of the Company's loan portfolio were issued to
borrowers in the movie production industry.
At December 31, 1996 and 1997, and June 30, 1998 (unaudited), a majority of
the Company's loan portfolio consisted of customers geographically located in
California.
Total SBA loans serviced were $57.4 million, $81.1 million and
$135.2 million at December 31, 1996 and 1997, and June 30, 1998 (unaudited),
respectively.
Loans held for sale at December 31, 1996 and 1997, and June 30, 1998
(unaudited) consist of SBA loans originated for sale.
NOTE 7. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------- --------------
1995 1996 1997 1997 1998
------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year....... $ 626 $ 1,536 $ 2,629 $2,629 $4,486
Loans charged off................ (613) (833) (850) (579) (402)
Recoveries on loans previously
charged off..................... 31 145 149 85 35
------- ------- ------- ------ ------
Net loans charged off............ (582) (688) (701) (494) (367)
Provision for loan losses........ 1,492 1,781 2,558 1,512 736
------- ------- ------- ------ ------
Balance, end of year............. $ 1,536 $ 2,629 $ 4,486 $3,647 $4,855
======= ======= ======= ====== ======
</TABLE>
F-15
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. INVESTMENT IN STOCK OF IMPERIAL CREDIT INDUSTRIES, INC.
The sale of shares of the Company's equity investment in ICII to the public
is recorded as "Gain on sale of ICII stock" in the combined statements of
income. The $25.6 million gain recorded for the year ended December 31, 1996
and the $5.0 million gain recorded for the year ended December 31, 1997
represent the proceeds from the sale of stock by the Company reduced by the
Company's recorded investment in those shares and expenses related to the
stock sale. The $10.8 million gain for the year ended December 31, 1996
resulted from ICII's sale of previously unissued stock in a public offering at
a per share offering price that exceeded the Company's per share carrying
amount for its equity investment in the common stock of ICII.
At December 31, 1997 and June 30, 1998 (unaudited), the Company owned
approximately 8.9 million shares of ICII at an equivalent book value of $8.39
and $9.14 per share, respectively, representing approximately 23.0% of all
outstanding ICII shares as of such dates. The following table illustrates the
changes in the Company's investment in ICII for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------- JUNE 30, 1998
1996 1997 (UNAUDITED)
------------ ----------- ----------------
<S> <C> <C> <C>
Shares owned, beginning of year. 5,801,052 9,396,106 8,941,106
Stock splits and stock divi-
dends.......................... 5,281,658 -- --
Sale of shares.................. (1,500,000) (320,000) --
Charitable donation of shares... (186,604) (135,000) --
------------ ----------- ---------
Shares owned, end of year....... 9,396,106 8,941,106 8,941,106
============ =========== =========
</TABLE>
The following tables contain summarized financial information for ICII:
<TABLE>
<CAPTION>
AT AT AT JUNE 30,
DECEMBER 31, DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets........................... $2,470,639 $2,102,094 $2,415,562
Total liabilities...................... 2,231,131 1,778,161 2,072,157
Shareholders' equity................... 239,508 323,933 343,405
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, (UNAUDITED)
-------------------------- -----------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income................ $129,482 $207,471 $227,937 $104,587 $113,503
Interest expense............... 95,728 135,036 126,594 60,056 57,446
Net interest income after pro-
vision for loan losses........ 28,304 62,662 62,392 35,925 48,757
Total revenue.................. 85,309 256,933 309,560 97,800 103,138
Total expenses................. 61,180 99,049 150,384 50,198 56,558
Income before extraordinary
item.......................... 14,193 75,984 89,916 25,105 29,162
Net income..................... 14,193 75,984 85,921 21,110 29,162
</TABLE>
In accordance with two consulting agreements, one with a senior executive of
the Bank, and the second with Second Southern Corp., an entity wholly-owned by
the chief executive officer of the Company ("Second Southern"), the Company is
obligated to pay commissions upon the sale of ICII shares. Each consultant is
entitled thereunder to receive an incentive fee of 2.5% of the realized pre-
tax gains received by the Company, when and if realized, from the disposition
of the remaining ICII shares held by the Company. If such sale by the Company
has not occurred by December 31 of each year from 1996 through 2000, the
agreements require that
F-16
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the Company will have considered to have sold an amount equal to 20% of any
such security as of January 1 of each year from 1997 through 2001, at a price
equal to the arithmetic average of the daily average stock price of ICII
common stock as reported by NASD during the preceding year. These agreements
have been accrued for over the vesting periods and remeasured quarterly for
changes in the average market price of ICII stock.
In satisfaction of the Company's obligation related to the consulting
agreement with the senior executive of the Bank, the Company agreed to pay to
the executive a portion of the proceeds received from selling 231,528 shares
of ICII stock in the third and fourth quarters of 1997. As a result of these
sales and the sale of an additional 88,472 shares of ICII stock during 1997
(for total sales of 320,000 shares during 1997) the Company recorded gains of
$5.0 million in "Gain on sale of ICII stock" in the Combined Statement of
Income. Offsetting the gain on sale was a $5.0 million consulting charge
recorded in "Consulting expense" which represented full satisfaction of the
senior executive's consulting agreement.
The Second Southern agreement remains an obligation of the Company as of
December 31, 1997 and June 30, 1998 (unaudited). Based on the daily average
market price for the year ended December 31, 1997 and the six months ended
June 30, 1998 (unaudited) of $21.34 and $22.22 per share, respectively, less
Second Southern's basis of $0.88 per share as of December 31, 1997 and June
30, 1998 (unaudited), as adjusted for stock splits and dividends, the total
liability to be accrued for over the vesting period approximated $4.7 million
and $4.9 million at December 31, 1997 and June 30, 1998 (unaudited),
respectively, of which $2.9 million and $3.2 million had been accrued for at
December 31, 1997 and June 30, 1998 (unaudited), respectively. The expense
relating to this remaining consulting agreement is being accrued over the
vesting period and will be remeasured quarterly for changes in the average
market price. During the years ended December 31, 1995, 1996 and 1997, and the
six months ended June 30, 1998 (unaudited), the Company recorded an expense of
$0.3 million, $0.9 million, $1.0 million and $0.3 million, respectively, to
its combined statements of income.
The Bank, the Company and Second Southern have agreed that, in connection
with and prior to the Distribution, the consulting agreement will be amended
to provide that it will be assumed by the Company and the Bank will be
released from its obligations thereunder. In addition, the parties have agreed
that, immediately following the Distribution, the consulting agreement (and
the related rights and obligations thereunder) will be terminated and in
consideration therefor, the Company will issue to Second Southern a
combination of cash and warrants to acquire Company Class A Common Stock in an
aggregate amount equal to the total liability owed to Second Southern under
the consulting agreement at the time of such amendment. In accordance with the
terms of the consulting agreement, this liability will be approximately $5.4
million (unaudited). The warrants will not be exercisable for two years and
the confirmation of the value of the warrants at the time of issuance will be
determined by an independent appraiser selected by the Company. The settlement
of the total liability owed to Second Southern will result in a one-time after
tax charge immediately following the Distribution to the Company's earnings of
approximately $1.3 million (unaudited). The effectiveness of the amendment of
the consulting agreement is conditioned upon the consummation of the
Distribution.
At December 31, 1996, 1997, and June 30, 1998 (unaudited), respectively, the
Company owned approximately 9.4 million, 8.9 million, and 8.9 million shares
of ICII at an equivalent book value per share of $6.16, $8.39 and $9.14,
representing approximately 25%, 23% and 23% of all outstanding ICII shares. On
June 30, 1998 (unaudited), the fair value of ICII common stock was $23.50,
representing a pre-tax unrealized gain on the Company's investment of over
$128 million. As of August 15, 1998 (unaudited), the Company beneficially
owned more than 25.0% of the outstanding common stock of ICII. Of the ICII
stock held by the Company, approximately 3.0% (or 1.2 million shares of ICII
common stock (the "Shares")) is beneficially owned by the Company pursuant to
the ICII Shareholders Agreement. The ICII Shareholders Agreement, among other
things, grants the Company the right to direct the voting of, and provide the
Company with an irrevocable proxy to vote, the Shares until the earliest of
(a) the written instructions of the Company and the administrative agent for
the Credit Facilities, (b) February 7, 2001, (c) the date of settlement of the
purchase of the Shares by the Company following the exercise of its option to
purchase the Shares and (d) upon the written instructions of
F-17
<PAGE>
Bear, Stearns & Co. Inc. after (I) approval by the ICII shareholders of a
merger or similar business combination resulting in a cancellation,
reclassification or similar change with respect to all shares of ICII common
stock or (II) the date beginning five trading days prior to the scheduled
expiration date of a tender offer or similar offer by any person to purchase
more than 10% of the outstanding common stock of ICII. The ICII Shareholders
Agreement also grants the Company, for the duration of the agreement, an
option to purchase all, but not a portion, of the Shares at a price equal to
the greater of (i) 110% of the average of the closing offer prices of ICII
common stock as reported on NASDAQ for the 20 consecutive trading days ending
on the second business day prior to the date the Company delivers notice of
its intent to exercise the option and (ii) the average of the closing offer
prices of ICII common stock as reported on NASDAQ for the 20 consecutive
trading days beginning the first trading day following the date on which the
Company delivers notice of its intent to exercise the option. In consideration
for entering into the ICII Shareholders Agreement, the Bank paid Bear, Stearns
& Co. Inc. approximately $1.8 million. If the agreement is terminated by the
Company prior to August 1, 2000, a portion of this fee will be refunded to the
Company. Entering into the ICII Shareholders Agreement (and its subsequent
ownership of in excess of 25% of the voting stock of ICII) was a condition to
the closing under the Credit Facilities.
In addition, pursuant to a letter agreement, dated June 11, 1998 (the
"Letter Agreement"), ICII has granted the Company preemptive rights to
purchase ICII common stock upon the public offering of ICII stock at the same
price and on the same terms in order to allow the Company to maintain its
percentage ownership in ICII prior to a public offering. Such rights do not
take effect if ICII repurchases its own stock, thereby increasing the
Company's percentage ownership of ICII, until ICII's proposed actions would
reduce the Company's percentage ownership to a level below that which the
Company would have held in the absence of such repurchasing. In addition, this
preemptive right does not exist with respect to shares of ICII common stock
issued upon the exercise of employee stock options.
NOTE 9. ACQUISITION
On September 30, 1994, the Company purchased from the Federal Deposit
Insurance Corporation, in its capacity as Receiver of CommerceBank, a
certificate of deposit custodial services business. The price paid, net of
assets acquired, amounted to $121,000. In return, the Company acquired custody
of $193 million in certificates of deposit and retained three employees who
were maintaining the certificates of deposit for the Receiver. The Company has
received $1,476,000, $788,000, $577,000, $377,000 and $50,000 in fees from
this business for the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1997 (unaudited) and 1998 (unaudited), respectively.
These amounts are included in "Trust fees" in the combined statements of
income. The amortization expense for the goodwill related to the purchase
amounted to $61,000 and $38,000 for the years ended December 31, 1995 and
1996, respectively, and is included in "Other expense" in the combined
statements of income. There was no amortization expense for goodwill for the
year ended December 31, 1997 and the six months ended June 30, 1997
(unaudited) and 1998 (unaudited). The fees related to this business are
expected to diminish over time and correspond to the certificates of deposit
in the related custodial accounts. The amount of certificates of deposit
remaining at each year end after considering maturities, is summarized as
follows:
<TABLE>
<CAPTION>
AMOUNTS
--------------
(IN THOUSANDS)
<S> <C>
1997...................................................... 21,704
1998...................................................... 18,007
1999...................................................... 9,961
2000...................................................... 8,056
2001 and thereafter....................................... 4,965
</TABLE>
F-18
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. INCOME TAXES
The income tax provision in the combined statements of income is comprised
of the following current and deferred amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current
Federal............................................. $ 1,809 $ 13,009 $ 1,943
State............................................... 547 4,356 723
------- -------- -------
Total............................................. 2,356 17,365 2,666
------- -------- -------
Deferred
Federal............................................. 1,391 5,814 4,849
State............................................... 594 2,496 1,390
------- -------- -------
Total............................................. 1,985 8,310 6,239
------- -------- -------
Total
Federal............................................. 3,200 18,823 6,792
State............................................... 1,141 6,852 2,113
------- -------- -------
Total............................................. $ 4,341 $ 25,675 $8,905
------- -------- -------
Taxes charged to stockholder's equity................. 28 1 168
------- -------- -------
Total............................................. $ 4,313 $ 25,674 $ 8,737
======= ======== =======
</TABLE>
The Company had current income taxes payable of $22.4 million and $5.7
million, at December 31, 1996 and 1997, respectively.
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax
liability.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Components of the deferred tax asset:
Deferred compensation....................................... $ (168) $ (768)
Bad debt deduction.......................................... (885) (1,728)
Unrealized loss on securities available for sale............ (1) --
Amortization of intangible assets........................... (65) (86)
State franchise taxes....................................... (3,424) (2,570)
Charitable contribution limitation.......................... (149) (1,223)
Valuation allowance......................................... -- --
------- -------
Total deferred tax asset, net of valuation allowance...... (4,692) (6,375)
------- -------
Components of the deferred tax liability:
Investment in Imperial Credit Industries, Inc............... 22,398 30,306
Unrealized gain on securities available for sale............ -- 167
Other....................................................... 8 23
------- -------
Total deferred tax liability.............................. 22,406 30,496
------- -------
Net deferred tax liability................................ $17,714 $24,121
======= =======
</TABLE>
The Company's total deferred tax asset, is supported by carryback and
carryforward provisions of tax laws as well as certain tax strategies which
create future taxable income.
F-19
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The total income tax provision differs from the amount computed by applying
the statutory federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- --------------- --------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ------ ------- ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rate...... $3,581 35.0% $22,511 35.0% $8,364 35.0%
Appreciation of donated ICII
stock............................ -- -- (1,294) (2.0) (986) (4.1)
State taxes, net of federal tax
benefit.......................... 725 7.1 4,454 7.0 1,292 5.4
Other, net........................ 7 0.0 3 0.0 67 0.3
------ ---- ------- ---- ------ ----
Total............................. $4,313 42.1% $25,674 40.0% $8,737 36.6%
====== ==== ======= ==== ====== ====
</TABLE>
NOTE 11. STOCKHOLDER'S EQUITY
On March 20, 1997, the Company authorized 1,000 shares of common stock of
which 100 shares were issued to the Bank.
Under the Certificate of Incorporation that will be in effect on the
Distribution Date, the Company will have authority to issue a total of 70
million shares of all classes of stock, of which 10 million may be shares of
preferred stock ("Preferred Stock"), 50 million may be shares of Company Class
A Common Stock, and 10 million may be shares of Company Class B Common Stock.
Company Class A Common Stock and Company Class B Common Stock are collectively
referred to herein as "Company Common Stock."
Based on the number of shares of Bancorp Common Stock outstanding as of June
30, 1998 (unaudited) and the Distribution Ratio, it is expected that
approximately 19,878,335 shares of Company Class A Common Stock will be
distributed to Bancorp Shareholders in the Distribution. The shares to be
distributed will constitute 100% of the outstanding shares of Company Class A
Common Stock. The Company's Amended and Restated Certificate of Incorporation
also authorizes preferred stock and Class B Common Stock, par value $.01 per
share (the "Company Class B Common Stock"). The Company Class B Common Stock
may only be issued pursuant to the terms of, or upon the exercise of,
outstanding options granted under any of the Company's employee benefit plans,
as stock dividends to holders of Company Class B Common Stock or in connection
with shares issued to a third party in a transaction approved by the Board of
Directors of the Company. Holders of Company Class B Common Stock are entitled
to one-tenth of one vote for each share on all matters voted on by
stockholders and will vote together as a single class with the holders of
Company Class A Common Stock. Each share of the Company Class B Common Stock
will convert into one share of Company Class A Common Stock on the earlier of
the fifth anniversary of the Distribution Date and a Change of Control (as
defined in the Certificate of Incorporation). No capital stock of the Company
other than the Company Class A Common Stock will be outstanding on the
Distribution Date.
F-20
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. PRO FORMA EARNINGS PER SHARE
The following table summarizes the calculation of the Company's pro forma
basic and diluted earnings per share for the periods presented:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997
------------------------ ------------------------- -------------------------
PER- PER- PER-
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ---------- ------ ------- ---------- ------ ------- ---------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Net income...................... $5,919 18,224,024 $0.32 $38,644 18,782,675 $2.06 $15,160 19,398,542 $0.78
Effect of Dilutive Securities
Incremental shares from
outstanding common stock
options........................ 95,818 132,108 393,170
---------- ---------- ----------
Diluted EPS
Income available to shareholders:
Net income...................... $5,919 18,319,842 $0.32 $38,644 18,914,783 $2.04 $15,160 19,791,712 $0.77
====== ========== ===== ======= ========== ===== ======= ========== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
-------------------------------------------------
1997 1998
------------------------ ------------------------
PER- PER-
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ---------- ------ ------ ---------- ------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available to shareholders:
Net income...................... $4,170 19,286,025 $0.22 $4,896 19,767,698 $0.25
Effect of Dilutive Securities
Incremental shares from
outstanding common stock
options........................ 387,266 1,139,000
---------- ----------
Diluted EPS
Income available to shareholders:
Net income...................... $4,170 19,673,291 $0.21 $4,896 20,906,698 $0.23
====== ========== ===== ====== ========== =====
</TABLE>
The number of shares used to compute basic and diluted earnings per share
was retroactively adjusted to reflect stock splits and dividends as
appropriate. On February 6, 1998, Imperial Bancorp split its common stock at
the ratio of one new share for every two shares outstanding. In the first
quarter of 1997, Imperial Bancorp declared and paid a 10% stock dividend. In
the first quarter of 1996, Imperial Bancorp declared and paid an 8% stock
dividend. In the fourth quarter of 1996, Imperial Bancorp split its common
stock at the ratio of one new share for every two shares outstanding. In 1995,
Imperial Bancorp declared and paid a 5% stock dividend.
NOTE 13. EMPLOYEE BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
The Company participates in the following Imperial Bancorp employee benefit
plans:
(A) IMPERIAL BANCORP PROFIT-SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company participates in Imperial Bancorp's Profit Sharing and Employee
Stock Ownership Plan. Effective December 31, 1996 the Employee Stock Ownership
Plan (ESOP) was merged with the Profit Sharing Plan and all assets of the ESOP
were transferred to the Profit Sharing Plan. The amounts allocated to eligible
employees included in "Personnel expense" in the accompanying combined
statements of income are $194,000, $252,000, $396,000, $176,000 and $186,000
for the years ended 1995, 1996 and 1997, and for the six months ended June 30,
1997 (unaudited) and 1998 (unaudited), respectively.
F-21
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(B) IMPERIAL BANCORP 401-K PLAN
Imperial Bancorp has a 401-K Plan in which all employees of the Company may
elect to enroll each January 1 or July 1 of every year provided that they have
been employed for at least six months prior to the semi-annual enrollment
date. Employees may contribute up to 14% of their salaries with Imperial
Bancorp matching 50% of any contribution, not to exceed 4% of the employee's
salary. The Company's 401-K matching expenses included in "Personnel expense"
in the accompanying combined statements of income are $50,000, $135,000,
$151,000, $70,000 and $90,000 for the years ended December 31, 1995, 1996 and
1997, and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited), respectively.
(C) DEFERRED COMPENSATION PLAN
Imperial Bancorp has two Deferred Compensation Plans in order to provide
specified benefits to certain key employees and directors. Participants are
allowed to defer portions of their compensation each plan year, subject to a
minimum and a maximum dollar amount of deferral. In any plan year, Imperial
Bancorp will make a matching contribution of not less than 10% or more than
50% of the participants' deferral for that year. The exact ratio will be
determined by a formula based on Imperial Bancorp's return on stockholder's
equity. The amounts allocated to eligible employees included in "Personnel
expense" in the accompanying combined statements of income are $72,000,
$248,000, $1,368,000, $684,000 and $588,000 for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June 30, 1997 (unaudited)
and 1998 (unaudited), respectively. The deferred amounts are also included in
"Borrowings from Imperial Bank" in the accompanying combined balance sheets.
(D) EMPLOYMENT AGREEMENTS
Agreement with Lewis Horwitz. The Bank and Lewis Horwitz entered into an
Employment Agreement, dated as of July 23, 1997 (the "Horwitz Agreement"),
which will be assigned from the Bank to the Company as part of the
Contribution, pursuant to which Mr. Horwitz serves as president and chief
executive officer of LHO. The initial term of the Horwitz Agreement expires on
December 31, 2001, subject to early termination at Mr. Horwitz's option after
December 31, 1999.
Pursuant to the Horwitz Agreement, Mr. Horwitz receives a base salary of
$250,000 and a guaranteed annual bonus of $500,000 and is entitled to an
annual incentive bonus based on the pre-tax earnings of LHO. Mr. Horwitz also
receives a monthly car allowance and is entitled to additional payments
aggregating $60,000 payable between 1997 and 2001. Mr. Horwitz was also
granted options to purchase up to three percent of the outstanding Company
Common Stock as of April 23, 1997 at an exercise price which is equal to 80%
of the fair value per share as determined in a report by NationsBanc
Montgomery dated as of April 23, 1997. Based on these terms, the Company will
accrue compensation expense of $194,000 per year over the vesting period.
These options vest after five years, subject to earlier vesting in certain
circumstances.
The Horwitz Agreement provides that Mr. Horwitz may be terminated for
permanent disability or cause. Upon such termination, he would be entitled to
receive all accrued compensation and bonuses described above, except that no
incentive bonus will be paid upon termination for cause. Mr. Horwitz is also
entitled to a severance payment on termination (in lieu of receiving a signing
bonus at the time of execution of the Horwitz Agreement) of up to $1,250,000,
which amount will be reduced annually by 50% of the cumulative guaranteed
bonus paid prior to such termination.
The Horwitz Agreement also provides that, following the initial term, Mr.
Horwitz will provide consulting services for the Company for an additional
three years for annual compensation of $200,000 (or an additional two years if
he retires prior to December 31, 2001). The Horwitz Agreement also contains a
non-compete provision that provides that during the term of employment and for
two years following termination, Mr. Horwitz
F-22
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
will not solicit employees or customers of the Company or any of its
affiliates and he may not work in a business directly or indirectly in
competition with LHO.
NOTE 14. STOCK OPTION PLANS
(A) SHARE INCENTIVE PLAN
The Company has adopted the Imperial Financial Group, Inc. 1997 Share
Incentive Plan (the "Plan") in order to provide incentives to attract, retain
and motivate highly competent persons as executive management, employees and
directors of the Company and of any affiliate thereof (other than Imperial
Bancorp or the Bank). The Plan, which is, and will be after the Distribution,
administered by the Compensation Committee, provides such persons with
opportunities to acquire shares of Company Class A Common Stock or Company
Class B Common Stock, or to receive monetary payments based on the value of
such shares pursuant to certain Benefits (as defined below). Benefits under
the Plan may be granted in any one or a combination of stock options, stock
appreciation rights, stock awards, performance awards and stock units
(collectively, the "Benefits"). The Company has authorized 1.0 million shares
of Company Class A Common Stock and 3.7 million shares of Company Class B
Common Stock that may be granted under the Plan, subject to certain
adjustments under certain circumstances.
Incentive Stock Options
During the year ended December 31, 1997, certain employees and directors of
the Company were granted ten-year incentive stock options to purchase shares
of the Company's Class B common stock. The number of shares subject to option,
the grant dates, and the vesting schedule are as follows as of December 31,
1997 and June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
NUMBER
OF
OPTIONS
DATE OF GRANT GRANTED VESTING
------------- ------- ----------------------
<S> <C> <C>
April 23, 1997.............................. 125,000 Five Years
September 22, 1997.......................... 450,000 (see discussion below)
</TABLE>
There were no stock options granted to employees and directors during the
six months ended June 30, 1998 (unaudited).
Non-Qualified Stock Options
During the year ended December 31, 1997, certain employees and directors of
the Company were granted ten-year non-qualified stock options to purchase
shares of the Company's Class B common stock. The number of shares subject to
option, the grant dates, the weighted average exercise prices and the vesting
schedule are as follows as of December 31, 1997 and June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
DATE OF GRANT GRANTED VESTING
------------- --------- ----------------------
<S> <C> <C>
April 23, 1997............................ 1,369,900 Five Years
September 22, 1997........................ 800,000 (see discussion below)
</TABLE>
The stock options granted on September 22, 1997, are scheduled to vest as
noted below:
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE BY WHICH STOCK PRICE
SHARES VESTED EXCEEDS EXERCISE PRICE
------------- -------------------------------
<S> <C>
25% 150%
25% 175%
50% 200%
</TABLE>
F-23
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Under the terms of the Plan, and for purposes of determining the performance
vesting percentages noted above, the stock price shall mean the publicly
traded price of the stock on a national securities exchange. Moreover, the
shares will not vest until such stock price exceeds the exercise price (by at
least the percentages noted above) for a period of 20 consecutive days.
To the extent vesting has not occurred pursuant to the above schedule, 100%
of the shares granted on September 22, 1997 will vest after five years or
sooner upon a change of control of the Company (as defined in the Plan); upon
the death or disability of the optionee; or upon other such conditions as
provided in the Plan.
The options granted in April 1997 have exercise prices ranging from $5.18 to
$6.48 and expire in April 2007. The options granted in September 1997 have an
exercise price of $9.63 and expire in September 2007.
The exercise price for all incentive stock options granted was equal to the
estimated fair value of such shares on the date of grant. 744,900 of the 1.4
million non-qualified stock options granted had an exercise price equal to 80%
of the estimated fair value of the shares on the date of grant. The estimated
fair value of all shares granted was determined by an independent third party
source.
The Company is accruing compensation expense of approximately $194,000
annually over the vesting period (five years) on those options where the
estimated fair value of the options exceeds the exercise price on the grant
date.
During the six months ended June 30, 1998 (unaudited), no non-qualified
stock options were granted to employees and directors of IFG.
The following table summarizes activity for the Company's Share Incentive
Plan for 1997, and the six months ended June 30, 1998 (unaudited). There were
no options issued or outstanding during 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
------------------ ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... -- -- 2,744,900 $7.56
Granted............................... 2,744,900 $7.56 -- --
Exercised............................. -- -- -- --
Forfeited............................. -- -- -- --
--------- ---------
Outstanding at end of year............ 2,744,900 $7.56 2,744,900 $7.56
========= =========
Weighted average fair value of options
granted during the year.............. $ 4.75 -- -- --
</TABLE>
The fair value of each option grant under the Share Incentive Plan is
estimated on the date of grant using the "Minimum Value Method." The "Minimum
Value Method" calculates the difference between the current stock price and
the present value of the exercise price, less the present value of expected
dividends, if any. The following assumptions were used for the Company's stock
options granted in 1997: expected stock option life of 7.5 years for each
grant date, dividend yield of 0% for each grant date, a risk free rate of
6.89% for the options granted on April 23, 1997 and 6.06% for the options
granted on September 22, 1997, and an estimated market price of $6.48 for the
options granted on April 23, 1997 and $9.63 for the options granted on
September 23, 1997.
F-24
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about the Company's stock options
outstanding under the Share Incentive Plan at December 31, 1997 and June 30,
1998 (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 SIX MONTHS ENDED JUNE 30, 1998
--------------------------------- ---------------------------------
OPTIONS OUTSTANDING OPTIONS OUTSTANDING
--------------------------------- ---------------------------------
WEIGHTED- WEIGHTED-
AVE. WEIGHTED- AVE. WEIGHTED-
NUMBER REMAINING AVE. NUMBER REMAINING AVE.
OUTSTANDING CONTRACTUAL EXERCISE OUTSTANDING CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 6/30/98 LIFE PRICE
- ------------------------ ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$5 to $6................ 744,900 9.3 $5.18 744,900 8.8 $5.18
$6 to $7................ 750,000 9.3 $6.48 750,000 8.8 $6.48
$9 to $10............... 1,250,000 9.7 $9.63 1,250,000 9.2 $9.63
--------- ---------
Total................... 2,744,900 9.5 $7.56 2,744,900 9.0 $7.56
========= =========
</TABLE>
There were no options exercisable under the Share Incentive Plan at December
31, 1997 and June 30, 1998 (unaudited).
(B) IMPERIAL BANCORP STOCK OPTION PLAN
Upon consummation of the Distribution, certain employees of the Bank will
cease to be employees of the Bank and will become employees of the Company. To
the extent any of these transferred employees holds nonqualified stock options
or incentive stock options to purchase Imperial Bancorp common stock
immediately prior to the Distribution, all such options will be automatically
converted into options to purchase Company Class A Common Stock. In connection
with this conversion of options, the number of shares that were formerly
underlying the Imperial Bancorp options and the exercise price of such options
will be appropriately adjusted to allow the transferred employees to retain an
equivalent economic position in the Company's common stock following the
Distribution. The Distribution will not be more favorable to the optionee on a
share by share comparison than the ratio of the option exercise price of the
Imperial Bancorp options immediately prior to the exchange to the fair value
of Imperial Bancorp common stock immediately preceding the Distribution. The
adjustment for the conversion will be calculated based on the five-day average
closing prices of Bancorp stock and the Company's stock before and after the
Distribution.
F-25
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity for the Imperial Bancorp Stock
Option Plan with respect to those stock options granted to the Company's
employees for the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998
1995 1996 1997 (UNAUDITED)
----------------- ----------------- ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 109,333 $3.04 211,588 $3.97 289,708 $5.77 118,614 $6.13
Granted................. 118,940 $4.66 98,996 $8.99 -- -- -- --
Exercised............... (16,685) $2.87 (20,876) $2.84 (111,692) $5.48 (32,407) $4.97
Forfeited............... -- -- -- -- (59,402) $8.99 (9,775) --
------- ------- -------- -------
Outstanding at end of
period................. 211,588 $3.97 289,708 $5.77 118,614 $6.13 76,432 $6.55
======= ======= ======== =======
Options exercisable at
period end............. 53,977 $2.96 75,724 $3.71 17,169 $6.45 22,379 $6.34
Weighted average fair
value of options
granted during the
period................. -- $2.29 -- $4.24 -- -- -- --
</TABLE>
The fair value of each option granted under the Bancorp Stock Option Plan
was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1995 1996
------ ------
<S> <C> <C>
Dividend yield............................................. 0% 0%
Expected life of options (years)........................... 6.5 6.5
Stock price volatility..................................... 44% 44%
</TABLE>
The risk-free interest rates used in the Black-Scholes option-pricing model
were equal to comparable U.S. Treasury rates at each respective grant date.
The following tables summarize information about Bancorp's stock options
outstanding at December 31, 1997 and June 30, 1998 (unaudited) with respect to
those stock options granted to the Company's employees:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3 to $4.............. 13,407 4.3 $3.23 6,703 $3.23
$4 to $5.............. 56,760 7.1 $4.45 630 $4.45
$8 to $9.............. 48,447 8.3 $8.90 9,836 $8.76
------- ------
Total................. 118,614 7.2 $6.13 17,169 $6.45
======= ======
</TABLE>
F-26
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 6/30/98 LIFE PRICE AT 6/30/98 PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3 to $4.............. 10,314 3.8 $3.23 10,314 $3.23
$4 to $5.............. 28,065 6.6 $4.45 -- --
$8 to $9.............. 38,053 7.8 $8.99 12,065 $8.99
------ ------
Total................. 76,432 6.7 $6.55 22,379 $6.34
====== ======
</TABLE>
(C) PRO FORMA NET INCOME
The Company applies APB 25 in accounting for the Share Incentive Plan as
well as those options that will be converted in conjunction with the
Distribution under the Imperial Bancorp Stock Option Plan. Accordingly, no
compensation cost has been recognized in the combined financial statements for
the fair value of stock options granted. Had the Company determined
compensation cost based on the fair value at the grant date for such stock
options under SFAS 123, the Company's net income would have been reduced to
the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------------
1997 1998
1995 1996 1997 (UNAUDITED) (UNAUDITED)
------- -------- -------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income, as reported... $ 5,919 $ 38,644 $ 15,160 $4,170 $4,896
Net income, pro forma..... $ 5,886 $ 38,584 $ 14,422 $3,785 $4,091
Diluted earnings per
share, as reported....... $ 0.32 $ 2.04 $ 0.77 $ 0.21 $ 0.23
Diluted earnings per
share, pro forma......... $ 0.32 $ 2.03 $ 0.72 $ 0.20 $ 0.20
</TABLE>
Pro forma net income reflects only options granted in 1995, 1996, 1997 and
1998 if any. Therefore, the full impact of calculating compensation cost for
stock options may not be reflected in the pro forma amounts presented above
because compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to January 1, 1995 is not
considered.
NOTE 15. DONATION
During the year ended December 31, 1997, the Company donated shares of ICII
stock with a fair value of $3.6 million to not-for-profit organizations.
Offsetting this expense, $2.8 million in appreciation gains were recognized
for the year ended December 31, 1997, on the donated stock at the time of the
donation. During 1996, the Company donated shares of ICII stock with a fair
value of $4.9 million to not-for-profit organizations. Offsetting this
expense, $3.7 million in appreciation gains were recognized on the donated
stock at the time of the donation. For the year ended December 31, 1995, there
were no donations of ICII stock.
NOTE 16. TRUST ASSETS
The Company has trust assets under administration amounting to $6.8 billion
representing 3,758 accounts, $7.5 billion representing 4,223 accounts, $8.7
billion representing 3,971 accounts, $9.5 billion representing 4,032 accounts,
at fair value, as of December 31, 1995, 1996 and 1997, and as of June 30, 1998
(unaudited) respectively. The amounts are not included in the accompanying
combined balance sheets.
F-27
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17. RELATED PARTY TRANSACTIONS
The Company and Imperial Bancorp provide each other services in the ordinary
course of business. Although these services are not conducted at "arm's
length," the Company and Imperial Bancorp attempt to negotiate market terms
for these services.
The Company provides trust services to Imperial Bancorp. The approximate
fair value of Imperial Bancorp's assets under administration and the
approximate fees received by the Company from Imperial Bancorp for trust
services are as follows:
<TABLE>
<CAPTION>
FAIR VALUE
OF ASSETS FEES
---------- ----
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1995 and for the year ended December 31, 1995.. $ 37,600 $118
At December 31, 1996 and for the year ended December 31, 1996.. 55,909 123
At December 31, 1997 and for the year ended December 31, 1997.. 105,096 121
At June 30, 1997 and for the six months ended June 30, 1997
(unaudited)................................................... 72,276 73
At June 30, 1998 and for the six months ended June 30, 1998
(unaudited)................................................... 93,354 43
</TABLE>
The Company receives fees for trust assets held in Monarch Funds (a family
of three money market mutual funds). As of September 1, 1995, each Monarch
Fund had invested substantially all of its assets in a corresponding portfolio
of Core Trust (Delaware) in an arrangement commonly known as a "master-feeder"
structure. Of the five trustees of the Monarch Funds, two are members of
Imperial Bancorp's management, one of whom is also a director of Imperial
Trust Company. As of December 31, 1996 and 1997, Imperial Bancorp's investment
in the Monarch Funds represented approximately 4.6% and 1.7%, respectively, of
the net asset value of all Monarch Funds. Trust assets under administration
invested in Monarch Funds and fees received by the Company from Monarch are as
follows:
<TABLE>
<CAPTION>
FAIR VALUE
OF ASSETS FEES
---------- ----
(IN THOUSANDS)
<S> <C> <C>
At December 31, 1995 and for the year ended December 31, 1995.. $ 604,795 $475
At December 31, 1996 and for the year ended December 31, 1996.. 629,755 567
At December 31, 1997 and for the year ended December 31, 1997.. 973,812 740
At June 30, 1997 and for the six months ended June 30, 1997
(unaudited)................................................... 913,114 339
At June 30, 1998 and for the six months ended June 30, 1998
(unaudited)................................................... 1,353,793 450
</TABLE>
The Bank provides the Company banking services, human resource services,
employee benefit plans, insurance, accounting assistance, accounting software,
legal services, computer support, other office services, and subleases all
office space to the Company. The costs for these services are billed to the
Company on a specific identification basis or on an allocation based either on
the number of employees, square feet of occupancy, number of officers, or
estimates. The Bank also reimburses the Company for outside data processing
services. The amounts paid to the Bank and the amount received by the Company
are as follows:
<TABLE>
<CAPTION>
AMOUNTS
AMOUNTS RECEIVED
PAID TO FROM
IMPERIAL IMPERIAL
BANK BANK
-------- --------
(IN THOUSANDS)
<S> <C> <C>
For the year ended December 31, 1995.......................... $757 $481
For the year ended December 31, 1996.......................... 832 534
For the year ended December 31, 1997.......................... 913 546
For the three months ended June 30, 1997 (unaudited).......... 457 269
For the three months ended June 30, 1998 (unaudited).......... 430 235
</TABLE>
Management believes that the methods used to allocate cost and determine
billing for the services provided by the Bank are reasonable.
F-28
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Bank provides funds to the Company to fund its operations. The amounts
outstanding are shown as "Borrowings from Imperial Bank" in the accompanying
combined balance sheets. The Bank charges for the use of those funds based on
average balances outstanding and the average interest rate for short-term
certificates of deposit plus one hundred basis points. The average interest
rate charged by the Company for the years ended December 31, 1995, 1996, and
1997 and for the six months ended June 30, 1997 (unaudited) and 1998
(unaudited) was 6.93%, 6.46%, 6.48%, 6.38%, and 6.52% respectively. The costs
of the funds are recorded as "Interest expense" in the combined statements of
income.
NOTE 18. COMMITMENTS AND CONTINGENT LIABILITIES
(A) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: The Company is a
party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit, which involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the combined balance sheet.
The contract amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
Commitments to extend credit only represent exposure to off-balance sheet
risk in the event the contract is drawn upon and the other party to the
contract defaults. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The amount of collateral obtained, if deemed necessary by the
Company upon extension of credit, is based on management's credit evaluation
of the counter party. The Company does not anticipate any material losses as a
result of these transactions.
The Company is party to interest rate swap transactions ("Swaps") which are
considered derivative financial instruments held for purposes other than
trading. Swaps generally involve the exchange of fixed and floating rate
interest payment obligations without the exchange of the underlying notional
amount. Because the credit exposure of these Swaps is limited to the potential
default of the Swap counterparty, the potential credit risks associated with
such Swaps are substantially less than the notional principal amounts of these
Swaps.
A summary of the contract or notional amounts of the Company's commitments
and contingent liabilities is as follows:
<TABLE>
<CAPTION>
AT JUNE 30,
AT DECEMBER 31, 1998
1996 1997 (UNAUDITED)
------- ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Commitments to extend credit................... $28,801 $11,635 $12,734
Standby letters of credit...................... 37,501 26,046 20,259
Interest rate swaps............................ -- -- 5,000
</TABLE>
In June 1998, Crown American Bank entered into two interest rate swap
transactions in which it was committed to pay three month LIBOR and receive a
fixed rate of 5.95%. The interest rate swaps had a combined notional value of
$5.0 million at June 30, 1998 and mature in June 1999. The Swaps are matched
with specific certificates of deposit and effectively convert the matched
fixed rate deposits into floating rate liabilities. Because the Swaps were
entered into for the purpose of converting the interest rate characteristics
of certain liabilities, "hedge accounting" rules apply and there is no
requirement to mark the value of the Swaps to market under generally accepted
accounting principles.
(B) LEGAL ACTION: The Company is a defendant in various lawsuits arising
from the normal course of business. Management believes, based upon the
opinion of legal counsel, that the ultimate resolution of the
F-29
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
pending litigation will not have a material effect upon the financial position
or future results of operations of the Company.
In the ordinary course of business the Company is subject to fiduciary
responsibilities relating to the trust assets. These duties are specifically
described in each trust agreement with the Company's customers. As a result,
the Company has a fiduciary responsibility to perform based on agreed
standards and to exercise prudent judgment. It is the opinion of management
that these duties have been met and no material contingent liability exists to
its knowledge.
(C) LEASE COMMITMENTS: The Company leases space for all its premises from
the Bank under noncancelable operating leases which expire in various years.
Lease payments charged to "Occupancy, net" in the accompanying combined
statements of income for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1997 (unaudited) and 1998 (unaudited) amounted
to $580,000, $769,000, $869,000, $470,000 and $403,000, respectively.
Aggregate minimum rental commitments under these leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998...................................................... $ 661
1999...................................................... 512
2000...................................................... 461
2001...................................................... 461
2002...................................................... 434
Thereafter................................................ 1,257
------
Total..................................................... $3,786
======
</TABLE>
NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Values of Financial Instruments" ("FAS 107") requires disclosures of fair
value information about financial instruments, whether or not recognized in
the combined balance sheet, for which it is practical to estimate. Such
instruments include securities, loans receivable, borrowings and various off-
balance sheet items. Because no market exists for a significant portion of the
Company's loan portfolio, fair value estimates are based on judgments
regarding credit risk, investor expectations of future economic conditions,
normal cost of administration of these instruments and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
The fair value estimates presented do not include the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. For example, the value of the Company's
fiduciary contracts for trust services are not considered financial
instruments; therefore, their values are not incorporated into the fair value
estimates.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
(A) CASH AND CASH EQUIVALENTS: The carrying values reported in the combined
balance sheet approximate fair values due to the short term nature of these
assets.
(B) SECURITIES AVAILABLE FOR SALE: Fair values are based on bid prices and
quotations published and/or received from securities dealers. Fair value on
interest only strips are based on discounted future cash flows using
F-30
<PAGE>
rates and prepayment speeds that an unaffiliated third-party purchaser would
require on instruments with similar terms and remaining maturities. For the
year ended December 31, 1996, the Company assumed a discount rate and
prepayment rate of 13.2% and 10.0%, respectively, to estimate the fair value
of the interest only strips. For the year ended December 31, 1997, the Company
assumed a discount rate and prepayment rate of 9.6% and 12.0%, respectively,
to estimate the fair value of the interest only strip.
(C) LOANS HELD FOR SALE: Fair value is based on quoted market prices and/or
forward delivery contracts.
(D) LOANS HELD FOR INVESTMENT: The fair value of the loan portfolio is
generally estimated by discounting expected future cash flows at an estimated
market rate of interest. A market rate of interest is estimated based on the
AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to
administer such instruments. Expected future cash flows are estimated using
maturity dates for performing loans, with cash flows on nonaccrual loans
estimated on an individual basis. For nonaccrual and potential problem loans
secured by real property, estimated fair value has been determined on an
individual basis, considering the value of the collateral as determined by a
current third party appraisal and estimated foreclosure, holding and selling
costs.
(E) EXCESS SERVICING FEES RECEIVABLE: The carrying value reported in the
combined balance sheet approximate fair values. The fair value was estimated
by discounting future cash flows using rates and prepayment speeds that an
unaffiliated third-party purchaser would require on instruments with similar
terms and remaining maturities.
(F) BORROWINGS FROM IMPERIAL BANK: The carrying amounts approximate their
fair values due to the short-term nature of the borrowings.
(G) OFF-BALANCE SHEET INSTRUMENTS: Fair values of commitments to extend
credit are based on fees currently charged to enter into similar agreements.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1996 1997
------------------ -------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents............. $ 5,245 $ 5,245 $ 2,813 $ 2,813
Securities available for sale, at fair
value................................ 1,179 1,179 6,027 6,027
Loans held for sale................... 5,531 6,058 3,763 4,102
Loans held for investment............. 72,528 67,424 134,407 140,029
Excess servicing fees receivable...... 3,294 3,294 -- --
FINANCIAL LIABILITIES:
Borrowings from the Bank.............. 6,184 6,184 77,934 77,934
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Commitments to extend credit.......... -- 721 -- 233
Standby letters of credit............. -- 750 -- 1,190
</TABLE>
F-31
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 20. SEGMENT REPORTING
The Company operates in three principal business segments: the origination
and sale of small business loans (CAB), the origination of entertainment loans
(LHO) and the provision of trust services (ITC). Certain financial information
with respect to these business segments, as well as such financial information
related to other operations of the Company, primarily ICII (ICII and Other),
are summarized in the following tables:
<TABLE>
<CAPTION>
ICII
AND
CAB LHO ITC OTHERS COMBINED
------- -------- ------ ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31,
1995
Net interest income............... $ 870 $ 2,821 $ 144 $ 1,757 $ 5,592
Provision for loan losses......... (281) (767) -- (444) (1,492)
Noninterest income................ 1,932 379 8,680 5,536 16,527
------- -------- ------ ------- --------
Total revenue.................... 2,521 2,433 8,824 6,849 20,627
Noninterest expense............... 1,862 696 5,769 2,068 10,395
------- -------- ------ ------- --------
Income before income taxes....... 659 1,737 3,055 4,781 10,232
Income tax expense................ 279 736 1,302 1,996 4,313
------- -------- ------ ------- --------
Net income....................... $ 380 $ 1,001 $1,753 $ 2,785 $ 5,919
======= ======== ====== ======= ========
Average assets.................... $16,895 $ 24,235 $6,846 $42,551 $ 90,527
------- -------- ------ ------- --------
FOR THE YEAR ENDED DECEMBER 31,
1996
Net interest income............... $ 1,488 $ 4,086 $ 138 $ 3,102 $ 8,814
Provision for loan losses......... (348) (859) -- (574) (1,781)
Noninterest income................ 3,844 746 7,975 61,553 74,118
------- -------- ------ ------- --------
Total revenue.................... 4,984 3,973 8,113 64,081 81,151
Noninterest expense............... 2,851 1,776 6,258 5,948 16,833
------- -------- ------ ------- --------
Income before income taxes....... 2,133 2,197 1,855 58,133 64,318
Income tax expense................ 903 930 790 23,051 25,674
------- -------- ------ ------- --------
Net income....................... $ 1,230 $ 1,267 $1,065 $35,082 $ 38,644
======= ======== ====== ======= ========
Average assets.................... $27,593 $ 47,122 $7,034 $57,571 $139,320
------- -------- ------ ------- --------
FOR THE YEAR ENDED DECEMBER 31,
1997
Net interest income............... $ 1,804 $ 5,816 $ 235 $ 3,458 $ 11,313
Provision for loan losses......... (415) (1,828) -- (315) (2,558)
Noninterest income................ 4,665 1,694 8,175 28,057 42,591
------- -------- ------ ------- --------
Total revenue.................... 6,054 5,682 8,410 31,200 51,346
Noninterest expense............... 4,749 3,467 6,765 12,468 27,449
------- -------- ------ ------- --------
Income before income taxes....... 1,305 2,215 1,645 18,732 23,897
Income tax expense................ 549 932 687 6,569 8,737
------- -------- ------ ------- --------
Net income....................... $ 756 $ 1,283 $ 958 $12,163 $ 15,160
======= ======== ====== ======= ========
Average assets.................... $39,391 $ 67,400 $8,498 $76,228 $191,517
------- -------- ------ ------- --------
FOR THE SIX MONTHS ENDED JUNE 30,
1997 (UNAUDITED)
Net interest income............... $ 895 $ 2,643 $ 85 $ 2,011 $ 5,634
Provision for loan losses......... (330) (1,049) -- (133) (1,512)
Noninterest income................ 2,359 852 3,996 7,824 15,031
------- -------- ------ ------- --------
Total revenue.................... 2,924 2,446 4,081 9,702 19,153
Noninterest expense............... 2,530 2,129 3,316 4,585 12,560
------- -------- ------ ------- --------
Income before income taxes....... 394 317 765 5,117 6,593
Income tax expense ............... 166 133 324 1,800 2,423
------- -------- ------ ------- --------
Net income ...................... $ 228 $ 184 $ 441 $ 3,317 $ 4,170
======= ======== ====== ======= ========
Average assets.................... $34,657 $ 51,513 $8,093 $67,070 $161,333
------- -------- ------ ------- --------
FOR THE SIX MONTHS ENDED JUNE 30,
1998 (UNAUDITED)
Net interest income............... $ 1,079 $ 3,272 $ 164 $ 1,796 $ 6,311
Provision for loan losses......... (279) (417) -- (40) (736)
Noninterest income................ 3,199 561 4,302 6,699 14,761
------- -------- ------ ------- --------
Total revenue.................... 3,999 3,416 4,466 8,455 20,336
Noninterest expense............... 3,687 1,734 3,480 2,967 11,868
------- -------- ------ ------- --------
Income before income taxes....... 312 1,682 986 5,488 8,468
Income tax expense................ 131 707 421 2,313 3,572
------- -------- ------ ------- --------
Net income....................... $ 181 $ 975 $ 565 $ 3,175 $ 4,896
======= ======== ====== ======= ========
Average assets.................... $44,093 $102,885 $8,514 $84,388 $239,880
------- -------- ------ ------- --------
</TABLE>
F-32
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
ITEM 1.FINANCIAL STATEMENTS ----
<S> <C>
Consolidated Balance Sheets--June 30, 1998 and December 31, 1997........ F-34
Consolidated Statements of Income--Three and six months ended June 30,
1998 and 1997.......................................................... F-35
Consolidated Statements of Cash Flows--Six months ended June 30, 1998
and 1997............................................................... F-36
Consolidated Statement of Changes in Shareholders' Equity--Six months
ended
June 30, 1998.......................................................... F-37
Notes to Consolidated Financial Statements.............................. F-38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................ F-47
PART II--OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS..................................................... F-66
ITEM 2.CHANGES IN SECURITIES................................................. F-66
ITEM 3.DEFAULTS IN SECURITIES................................................ F-66
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................... F-66
ITEM 5.OTHER INFORMATION..................................................... F-67
ITEM 6.EXHIBIT--STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE........ F-68
SIGNATURES.............................................................. F-69
</TABLE>
FORWARD LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
F-33
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Cash................................................. $ 155,306 $ 50,597
Interest bearing deposits............................ 13,931 103,738
Investment in Federal Home Loan Bank stock........... 4,795 5,646
Securities held for trading, at market............... 70,529 120,904
Securities available for sale, at market............. 111,242 107,727
Loans and leases held for sale....................... 178,860 162,571
Loans and leases held for investment, net............ 1,587,485 1,266,718
Purchased and originated servicing rights............ 5,114 4,731
Retained interest in loan and lease securitizations.. 53,216 43,105
Accrued interest receivable.......................... 13,009 9,132
Premises and equipment, net.......................... 9,693 9,513
Other real estate owned, net......................... 7,322 10,905
Goodwill............................................. 34,290 35,607
Investment in Southern Pacific Funding Corporation... 78,042 65,303
Investment in Franchise Mortgage Acceptance Company.. 59,685 53,099
Other assets......................................... 33,043 52,798
---------- ----------
Total assets....................................... $2,415,562 $2,102,094
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................. $1,514,805 $1,156,022
Borrowings from Federal Home Loan Bank............... 20,000 45,000
Other borrowings..................................... 119,253 144,841
Remarketed Par Securities............................ 70,000 70,000
Senior Notes......................................... 219,835 219,813
Accrued interest payable............................. 22,972 21,484
Accrued income taxes payable......................... 67,540 60,528
Minority interest in consolidated subsidiaries....... 2,928 3,174
Other liabilities.................................... 34,824 57,299
---------- ----------
Total liabilities.................................. 2,072,157 1,778,161
========== ==========
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding............................... -- --
Common stock, no par value. Authorized 80,000,000
shares; 38,619,351 and 38,791,439 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively........................................ 142,169 147,109
Retained earnings.................................... 204,060 174,898
Accumulated other comprehensive income: unrealized
(loss) gain on securities available for sale, net... (2,824) 1,926
---------- ----------
Total shareholders' equity......................... 343,405 323,933
---------- ----------
Total liabilities and shareholders' equity......... $2,415,562 $2,102,094
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-34
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases............ $ 3,273 $28,558 $ 8,845 $37,224
------- ------- ------- -------
Interest on loans and leases................ 53,128 53,512 98,664 96,442
Interest on investments..................... 4,063 1,129 9,035 6,754
Interest on other finance activities........ 2,673 734 5,804 1,391
------- ------- ------- -------
Total interest income..................... 59,864 55,375 113,503 104,587
Interest on deposits........................ 19,911 17,082 38,198 34,084
Interest on other borrowings................ 2,385 8,486 4,139 15,104
Interest on long term debt.................. 7,555 6,084 15,109 10,868
------- ------- ------- -------
Total interest expense.................... 29,851 31,652 57,446 60,056
------- ------- ------- -------
Net interest income....................... 30,013 23,723 56,057 44,531
Provision for loan and lease losses......... 3,450 5,736 7,300 8,606
------- ------- ------- -------
Net interest income after provision for
loan and lease losses...................... 26,563 17,987 48,757 35,925
------- ------- ------- -------
Loan servicing income....................... 4,055 2,170 8,083 3,450
Gain (loss) on sale of securities........... 6 -- 6 (403)
Equity in net income of Southern Pacific
Funding Corporation........................ 6,764 6,678 12,739 12,931
Equity in net income of Franchise Mortgage
Acceptance Company......................... 3,817 -- 6,586 --
Investment banking fees..................... 6,433 -- 10,968 --
Asset management fees....................... 1,575 1,237 2,780 2,816
Gain on sale of Southern Pacific Funding
Corporation stock.......................... -- -- -- 4,306
Other income................................ 2,226 875 4,374 1,551
------- ------- ------- -------
Total other income........................ 24,876 10,960 45,536 24,651
------- ------- ------- -------
Total revenue............................... 54,712 57,505 103,138 97,800
======= ======= ======= =======
EXPENSES:
Personnel expense........................... 15,519 12,433 31,773 23,104
Amortization of servicing rights............ 360 206 701 225
Occupancy expense........................... 1,482 983 3,028 1,890
Data processing expense..................... 410 378 903 805
Net expense (income) of other real estate
owned...................................... 288 3,480 (71) 4,237
Professional services....................... 2,534 3,615 5,289 6,203
FDIC insurance premiums..................... 321 -- 321 --
Telephone and other communications.......... 867 754 1,624 1,183
Amortization of Goodwill.................... 654 897 1,317 1,497
General and administrative expense.......... 6,513 6,318 11,673 11,054
------- ------- ------- -------
Total expenses............................ 28,948 29,064 56,558 50,198
------- ------- ------- -------
Income before income taxes, minority inter-
est and extraordinary item................. 25,764 28,441 46,580 47,602
Income taxes................................ 9,360 9,866 17,184 17,843
Minority interest in income of consolidated
subsidiaries............................... 142 4,502 234 4,654
------- ------- ------- -------
Income before extraordinary item............ 16,262 14,073 29,162 25,105
Extraordinary item--Loss on early extin-
guishment of debt, net of income taxes..... -- -- -- (3,995)
------- ------- ------- -------
Net income.................................. $16,262 $14,073 $29,162 $21,110
======= ======= ======= =======
BASIC INCOME PER SHARE:
Income before extraordinary item............ $ 0.42 $ 0.37 $ 0.75 $ 0.65
Extraordinary item--Loss on early extin-
guishment of debt, net of income taxes..... -- -- -- (0.10)
------- ------- ------- -------
Net Income per common share................. $ 0.42 $ 0.37 $ 0.75 $ 0.55
======= ======= ======= =======
DILUTED INCOME PER SHARE:
Income before extraordinary item............ $ 0.40 $ 0.35 $ 0.71 $ 0.62
Extraordinary item--Loss on early extin-
guishment of debt, net of income taxes..... -- -- -- (0.10)
------- ------- ------- -------
Net Income per common share................. $ 0.40 $ 0.35 $ 0.71 $ 0.52
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
F-35
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 29,162 $ 21,110
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan and lease losses.................... 7,300 8,606
Depreciation........................................... 1,899 2,278
Amortization of goodwill............................... 1,317 1,497
Amortization of servicing rights....................... 701 225
Accretion of discount.................................. (5,804) (1,391)
Gain on sale of loans and leases....................... (8,845) (37,224)
Gains on sale of SPFC stock............................ -- (4,306)
Equity in net earnings of SPFC......................... (12,739) (12,931)
Equity in net earnings of FMC.......................... (6,586) --
Loss on sale of OREO................................... 1,217 3,384
(Recovery) writedowns on OREO.......................... (1,481) 147
Originations of loans held for sale.................... (349,400) (655,900)
Sales and collections on loans held for sale........... 341,956 1,059,255
Purchase of trading securities......................... (20,503) (15,786)
Sale of trading securities............................. 79,751 --
Net change in securities held for investment........... -- (2,647)
Net change in accrued interest receivable.............. (3,877) 358
Net change in retained interest in loan and lease
securitizations....................................... (4,307) (6,382)
Net change in other assets............................. 23,542 (11,264)
Net change in other liabilities........................ (24,507) 19,342
-------- ---------
Net cash provided by operating activities................ 48,796 368,371
-------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits................ 89,807 (237,916)
Proceeds from sale of other real estate owned.......... 4,109 1,027
Sales of securities available for sale................. -- 15,176
Net change in loans held for investment................ (328,329) (68,180)
Purchases of securities available for sale............. (10,327) --
Purchases of premises and equipment.................... (2,079) (3,130)
Proceeds from sale of SPFC stock....................... -- 6,151
Purchase of stock in Federal Home Loan Bank............ -- (1,985)
Redemption of stock in Federal Home Loan Bank.......... 1,000 10,900
Cash utilized for acquisitions......................... -- (750)
-------- ---------
Net cash (used in) provided by investing activities...... (245,819) (278,707)
-------- ---------
Cash flows from financing activities:
Net increase in deposits............................... 358,783 191,807
Advances from Federal Home Loan Bank................... 44,500 30,000
Repayments of advances from Federal Home Loan Bank..... (69,500) (170,500)
Net change in other borrowings......................... (25,588) (335,994)
Proceeds from issuance of Senior Notes due 2007........ -- 194,500
Proceeds from offering of Remarketed Par Securities.... -- 68,075
Repayments of Senior Notes due 2004.................... -- (73,241)
Retirement of common stock............................. (6,946) --
Net change in minority interest........................ (246) (48,888)
Proceeds from exercise of stock options................ 729 880
-------- ---------
Net cash provided by (used in) financing activities...... 301,732 (143,361)
-------- ---------
Net change in cash....................................... 104,709 (53,697)
Cash at beginning of period.............................. 50,597 74,247
-------- ---------
Cash at end of period.................................... $155,306 $ 20,550
======== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-36
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
(LOSS) ON
NUMBER OF SECURITIES TOTAL
SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY
----------- -------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1997................... 38,791 $147,109 $174,898 $ 1,926 $323,933
Exercise of stock op-
tions.................. 181 721 -- -- 721
Retirement of stock..... (353) (6,938) -- -- (6,938)
Tax benefit from
exercise of stock
options................ -- 1,277 -- -- 1,277
Decrease in unrealized
gain on securities
available for sale,
net.................... -- -- -- (4,750) (4,750)
Net income for the six
months ended June 30,
1998................... -- -- 29,162 -- 29,162
------ -------- -------- ------- --------
Balance, June 30, 1998.. 38,619 $142,169 $204,060 $(2,824) $343,405
====== ======== ======== ======= ========
</TABLE>
F-37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 23.1% owned by Imperial Bank. In 1991 Imperial Bank
recapitalized the Company to conduct a full service mortgage banking
operation, from which it has diversified beginning in 1995. The consolidated
financial statements include Imperial Credit Industries, Inc. ("ICII"), its
significant wholly-owned operating subsidiaries, significant majority-owned
operating subsidiaries and significant equity investments in two publicly
traded companies (collectively the "Company"). The significant wholly-owned
subsidiaries include Southern Pacific Bank ("SPB"), Imperial Business Credit
Inc. ("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Imperial Credit
Commercial Asset Management Corporation, ("ICCAMC"), Auto Marketing Network,
Inc. ("AMN"), Imperial Credit Worldwide Ltd. ("ICW") and Statewide
Documentation, Inc. ("SDI"). The significant operating majority owned
consolidated subsidiary is Imperial Capital Group, LLC ("ICG") which is 60%
owned by the Company and 40% owned by ICG's management. The significant equity
investments in publicly traded companies are Southern Pacific Funding
Corporation ("SPFC") NYSE Symbol: SFC, and Franchise Mortgage Acceptance
Company ("FMC") NASDAQ Symbol: FMAX. Both SPFC and FMC were former
consolidated subsidiaries of the Company. The Company manages through its
ICCAMC subsidiary, an 8.9% equity ownership interest in a commercial REIT,
Imperial Credit Commercial Mortgage Investment Corporation (Nasdaq: ICMI). The
Company also owns Imperial Credit Capital Trust I ("ICCT1"), a subsidiary of
the Company organized for the sole purpose of issuing the $70.0 million of
10.25% Remarketed Par securities. All material intercompany balances and
transactions with consolidated subsidiaries and unconsolidated subsidiaries
have been eliminated.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Actual results could differ significantly
from those estimates. Prior year's consolidated financial statements have been
reclassified to conform to the 1998 presentation.
3. NET INCOME PER SHARE INFORMATION
The following table reconciles the number of shares used in the computations
of basic and diluted income per share for the second quarter and year to date
periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS
QUARTER ENDED JUNE 30, PERIOD ENDED JUNE 30,
----------------------- ---------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted-average common
shares outstanding during
the year used to compute
basic income per share..... 38,752,018 38,508,484 38,747,417 38,463,568
Assumed common shares issued
on exercise of stock
options.................... 2,060,373 2,114,095 2,052,063 2,305,349
----------- ----------- ---------- ----------
Number of common shares used
to compute diluted income
per share.................. 40,812,391 40,622,579 40,799,480 40,768,917
=========== =========== ========== ==========
</TABLE>
F-38
<PAGE>
4. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" as of January 1, 1998. SFAS No. 130
establishes standards for reporting comprehensive income and its components in
the consolidated financial statements. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company's comprehensive income is
comprised of net income plus the change in the unrealized gain (loss) on
securities available for sale, net for all periods reported. Comprehensive
income for the three and six months ended June 30, 1998 totaled $11.4 million
and $24.4 million, as compared to $15.9 million and $22.8 million for the same
periods last year, respectively. Accumulated other comprehensive income
(loss), consisting of the unrealized (loss) gain on securities available for
sale at June 30, 1998 and December 31, 1997 totaled ($2.8) million and $1.9
million respectively.
5. ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 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 recognize all derivatives as either
assets or liabilities in the statement of financial position and measure 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 foreign-currency-denominated forecasted
transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Management is in the process of determining the impact, if any, this
statement will have on the Company.
6. LOANS AND LEASES HELD FOR SALE
Loans and leases held for sale consisted of the following at June 30, 1998
and December 31, 1997:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1998 1997
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.............................. $ 30,102 $ 13,169
Multi-family................................... 110,284 68,294
-------- --------
140,386 81,463
Automobile loans................................. 14,224 9,102
Leases........................................... 9,816 13,561
Commercial loans................................. 14,434 58,445
-------- --------
$178,860 $162,571
======== ========
</TABLE>
F-39
<PAGE>
7. LOAN AND LEASE COMMITMENTS
At June 30, 1998, the Company's consolidated lending commitments were as
follows:
<TABLE>
<CAPTION>
COMMITMENT
TYPE OF LENDING COMMITMENT AMOUNT
-------------------------- --------------
(IN THOUSANDS)
<S> <C>
Loan and unused line commitments.............................. $ 994,020
Standby letters of credit..................................... 3,184
Lease Financing............................................... 20,600
----------
$1,017,804
==========
</TABLE>
8. CONSOLIDATING BALANCE SHEET AND INCOME STATEMENTS
The following represents summarized consolidating financial information as
of June 30, 1998 and December 31, 1997, and for the six months ended June 30,
1998 and 1997, with respect to the financial position, results of operations
and cash flows of the Company and its wholly-owned and majority-owned
subsidiaries. On January 17, 1997, the Company sold $200 million of 9.875%
Senior Notes due 2007. As of June 30, 1998, the 9.875% Senior Notes are
guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI,
ICCAMC, ICW and AMN (the "Guarantor Subsidiaries"). As of June 30, 1998, the
non-guarantor subsidiaries are SPB, ICG and ICCTI. FMC was a guarantor
subsidiary through September 30, 1997. Each of the guarantees is full and
unconditional and joint and several. The summarized consolidated financial
information is presented in lieu of separate financial statements and other
related disclosures of the wholly-owned subsidiary guarantors as management
has determined that such information is not material to investors. None of the
subsidiary guarantors is restricted from making distributions to the Company.
F-40
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ 3,596 $ 6,899 $ 147,334 $ (2,523) $ 155,306
Interest bearing
deposits............... 9,881 550 3,500 -- 13,931
Investment in Federal
Home Loan Bank stock... -- -- 4,795 -- 4,795
Securities available for
sale and trading....... 138,967 22,979 19,825 -- 181,771
Loans and leases held
for sale............... 12,252 41,890 124,718 -- 178,860
Loans and leases held
for investment, net.... 72,226 11,705 1,538,554 (35,000) 1,587,485
Investment in SPFC...... 78,042 -- -- -- 78,042
Investment in FMC....... 59,685 -- -- -- 59,685
Purchased and originated
servicing rights....... -- -- 5,114 -- 5,114
Retained interest in
loan and lease
securitizations........ -- 53,216 -- -- 53,216
Investment in
subsidiaries........... 312,771 -- -- (312,771) --
Goodwill................ -- 12,753 21,537 -- 34,290
Other assets............ 47,390 (5,660) 22,262 (925) 63,067
-------- -------- ---------- --------- ----------
Total assets.......... $734,810 $144,332 $1,887,639 $(351,219) $2,415,562
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
---------------------
Deposits................ $ -- $ (33) $1,517,361 $ (2,523) $1,514,805
Other borrowings........ -- 23,253 152,925 (36,925) 139,253
Remarketed Par
Securities............. 72,165 (2,165) -- -- 70,000
Senior notes............ 219,835 -- -- -- 219,835
Minority interest in
consolidated
subsidiaries........... 946 (86) 167 1,901 2,928
Other liabilities....... 98,459 14,065 20,474 (7,662) 125,336
-------- -------- ---------- --------- ----------
Total liabilities..... 391,405 35,034 1,690,927 (45,209) 2,072,157
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 142,169 135,389 100,739 (236,128) 142,169
Retained earnings....... 204,060 (38,091) 95,973 (57,882) 204,060
Unrealized (loss) on
securities available
for sale............... (2,824) -- -- -- (2,824)
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 343,405 109,298 196,712 (306,010) 343,405
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $734,810 $144,332 $1,887,639 $(351,219) $2,415,562
======== ======== ========== ========= ==========
</TABLE>
F-41
<PAGE>
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
------
Cash.................... $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597
Interest bearing
deposits............... 31,390 1,149 71,199 -- 103,738
Investment in Federal
Home Loan Bank stock... -- -- 5,646 -- 5,646
Securities available for
sale and trading....... 107,671 21,031 99,929 -- 228,631
Loans and leases held
for sale............... 12,138 23,694 126,739 -- 162,571
Loans and leases held
for investment, net.... 78,922 44,941 1,197,430 (54,575) 1,266,718
Investment in SPFC...... 65,303 -- -- -- 65,303
Purchased and originated
servicing rights....... -- -- 4,731 -- 4,731
Investment in FMC....... 53,099 -- -- -- 53,099
Retained interest in
loan and lease
securitizations........ -- 43,105 -- -- 43,105
Investment in
subsidiaries........... 281,454 -- -- (281,454) --
Goodwill................ -- 13,229 22,378 -- 35,607
Other assets............ 59,911 (1,104) 26,473 (2,932) 82,348
-------- -------- ---------- --------- ----------
Total assets.......... $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $ -- $ -- $1,189,840 $ (33,818) $1,156,022
Other borrowings........ -- 30,250 196,528 (36,937) 189,841
Remarketed Par
Securities............. 72,165 -- (2,165) -- 70,000
Senior notes............ 219,813 -- -- -- 219,813
Minority interest in
consolidated
subsidiaries........... 946 20 111 2,097 3,174
Other liabilities....... 86,260 7,327 45,095 629 139,311
-------- -------- ---------- --------- ----------
Total liabilities..... 379,184 37,597 1,429,409 (68,029) 1,778,161
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 147,109 125,139 89,342 (214,481) 147,109
Retained earnings....... 174,898 (22,023) 79,092 (57,069) 174,898
Unrealized gain on
securities available
for sale............... 1,926 -- -- -- 1,926
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 323,933 115,116 168,434 (283,550) 323,933
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
</TABLE>
F-42
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans
and leases............. $ 46 $ 3,072 $ 5,727 $ -- $ 8,845
------- ------- ------- -------- --------
Interest income......... 14,879 8,488 92,365 (2,229) 113,503
Interest expense........ 14,882 1,016 43,777 (2,229) 57,446
------- ------- ------- -------- --------
Net interest (expense)
income................. (3) 7,472 48,588 -- 56,057
Provision for loan and
lease losses........... -- 300 7,000 -- 7,300
------- ------- ------- -------- --------
Net interest (expense)
income after
provision for loan
and lease losses..... (3) 7,172 41,588 -- 48,757
------- ------- ------- -------- --------
Loan servicing (expense)
income................. (279) 5,011 3,351 -- 8,083
Investment banking fees. -- -- 10,968 -- 10,968
Asset management fees... -- 2,780 -- -- 2,780
Equity in net income of
SPFC................... 12,739 -- -- -- 12,739
Equity in net income of
FMC.................... 6,586 -- -- -- 6,586
Other (expense) income.. (424) 1,079 2,725 1,000 4,380
------- ------- ------- -------- --------
Total other income.... 18,622 8,870 17,044 1,000 45,536
------- ------- ------- -------- --------
Total revenues...... 18,665 19,114 64,359 1,000 103,138
------- ------- ------- -------- --------
EXPENSES:
Personnel expense....... 2,115 8,885 20,773 -- 31,773
Amortization of
servicing rights....... -- -- 701 -- 701
Occupancy expense....... 610 626 1,792 -- 3,028
Data processing expense. 251 142 510 -- 903
Net (income) expense of
other real estate
owned.................. (539) 791 (323) -- (71)
Professional services... 1,496 1,243 2,550 -- 5,289
Telephone and other
communications......... 156 713 755 -- 1,624
Amortization of
goodwill............... -- 475 842 -- 1,317
General, administrative
and other expense...... 1,149 2,976 7,869 -- 11,994
------- ------- ------- -------- --------
Total expenses........ 5,238 15,851 35,469 -- 56,558
------- ------- ------- -------- --------
Income before income
taxes, minority
interest and
extraordinary item..... 13,427 3,263 28,890 1,000 46,580
Income taxes............ 3,364 1,520 11,877 423 17,184
------- ------- ------- -------- --------
Income before minority
interest and
extraordinary item..... 10,063 1,743 17,013 577 29,396
Minority interest in
(loss) income of
consolidated
subsidiaries........... -- (106) 56 284 234
------- ------- ------- -------- --------
Income before equity in
undistributed income of
subsidiaries and
extraordinary item..... 10,063 1,849 16,957 293 29,162
Equity in undistributed
income of subsidiaries. 19,099 -- -- (19,099) --
------- ------- ------- -------- --------
Net income.............. $29,162 $ 1,849 $16,957 $(18,806) $ 29,162
======= ======= ======= ======== ========
</TABLE>
F-43
<PAGE>
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
(Loss) gain on sale of
loans and leases....... $(2,159) $6,402 $32,803 $ 178 $37,224
------- ------ ------- -------- -------
Interest income......... 11,271 13,017 84,517 (4,218) 104,587
Interest expense........ 10,971 4,512 48,791 (4,218) 60,056
------- ------ ------- -------- -------
Net interest income..... 300 8,505 35,726 -- 44,531
Provision for loan and
lease losses........... -- 2,981 5,625 -- 8,606
------- ------ ------- -------- -------
Net interest income
after Provision for
loan and lease
losses............... 300 5,524 30,101 -- 35,925
------- ------ ------- -------- -------
Loan servicing (expense)
income................. (1,756) 2,734 2,472 3,450
Asset management fees... -- 2,816 -- -- 2,816
Gain on sale of SPFC
stock.................. 4,306 -- -- -- 4,306
Equity in net income of
SPFC................... 12,931 -- -- -- 12,931
Other (expense) income.. (1,204) 955 1,800 (403) 1,148
------- ------ ------- -------- -------
Total other income.... 14,277 6,505 4,272 (403) 24,651
------- ------ ------- -------- -------
Total revenues...... 12,418 18,431 67,176 (225) 97,800
------- ------ ------- -------- -------
EXPENSES:
Personnel expense....... 1,216 6,740 15,148 -- 23,104
Amortization of
servicing rights....... -- 225 -- -- 225
Occupancy expense....... 510 281 1,099 -- 1,890
Data processing expense. 287 167 351 -- 805
Net expense of other
real estate owned...... 2,652 -- 1,585 -- 4,237
Professional services... 2,226 696 3,281 -- 6,203
Telephone and other
communications......... 110 418 655 -- 1,183
Amortization of
goodwill............... -- 772 725 -- 1,497
General, administrative
and other expense...... 2,564 3,855 4,860 (225) 11,054
------- ------ ------- -------- -------
Total expenses........ 9,565 13,154 27,704 (225) 50,198
------- ------ ------- -------- -------
Income before income
taxes, minority
interest, deferred
inter-company expense
and extraordinary item. 2,853 5,277 39,472 -- 47,602
Income taxes............ 4,848 2,236 10,759 -- 17,843
------- ------ ------- -------- -------
(Loss) income before
minority interest and
extraordinary item..... (1,995) 3,041 28,713 -- 29,759
Minority interest in
income of consolidated
subsidiaries........... -- -- -- 4,654 4,654
------- ------ ------- -------- -------
(Loss) income before
equity in undistributed
income of subsidiaries
and extraordinary item. (1,995) 3,041 28,713 (4,654) 25,105
Equity in undistributed
income of subsidiaries. 27,100 -- -- (27,100) --
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. (3,995) -- -- -- (3,995)
------- ------ ------- -------- -------
Net (loss) income..... $21,110 $3,041 $28,713 $(31,754) $21,110
======= ====== ======= ======== =======
</TABLE>
F-44
<PAGE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $ (8,541) $ (34,389) $ 99,993 $ (8,267) $ 48,796
-------- --------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... 21,509 566 67,700 32 89,807
Purchase of securities
available for sale... (10,327) -- -- -- (10,327)
Proceeds from sale of
OREO................. 855 2,550 704 -- 4,109
Net change in loans
held for investment.. 6,434 19,156 (348,207) (5,712) (328,329)
Net change in
investment in
Subsidiaries......... (12,127) -- -- 12,127 --
Other, net............ (1,219) (123) (147) 410 (1,079)
-------- --------- --------- -------- ---------
Net cash provided by
(used in) investing
activities............. 5,125 22,149 (279,950) 6,857 (245,819)
-------- --------- --------- -------- ---------
Cash flows from
financing activities:
Net increase in
deposits............. -- -- 327,520 31,263 358,783
Advances from Federal
Home Loan Bank....... -- -- 44,500 -- 44,500
Repayments of advances
from Federal Home
Loan Bank............ -- -- (69,500) -- (69,500)
Net change in other
borrowings........... -- 12,577 (18,603) (19,562) (25,588)
Retirement of common
stock................ (6,946) -- -- -- (6,946)
Other, net............ 729 (106) 56 (196) 483
-------- --------- --------- -------- ---------
Net cash (used in)
provided by financing
activities............. (6,217) 12,471 283,973 11,505 301,732
-------- --------- --------- -------- ---------
Net change in cash.... (9,633) 231 104,016 10,095 104,709
Cash at beginning of
period............... 13,229 6,668 43,318 (12,618) 50,597
-------- --------- --------- -------- ---------
Cash at end of period. $ 3,596 $ 6,899 $ 147,334 $ (2,523) $ 155,306
======== ========= ========= ======== =========
</TABLE>
F-45
<PAGE>
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 13,552 $(141,381) $ 498,690 $ (2,490) $ 368,371
--------- --------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (112,354) (101) (125,559) 98 (237,916)
Net change in loans
held for investment.. (76,881) (16,140) (102,067) 126,908 (68,180)
Proceeds from sale
of SPFC stock........ 6,151 -- -- -- 6,151
Redemption of Federal
Home Loan Bank stock. -- -- 10,900 -- 10,900
Cash utilized for
acquisitions......... (750) -- -- -- (750)
Net change in
investment in
Subsidiaries......... 45,652 -- -- (45,652) --
Other, net............ (6,018) 81,049 17,925 (81,868) 11,088
--------- --------- --------- -------- ---------
Net cash (used in)
provided by investing
activities............. (144,200) 64,808 (198,801) (514) (278,707)
--------- --------- --------- -------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 194,331 (2,524) 191,807
Advances from Federal
Home Loan Bank....... -- -- 30,000 -- 30,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (170,500) -- (170,500)
Net change in other
borrowings........... (15,363) 72,809 (391,059) (2,381) (335,994)
Proceeds from offering
of Senior Notes...... 194,500 -- -- -- 19 ,500
Repurchase of Senior
Notes................ (73,241) -- -- -- (73,241)
Proceeds from offering
of Remarketed Par
Securities........... 68,075 -- -- -- 68,075
Net change in minority
interest............. (44,400) -- -- (4,488) (48,888)
Other, net............ 880 750 (14,920) 14,170 880
--------- --------- --------- -------- ---------
Net cash provided by
(used in) financing
activities............. 130,451 73,559 (352,148) 4,777 (143,361)
--------- --------- --------- -------- ---------
Net change in cash.... (197) (3,014) (52,259) 1,773 (53,697)
Cash at beginning of
period............... 5,213 7,973 64,755 (3,694) 74,247
--------- --------- --------- -------- ---------
Cash at end of period. $ 5,016 $ 4,959 $ 12,496 $ (1,921) $ 20,550
========= ========= ========= ======== =========
</TABLE>
F-46
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Imperial Credit Industries, Inc. (the "Company" or "ICII"), with
consolidated assets of $2.4 billion as of June 30, 1998, is a diversified
commercial and consumer lending, financial services and investment holding
company, organized in 1986 with its headquarters located in Torrance,
California. Its principal business activities consist of the operation of five
significant wholly owned operating subsidiaries: Southern Pacific Bank
("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Advisors, Inc.
("ICAI"), Imperial Credit Commercial Asset Management Corporation ("ICCAMC")
and Imperial Credit Worldwide, Ltd. ("ICW"), one significant majority owned
consolidated operating subsidiary, Imperial Capital Group, LLC ("ICG") and
significant equity investments in two publicly traded companies, Southern
Pacific Funding Corporation ("SPFC") NYSE Symbol: SFC and Franchise Mortgage
Acceptance Company ("FMC") Nasdaq: Symbol: FMAX.
STRATEGIC FOCUS AND ACQUISITIONS
Historically, the Company's primary business was the origination and sale of
conforming residential mortgage loans. In 1995, the Company began to diversify
away from the conforming residential mortgage lending business, and began to
focus on selected lending businesses, including non-conforming residential
mortgage banking, franchise mortgage lending, sub-prime mortgage banking, sub-
prime auto lending, commercial mortgage banking, business lending and consumer
lending. During 1996 and 1997, the Company successfully completed initial
public offerings of the sub-prime mortgage banking and franchise lending
subsidiaries into SPFC and FMC, respectively. As of June 30, 1998, the Company
owns 47.0% and 38.4%, respectively, of SPFC's and FMC's common stock as
investments accounted for under the equity method, respectively.
The Company's loans and leases by sector consist primarily of the following:
asset based lending, commercial mortgage banking and income producing property
loans; business lending--equipment leasing, asset-based lending, and
participation in syndicated commercial lending; consumer loans--sub-prime auto
loans and Title I home improvement loans. The Company solicits loans and
leases from brokers on a wholesale and portfolio basis and originates loans
directly from borrowers. The majority of the Company's loans and leases, other
than those held by SPB for investment, are sold in secondary markets through
securitizations and whole loan sales.
In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis. The acquisition was recorded using the purchase
method of accounting. The purchase price was allocated to the net assets
acquired based on their fair value and goodwill of approximately $20.8 million
was recorded. Since the March 1997 acquisition date, AMN posted operating
losses and experienced significant increases in non-performing assets, loan
charge-offs and loan loss provisions. In December 1997, the Company developed
revised operating projections which indicated that the goodwill resulting from
the AMN acquisition was not recoverable. Accordingly, the remaining goodwill
balance of $20.1 million was written off during the fourth quarter of 1997.
See "--Subsequent Event"--describing AMN's discontinued operations disclosure.
In July 1997, the Company formed ICG, which, together with its subsidiaries
Imperial Capital, LLC ("IC") and Imperial Asset Management, LLC ("IAM"), to
offer individual and institutional investors financial products and services.
IC is a registered broker/dealer with the United States Securities and
Exchange Commission and is a member of the National Association of Securities
Dealers, Inc. IC provides investment opportunities and research to individual
and institutional investors, raises private and public capital for middle
market companies, and trades debt, equity and asset backed securities. IAM is
an investment advisor registered with the United States Securities and
Exchange Commission, and provides investment management services to high net
worth individuals and institutional clients. ICG is a subsidiary which the
Company controls through its 60% voting and equity ownership interest.
F-47
<PAGE>
During the fourth quarter of 1997, the Company formed ICCAMC, a wholly-owned
subsidiary, to oversee the day to day operations of Imperial Credit Commercial
Mortgage Investment Corp. ("ICCMIC") (Nasdaq: ICMI), a real estate investment
trust investing primarily in performing multi-family and commercial real
estate loans, mortgage-backed securities and real property investments. In
October 1997, ICCMIC completed its initial public offering and sold
approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. The Company
purchased 2,970,000 shares of ICCMIC common stock in the offering and an
additional 100,000 shares in December 1997. As of June 30, 1998, the Company
owned 8.9% of the common stock of ICCMIC.
During the second quarter ended June 30, 1998, the Company formed and began
managing an investment hedge fund, Cambria Investment Partnership I, LP. At
June 30, 1998, Cambria had assets under management of $113.1 million.
The Company now operates as a diversified commercial and consumer lending,
financial services and investment holding company providing financial services
products in the following sectors: business finance lending, commercial
mortgage and consumer lending, investment products and asset management
services.
The Company's core business has remained consistent in that it originates
loans and leases funded primarily by deposits, warehouse lines of credit,
repurchase facilities, securitizations and whole loan sales in the secondary
market. The Company's business strategy emphasizes:
. Investing in and managing businesses in niche segments of the financial
services industry.
. Conservative, disciplined underwriting and credit risk management.
. Loan and lease originations, where possible, on a wholesale basis.
. Securitization or sale in the secondary market of substantially all of
the Company's loans and leases, other than those held by SPB for
investment.
. Maintaining business and financial flexibility to take advantage of
changing market conditions with respect to specific financial services
businesses.
The Company diversified its business lines into investment products and
asset management services by focusing on the creation and acquisition of
additional businesses in the financial services industry in order to reduce
its dependency on residential and commercial mortgage lending. When acquiring
new businesses or targeting expansion opportunities, the Company seeks to
retain existing management and recruit additional experienced management to
increase growth and profitability and to reduce the risks associated with
operating the newly acquired entity. The Company intends to retain a
significant equity investment in acquired companies to provide a source of
future earnings and cash flow for the Company.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the "Year 2000" problem
concerning existing computer systems. The Year 2000 problem affects every
computer and subsystem the Company operates, both in-house and from
independent servicers and vendors. The issue is whether the Company's computer
systems will properly recognize the "00" date when the year changes to 2000.
Computer systems that do not properly recognize the "00" date could generate
erroneous data or cause a computer system to fail.
The Company is utilizing both internal and external resources to correct,
reprogram and test the computer systems for the Year 2000 compliance. It is
anticipated that all reprogramming changes will be completed and installed by
December 31, 1998, allowing adequate time for testing all data from the
Company's in-house, independent servicers and vendor computer systems through
March 31, 1999. Management has assessed the Year 2000 compliance costs and
does not believe such costs will have a material effect on the Company's
consolidated financial statements.
F-48
<PAGE>
BUSINESS FINANCE LENDING
COMMERCIAL EQUIPMENT LEASING
IBC's lease originations totaled $26.6 million and $61.7 million for the
three and six months ended June 30, 1998 as compared to $34.4 million and
$64.5 million for the same period last year. IBC securitized $31.2 million and
$66.7 million of leases during the three and six months ended June 30, 1998 as
compared to $17.6 million and $115.5 million of leases for the same periods
last year.
ASSET BASED LENDING
At June 30, 1998, the Coast Business Credit ("CBC") loan portfolio
represented lending relationships with approximately 165 customers, with an
average total loan per customer of $3.6 million. During 1997, CBC executed an
expansion plan which has increased its customer base outside of California.
CBC now operates four loan production centers in California and additional
loan production centers in Atlanta, Baltimore, Boston, Chicago, Cleveland,
Detroit, Minneapolis, Phoenix, Portland, Providence, and Seattle. At June 30,
1998 and December 31, 1997, CBC had outstanding loans totaling $586.8 million
and $484.8 million, of which $184.2 million and $201.8 million were
outstanding to technology companies, respectively. CBC had open unused
commitments of $405.4 million at June 30, 1998. As of June 30, 1998, CBC had
total loan commitments of $992.2 million.
LOAN PARTICIPATION AND INVESTMENT GROUP ("LPIG")
At June 30, 1998, loan participations held by the LPIG division of SPB
ranged in size from approximately $420,000 to approximately $16 million, as
compared to approximately $800,000 to $17.5 million at June 30, 1997,
respectively. As of June 30, 1998, LPIG committed to fund approximately $674.0
million of senior secured loan participation commitments. Loans outstanding
under LPIG's participation commitments at June 30, 1998 totaled $292.5
million.
AUTO LEND GROUP
Auto Lend had $73.8 million of commitments and $17.4 million of loans
outstanding at June 30, 1998. SPB believes that Auto Lend's products offer
synergistic opportunities, when offered in connection with SPB's sub-prime
auto lending program, to provide car dealers a complete financing package. See
"Consumer Lending, Sub-prime Auto Lending."
COMMERCIAL MORTGAGE LENDING
INCOME PROPERTY LENDING DIVISION ("IPLD")
For the three months and six months ended June 30, 1998, the IPLD division
of SPB funded approximately $106.9 million and $171.6 million in loans, as
compared to $72.2 million and $148.1 million in loans for the same periods
last year, respectively.
CONSUMER LENDING
SUB-PRIME AUTO LENDING
SPB's Auto Lending Division originated $40.7 million and $73.2 million in
sub-prime auto loans during the three and six months ended June 30, 1998 as
compared to $23.4 million and $39.7 million, for the same periods last year,
respectively. The Company currently originates sub-prime auto loans through
three Northern California retail offices.
AMN originated $5.5 million and $8.1 million in sub-prime auto loans during
the three and six months ended June 30, 1998, as compared to $77.8 million and
$93.9 million, for the same periods last year, respectively.
F-49
<PAGE>
AMN had total assets of $61.7 million at June 30, 1998. Total revenues for the
three and six months ended June 30, 1998 were $2.9 million and $3.8 million as
compared to $3.3 million and $4.4 million for the three months ended June 30,
1997 and the period from the acquisition date of March 15, 1997 to June 30,
1997, respectively. For the three and six months ended June 30, 1998, AMN's
net losses were $142,000 and $1.8 million as compared to net losses of $1.1
million and $765,000 for the three months ended June 30, 1997 and the period
from the acquisition date of March 15, 1997 to June 30, 1997, respectively.
See "--Subsequent Event"--describing AMN's discontinued operations disclosure.
HOME IMPROVEMENT LOANS AND OTHER CONSUMER CREDIT
During the three and six months ended June 30, 1998, SPB's Consumer Credit
Division originated $12.5 million and $18.0 million in loans as compared to
$6.0 million and $10.0 million for the same periods last year, respectively.
PRINCAP MORTGAGE WAREHOUSE
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. and contributed such assets to its PMW Mortgage
Warehouse, Inc. subsidiary ("PrinCap"). The acquisition was accounted for as a
purchase, and the purchase price of $123.7 million was allocated to the net
assets acquired based on their fair value resulting in goodwill of $6.8
million. PrinCap's primary business is residential mortgage warehouse lending
to medium- sized brokers and mortgage bankers on a national basis. At June 30,
1998 and December 31, 1997, PrinCap had total commitments and outstanding
loans of $207.1 million and $175.0 million, and $124.6 million and $122.5
million, respectively.
ASSET MANAGEMENT, INVESTMENT PRODUCTS AND OTHER ACTIVITIES
The Company conducts asset management, investment and other advisory
services through its ICCAMC, ICG and ICAI subsidiaries and has substantial
equity investments in SPFC, a publicly traded sub-prime residential mortgage
lender, FMC, a publicly traded specialty commercial finance company, Imperial
Credit Commercial Mortgage Investment Corp. ("ICCMIC"), a publicly traded REIT
engaged in commercial mortgage lending activities, and ICW, a holding company
for international finance activities.
IMPERIAL CREDIT COMMERCIAL ASSET MANAGEMENT CORPORATION
ICCAMC was formed in the third quarter of 1997 to oversee the day-to-day
operations of ICCMIC pursuant to a management agreement. For the three months
and six months ended June 30, 1998, ICCAMC earned $1.3 million and $2.5
million, respectively, in management fees from ICCMIC.
The Company also earned management fees of $263,000 from the Cambria
Investment Partnership I, LP., a newly formed hedge fund managed by the
Company. At June 30, 1998, Cambria had assets under management of $113.1
million.
IMPERIAL CAPITAL GROUP, LLC
ICG is a subsidiary which the Company controls through its 60% voting and
equity ownership interest. ICG was formed in July 1997. ICG, together with its
subsidiaries IC and IAM, offer individual and institutional investors
financial products and services. IAM is an investment advisor registered with
the United States Securities and Exchange Commission, and provides investment
management services to high net worth individuals and institutional clients.
For the three and six months ended June 30, 1998, ICG generated $6.4 million
and $11.0 million in investment banking revenues as compared to none for the
same periods last year.
F-50
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
SPFC is a publicly traded sub-prime mortgage banking company which
originates, purchases and sells high yielding, single family sub-prime
mortgage loans. Substantially all of SPFC's loans are secured by first or
second mortgages on owner occupied single family residences. The majority of
the originated and purchased loans are made to borrowers who do not qualify
for or are unwilling to obtain financing from conventional mortgage sources.
As of June 30, 1998, ICII owned 9,742,500 shares of SPFC common stock,
representing 47.0% of the outstanding common stock of SPFC, which, commencing
with the three months ended March 31, 1997, is reflected on the Company's
consolidated balance sheet as "Investment in Southern Pacific Funding
Corporation" and is accounted for pursuant to the equity method of accounting.
Equity in the net income of SPFC for the three and six months ended June 30,
1998 was $6.8 million and $12.7 million, respectively, as compared to $6.7
million and $12.9 million for the same periods last year, which represents the
Company's share of SPFC's net income based on the Company's ownership
percentage.
During the second quarter ended June 30, 1998, SPFC borrowed a maximum of
$21.5 million from the Company at an interest rate of 12%. The average loan
balance during the quarter was $8.0 million. The loan was repaid in full plus
accrued interest on June 29, 1998. As of June 30, 1998, the Company had no
loans outstanding to SPFC.
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
FMC is a publicly traded specialty commercial finance company engaged in the
business of originating and servicing loans and equipment leases to small
businesses, with a primary focus on established national and regional
franchise concepts. More recently, FMC has expanded its focus to include
retail energy licensees (service stations, convenience stores, truck stops,
car washes and quick lube businesses), funeral homes, cemeteries and golf
operating businesses (golf courses and golf practice facilities). FMC
originates long-term fixed and variable rate loan and lease products and sells
such loans and leases either through securitizations or whole loan sales to
institutional purchasers on a servicing retained basis. FMC also periodically
makes equity investments or receives contingent equity compensation as part of
its core lending and leasing business. In March 1998, FMC purchased Bankers
Mutual, an originator of multifamily income property loans.
During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. As a
result of the Company's participation in the public offering, the Company's
percentage ownership of FMC was reduced to 38.4% from 66.7%.
Consequently, commencing with the quarter ended December 31, 1997, the
financial statements of FMC are no longer consolidated with those of ICII. As
of June 30, 1998, ICII owned 11,023,492 shares of FMC common stock. ICII's
investment in FMC is reflected on the Company's consolidated balance sheet as
"Investment in Franchise Mortgage Acceptance Company" and is accounted for
pursuant to the equity method of accounting. Equity in the net income of FMC
for the three and six months ended June 30, 1998 was $3.8 million and $6.6
million, respectively, as compared to none for the same periods last year.
IMPERIAL CREDIT COMMERCIAL MORTGAGE INVESTMENT CORP.
In October 1997, the Company completed a public offering of the common stock
of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial
loans, mortgage-backed securities and real property investments. The Company
owned 3,070,000 shares or 8.9% of the outstanding common stock of ICCMIC as of
June 30, 1998.
IMPAC MORTGAGE HOLDINGS, INC.
Pursuant to a termination agreement entered into in December of 1997,
related to the management agreement between ICAI and IMH, the Company received
2,009,310 shares of IMH common stock and certain
F-51
<PAGE>
securitization-related assets. Additionally, the Company agreed to cancel its
note receivable from ICI Funding Corporation ("ICIFC"), a former subsidiary of
ICII which is now known as Impac Funding Corporation and is the origination
unit of IMH. The Company owned 8.4% of the outstanding common stock of IMH as
of June 30, 1998.
IMPERIAL CREDIT WORLDWIDE, LTD.
ICW is a holding company for the Company's international finance activities
and is a majority owner of Credito Imperial Argentina, a mortgage banking
company conducting residential mortgage business in Argentina. ICW originated
$10.1 million and $16.8 million in residential loans for the second quarter
and six months ended June 30, 1998, respectively, as compared to $0 for the
same periods last year.
IMPERIAL CREDIT ADVISORS, INC.
ICAI provides capital markets, portfolio management and research services to
the Company's subsidiaries and affiliates. Prior to December 1997, ICAI
oversaw the day-to-day operations of IMH pursuant to a management agreement.
The asset management fees earned of $1.2 million and $2.8 million, for the
three months and six months ended June 30, 1997, respectively, were solely
related to ICAI providing REIT management services for Impac Mortgage
Holdings, Inc. ("IMH"). For the three and six months ended June 30, 1998, ICAI
did not earn asset management fees. The asset management fees earned for the
prior periods were solely related to Imperial Credit Advisors, Inc ("ICAI")
which provided REIT management services for Impac Mortgage Holdings, Inc.
("IMH") until December 1997.
SECURITIZATION TRANSACTIONS AND LOAN SALES
During the quarter ended June 30, 1998, the Company sold $93.4 million of
commercial and multifamily loans to ICCMIC and securitized $31.2 million of
leases originated by Imperial Business Credit, Inc. ("IBC"), generating gains
of $1.9 million and $1.1 million, respectively.
During the quarter ended June 30, 1997, the Company securitized $379.3
million of loans and leases originated by SPB's income property division, FMC
and IBC. Excluding loans securitized by FMC, the Company securitized $220.7
million of loans and leases for the quarter ended June 30, 1997.
The decrease in securitization transactions is consistent with the Company's
objective of becoming less reliant on gain on sale as a source of revenue.
Gain on sale of loans and leases decreased to $3.3 million and $8.8 million
during the second quarter and six months ending June 30, 1998, respectively,
from $28.6 million and $37.2 million for the same periods last year. The
decrease in gain on sale of loans and leases was primarily attributable to the
deconsolidation of FMC. Gain on sale of loans and leases decreased to 6% and
9% of total revenues during the quarter and six months ended June 30, 1998, as
compared to 50% and 38% for the same periods last year, respectively.
During the six months ended June 30, 1998, the Company completed loan and
lease securitizations totaling $66.7 million as compared to $477.2 million for
the same periods last year. During the six months ended June 30, 1998, the
Company through its SPB subsidiary sold $190.0 million in multi family and
commercial mortgages to ICCMIC as compared to $0 for the same period last
year.
The Company has retained interests in loan and lease securitizations
representing the excess of the total amount of loans sold in the
securitization over the amounts represented by interests in the security sold
to investors. The retained interests in the loan and lease securitizations
were $53.2 million and $43.1 million at June 30, 1998 and December 31, 1997,
respectively. The increase in retained interests in the loan and lease
securitizations were primarily attributable to lease securitizations at IBC
during the six months ended June 30, 1998.
F-52
<PAGE>
FUNDING
LINES OF CREDIT
Until 1995, apart from equity and debt offerings in the capital markets, the
Company's primary sources of financing were warehouse lines of credit at ICII
and deposits with SPB. Typically, ICII would borrow funds under its warehouse
lines in connection with its wholesale loan originations and purchases, while
SPB used its deposits and borrowings from the Federal Home Loan Bank of San
Francisco ("FHLB") to finance its lending activities.
In connection with its diversification strategy, the Company believes that
lower cost financing is available through credit lines, repurchase facilities,
whole loan sales and securitization programs established by IBC and SPB.
The Company continues to rely on FDIC insured deposits generated by SPB and
third party warehouse lines of credit and securitizations. At June 30, 1998,
SPB had total deposits of approximately $1.5 billion (excluding deposits of
ICII maintained with SPB).
ICII and its subsidiaries had various revolving warehouse lines of credit
available at June 30, 1998, as follows:
<TABLE>
<CAPTION>
INTEREST INDEX EXPIRATION
RATE COMMITMENT OUTSTANDING (BASIS POINTS) DATE
-------- ---------- ----------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 7.00% $100,000 $ 15,997 Libor plus 135 March 9, 1999
Core States (IBC)....... 7.86% 30,000 7,256 Libor plus 220 October 6, 1998
Morgan Stanley (SPB).... 6.16% 200,000 96,000 Libor plus 50 October 1, 1998
-------- --------
$330,000 $119,253
======== ========
</TABLE>
F-53
<PAGE>
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO
THREE AND SIX MONTHS ENDED JUNE 30, 1997
The Company's consolidated net income for the three and six months ended
June 30, 1998 increased to $16.3 million and $29.2 million or $0.40 and $0.71
diluted income per share as compared to $14.1 million and $21.1 million or
$0.35 and $0.52 diluted income per share for the same period last year. Net
income for the first six months of 1997 includes an extraordinary item of $4.0
million or $0.10 per diluted share representing a loss on the Company's early
retirement of debt. Basic consolidated net income per share for the three and
six months ended June 30, 1998 was $0.42 and $0.75 per basic share as compared
to $0.37 and $0.55 per basic share for the same period last year. The increase
in net income for the three months ending June 30, 1998 is primarily
attributable to an increase in net interest income, loan servicing income,
investment banking fees, partially offset by a decrease in the Company's
equity ownership in FMC's earnings. The Company's ownership in FMC's common
stock as of June 30, 1998 was 38.4% as compared to 66.7% for the same period
last year.
The increase in net income for the six months ending June 30, 1998 is
primarily attributable to an increase in net interest income, loan servicing
income, investment banking fees, equity in the earnings of FMC, and lower
provision for loan and lease losses, partially offset by increases in total
expenses related to continued growth and increased activities at the Company's
new business lines of Imperial Capital Group, LLC, and Imperial Credit
Commercial Asset Management Corporation.
RETURN ON EQUITY
Return on equity ("ROE") was 19.2% and 17.5% for the three months and six
months ending June 30, 1998, as compared to ROE of 22.0% and 20.1% for the
same periods last year. The Company's strong capital position provides it with
excellent opportunities to reduce risk and improve corporate performance and
profitability in the future through opportunistic acquisitions and future
capital redeployment opportunities.
DECONSOLIDATION OF FMC
During the fourth quarter of 1997, the Company reduced its ownership
percentage in FMC from 66.7% to 38.4% through an initial public offering of
FMC common stock. The income from FMC is accounted for by the equity method of
accounting beginning with the quarter ended December 31, 1997. For the three
and six months ended June 30, 1998, the equity in net income of FMC was $3.8
million and $6.6 million, respectively. As a result of the deconsolidation of
FMC, gain on sale of loans, net interest income, other income and, general and
administrative expenses are not comparable to the prior year. Therefore, the
following income statements present gain on sale of loans, net-interest
income, other income and general and administrative expenses for the Company
as if FMC had been accounted for as an equity investment for all periods
presented.
F-54
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases........... $ 3,273 $ 8,737 $ 8,845 $17,013
------- ------- ------- -------
Interest income............................ 59,864 49,421 113,503 95,291
Interest expense........................... 29,851 26,428 57,446 52,133
------- ------- ------- -------
Net interest income...................... 30,013 22,993 56,057 43,158
Provision for loan and lease losses.......... 3,450 5,736 7,300 8,606
------- ------- ------- -------
Net interest income after provision for loan
and lease losses............................ 26,563 17,257 48,757 34,552
------- ------- ------- -------
Other income:
Loan servicing income...................... 4,055 1,434 8,083 2,074
Equity in net income of Southern Pacific
Funding Corp.............................. 6,764 6,678 12,739 12,931
Equity in net income of Franchise Mortgage
Acceptance Company........................ 3,817 11,170 6,586 9,310
Investment banking fees.................... 6,433 -- 10,968 --
Management fees............................ 1,575 1,238 2,780 2,816
Gain on sale of Southern Pacific Funding
Corporation stock......................... -- -- -- 4,306
Other income............................... 2,232 874 4,380 1,550
------- ------- ------- -------
Total other income........................... 24,876 21,394 45,536 32,987
------- ------- ------- -------
Total revenue................................ 54,712 47,388 103,138 84,552
------- ------- ------- -------
EXPENSES:
Personnel expense.......................... 15,519 10,366 31,773 18,439
Amortization of servicing rights........... 360 206 701 225
Occupancy expense.......................... 1,482 822 3,028 1,613
Data processing expense.................... 410 342 903 762
Net (income) expenses of other real estate
owned..................................... 288 3,480 (71) 4,237
General, administrative and other expense.. 10,889 9,315 20,224 16,329
------- ------- ------- -------
Total expenses........................... 28,948 24,531 56,558 41,605
------- ------- ------- -------
Income before income taxes, minority
interest and extraordinary item........... 25,764 22,857 46,580 42,947
Income taxes............................... 9,360 8,784 17,184 17,842
Minority interest in income of consolidated
subsidiaries.............................. 142 -- 234 --
------- ------- ------- -------
Income before extraordinary item........... 16,262 14,073 29,162 25,105
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes................................... -- -- -- (3,995)
------- ------- ------- -------
Net income............................. $16,262 $14,073 $29,162 $21,110
======= ======= ======= =======
</TABLE>
F-55
<PAGE>
REVENUES
GENERAL
Total revenues for the Company during the second quarter ended June 30, 1998
were $54.7 million as compared to $57.5 million reported for the same period
in 1997. After adjusting the three months ended June 30, 1997 as if the
deconsolidation of FMC occurred on January 1, 1997, total revenues increased
by 15% to $54.7 million as compared to $47.4 million for the same period last
year.
Total revenues for the six months ended June 30, 1998 were $103.1 million,
as compared to $97.8 million for the same period last year. Excluding the
gains on the sale of SPFC stock for the six month periods ended June 30, 1997
and adjusting the six months ended June 30, 1997 as if the deconsolidation of
FMC occurred on January 1, 1997, total revenues increased by 29% to $103.1
million from $80.2 million, respectively.
GAIN ON SALE/LOAN & LEASE SECURITIZATION AND SALES
Consistent with the Company's objective of becoming less reliant on gain on
sale as a source of revenue, gain on sale of loans and leases decreased $25.3
million to $3.3 million during the second quarter of 1998 from $28.6 million
for the same period last year. Gain on sale of loans and leases consists
primarily of gains recorded upon the sale of loans and leases, net of
associated expenses, and to a lesser extent, fees received on the origination
of loans, and fees received for commitments to fund loans. Gain on sale of
loans decreased $28.4 million to $8.8 million for the six months ended June
30, 1997 from $37.2 million for the same period last year, primarily as a
result of the deconsolidation of FMC and lower volume of securitizations at
SPB.
During the three and six months ended June 30, 1998, the Company sold $93.4
million and $190.0 million of commercial and multifamily loans to ICCMIC, and
securitized $31.2 million and $66.7 million of leases originated by IBC,
generating gains of $1.9 million and $5.7 million, and $1.1 million and $2.7
million, respectively.
During the three and six months ended June 30, 1997, the Company securitized
$379.3 million and $477.2 million of loans and leases. Excluding loans
securitized by FMC, the Company securitized $220.7 million of loans and leases
for the quarter ended June 30, 1997.
TOTAL INTEREST INCOME
For the three and six months ended June 30, 1998, total interest income
increased to $59.9 million and $113.5 million, respectively, from $55.4
million and $104.6 million for the same periods last year. The increase in
total interest income is primarily attributable to increases in yield as well
as the outstanding average balance on interest-earning assets. The increase in
the average yield on interest-earning assets in 1998 is primarily attributable
to increases in the average yields on loans held for investment and sale
reflecting a more diversified and higher-yielding mix of loan products
relative to 1997. The comparison of total interest income for the three months
ended June 30, 1998 and 1997 is also impacted by the deconsolidation of FMC.
Excluding FMC's interest income for the three and six months ended June 30,
1997, total interest income would have been $49.4 million and $95.3 million as
compared to the consolidated interest income of $55.4 million and $104.6
million for the three and six months ended June 30, 1998, respectively.
TOTAL INTEREST EXPENSE
For the three months and six months ended June 30, 1998, total interest
expense decreased to $29.9 million and $57.4, respectively, million as
compared to $31.7 million and $60.1 million for the same periods last year.
The decrease in interest expense was attributable to a decrease in other
borrowings resulting from the deconsolidation of FMC, which was partially
offset by increases in interest on deposits and long term debt. The increase
in interest on deposits and long term debt was attributable to the increase in
deposits at SPB in 1998 and the interest expense related to the issuance of
$70 million of Remarketed Par Securities in June of 1997. Excluding FMC's
interest expense for the three and six months ended June 30, 1997, total
interest expense would have been $26.4 million and $52.1 million as compared
to the consolidated interest expense of $29.9 million and $57.4 million for
the three and six months ended June 30, 1998, respectively.
F-56
<PAGE>
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses was $3.5 million and $7.3 million
for the three and six months ended June 30, 1998, respectively, as compared to
$5.7 million and $8.6 million for the same periods last year. The decrease in
the loan and lease loss provision for the three and six months ended June 30,
1998 was primarily the result of the decrease in both nonaccrual loans and net
charge-offs to average loans held for investment. At June 30, 1998, nonaccrual
loans declined to $63.9 million as compared to $70.6 million at December 31,
1997 or 3.9% and 5.4% of gross loans held for investment, respectively.
Additionally, excluding net charge-offs of $13.7 million and $102,000 at AMN
for the six months ended June 30, 1998 and 1997, net charge-offs were $4.3
million and $7.3 million, respectively.
LOAN SERVICING INCOME
Loan servicing income for the three and six months ended June 30, 1998 was
$4.1 million and $8.1 million, respectively, as compared to $2.2 million and
$3.5 million for the same periods last year. The increase in loan servicing
income was primarily attributable to a decrease in servicing related expenses
associated with the Company's former residential mortgage banking loan
portfolio and an increase in the average outstanding balance of loans and
leases serviced for others at SPB, IBC and AMN.
EQUITY IN NET INCOME OF SPFC
Equity in the net income of SPFC for the three and six months ended June 30,
1998 was $6.8 million and $12.7 million, respectively, as compared to $6.7
million and $12.9 million for the same periods last year, which represents the
Company's share of SPFC's net income based on the Company's ownership
percentage. At June 30, 1997 and 1998, the Company's ownership percentage in
SPFC was 47.0%. The Company accounts for its investment in SPFC using the
equity method.
EQUITY IN NET INCOME OF FMC
Equity in the net income of FMC for the three and six months ended June 30,
1998 was $3.8 million and $6.6 million, respectively, as compared to $0 for
the same periods last year, which represents the Company's share of FMC's net
income based on the Company's ownership percentage. The increase in the equity
in net income of FMC is due to the difference in accounting methods used for
the Company's investment in FMC at June 30, 1998 and 1997. At June 30, 1998,
the Company's ownership percentage in FMC was 38.4%, and accordingly, the
Company accounted for its investment in FMC using the equity method. During
the first quarter and six months ended June 30, 1997, FMC was a 66.67% owned
consolidated subsidiary of the Company, which contributed pre-tax earnings to
the Company of $11.2 million and $9.3 million, respectively.
INVESTMENT BANKING FEES
Investment banking fees were $6.4 million and $11.0 million for the three
and six months ended June 30, 1998, respectively, compared to $0 for the same
periods last year. During the fourth quarter of 1997, the Company capitalized
a new subsidiary, ICG, which includes a registered broker/dealer and an asset
management company offering individual and corporate investors a wide range of
financial products and services. The investment banking fees consist of fees
related to equity, debt offerings and brokerage commissions.
GAIN ON SALE OF SPFC STOCK
During the three and six months ended June 30, 1998, the Company did not
sell any shares of its common stock ownership in SPFC. During the first
quarter of 1997, the Company sold 370,000 shares of SPFC common stock at
$16.63 per share generating net proceeds of $6.2 million and a gain of $4.3
million.
EXPENSES
Total expenses for the Company during the second quarter of 1998 were $28.9
million as compared to $29.1 million for the same period last year. For the
six months ending June 30, 1998 total expenses were $56.6 million as compared
to $50.2 million reported for the same period last year. Excluding the
expenses of the FMC deconsolidation, expenses for the three and six month
periods ended June 30, 1997 were $24.5 million and $41.6 million,
respectively.
F-57
<PAGE>
The increase in total expenses for the three and six months periods ended
June 30, 1998 was attributable to continued growth and increased activities at
the Company's new business lines including Imperial Capital Group, LLC, and
Imperial Credit Commercial Asset Management Corporation. Total expenses from
ICG and from the Company's other startup asset management operations were $5.3
million and $10.1 million for the three and six months ended June 30, 1998 as
compared to none for the same periods last year.
PERSONNEL EXPENSE
Personnel expense increased to $15.5 million and $31.8 million for the three
and six months ended June 30, 1998, respectively, as compared to $12.4 million
and $23.1 million for the same periods of the previous year. This increase was
primarily the result of growth and increased activities at the Company's new
business lines, including ICG, ICW and ICCAMC.
AMORTIZATION OF SERVICING RIGHTS
Amortization of servicing rights increased to $360,000 and $701,000 for the
three and six months ended June 30, 1998 as compared to $206,000 and $225,000
for the same periods last year. The increase was primarily the result of an
increased balance of servicing rights retained from recent loan sales and
securitizations at SPB.
OCCUPANCY EXPENSE
Occupancy expense increased to $1.5 million and $3.0 million for the three
and six months ended June 30, 1998, respectively, as compared to $983,000 and
$1.9 million for the same periods of the previous year. The increase is
primarily attributable to the Company's acquisition and expansion activities
throughout 1997 and during the first six months of 1998.
NET INCOME/EXPENSES OF OTHER REAL ESTATE OWNED
During the second quarter of 1998 expenses from OREO operations were
$288,000 as compared to $3.5 million for the same period last year. For the
six months ended June 30, 1998, the Company generated income of $71,000 as
compared to expenses of $4.2 million. The decrease in expenses primarily
resulted from a lower level of losses and write-downs related to the sale of
properties from the Company's former mortgage banking operations.
OTHER EXPENSES
All other expenses (including data processing, professional services, FDIC
insurance premiums, telephone and other communications, amortization of
goodwill and general and administrative expense) for the three and six months
ended June 30, 1998 totaled $11.3 million and $21.1 million, respectively, as
compared to $12.0 million and $20.7 million for the same periods last year.
The comparison of other expenses for the first quarter 1998 and 1997 is also
impacted by the deconsolidation of FMC. Excluding FMC's total other expenses
for the three and six months ended June 30, 1997, other expenses would have
been $9.7 million and $17.1 million, respectively, as compared to the
consolidated total expenses of $11.3 million and $21.1 million. This increase
reflects the Company's acquisition and expansion activities.
MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES
The Company's minority interest in income of consolidated subsidiaries was
$142,000 and $234,000 for the three and six months ended June 30, 1998,
respectively, as compared to $4.5 million and $4.7 million for the same
periods last year. The minority interest in income of consolidated
subsidiaries for the three and six months ended June 30, 1998 is attributable
to the Company's 60% ownership in ICG. The minority interest in income of
consolidated subsidiaries for the same period last year was attributable to
the Company's 66.7% ownership in FMC. The comparison of the Company's minority
interest in income of consolidated subsidiaries for the three and six months
ended June 30, 1998 and 1997 is impacted by the deconsolidation of FMC.
Excluding the Company's minority interest in income of FMC for the three and
six months ended June 30, 1997, total minority interest in income of
consolidated subsidiaries would have been $0 when compared to $142,000 and
$234,000 for the current periods presented.
F-58
<PAGE>
EXTRAORDINARY ITEM--LOSS ON EARLY EXTINGUISHMENT OF DEBT
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007. A portion of the
proceeds from the offering were used to repurchase $69.8 million of 9.75%
Senior Notes due 2004 for which the Company recorded an extraordinary after-
tax charge of $4.0 million.
The Company engaged in the new issuance in order to obtain a more favorable
debt covenant package and to raise new capital to support its growing
businesses.
ASSET QUALITY
LOAN LOSS PROVISION AND NONACCRUAL LOANS AND LEASES
As a result of the growth in the loan portfolio and the change in its
product mix, the Company continued to add to the allowance for loan and lease
losses. The provision for loan and lease losses was $3.5 million and $7.3
million for the second quarter and six months ended June 30, 1998,
respectively, as compared to $5.7 million and $8.6 million for the same
periods last year. The decrease in the loan and lease loss provision for the
second quarter of 1998 was primarily the result of the decrease in nonaccrual
loans. Nonaccrual loans and leases as of June 30, 1998 decreased to $63.9
million from $70.6 million at December 31, 1997, or 3.9% and 5.4% of gross
loans held for investment, respectively.
The balance of nonaccrual loans relating to the former mortgage banking
operations included $5.9 million and $6.9 million of loans at June 30, 1998
and December 31, 1997, respectively. The Company periodically reviews the
allowance for loan and lease losses in connection with the overall loan and
lease portfolio. Based on the Company's charge-off experience and relatively
stable balance of nonaccrual loans, management believes the current balance of
the allowance for loan and lease losses is sufficient in relation to the
amount of risk in the loan and lease portfolio. The Company's activity in the
allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Beginning balance as of December 31, 1997 and 1996.... $ 38,047 $ 19,999
Provision for loan and lease losses................... 7,300 8,606
Business acquisitions and bulk loan purchases......... -- 4,864
Sale of Leases........................................ -- (900)
Deconsolidation of ICIFC.............................. -- (687)
--------- ---------
45,347 31,882
--------- ---------
LOANS CHARGED OFF:
Mortgage.............................................. (1,157) (1,826)
Multifamily........................................... -- (420)
Commercial............................................ (28) (780)
Leases................................................ (830) (3,567)
AMN auto loans........................................ (13,716) (102)
Other consumer........................................ (3,635) (1,274)
--------- ---------
Total................................................ (19,366) (7,969)
--------- ---------
Recoveries on loans previously charged off:
Mortgage.............................................. 143 50
Multifamily........................................... 142 --
Commercial............................................ 36 --
Leases................................................ 648 425
Consumer.............................................. 321 132
--------- ---------
Total................................................ 1,290 607
--------- ---------
Net charge-offs....................................... (18,076) (7,362)
--------- ---------
Ending balance as of June 30, 1998 and 1997........... $ 27,271 $ 24,520
========= =========
</TABLE>
F-59
<PAGE>
Net charge-offs increased to $18.1 million for the six month period ended
June 30, 1998 as compared to $7.4 million for the same period last year. The
increase was primarily related to charge-offs of auto and consumer loans at
AMN and SPB. Excluding net charge-offs of AMN loans, total net charge-offs
decreased to $4.4 million for the six months ended June 30, 1998 as compared
to $7.3 million for the same period last year. See "--Subsequent Event--
describing AMN's discontinued operations disclosure.
Loans held for investment consisted of the following at June 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single Family 1-4............................ $ 169,325 $ 244,588
Multi-Family................................. 43,265 17,261
Commercial................................... 7,158 1,085
---------- ----------
219,748 262,934
Leases....................................... 4,446 7,745
Installment loans............................ 244,218 129,595
Auto Marketing Network, Inc. auto loans...... 14,883 25,324
Franchise loans.............................. 67,042 62,219
Asset based loans............................ 586,754 484,832
Loan participations.......................... 292,517 196,339
Mortgage warehouse lines..................... 174,953 122,488
Commercial................................... 32,244 26,055
---------- ----------
Total...................................... 1,636,805 1,317,531
Unearned income.............................. (13,322) (7,850)
Deferred loan fees........................... (8,727) (4,916)
---------- ----------
Total...................................... 1,614,756 1,304,765
Allowance for loan and lease losses.......... (27,271) (38,047)
---------- ----------
Total...................................... $1,587,485 $1,266,718
========== ==========
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, asset based loans to
middle market companies mainly in California, participations in commercial
loan syndications and loans to experienced franchisees of nationally
recognized restaurant concepts. The increase in loans held for investment was
primarily attributable to loan originations at SPB's Coast Business Credit,
Loan Participation and Investment Group, and Consumer Credit divisions.
Additionally, SPB's acquisition of PrinCap Mortgage Warehouse Inc. during the
fourth quarter of 1997 contributed to the increase in loans held for
investment.
The Company's allowance for loan and lease losses decreased to $27.3 million
as compared to $38.0 million at December 31, 1997. The allowance for loan and
lease losses as a percentage to non-accruing loans was 42.7% at June 30, 1998
as compared to 53.9% at December 31, 1997. The decrease was primarily
attributable to net charge-offs of AMN loans and a decrease in non-accrual
loans during the six months ended June 30, 1998.
As a result, the loan portfolio has a high concentration in the same
geographic region. Although the Company has a diversified portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy of California.
NONPERFORMING ASSETS ("NPA")
The Company's NPA's consist of non-accruing loans, OREO and repossessed
property. Total NPA's were $72.4 million as of June 30, 1998 as compared to
$90.5 million at December 31, 1997. Total NPA's as a percentage of loans, OREO
and repossessed assets were 3.97% at June 30, 1998, as compared to 6.04% at
December 31, 1997. The Company's NPA's as a percentage of loans, OREO and
repossessed assets at AMN,
F-60
<PAGE>
former mortgage banking operations and all other lending activities were
2.97%, 24.13% and 43.31% at June 30, 1998, as compared to 3.52%, 52.51% and
69.88% at December 31, 1997. The decrease in NPA's as a percentage of loans,
OREO and repossessed assets was mainly attributable to loan charges-offs and
sales of OREO properties during the six months ended June 30, 1998.
The following table sets forth the amount of non performing assets
attributable to the Company's other lending activities, former mortgage
banking operations and AMN.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
---------------------------------------------- ------------------------
FORMER AUTO FORMER AUTO
ALL OTHER MORTGAGE MARKETING ALL OTHER MORTGAGE MARKETING
LENDING BANKING NETWORK, INC LENDING BANKING NETWORK, INC.
ACTIVITIES OPERATIONS OPERATIONS ACTIVITIES OPERATIONS OPERATIONS
---------- ---------- ------------ ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
One to four family..... $ 24,897 $ 5,852 $ -- $ 27,573 $ 6,874 $ --
Commercial property.... 8,552 -- -- 5,058 -- --
Multi-family property.. 2,417 -- -- 1,837 -- --
Leases and installment. 10,196 -- 11,976 6,608 -- 22,681
---------- ------- ------- ---------- ------- -------
Total nonaccrual loans.. 46,062 5,852 11,976 41,076 6,874 22,681
---------- ------- ------- ---------- ------- -------
OREO:
One to four family..... 5,702 1,080 -- 2,552 5,774 --
Commercial property.... 540 -- -- 2,526 -- --
Multi-family property.. -- -- -- 53 -- --
---------- ------- ------- ---------- ------- -------
Total OREO.............. 6,242 1,080 -- 5,131 5,774 --
---------- ------- ------- ---------- ------- -------
Repossessed property:
Equipment held for
sale.................. 47 -- -- 4,437 -- --
Repossessed vehicles... -- -- 1,114 -- -- 4,563
---------- ------- ------- ---------- ------- -------
Total repossessed
property............... 47 -- -- 4,437 -- --
---------- ------- ------- ---------- ------- -------
Total NPAs.............. $ 52,351 $ 6,932 $13,090 $ 50,644 $12,648 $27,244
========== ======= ======= ========== ======= =======
Total loans, OREO and
repossessed property... $1,765,194 $28,733 $30,221 $1,436,932 $24,087 $38,989
Total NPA's as a
percentage of loans,
OREO and repossessed
property............... 2.97% 24.13% 43.31% 3.52% 52.51% 69.88%
</TABLE>
There are no loans over 90 days past due accruing interest at June 30, 1998
or December 31, 1997, respectively.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan and lease losses, management
F-61
<PAGE>
considers such factors as historical loan loss experience, underlying
collateral values, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio.
Loans deemed by management to be uncollectible are charged to the allowance
for loan and lease losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan and lease losses are charged to
expense and credited to the allowance in amounts deemed appropriate by
management based upon its evaluation of the known and inherent risks in the
loan portfolio. Future additions to the allowance for loan and lease losses
may be necessary.
TOTAL RATE OF RETURN SWAPS
The Company has entered into total rate of return swap contracts for
investment purposes with various investment bank counterparties, the
provisions of which entitle the Company to receive the total return on various
commercial loans in exchange for a floating payment of one month LIBOR plus a
spread. As of June 30, 1998, the Company is party to total rate of return swap
contracts with a total notional amount of $292.7 million, under which the
Company was obligated to pay one month LIBOR plus a weighted average spread of
1.83%. The weighted average remaining life of these contracts was 36.1 months
as of June 30, 1998. These contracts are off-balance sheet instruments. For
the three and six months ended June 30, 1998, the Company recognized $1.1
million and $2.1 million, respectively, of interest income on total return
swaps as compared to $294,000 and $739,000 for the same periods last year.
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with Generally Accepted Accounting
Principles, 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 cost of the Company's operations.
Unlike industrial companies, nearly all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Inflation affects the Company 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 loans and a borrower's ability to
qualify for mortgage financing in a purchase transaction may be adversely
affected. During periods of decreasing interest rates borrowers are more
likely to refinance their existing loans, which may negatively impact the
Company's investments in securitization related assets and interest-only
securities.
REGULATORY MATTERS
SPB'S CAPITAL RATIOS
The following table presents SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations and (iii) the FDIC Leverage ratio regulation as of June
30, 1998.
<TABLE>
<CAPTION>
MINIMUM
MINIMUM WELL CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- ------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ------- ----- --------- -------
(IN THOUSANDS EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Lim-
itation................ $173,338 11.42% $75,868 5.00% $ -- -- %
Risk-based Capital...... 211,987 10.24% 165,490 8.00% 206,863 10.00%
Risk-based Tier 1 Capi-
tal.................... 153,247 7.40% 82,745 4.00% 124,118 6.00%
FDIC Leverage Ratio..... 153,247 9.09% 67,383 4.00% 84,229 5.00%
</TABLE>
F-62
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
loan and lease originations and acquisitions increases. The Company's primary
cash requirements include the funding of (i) loan and lease originations and
acquisitions pending their pooling and sale, (ii) points and expenses paid in
connection with the acquisition of wholesale loans, (iii) fees and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold, (v) ongoing administrative and other operating
expenses and (vi) the costs of the Company's warehouse credit and repurchase
facilities with certain financial institutions.
The Company has financed its activities through warehouse lines of credit
and repurchase facilities with financial institutions, equity and debt
offerings in the capital markets, deposits or borrowings at SPB, dividends
from SPB, and securitizations. The Company believes that such sources will be
sufficient to fund the Company's liquidity requirements for the foreseeable
future. There can be no assurance that the Company will have access to the
capital markets in the future or that financing will be available to satisfy
the Company's operating and debt service requirements or to fund its future
growth. The ability of SPB to dividend funds to the Company is subject to
regulatory restrictions.
SPB obtains the necessary liquidity to fund its own lending activities
through deposits and, if necessary through borrowings from the FHLB. At June
30, 1998 and December 31, 1997, SPB had available lines of credit from the
FHLB equal to $23.0 million and $45.8 million, respectively. The FHLB advances
are secured by the investment in stock of FHLB and certain real estate loans
with a carrying value of $67.0 million and $228.5 million at June 30, 1998 and
December 31, 1997, respectively. The highest FHLB advance outstanding during
the quarter ending June 30, 1998 was $34.5 million, with an average
outstanding balance of $24.7 million. The outstanding balance of FHLB advances
was $20.0 million at June 30, 1998. Since December 31, 1991, SPB has increased
its deposits as necessary so that deposits, together with cash, liquid assets
and FHLB borrowings have been sufficient to provide the funding for its loans
held for sale and investment. SPB's deposit portfolio which consists mostly of
certificate accounts increased to $1.5 billion as of June 30, 1998 as compared
to $1.2 billion at December 31, 1997.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. The Company tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected
fundings. Cash management systems at SPB allow SPB to anticipate both funding
and sales and adjust deposit levels and short-term investments against the
demands of the Company's lending activities. SPB also has a $200.0 warehouse
line of credit available from Morgan Stanley, with a balance outstanding of
$96.0 million at June 30, 1998.
In addition to warehouse lines of credit and SPB borrowings, the Company has
also accessed the capital markets to fund its operations. In the second
quarter of 1992, the Company completed its initial public offering of
8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the
Company completed a stock offering of 4,879,808 shares of its common stock at
$13.00 per share generating net proceeds of $59.2 million.
In January 1994, the Company issued $90.0 million principal amount of the
9.75% Senior Notes. In October 1994, the Company repurchased $8.5 million of
said notes. As of December 31, 1995, the Company was not in compliance with
certain debt covenants related to these notes. Subsequent to December 31,
1995, these defaults were corrected. In March 1996, the Company reissued the
$8.5 million of the notes which it purchased in October 1994. At December 31,
1996, $90.0 million of these notes were outstanding.
In January 1997, the Company issued $200.0 million principal amount of the
9.875% Senior Notes and used a portion of the proceeds to purchase
approximately $69.8 million of the 9.75% Senior Notes. The Company contributed
$35.0 million of the proceeds to SPB in the form of subordinated indebtedness.
F-63
<PAGE>
In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which the Company was a selling shareholder. SPFC and the Company
received net proceeds from such offering of approximately $53.8 million and
$35.9 million, respectively. In November 1996, (i) SPFC issued $75.0 million
of convertible subordinated notes due 2006 and (ii) the Company sold 1.0
million shares of SPFC common stock held by the Company for net proceeds of
approximately $28.0 million.
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of SPFC at $16.63 per share, generating net proceeds of $6.2
million, resulting in a gain of $4.3 million, reducing its ownership of SPFC
from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the
results of SPFC operations are now accounted for in the Company's financial
statements under the equity method of accounting. During the third quarter
ending September 30, 1997, the Company sold an additional 500,000 shares of
SPFC common stock, generating net proceeds of $7.6 million and resulting in a
gain of $5.2 million, further reducing its ownership percentage to 47.0%. As
of December 31, 1997, the Company's ownership in SPFC common stock was 47.0%,
excluding shares issuable upon exercise of options granted or to be granted
pursuant to SPFC's stock option plans and shares issuable upon conversion of
the $75.0 million of convertible subordinated notes, mentioned above.
During the second quarter of 1997, ICII issued $70.0 million of Senior Notes
under a proprietary product known as "ROPES." These securities can be redeemed
at par upon their maturity or remarketed as 30 year capital instruments. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering are being used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. FMC and
ICII and another selling stockholder received net proceeds from such offering
of approximately $114.3 million, $59.7 million and $18.5 million,
respectively. As of December 31, 1997, the Company's ownership percentage in
FMC was 38.4%.
During the second quarter ended June 30, 1998, SPFC borrowed a maximum of
$21.5 million from the Company at an interest rate of 12%. The average loan
balance during the quarter was $8.0 million. The loan was repaid in full plus
accrued interest on June 29, 1998. As of June 30, 1998, there were no loans
outstanding to SPFC.
SUBSEQUENT EVENTS
On July 31, 1998, the Company announced AMN's decision to discontinue its
auto lending operations. As of June 30, 1998, AMN's operations reflected a net
loss of $1.8 million. AMN's near term activities will be limited to the
disposition of the remaining loans and residual interests in securitizations
effected with previously originated loans. Effective as of August 1, 1998, AMN
and ICII retained an unrelated third party to perform all of the AMN auto loan
servicing and collection obligations. Management anticipates that the bulk of
the discontinued assets, consisting of the loans and residual interests in
securitizations, will be sold within one year.
The Company will take an after-tax charge of $7.1 million for the quarter
ending September 30, 1998 related to the discontinuation of AMN's operations.
Additionally, AMN will be recording a $1.5 million net operating loss for the
month of July 1998.
AMN's revenue, expenses, and net income (loss) were as follows: (In
thousands)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue..................................... $ 2,908 $ 3,345 $ 3,845 $ 4,424
Expenses.................................... 3,190 4,979 6,865 5,740
Net income (loss)........................... (142) (1,084) (1,843) (766)
</TABLE>
F-64
<PAGE>
On July 13, 1998, the Company announced the acquisition of all of the
outstanding shares of the capital stock of Statewide Documentation, Inc.
("SDI"), a company providing loan documentation preparation, loan closing,
notary and recording services and marketing of insurance products, for 236,302
shares of ICII common stock.
The Company granted the former holders of the SDI capital stock certain
registration rights covering the ICII Shares. The acquisition will be recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $4.7 million will be recorded. In connection with this
transaction, Paul Lipson, the President of SDI and one of the former holders
of the SDI capital stock, entered into a three year employment contract with
ICII to be President and Chief Executive Officer of SDI.
F-65
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Belch v. Imperial Credit Industries, Inc., San Diego County Superior Court
Case No. 718817.
On April 22, 1998, the Company was served with an alleged class action
complaint filed in the Superior Court of San Diego County, California by
plaintiff Michael Belch. Plaintiff seeks to represent a class of individuals
who, since March 1994, requested, obtained and were charged fees for both loan
payoff statements and corporate, recording and other fees incurred in the
early repayment of mortgage loans where the borrowers were obtaining
refinancing from other lenders. The complaint alleges, on behalf of the
purported class, that the fees charged were unauthorized, oppressive,
unreasonable or in violation of applicable statute and seeks monetary damages
according to proof. The case involves the discontinued mortgage banking
operations of the Company. The Company is actively defending this case.
Fortune Mortgage, etc., et. al. v. Imperial Credit Industries, Inc.,
Imperial Credit Mortgage Holdings, Inc., ICI Funding Corp., Imperial Warehouse
Lending Group, Inc., William Ashmore, Edward Pollard, Wayne Snavely, and
Joseph Tomkinson, Orange County Superior Court Case No. 776153.
Reference is made to the discussion of the above-referenced legal
proceedings contained in the Company's Form 10-K for the year ended December
31, 1997 under Part I, Item 3, "Legal Proceedings." The lawsuit was resolved
in June 1998. The terms of the resolution are confidential, however, such
resolution will not have a material impact on the Company's financial position
or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1998 Annual Meeting of Stockholders was held on June 24, 1998.
PROPOSAL 1.Election of Board of Directors to serve for the ensuing year:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
H.Wayne Snavely.......................................... 31,713,737 589,666
Kevin Villani............................................ 31,713,539 589,864
Stephan J. Shugerman..................................... 31,713,737 589,666
G. Louis Graziadio, III.................................. 31,713,737 589,666
James Clayburn La Force Jr. ............................. 31,713,737 589,666
Perry Lerner............................................. 31,713,737 589,666
Robert Muehlenbeck....................................... 31,713,737 589,666
Joseph Tomkinson......................................... 31,710,082 589,321
</TABLE>
PROPOSAL 2. To consider and act upon a proposal to ratify the appointment of
KPMG Peat Marwick LLP as the independent accountants of the
Company for the year ending December 31, 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
32,288,145 11,308 3,950
</TABLE>
F-66
<PAGE>
PROPOSAL 3. To approve the Executive Performance Compensation Plan
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C>
32,170,548 116,141 16,714
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The registrant filed the following report on Form 8-K dated August 14, 1998.
On July 13, 1998, the Company announced the acquisition of all of the
outstanding shares of the capital stock of Statewide Documentation, Inc.,
("SDI"), a company providing loan documentation preparation, loan closing,
national notary and recording services and marketing of insurance products,
for 236,302 shares of ICII common stock (the "ICII Shares"). The Company
granted the former holders of the SDI capital stock certain registration
rights covering the ICII Shares. The acquisition will be recorded using the
purchase method of accounting. The purchase price was allocated to the net
assets acquired based on their fair value and goodwill of approximately $4.7
million will be recorded. In connection with this transaction, Paul Lipson,
the President of SDI and one of the former holders of the SDI capital stock,
entered into a three year employment contract with ICII to be President and
Chief Executive Officer of SDI.
On July 31, 1998, Imperial Credit Industries, Inc. (the "Company" and
"ICII") announced that the operations of its wholly owned subsidiary, Auto
Marketing Network, Inc. ("AMN") were being discontinued. AMN's near term
activities will be limited to the disposition of the remaining loans and
residual interests in securitizations effected with previously originated
loans. Effective as of August 1, 1998, AMN and ICII retained an unrelated
third party to perform all of the AMN auto loan servicing and collection
obligations. Management anticipates that the bulk of the discontinued assets,
consisting of the loans and residual interests in securitizations, will be
sold within one year.
The Company will take an after-tax charge of $7.1 million for the quarter
ending September 30, 1998 related to the discontinuation of AMN's operations.
Additionally, AMN will be recording a $1.5 million net operating loss for the
month of July 1998.
F-67
<PAGE>
ITEM 6 EXHIBIT-11
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF EARNING PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER QUARTER SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary items...... $16,262 $14,073 $29,162 $25,105
------- ------- ------- -------
Extraordinary item--Early
extinguishment of debt, net of income
taxes................................. -- -- -- (3,995)
------- ------- ------- -------
Net income............................. $16,262 $14,073 $29,162 $21,110
======= ======= ======= =======
Weighted-average common shares
outstanding used to compute basic
income per share...................... 38,752 38,509 38,747 38,464
Assumed common shares issued on
exercise of stock options............. 2,060 2,114 2,052 2,305
------- ------- ------- -------
Number of common shares used to compute
diluted income per share.............. 40,812 40,623 40,799 40,769
======= ======= ======= =======
BASIC EARNINGS PER SHARE:
- -------------------------
Income before extraordinary item....... $ 0.42 $ 0.37 $ 0.75 $ 0.65
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes................................. -- -- -- (0.10)
------- ------- ------- -------
Net income per common share............ $ 0.42 $ 0.37 $ 0.75 $ 0.55
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
- ---------------------------
Income before extraordinary item....... $ 0.40 $ 0.35 $ 0.71 $ 0.62
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes................................. -- -- -- (0.10)
------- ------- ------- -------
Net income per common share............ $ 0.40 $ 0.35 $ 0.71 $ 0.52
======= ======= ======= =======
</TABLE>
F-68
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS 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.
IMPERIAL CREDIT INDUSTRIES, INC.
/s/ Kevin E. Villani
By: _________________________________
KEVIN E. VILLANI
Executive Vice President--Finance
Date: August 14, 1998
F-69
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... F-71
Consolidated Balance Sheets................................................ F-72
Consolidated Statements of Earnings........................................ F-73
Consolidated Statements of Shareholders' Equity............................ F-74
Consolidated Statements of Cash Flows...................................... F-75
Notes to Consolidated Financial Statements................................. F-76
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
F-70
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southern Pacific Funding Corporation:
We have audited the accompanying consolidated balance sheets of Southern
Pacific Funding Corporation and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the years in the three-year period ended 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 Southern Pacific Funding Corporation and subsidiaries as of December 31,
1996 and 1997, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
January 29, 1998
F-71
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Cash................................................ $ 14,175,566 $ 7,886,412
Loans held for sale................................. 223,059,102 264,384,993
Interest-only and residual certificates............. 87,016,900 277,156,343
Accrued interest receivable......................... 3,181,449 4,568,977
Premises and equipment, net......................... 3,036,388 7,660,691
Goodwill, net of accumulated amortization of $0 and
$448,375 at December 31, 1996 and 1997,
respectively....................................... 4,742,571 6,615,080
Other assets........................................ 5,165,048 21,072,897
------------ ------------
Total assets.................................... $340,377,024 $589,345,393
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Borrowings under warehouse lines of credit........ $152,680,395 $205,031,055
Notes Payable..................................... -- 3,431,972
Deferred tax liability............................ 18,445,495 48,074,988
Long term debt.................................... 75,000,000 175,000,000
Other liabilities................................. 9,164,901 18,652,471
------------ ------------
Total liabilities............................... 255,290,791 450,190,486
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued or outstanding at
December 31, 1996 and 1997....................... -- --
Common stock, no par value, 75,000,000 shares
authorized; 20,737,500 and 20,760,450 shares
issued and outstanding at December 31, 1996 and
1997, respectively............................... 53,798,099 54,100,622
Contributed capital............................... 247,500 247,500
Translation adjustment............................ -- (8,745)
Retained earnings................................. 31,040,634 84,815,530
------------ ------------
Total shareholders' equity...................... 85,086,233 139,154,907
------------ ------------
Total liabilities and shareholders' equity...... $340,377,024 $589,345,393
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-72
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans................ $16,328,621 $55,360,515 $148,403,866
Interest income........................ 4,304,760 13,848,976 39,306,759
Securities valuation and other income.. 1,666,682 4,265,285 1,634,175
----------- ----------- ------------
Total revenues....................... 22,300,063 73,474,776 189,344,800
=========== =========== ============
Expenses:
Interest............................... 3,413,652 7,799,986 27,613,103
Personnel and commission expense....... 4,190,566 10,996,713 45,027,704
General and administrative expense..... 2,153,220 6,599,474 24,685,987
----------- ----------- ------------
Total expenses....................... 9,757,438 25,396,173 97,326,794
=========== =========== ============
Earnings before taxes.................... 12,542,625 48,078,603 92,018,006
Income taxes............................. 5,205,190 20,446,614 38,243,110
----------- ----------- ------------
Net earnings......................... $ 7,337,435 $27,631,989 $ 53,774,896
=========== =========== ============
Net earnings per share:
Basic.................................. $ .47 $ 1.49 $ 2.59
Diluted................................ $ .47 $ 1.37 $ 2.23
Weighted average number of shares
outstanding:
Basic.................................. 15,562,500 18,552,500 20,747,665
Diluted................................ 15,562,500 20,511,936 25,358,202
</TABLE>
See accompanying notes to consolidated financial statements.
F-73
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- CONTRIBUTED TRANSLATION RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS EQUITY
---------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 15,562,500 $ -- $789,591 $ -- $ 4,761,693 $ 5,551,284
Net earnings, 1995...... -- -- -- -- 7,337,435 7,337,435
---------- ----------- -------- ------- ----------- ------------
Balance, December 31,
1995................... 15,562,500 -- 789,591 -- 12,099,128 12,888,719
Effect of contribution
transaction............ -- -- (542,091) -- (8,690,483) (9,232,574)
Proceeds from initial
public offering of
5,175,000 shares of
common stock, net of
offering expenses of
$4,810,911............. 5,175,000 53,798,099 -- -- -- 53,798,099
Net earnings, 1996...... -- -- -- -- 27,631,989 27,631,989
---------- ----------- -------- ------- ----------- ------------
Balance, December 31,
1996................... 20,737,500 53,798,099 247,500 -- 31,040,634 85,086,233
Exercise of stock
options for 22,950
shares of common stock. 22,950 302,523 -- -- -- 302,523
Translation adjustment.. -- -- -- (8,745) -- (8,745)
Net earnings, 1997...... -- -- -- -- 53,774,896 53,774,896
---------- ----------- -------- ------- ----------- ------------
Balance, December 31,
1997................... 20,760,450 $54,100,622 $247,500 $(8,745) $84,815,530 $139,154,907
========== =========== ======== ======= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-74
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings..................... $ 7,337,435 $ 27,631,989 $ 53,774,896
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization.. 51,488 615,258 2,714,870
Amortization of discount on
note payable.................. -- -- 163,972
Translation adjustment......... -- -- (8,745)
Securities valuation .......... -- (4,265,285) 427,799
Deferred tax expense........... -- 20,446,614 29,629,493
Changes in certain assets and
liabilities, net of effect of
acquisitions and contribution
transaction:
Mortgage loans held for sale... (63,536,648) (143,632,836) (41,325,891)
Net change in interest only and
residual certificates......... (18,235,099) (71,493,840) (186,767,242)
Loans held under repurchase
agreement..................... (12,800,565) 12,800,565 --
Accrued interest receivable.... (928,119) (2,204,075) (1,387,528)
Other assets................... (282,831) (1,387,556) (12,465,420)
Other liabilities.............. 3,186,942 3,787,856 9,487,570
------------ ------------- -------------
Net cash used in operating
activities.................. (85,207,397) (157,701,310) (145,756,226)
------------ ------------- -------------
Cash Flows Used in Investing
Activities:
Purchases of premises and
equipment....................... (436,853) (3,028,897) (5,649,989)
Purchase of interest-only and
residual certificates........... -- -- (3,800,000)
Payment for acquisitions......... -- (5,000,000) --
Payment for long-term investment
and loan commitment............. -- (525,000) --
------------ ------------- -------------
Net cash used in investment
activities:................. (436,853) (8,553,897) (9,449,989)
------------ ------------- -------------
Cash Flows from Financing
Activities:
Net change in:
Borrowings under warehouse
lines of credit............... 96,130,120 56,550,275 52,350,660
Borrowings from SPTL........... (12,940,537) 322,053 --
Due to affiliates.............. 1,585,150 (1,504,984) --
Bank overdraft................. 619,517 (619,517) --
Proceeds from long term debt... -- 72,162,436 96,263,878
Proceeds from issuance of
common stock.................. -- 53,798,099 302,523
Contribution transaction....... -- (277,589) --
------------ ------------- -------------
Net cash provided by (used
in) financing activities.... 85,394,250 180,430,773 148,917,061
------------ ------------- -------------
Net change in cash................. (250,000) 14,175,566 (6,289,154)
Cash at beginning of year.......... 250,000 -- 14,175,566
------------ ------------- -------------
Cash at end of year................ $ -- $ 14,175,566 $ 7,886,412
============ ============= =============
Supplementary information:
Interest paid.................... $ 2,129,369 $ 6,330,097 $ 25,540,511
Taxes paid....................... $ -- $ 1,213,252 $ 9,105,917
</TABLE>
See accompanying notes to consolidated financial statements.
F-75
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
1. ORGANIZATION
Southern Pacific Funding Corporation ("SPFC" or the "Company") is the
successor to the Residential Lending Division of Southern Pacific Thrift and
Loan ("SPTL"). The Company originates and acquires non-conforming single-
family residential loans, including loans secured by second mortgages. In
October 1994, Imperial Credit Industries, Inc. ("ICII") incorporated the
Company as part of a strategic decision to form a separate subsidiary through
which to operate SPTL's Residential Lending Division. In April 1995, ICII
caused SPTL to contribute (the "Contribution Transaction") to SPFC certain
customer lists of SPTL's Residential Lending Division to the ongoing
operations of such division. In addition, in April 1995 all employees of
SPTL's Residential Lending Division became employees of SPFC. The Company
completed an initial public offering of its Common Stock in June 1996. At
December 31, 1997, upon completion of three secondary offerings, ICII owned
approximately 46.9% of the Company's outstanding Common Stock.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SPFC and its
majority and wholly owned subsidiaries. These subsidiaries include National
Capital Funding, Inc., Oceanmark Financial Corporation, Home America Financial
Services, Inc. and Hallmark America Corp. which are located throughout the
United States and Southern Pacific Mortgage Limited which is the Company's
United Kingdom operation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. These loans are pledged against the Company's lines of credit. The
cost of mortgage loans held for sale is the cost of the mortgage loans reduced
or increased by the net deferred fees or costs associated with originating or
acquiring the loan and increased by costs that are recognized upon sale. On an
ongoing basis, management of the Company monitors the loan portfolio and
considers such factors as historical loan loss experience, underlying
collateral values, known problem loans, assessment of economic conditions,
including changes in interest rates, and other appropriate data to identify
risks in the loan portfolio.
Interest-only and Residual Certificates
Assets reflected in the accompanying consolidated balance sheets as
interest-only and residual certificates in real estate mortgage investment
conduits (REMICs) are recorded as a result of the Company's securitization of
loans through various trust vehicles. The Company considers its obligations
under recourse provisions in connection with its securitizations in valuing
its interest-only and residual certificates. The Company estimates future cash
flows from these interest-only and residual certificates and values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and records them as trading
securities at fair value. Unrealized gains and losses are included in gains on
sales of loans in the accompanying financial statements. The initial and
subsequent changes in the unrealized gains and losses are included in
securities valuation and other income. To the Company's knowledge, there is no
active market for the sale of these interest-only and residual certificates.
The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2) a
base servicing fee paid to the loan servicer, (3) expected losses to be
incurred on the portfolio of loans sold
F-76
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over the lives of the loans, and (4) fees payable to the trustee and monoline
insurer. Prepayment assumptions used in the present value computation are
based on recent evaluations of the actual prepayments of the Company's
servicing portfolio or on market prepayment rates on new portfolios, taking
into consideration the current interest rate environment and its expected
impact on prepayment rates. The 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 on such a
financial instrument. To the extent that actual future excess cash flows are
different from estimated excess cash flows, the fair value of the Company's
interest-only and residual certificates will be adjusted monthly with
corresponding adjustments made to earnings in that period.
In certain of its securitizations, the Company provided an initial
overcollateralization on the securities sold and in all its securitizations
the Company builds overcollateralization as cash flows projected as described
above are used by the trustee to reduce the outstanding balance of the
securities sold by the Company.
The Company currently uses a 12% discount rate to calculate present value of
anticipated "out of the trust" cash flows that it anticipates receiving from
the securitization trust after overcollateralization requirements have been
achieved. Prepayment assumptions are applied to each discrete security and
further to each product (i.e. ARM's, Fixed and 2/28's) within each security.
The estimated CPR varies over time based upon the relative maturity of the
loans included in each pool. The estimated annual CPR is 4% at inception and
increases in equal monthly increments until the peak estimated CPR is
achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for
ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally
maintained through month 36. Thereafter, peak CPR's are reduced in two twelve
month steps at which time terminal CPR's are reached. Terminal CPR's are
estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The
Company also periodically provides for additional credit losses which may be
incurred on loans which the Company voluntarily purchases from the trusts.
Gains on Sales of Loans
Gains on sales of loans are determined by deducting from the gross proceeds
of the sales or securitizations the allocated basis in the loans sold or
securitized and related transaction costs. The initial fair value of interest-
only and residual certificates is included as proceeds in calculating gains on
sales of loans.
Interest Income
Interest income includes interest earned on mortgage loans held for sale.
Interest expense includes interest paid on the Company's outstanding warehouse
lines of credit, the Company's convertible subordinated debentures and the
Company's senior notes.
Securities Valuation and Other Income
Securities valuation and other income includes the change in unrealized
gains and losses on interest-only and residual certificates.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation is recorded using the straight-line method over the
estimated useful lives of individual assets (three to five years). Leasehold
improvements are amortized over the terms of the related leases or the
estimated useful lives of improvements, whichever is shorter.
F-77
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Dividends
The Company intends to retain all of its future earnings to finance its
operations. The subsidiaries of the Company are restricted from paying
dividends to the Company or any of its subsidiaries due to covenants in the
Company's senior note agreement.
Goodwill
Goodwill, which represents the excess of purchases price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
(See Note 12).
Long-Term Investments
Long-term investments, included in other assets, are carried at cost and
consist of preferred stock in Hallmark Government, Inc. of $360,000 at
December 31, 1997.
Deferred Income Taxes
The accompanying financial statements reflect income taxes for SPFC as if it
had been a separate entity for all years presented. SPFC accounts for income
taxes under the asset and liability method of accounting for income taxes.
Under the asset and liability method, 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 bases. 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. Under the asset and liability method, 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.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Net Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No.
128 establishes standards for computing and presenting earnings per share
(EPS). It simplifies the standards in APB Opinion No. 15, Earnings per Share,
for computing EPS by replacing primary earnings per share with basic earnings
per share and by alterning the calculation of diluted EPS, which replaces
fully diluted EPS. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. All
prior period EPS figures have been restated to conform to the provisions of
the Statement.
F-78
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net income available to common
shareholders......................... $ 7,337,435 15,562,500 $0.47
Effect of dilutive securities:
Stock options....................... -- --
Convertible subordinated notes...... -- --
----------- ---------- -----
Diluted EPS........................... $ 7,337,435 15,562,500 $0.47
=========== ========== =====
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net Income available to common
shareholders......................... $27,631,989 18,552,500 $1.49
Effect of dilutive securities:
Stock options....................... 481,422
Convertible subordinated notes...... 510,078 1,478,014
----------- ---------- -----
Diluted EPS........................... $28,142,067 20,511,936 $1.37
=========== ========== =====
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net Income available to common
shareholders......................... $53,774,896 20,747,665 $2.59
Effect of dilutive securities:
Stock options....................... 1,459,277
Convertible subordinated notes...... 2,864,198 3,151,260
----------- ---------- -----
Diluted EPS........................... $56,639,094 25,358,202 $2.23
=========== ========== =====
</TABLE>
Foreign Currency Translation
All assets and liabilities of the U.K. subsidiaries are translated into U.S.
dollars at the rate in effect as of the date of the financial statements.
Income and expense items are translated at the weighted average exchange rate
for the period. The resulting translation adjustments are recorded as a
component of shareholder's equity.
4. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Premises and equipment.. $3,634,193 $ 9,938,813
Less accumulated
depreciation and
amortization........... (597,805) (2,278,122)
---------- -----------
$3,036,388 $ 7,660,691
========== ===========
</TABLE>
F-79
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------- -------------------------
CARRY VALUE FAIR VALUE CARRY VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash....................... $ 14,175,566 $ 14,175,566 $ 7,886,412 $ 7,886,412
Loans held for sale........ 223,059,102 231,981,466 264,384,993 274,960,393
Interest-only and residual
certificates.............. 87,016,900 87,016,900 277,156,343 277,156,343
Notes Payable.............. -- -- 3,431,972 3,431,972
Long Term Debt............. 75,000,000 75,000,000 175,000,000 175,000,000
Borrowings under warehouse
lines of credit........... 152,680,395 152,680,395 205,031,055 205,031,055
</TABLE>
Because no market exists for certain of the Company's assets and
liabilities, fair value estimates are based on judgments regarding credit
risk, investor expectations of future economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off balance sheet instruments
disclosed in Note 13, are as follows:
Loans held for sale. The Company has estimated the fair values reported
based on recent sales and securitizations.
Interest-only and residual certificates. Fair value determined using
estimated discounted future cash flows taking into consideration anticipated
prepayment rates, loss experience and prepayment penalties.
The Company currently uses a 12% discount rate to calculate present value of
anticipated "out of the trust" cash flows that it anticipates receiving from
the securitization trust after overcollateralization requirements have been
achieved. Prepayment assumptions are applied to each discrete security and
further to each product (i.e. ARM's, Fixed and 2/28's) within each security.
The estimated CPR varies over time based upon the relative maturity of the
loans included in each pool. The estimated annual CPR is 4% at inception and
increases in equal monthly increments until the peak estimated CPR is
achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for
ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally
maintained through month 36. Thereafter, peak CPR's are reduced in two twelve
month steps at which time terminal CPR's are reached. Terminal CPR's are
estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The
Company also periodically provides for additional credit losses which may be
incurred on loans which the Company voluntarily purchases from the trusts.
Borrowings under warehouse lines of credit. The carrying value reported
approximates fair value due to the short-term nature of the borrowings and the
variable interest rates charged on the borrowings.
Commitments to originate loans and loans in process. Many loan commitments
are expected to, and typically do, expire without being drawn upon. As the
rates and terms of the commitments to lend and loans in process are
competitive with others in which the Company operates, the values disclosed in
Note 15 are determined to be a reasonable estimate of fair value.
Notes Payable. The carrying value reported approximates fair value due to
the nature of the borrowings.
F-80
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long Term Debt. The carrying value reported approximates fair value based on
the current debt rates.
Hedging Transactions. The Company regularly securitizes and sells fixed and
variable-rate mortgage loans. To offset the effects of interest rate
fluctuations on the value of its fixed-rate loans held for sale, the Company
in certain cases will hedge its interest rate risk related to loans held for
sale by selling U.S. Treasury securities short or in the forward market.
As of December 31, 1996 and 1997, the Company had open hedge positions of
$32.6 million and $65.6 million respectively, related to the sales of United
States Treasury securities in the forward market. The proceeds from the short
sale are shown net of the related liability in the accompanying balance sheet
at December 31, 1996 and 1997.
6. RELATED PARTY TRANSACTIONS
Intracompany Cost Allocations
During 1995 and 1996, the Company accrued allocated expenses for ICII that
are included as part of personnel and commission expense and general and
administrative expenses of $256,000 and $292,000, respectively. No
administrative services are being provided by ICII or SPTL, effective January
1, 1997.
Borrowings from Affiliates
The average borrowings from affiliates and interest rates used to determine
the weighted average interest on borrowings for the years ended December 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Average borrowings.................. $34,777,138 $3,890,267 $1,250,000
Interest rate....................... 3.69% 6.25% 12.00%
Interest on borrowings.............. $ 1,284,282 $ 230,236 $ 125,000
</TABLE>
SPTL
In March 1996, the Company entered into a $10 million revolving credit and
term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to
expire on September 30, 1996. Advances under the SPTL Agreement were
collateralized by the Company's interest-only and residual certificates (other
than such interests retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. In April, 1996 the Company repaid all
borrowings outstanding under the SPTL Agreement and it was canceled.
ICII
On July 17, 1997, the Company borrowed $15 million from ICII due on October
17, 1997 and bore interest at a rate of 12%. The $15 million was repaid on
August 11, 1997 along with $125,000 in interest.
Loan Servicing
From the point of commencement of operations until March 1994, SPTL served
as the loan servicer for the Company and the Company was allocated its pro
rata portion of SPTL's loan servicing expenses.
F-81
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In March 1994, ICII assumed the role of loan servicer for a servicing fee of
approximately $7.50 per loan per month, so that the Company could complete its
first securitization. In September 1995, the Company began to utilize the
services of Advanta, an independent loan servicer, as the master servicer.
Fees charged by Advanta are $25 per loan and 37.5 basis points per annum on
the declining principal balance of each loan serviced, paid monthly,
respectively, which fees are higher than those previously paid to ICII due to
the additional collection activities performed by Advanta.
Consulting Agreements
In June 1996, the Company entered into a five-year consulting agreement with
The Dewey Consulting Group, owned by one of the Company's directors, John D.
Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the
development of strategic alliances with selected mortgage lenders, including
the identification of potential strategic alliance participants. The Company
has agreed to compensate Mr. Dewey based upon actual strategic alliances
entered into and loan production and earnings resulting from those alliances
which amounts to .015% of the Company's share of warrants, interest-only cash
received, and interest-only strips. No amounts were paid in 1996 or owing at
December 31, 1996, $254,122 was paid in 1997 and $335,619 was owing at
December 31, 1997.
Other
The Company has outstanding receivables from Hallmark Government, Inc. of
$7,153,800, collateralized by first mortgage loans.
7. LONG TERM OBLIGATIONS
Long Term Debt at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- ------------
<S> <C> <C>
Senior Notes, interest at 11.5%, due semi-
annually, principal due November 1, 2004......... $ -- $100,000,000
Convertible subordinated debentures, interest at
6.75%, due
semi-annually, principal due October 15, 2006.... 75,000,000 75,000,000
</TABLE>
Interest on the senior notes is payable semi-annually. Debt issuance costs
of $3,647,368 at December 31, 1997 are included in other assets. These costs
have been deferred and are being amortized over seven years using the interest
method.
The Convertible subordinated debentures are convertible into 3,151,125
shares of common stock, for a conversion price of $23.80 per share, at any
time prior to maturity. Interest on the debentures is payable semi-annually.
Debt issuance costs of $2,794,220 and $2,521,360 at December 31, 1996 and
1997, respectively, are included in other assets. These costs have been
deferred and are being amortized over ten years using the interest method.
Notes Payable at December 31, 1997 represents a payable to Oceanmark Bank
for the purchase of Mortgage Division Assets and has a face amount of
$3,800,000. The note bears no interest and has a 36 month term. Principal is
payable in three equal installments of $1,266,667 at 12 months, 24 months and
36 months. The note was initially recorded at its present value of $3,268,000,
discounted at 7%. The discount will be amortized over the term of the note
using the interest method.
F-82
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
For the 1996 period through the effective date of the IPO in June 1996, SPFC
is included in a consolidated tax return filing with ICII. For the 1996 period
subsequent to the IPO and 1997, SPFC will file a separate tax return on a
stand-alone basis.
SPFC's income taxes were as follows for the years ended December 31, 1996
and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................... $2,731,115 $ 3,680,000 $ 7,341,259
State................................. 602,452 772,000 1,272,358
---------- ----------- -----------
Total current....................... 3,333,567 4,452,000 8,613,617
Deferred:
Federal............................... 1,533,378 11,461,414 24,977,663
State................................. 338,245 4,533,200 4,651,830
---------- ----------- -----------
Total deferred...................... 1,871,623 15,994,614 29,629,493
---------- ----------- -----------
Total income taxes...................... $5,205,190 $20,446,614 $38,243,110
========== =========== ===========
</TABLE>
The following table shows the tax effects of temporary differences which
give rise to the primary components of SPFC's net deferred tax liability at
December 31, 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only and residual certificates....... $18,445,495 $48,074,988
=========== ===========
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the statutory Federal corporate income tax rate to income before
income taxes are as follows for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate................ 35.0% 35.0% 35.0%
Increases in rate resulting from state income taxes,
net of Federal benefit............................... 6.5 7.5 6.5
---- ---- ----
Effective income tax rate............................. 41.5% 42.5% 41.5%
==== ==== ====
</TABLE>
At the effective date of the IPO, the Company entered into a tax agreement
with ICII whereby, among other things, ICII will indemnify and hold the
Company harmless from any tax liability attributable to periods ending on or
before the effective date of the IPO in excess of such taxes as the Company
has already paid or recognized.
F-83
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
Prior to October 1, 1997, employees of SPFC were eligible to participate in
the ICII 401(k) plan. The ICII 401(k) plan matched a portion of the employee
pretax contribution. Effective October 1, 1997 employees of SPFC are eligible
to participate in the SPFC 401(k) plan which came into effect at that time.
Employees may elect to enroll in the plan on the first day of any month,
provided that they have been employed by SPFC for at least six months.
Employees may contribute up to 15% of their compensation to the SPFC 401(k)
Plan and SPFC will match 50% of the first 6% of employee pretax contributions.
SPFC matching contributions are made as of December 31st each year. SPFC
recorded 401(k) matching expense of approximately $26,000, $111,000 and
$433,148 for the years ended December 31, 1995, 1996, and 1997, respectively.
10. STOCK OPTIONS
Effective November 1, 1995, the Company reserved and granted options for
1,942,200 shares of Company common stock pursuant to the 1995 Senior
Management Stock Option Plan (the "Senior Management Plan"). All of the
options granted under the Senior Management Plan have been issued to senior
management personnel at an exercise price of $7.00 per share, the fair value
on the date of grant. The options vest ratably over a five-year period
commencing one year after the date of grant.
Also effective November 1, 1995, the Company adopted the 1995 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which
provides for the grant of qualified incentive stock options, incentive stock
options, and awards consisting of deferred stock, restricted stock, stock
appreciation rights and limited stock appreciation rights. The Stock Option
Plan authorizes the grant of options to purchase, and awards of, an aggregate
of 1,942,200 shares of Company common stock. If an option granted under the
Stock Option Plan expires or terminates, or an award is forfeited, the shares
subject to any unexercised portion of such option or award will again become
available for the issuance of further options or awards under the Stock Option
Plan.
All share data related to shares issued and outstanding have been restated
to give retroactive recognition to a 4,150 for one stock split effective April
1, 1996 and a three for two stock split effective January 23, 1997.
The Company applies APB Opinion No. 25 in accounting for its Plans 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 under SFAS No. 123,
the Company's net earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net Earnings:
As reported............................... $7,337,435 $27,631,989 $53,774,896
Pro forma................................. 7,105,518 26,266,703 50,612,358
Net Earnings Per Share:
As reported: Basic........................ $0.47 $1.49 $2.59
Diluted.............................. $0.46 $1.37 $2.23
Pro forma: Basic.......................... $0.47 $1.42 $2.44
Diluted............................... $0.46 $1.31 $2.11
</TABLE>
F-84
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity during the period indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1994..................... -- --
Granted........................................ 1,942,200 $7.00
Exercised...................................... -- --
Forfeited...................................... -- --
Expired........................................ -- --
--------- -----
Balance at December 31, 1995..................... 1,942,200 7.00
Granted........................................ 1,078,500 12.57
Exercised...................................... -- --
Forfeited...................................... (113,250) 11.90
Expired........................................ -- --
--------- -----
Balance at December 31, 1996..................... 2,907,450 8.85
Granted........................................ 868,750 11.15
Exercised...................................... (22,950) 11.39
Forfeited...................................... (276,300) 13.07
Expired........................................ -- --
--------- -----
Balance at December 31, 1997..................... 3,476,950 $9.09
</TABLE>
At December 31, 1997, there were 384,500 additional shares available for
grant under the Stock Option Plan. The per share weighted-average fair value
of stock options granted during 1995, 1996 and 1997 was $15.74, $13.34 and
$11.17, respectively, on the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: expected
dividend yield 0.00%, risk free interest rate of 5.42%, an expected life of 6
years and an annualized volatility rate of 66.57%.
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $7.00-15.00 and 8.20
years and $15.01-$20.00 and 8.80 years, respectively.
At December 31, 1996 and 1997 there were 388,440, and 1,129,830 options,
respectively exercisable.
11. SHORT TERM BORROWINGS
Lines of Credit
The Company has obtained five lines of credit from investment banks, for the
purpose of funding one-to-four family residential first and second mortgage
loans, which is subject to certain operating and financial covenants and
collateral requirements. Total borrowings under the warehouse lines are
limited to $988.2 million and the lines are scheduled to expire between April
15, 1998 and December 14, 1998.
As of December 31, 1996 and 1997, $152,680,395 and $205,031,055,
respectively, were outstanding on the lines of credit, on which interest was
charged based on the type of loan funded. Interest expense incurred for the
years ended December 31, 1995, 1996 and 1997 amounted to approximately
$131,000, $6,409,061 and $19,544,258, respectively with weighted average
interest rates ranging from 5.7% to 8.3% for 1997.
Residual Facility
In May, 1997 the Company entered into a residual financing facility of $30
million that allowed the Company to obtain debt secured by interest-only and
residual certificates. The Company drew upon $29.4 million of this facility
and repaid the full amount on November 4, 1997.
F-85
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. ACQUISITIONS
In 1996, the Company purchased 95% of the common stock of a diversified
financial services company for $5,000,000 in cash. The amount in excess of the
fair value of net assets acquired is $4,742,571. The Company acquired net
assets of $5,000,000 consisting primarily of goodwill of $4,742,571. The
results of operations of the acquired company have been included in the
consolidated financial statements since the date of acquisition.
In May 1997, the Company purchased certain assets of a diversified financial
services company in exchange for a $3,800,000 note payable (see Note 7). The
amount in excess of the fair value of the net assets acquired was $2,320,884
which has been recorded as goodwill in the accompanying financial statements.
In addition, the Company acquired interest-only and residual certificates for
cash of $3.8 million.
In December 1997, the Company purchased the loan servicing operation of NAMC
for $400,000. The Company acquired NAMC's servicing operations assets and
retained its loan servicing employees.
13. LOAN SERVICING
Through December 1997 the company contracted for the servicing of
substantially all loans it originated, purchased and held for sale with
Advanta. This arrangement allowed the Company to increase the volume of loans
it originated and purchased without incurring the overhead investment in
servicing operations. As with any external service provider, the Company is
subject to risks associated with inadequate or untimely services. The Company
regularly reviews the delinquency of its servicing portfolio. Many of the
Company's borrowers require notices and reminders to keep their loans current
and to prevent delinquencies and foreclosures. A substantial increase in the
Company's delinquency rate or foreclosure rate could adversely affect its
ability to profitably access the capital markets for its financing needs,
including future securitizations.
As of December 31, 1997 the Company's servicing portfolio (inclusive of
securitized loans where the Company has ongoing risk of loss) was
approximately $2.5 million. Through that date substantially all of the
Company's loan servicing had either been outsourced or subcontracted to
Advanta.
The Company's acquisition in December 1997 of NAMC's loan servicing
operations allowed the Company in mid-January 1998 to begin its own loan
servicing operation for all new loans originated and purchased. In the second
quarter of 1998, the Company plans to transfer to its internal servicing
department the servicing of the loans included in the Company's December 1997
securitization and of remaining loans originated and purchased in December
1997 and January 1998.
14. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off Balance Sheet Risk
The Company is a party to financial instruments with off balance sheet risk
in the normal course of business. These financial instruments include
agreements to fund fixed and variable-rate mortgage loans and loans in
process. For agreements to fund fixed-rate loans, the contract amounts
represent exposure to loss from market fluctuations as well as credit loss.
The Company controls the credit risk of its agreements to fund fixed and
variable-rate loans through credit approvals, limits and monitoring
procedures.
Agreements to fund mortgage loans are agreements to lend to customers as
long as there is no violation of any condition established in the contracts.
Such agreements generally have fixed expiration dates or other termination
clauses. Since some agreements may expire without being drawn upon, the total
agreement amounts do not necessarily represent future cash requirements. As of
December 31, 1997, the Company had agreements to fund loans of approximately
$43.0 million.
F-86
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales of Loans and Servicing Rights
In the ordinary course of business, SPFC is exposed to liability from
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances,
SPFC is required to repurchase mortgage loans if there has been a breach of a
representation or warranty. For loans which have been securitized, the Company
includes an estimate of credit loss, using a risk free rate, in determining
its discounted recourse liability. On a periodic basis, the Company reviews
its assumptions in light of historical experience and economic trends to
evaluate their reasonableness in measuring the fair value of recorded assets.
The Company's servicing agreement with Advanta provides that if the Company
desires to terminate the agreement without cause upon 90 days' written notice,
the Company will be required to pay Advanta an amount equal to 1.0% of the
aggregate principal balance of the mortgage loans being serviced by Advanta at
that time. The agreement also provides that a transfer service fee of $100 per
loan shall be paid to Advanta for any mortgage loan for which the Company
transfers servicing from Advanta to another servicer, without terminating the
agreement.
Litigation
The Company, its subsidiary Oceanmark Financial Corporation, and members of
its board directors are defendants in a lawsuit in US District Court for the
southern District of Florida. Oceanmark Bank, F.S.B. is the plaintiff. The
Company was served on March 9, 1998. The complaint relates to the Company's
acquisition of mortgages and notes of Oceanmark Bank beginning in 1995 and
ending with the Company's acquisition of the mortgage operations of Oceanmark
Bank and certain residual assets in May 1997 and events subsequent to the May
1997 acquisition. The complaint alleges, among other things, that employees of
Oceanmark Bank conspired with the Company to lower the purchase price of the
assets sold to the Company by Oceanmark Bank. The plaintiff seeks relief under
theories of racketeering, securities fraud, breach of contract, breach of
fiduciary duty, conspiracy, and negligence and requests compensatory and
punitive damages totaling $75 million.
The Company's management believes that the Oceanmark claims are without
merit and intends to defend the Company's position vigorously. Management
believes that the resolution of this matter will not have a material adverse
effect on the Company's financial condition, results of operations or
liquidity.
SPFC occasionally becomes involved in litigation arising in the normal
course of business. Management believes that any liability with respect to
such legal actions, individually or in the aggregate, will not have a material
adverse effect on the Company's financial position or results of operations.
Operating Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1997
were as follows:
<TABLE>
<S> <C>
1998......................................................... $ 4,190,910
1999......................................................... 3,917,316
2000......................................................... 3,092,437
2001......................................................... 2,666,172
2002......................................................... 2,057,852
-----------
Total...................................................... $15,924,687
===========
</TABLE>
F-87
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense amounted to $309,607, $484,416 and $2,394,621 for the years
ended December 31, 1995, 1996 and 1997, respectively.
15. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
Following is consolidating condensed financial information of SPFC, the
Subsidiary Guarantors of the 11 1/2% Senior Notes due 2004 issued in November
1997 and the Subsidiary which is not a Subsidiary Guarantor:
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 408,286 $ 2,047,362 $ 5,430,764 $ 7,886,412 $ -- $ 7,886,412
Loans held for sale..... 133,110,124 61,330,849 67,991,237 262,432,210 1,952,783 264,384,993
Interest-only and
residual certificates.. 277,156,343 -- -- 277,156,343 -- 277,156,343
Investment in
subsidiaries........... 11,220,645 -- -- 11,220,645 (11,220,645) --
Other assets............ 104,244,775 53,563,593 1,507,189 159,315,557 (119,397,912) 39,917,645
------------ ------------ ----------- ------------ ------------- ------------
Total assets......... $526,140,173 $116,941,804 $74,929,190 $718,011,167 $(128,665,774) $589,345,393
============ ============ =========== ============ ============= ============
Borrowings of credit
under warehouse line... $143,789,768 $ -- $61,241,287 $205,031,055 $ -- $205,031,055
Deferred tax liability.. 44,111,149 4,213,931 (211,030) 48,114,050 (39,062) 48,074,988
Convertible subordinated
notes.................. 175,000,000 -- -- 175,000,000 -- 175,000,000
Other liabilities....... 29,454,384 95,414,744 14,111,962 138,981,090 (116,896,647) 22,084,443
------------ ------------ ----------- ------------ ------------- ------------
Total liabilities.... 392,355,301 99,628,675 75,142,219 567,126,195 (116,935,709) 450,190,486
============ ============ =========== ============ ============= ============
Shareholders' equity:
Common stock........... 54,100,644 25,343 -- 54,125,987 (25,365) 54,100,622
Contributed capital.... 247,500 11,649,637 -- 11,897,137 (11,649,637) 247,500
Translation
adjustment............ -- -- (8,745) (8,745) -- (8,745)
Retained earnings...... 79,436,728 5,638,149 (204,284) 84,870,593 (55,063) 84,815,530
------------ ------------ ----------- ------------ ------------- ------------
Total shareholders'
equity.............. 133,784,872 17,313,129 (213,029) 150,884,972 (11,730,065) 139,154,907
------------ ------------ ----------- ------------ ------------- ------------
Total liabilities and
shareholders'
equity.............. $526,140,173 $116,941,804 $74,929,190 $718,011,167 $(128,665,774) $589,345,393
============ ============ =========== ============ ============= ============
</TABLE>
F-88
<PAGE>
CAPITAL CONTRIBUTION AGREEMENT
THIS CAPITAL CONTRIBUTION AGREEMENT dated as of August __, 1998 is
made and entered into by and between Imperial Financial Group, Inc., a Delaware
corporation ("IFG") and Crown American Bank, a California industrial loan
corporation ("Crown"), on the one hand, and Imperial Bank, a California banking
corporation (the "Bank"), and Imperial Bancorp, a California corporation
("Imperial Bancorp"), on the other hand, with reference to the following:
A. The Bank owns all of the issued and outstanding Class A Common
Stock, no par value, of IFG ("IFG Class A Common").
B. The Bank is the owner of all of the outstanding shares of capital
stock of Imperial Trust Company, a California licensed trust company ("Trust
Co."), 8,941,106 shares of common stock (the "ICII Stock") of Imperial Credit
Industries, Inc. ("ICII"), all rights under that certain Agreement dated as of
August 3, 1998 between IFG and Bear, Stearns & Co. Inc., all of the outstanding
equity securities of Crown, and all of the assets comprising an operating
division known as the Lewis Horwitz Organization. The foregoing securities and
assets are collectively referred to as the "Contributed Assets".
C. The Bank has contributed the SBA Division (as defined herein) to
Crown and upon the Distribution will contribute 100% of the equity securities of
Crown and the remaining Contributed Assets to IFG.
D. IFG wishes to accept the Contributed Assets as a contribution to
capital.
E. Thereafter, the Bank wishes to distribute the IFG Class A Common
to Imperial Bancorp.
F. Imperial Bancorp then wishes to distribute the IFG Class A Common
to holders of shares of Imperial Bancorp common stock in accordance with the
provisions of this Agreement.
G. It is intended that for United States federal income tax purposes
the Distribution shall qualify as a tax-free distribution pursuant to the
provisions of Section 355 of the Internal Revenue Code of 1986, as amended, and
the rules and regulations promulgated thereunder.
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
-1-
<PAGE>
ARTICLE I
CERTAIN DEFINITIONS
When used in this Agreement, the following terms shall have the
respective meanings set forth below:
"Affiliate" shall mean with respect to any person or entity (i) a
person or entity directly or indirectly controlling, controlled by or under
common control with such person or entity; (ii) a person or entity owning or
controlling 10% or more of the outstanding voting securities of such person or
entity; or (iii) an officer, director or partner of such person or entity. When
the Affiliate is an officer, director or partner of such person or entity, any
other person or entity for which the Affiliate acts in that capacity shall also
be considered an Affiliate. For these purposes, control 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 the ownership of voting
securities, by contract or otherwise.
"Agent" shall mean the distribution agent to be appointed by Imperial
Bancorp to distribute the shares of IFG Class A Common in the Distribution.
"Agreement" shall mean this Capital Contribution Agreement, including
all exhibits hereto, as the same may hereafter be amended, modified or
supplemented from time to time.
"Asset" shall mean any and all right, title and interest in and to all
of the rights, properties, assets, claims, Contracts and businesses of every
kind, character and description, whether real, personal or mixed, whether
tangible or intangible, whether accrued, contingent or otherwise, and wherever
located but, except as reflected on the Opening IFG Balance Sheet, excluding all
cash and cash equivalents. Without limitation, the term Assets shall include
(i) notes, prepaid expenses and accounts receivable (whether current or non-
current); (ii) all capital stock, partnership interests and other equity or
ownership interests or rights, directly or indirectly, in any entity; (iii) all
investment securities including, without limitation, debentures, evidences of
indebtedness, certificates of interest or participation, collateral trust
certificates, preorganization certificates or subscriptions, investment
contracts, foreign currency and interest rate contracts (including, without
limitation, forward, option, cap and swap contracts), trust certificates, puts,
calls, straddles, options and other securities or hedging arrangements of any
kind; (iv) all registered and unregistered trademarks, service marks, service
names, trade styles and trade names (including, without limitation, trade dress
and other names, marks and slogans) and all associated goodwill; all statutory,
common law and registered copyrights; all patents; all applications for any of
the foregoing together with all rights to use all of the foregoing and all other
rights in, to, and under the foregoing; all know-how, inventions, discoveries,
improvements, processes, formulae (secret or otherwise), specifications, trade
secrets, whether patentable or not, licenses and other similar agreements,
confidential information, and all drawings, records, books or other indicia,
however evidenced, of the foregoing; (v) all Contracts and rights existing
thereunder and under all other business arrangements; (vi) all interests in real
estate and all plants, buildings and other improvements thereon; (vii) all
leasehold improvements and all equipment (including all transportation and
office equipment), fixtures, trade fixtures and furniture; (viii) all
-2-
<PAGE>
supplies and other tangible property of any kind; (ix) all computer hardware,
software, computer programs, systems and codes and documentation relating
thereto and all databases and reference and resource materials; (x) all
prepayments of prepaid expenses; (xi) all claims, causes of action, choses in
action, rights under express or implied warranties, rights of recovery and
rights of set-off of any kind (collectively "Claims"); (xii) all customer lists
and records pertaining to customers and accounts, personnel records, all fiats
and records pertaining to suppliers and agents, and all books, ledgers, files
and business records of every kind; (xiii) all advertising materials and all
other printed or written materials; (xiv) all permits, consents, licenses,
approvals and authorizations issued by any Authority or third party; (xv) all
goodwill as a going concern and all other intangible properties; and (xvi) all
employee contracts, including, without limitation, the right thereunder to
restrict the employee from competing in certain respects.
"Authority" shall mean any governmental, regulatory or administrative
body, agency or authority, any court of judicial authority, any arbitrator or
any public, private or industry regulatory authority, whether international,
national, Federal, state or local.
"Bank Documents" shall mean this Agreement and all other agreements
and instruments to be executed by the Bank or Imperial Bancorp in connection
with this Agreement.
"Closing" shall mean the consummation of the transactions contemplated
in this Agreement
"Closing Date" shall mean the date upon which the Closing occurs.
"Contract" shall mean any contract, agreement, lease, license, sales
order, purchase order, instrument or other commitment, written or oral, that is
binding on any person or entity or any part of its property under Law.
"Contributed Assets" shall have the meaning ascribed to such term in
Recital B hereof.
"Crown" shall mean Crown American Bank, a California industrial loan
company.
"Distribution" shall mean (i) the distribution of IFG Class A Common
to Imperial Bancorp by the Bank and, immediately thereafter, (ii) the
distribution of IFG Class A Common to holders of shares of Imperial Bancorp
Common Stock to be effected on the basis of one share of IFG Class A Common for
every two shares of Imperial Bancorp Common Stock held of record as of the
Record Date.
"Distribution Time" shall mean the date and time as of which the
Distribution shall be effected, as determined by the respective Boards of
Directors of the Bank and Imperial Bancorp.
"Effective Time" shall mean 12:01 a.m. Los Angeles time on the Closing
Date.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
-3-
<PAGE>
"Form 10" shall mean the Registration Statement on Form 10 (Commission
File No. 1-135971) of IFG initially filed under the Securities Exchange Act of
1934 on November 10, 1997 and all amendments thereto.
"IFG Businesses" means the businesses conducted on, prior to or after
the Effective Time by IFG, the LHO Division, the SBA Division, Trust Co. or
Crown.
"IFG Employees" shall mean those persons listed on Exhibit "A"
attached hereto.
"Imperial Bancorp Common Stock" shall mean the Common Stock, no par
value per share, of Imperial Bancorp.
"Information Statement" shall mean the information statement to be
sent to the holders of Imperial Bancorp Common Stock in connection with the
Distribution.
"Law" shall mean any law, statute, regulation, ordinance, requirement,
announcement or other binding action or requirement of an Authority.
"Liability" shall mean, with respect to any person or entity, any
direct or indirect liability (whether absolute, accrued or unaccrued,
contingent, liquidated or unliquidated, matured or unmatured, reflected on a
balance sheet (or in the notes thereto) or otherwise, and whether known or
unknown), indebtedness, obligation, expense, claim, deficiency, guarantee or
endorsement of or by such person or entity (including without limitation, those
arising under any Law or pending or future Order, and those arising under any
Contract or undertaking).
"LHO Division" shall mean all of the Assets and Liabilities relating
to or arising out of the Bank's operating division known as the Lewis Horwitz
Organization, as such division is described under the heading "LHO" in the Form
10. The material Contracts relating to the LHO Division include those listed on
Exhibit "B".
"Losses" shall have the meaning ascribed to it in Section 12.1.
"Opening IFG Balance Sheet" shall mean the balance sheet of IFG as of
the Effective Time reflecting the contribution transactions contemplated by this
Agreement.
"Order" shall mean any decree, order, judgment, writ, award,
injunction, rule or consent of or by an Authority.
"Record Date" shall mean the close of business on the date to be
determined by the Board of Directors of Imperial Bancorp, as the record date for
determining shareholders of Imperial Bancorp entitled to receive the
Distribution.
"Ruling" shall mean the favorable ruling requested by the Ruling
Request.
"Ruling Request" shall mean that certain Request for Ruling submitted
by KPMG Peat Marwick LLP on behalf of Imperial Bancorp dated April 11, 1997, as
modified, supplemented or amended, requesting a favorable ruling from the
Internal Revenue Service to the
-4-
<PAGE>
effect that certain "spin off" transactions, including the transactions
contemplated by this Agreement, will not be taxable to Imperial Bancorp, its
shareholders or the Bank.
"SBA Division" shall mean all of the Assets and Liabilities relating
to or arising out of the Bank's small business administration lending group
division, as such division is described under the heading "CAB" in the Form 10.
The material Contracts relating to the LHO Division include those listed on
Exhibit "C".
"Services Agreement" shall mean the Services Agreement dated as of the
date hereof between the Bank and IFG.
"Tax Sharing Agreement" shall mean that certain Tax Sharing Agreement
dated as of the date hereof between Imperial Bancorp and IFG.
"Taxes" shall have the meaning ascribed to it in the Tax Sharing
Agreement.
"Transferee Documents" shall mean this Agreement and all other
agreements and instruments to be executed and delivered by IFG, Crown and/or
Trust Co. in connection with this Agreement.
ARTICLE II
CONTRIBUTION
2.1 Contribution by the Bank. Subject to, and in reliance upon the
representations, warranties, terms and conditions of this Agreement, at the
Closing (as defined below):
(a) the SBA Division shall have been contributed by the Bank to
the capital of Crown; and
(b) the Bank shall contribute the following to the capital of
IFG:
(i) all of the issued and all outstanding securities of
Crown;
(ii) all of the ICII Stock owned beneficially and of record
at the Closing by the Bank;
(iii) all of the issued and outstanding securities of Trust
Co.; and
(iv) the LHO Division.
Except as set forth herein, the foregoing Contributed Assets are being assigned
and quit claimed on an "as is", "where is" basis and without any representation
or warranty of any kind whatsoever.
Notwithstanding anything to the contrary contained in this Agreement,
this Agreement shall not constitute an agreement to assign, convey or transfer
any action, claim or other Liability, Asset or Contract or any claim or right or
any benefit arising thereunder or
-5-
<PAGE>
resulting therefrom as to which (x) a prior right of assignment, conveyance or
transfer exists which has not been waived as of immediately prior to the
Effective Time or (y) any consent to assignment, conveyance or transfer thereof
is required but has not been obtained as of immediately prior to the Effective
Time. Subject to the preceding sentence and the provisions of Section 15.2, to
the extent that any such assignment and transfer shall not have been so
consummated as of immediately prior to the Effective Time, the parties shall use
their commercially reasonable efforts to effect such consummation as promptly
thereafter as shall be practicable, and as between IFG and the Bank, effective
as of immediately prior to the Effective Time, the Bank shall be deemed to have
contributed to Crown and IFG (as applicable), and such entity shall have and be
deemed to have obtained, complete and sole beneficial ownership over all of the
Contributed Assets to be contributed to such entity, together with all of the
rights, powers and privileges incident thereto which are held by the Bank, and
such entity shall be deemed to have assumed, effective as of immediately prior
to the Effective Time, in accordance with the terms of this Agreement all of the
Liabilities to be assumed by it pursuant to Article III hereto and all of the
duties, obligations and responsibilities of the Bank incident thereto, whether
or not all instruments of transfer and assumption shall have been executed and
delivered.
2.2 Net Book Value. The parties agree and accept the Opening IFG
--------------
Balance Sheet, including the value of all reserves shown thereon, which shall be
calculated after giving effect to the sharing of Transaction Taxes (as defined
in the Tax Sharing Agreement) and the other transaction costs relating to the
Distribution.
2.3 Prorations. All ordinary and day-to-day expenses and obligations
----------
related to the Contributed Assets (other than employee related sick pay
expenses) to be acquired by IFG and Crown pursuant to the terms of this
Agreement will be prorated as of the Effective Time, with the Bank being
responsible for that portion relating to the period prior thereto and IFG and/or
Crown (as applicable) being responsible for that portion relating to the period
subsequent thereto. A final determination of the prorations and other
adjustments pursuant to the provisions of this Section 2.3 shall be made by the
Bank with the full cooperation of Crown and IFG, and a statement thereof
prepared by the Bank and certified to by its Chief Financial Officer shall be
delivered to IFG not later than 45 days after the Closing Date. Such statement
shall contain a reasonably-detailed breakdown of each proration and shall be
accompanied by supporting documentation if such documentation is reasonably
available to the Bank. IFG shall review such statement and if IFG disapproves of
any determination contained in such statement it shall give the Bank written
notice stating its objections thereto and identifying the reasons therefor
within 30 days after receipt of such statement. The Bank and IFG shall then
attempt to agree on the amount of each determination to which any party objects
within 15 days thereafter. The payment required under the statement shall be
made by the party responsible therefor to the other party promptly and in any
event within 20 days after the parties agree to the applicable proration and
shall be made by check. If any item contemplated by this Section 2.3 cannot be
prorated as of the date the statement is otherwise required to be delivered,
then it shall be separately prorated as soon as possible thereafter with payment
of an amount equal to the amount charged against either party being paid by that
party to the other by check within five days after determination of the charge.
Any disagreement between the Bank and IFG respecting prorations shall be settled
by KPMG Peat Marwick, whose determination shall be final, absent manifest error.
-6-
<PAGE>
ARTICLE III
ASSUMPTION OF LIABILITIES
3.1 Liabilities Assumed.
-------------------
(a) Subject to Sections 2.3 and 3.2, Crown shall assume,
perform, discharge and pay when due all Liabilities relating to or arising out
of the SBA Division whether such Liabilities arose prior to, or arise on or
after the Effective Time and whether or not such Liabilities are reflected in
the Opening IFG Balance Sheet.
(b) Subject to Sections 2.3 and 3.2, IFG shall, from and after
the Effective Time, assume, perform, discharge and pay (or cause to be assumed,
performed, discharged and paid) when due all Liabilities relating to or arising
out of the Contributed Assets whether such Liabilities arose prior to, or arise
on or after the Effective Time and whether or not such Liabilities are reflected
in the Opening IFG Balance Sheet. Except as contemplated in Sections 2.3 and
3.2, such Liabilities shall include all Liabilities relating to or arising out
of the following:
(i) all past and present employment relationships and
contracts of IFG Employees, including all accrued vacation, sick leave
and other benefits;
(ii) loans relating to the IFG Businesses, heretofore sold
individually or as part of a pool to any third party; and
(iii) all Liabilities relating to that certain Consulting
Agreement, dated as of November 1, 1991, between the Bank and Second
Southern Corp.
(c) Subject to Section 3.2 below, the Bank shall, from and
after the Effective Time, perform, discharge and pay when due, and remain liable
for, as the case may be, all Liabilities relating to or arising out of any
business or Assets other than the Contributed Assets, whether such Liabilities
arose prior, to, or arise on or after the Effective Time, including, without
limitations, the loans set forth on Exhibit "D" attached hereto.
It is the intention of the parties that the foregoing
assumption of Liabilities be construed in the broadest sense as if Crown
and IFG were stand-alone companies owning their respective Contributed
Assets from the inception of all business activities relating to or arising
out of the Contributed Assets.
3.2 Liabilities for Taxes. The provisions of this Agreement relating
---------------------
to the assumption of Liabilities shall not apply to Liabilities relating to
Taxes, which shall be governed by the Tax Sharing Agreement.
3.3 Transaction Suits.
-----------------
(a) Following the date hereof, in the event that any action,
claim, suit, arbitration, inquiry, proceeding or investigation by or before any
Authority is commenced against
-7-
<PAGE>
the Bank, Imperial Bancorp or IFG, or any of their respective Affiliates
challenging the transactions contemplated by this Agreement ("Transaction
Suits"), such Transaction Suits shall be deemed a Liability of the Bank not
assumed by IFG pursuant to Section 3.1 hereof.
(b) Following the Distribution Time, IFG shall be entitled to
participate in the defense of each Transaction Suit to which it or any of its
subsidiaries or any of their respective officers, directors, employees or
consultants is a party and to employ counsel of its choice and at its sole cost
and expense to assist in the handling of such suit. Following the Distribution
Time, Imperial Bancorp shall not settle any Transaction Suite to which IFG or
any such person or entity is a party, without the prior written consent of IFG
(which consent shall not be unreasonably withheld), unless such settlement (i)
includes a complete release of IFG or such other person or entity, as the case
may be, and (ii) does not require IFG to make any payment or forego or take any
action.
ARTICLE IV
CLOSING
4.1 Time and Place. The closing of the transactions contemplated
--------------
hereby shall take place at a location mutually agreed upon by the parties at
10:00 a.m. local time on October 1, 1998 (the "Closing").
4.2 Transactions at Closing. At Closing, the following acts and
-----------------------
deliveries shall occur:
(a) The Bank shall deliver the appropriate stock assignment,
bills of sale and other instruments of conveyance respecting the Contributed
Assets in form and substance satisfactory to legal counsel to IFG;
(b) the Bank and IFG shall execute and deliver the Services
Agreement;
(c) Imperial Bancorp and IFG shall execute and deliver the Tax
Sharing Agreement;
(d) Imperial Bancorp shall deliver to the Agent a share
certificate or certificates issued to Imperial Bancorp by IFG, representing all
of the outstanding shares of IFG Class A Common to be distributed in connection
with the payment of the Distribution;
(e) Imperial Bank shall distribute as of the Distribution Time to
Imperial Bancorp, as its sole stockholder, all of the outstanding shares of IFG
Class A Common;
(f) Imperial Bancorp shall instruct the Agent to distribute, as
of the Distribution Time, to holders of record of Imperial Bancorp Common Stock
on the Record Date, one share of IFG Class A Common in respect of each two
shares of Imperial Bancorp Common Stock held by such holders of record of
Imperial Bancorp Common Stock on the Record Date; and
-8-
<PAGE>
(g) IFG, the Bank and Imperial Bancorp shall deliver the
certificates referenced in Article VIII.
The foregoing transactions shall be deemed to occur simultaneously at the
Closing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE BANK AND IMPERIAL BANCORP
The Bank and Imperial Bancorp hereby jointly and severally represent
and warrant to IFG that:
5.1 Due Incorporation. Each of the Bank and Imperial Bancorp is duly
-----------------
organized, validly existing and in good standing under the laws of the State of
California.
5.2 Authority to Execute and Perform Agreements. Each of the Bank
-------------------------------------------
and Imperial Bancorp has all requisite power, authority and approvals required
to enter into, execute and deliver this Agreement and all of the other Bank
Documents and to perform its obligations hereunder and thereunder.
5.3 Due Authorization; Enforceability. Each of the Bank and Imperial
---------------------------------
Bancorp has taken all actions necessary to authorize it to enter into and
perform fully its obligations under this Agreement and all of the other Bank
Documents and to consummate the transactions contemplated herein and therein.
This Agreement is, and as of the Closing Date, the other Bank Documents will be,
the legal, valid and binding obligations of the Bank and Imperial Bancorp,
enforceable in accordance with their respective terms.
5.4 No Violation. Neither the execution or delivery by the Bank or
------------
Imperial Bancorp of this Agreement or any of the Bank Documents nor the
consummation of the transactions contemplated herein or therein will violate any
provision of the Articles of Incorporation, bylaws or other charter documents of
the Bank or Imperial Bancorp, any Order or any, to the best knowledge of Bank
and Imperial Bancorp, Contracts of the Bank or Imperial Bancorp not transferred
to IFG or its subsidiaries as part of the Contributed Assets.
5.5 Regulatory Approvals. All consents, approvals, authorizations and
--------------------
other requirements described by any Law or Order or third person which must be
obtained or satisfied by the Bank or Imperial Bancorp and which are necessary
for the execution and delivery by the Bank or Imperial Bancorp of this Agreement
and all other Bank Documents and the consummation of the transactions
contemplated by this Agreement will be obtained and satisfied prior to the
Closing, other than those consents, approvals, authorizations or other
requirements, the failure of which to obtain or satisfy would not have a
material adverse effect on the IFG Businesses; provided, however, that no
representation is made hereunder with respect to consents of third persons that
pertain to Contracts constituting Contributed Assets.
5.6 Litigation. Except as set forth on Exhibit "E", there are no
----------
actions, suits, hearings or proceedings of any kind pending, or to the knowledge
of the office of the General
-9-
<PAGE>
Counsel of the Bank and Imperial Bancorp, threatened, before or by any Authority
that relate to, or arise from or are in any way connected with, the Contributed
Assets.
5.7 Title to Contributed Assets. The Bank has, and immediately
---------------------------
following the Effective Date, IFG will have, good, valid and marketable title
to, or a valid leasehold, license or other appropriate interest in, all of the
Contributed Assets, in each case free and clear of all liens, charges, security
interests, mortgages or other encumbrances of any nature whatsoever, other than
liens for taxes not yet due and payable.
5.8 Representations and Warranties on Closing. The representations
-----------------------------------------
and warranties contained in this Article V shall be true and complete in all
material respects at and as of the Effective Time with the same force and effect
as though such representations and warranties had been made at and as of the
Effective Time.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF IFG
IFG represents and warrants to the Bank and Imperial Bancorp as
follows:
6.1 Due Incorporation. IFG is a corporation duly organized, validly
-----------------
existing and in good standing under the Laws of its jurisdiction of
incorporation.
6.2 Authority to Execute and Perform Agreements. IFG has all
-------------------------------------------
requisite power, authority and approval required to enter into, execute and
deliver this Agreement and the other Transferee Documents and to perform fully
its obligations hereunder and thereunder.
6.3 Due Authorization: Enforceability. IFG has taken all actions
---------------------------------
necessary to authorize it to enter into and perform its obligations under this
Agreement and all other Transferee Documents and to consummate the transactions
contemplated herein and therein. This Agreement is, and as of the Closing Date,
such other Transferee Documents will be, the legal, valid and binding
obligations of IFG, enforceable in accordance with their respective terms.
6.4 No Violation. Neither the execution and delivery of this
------------
Agreement and all other Transferee Documents nor the consummation of the
transactions contemplated herein and therein will violate any provision of the
charter documents of IFG or Crown.
6.5 Regulatory Approvals. All consents, approvals, authorizations and
--------------------
other requirements prescribed by any Law or Order or which must be obtained or
satisfied by IFG and Crown and which are necessary for the execution and
delivery by IFG of this Agreement and all other Transferee Documents and the
consummation of the transactions contemplated by this Agreement will be obtained
and satisfied prior to the Closing, other than those consents, approvals,
authorizations or other requirements, the failure of which to obtain or satisfy
would not have material adverse effect on Imperial Bancorp or the Bank.
6.6 Representations and Warranties on Closing Date. The
----------------------------------------------
representations and warranties contained in this Article VI shall be true and
complete at and as of the Effective Time
-10-
<PAGE>
with the same force and effect as though such representations and warranties had
been made at and as of the Effective Time.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATION
OF EACH PARTY TO CLOSE
The obligations of each party to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment, at or prior
to the Closing of all of the conditions set forth below in this Article VII. The
parties may waive any or all of such conditions in whole or in part without
prior notice; provided, however, that no such waiver shall constitute a waiver
by any party of any other right or remedy if any other party shall be in default
of any of its respective representations, warranties or covenants contained in
this Agreement.
7.1 No Action or Proceeding. No action, suit or proceeding shall have
-----------------------
been instituted or threatened before any Authority seeking to challenge or
restrain the transactions contemplated herein which presents a substantial risk
that such transactions will be restrained or that either party hereto may suffer
material damages or other relief as a result of consummating such transactions.
7.2 Compliance With Law. The transactions contemplated hereby shall
-------------------
be in compliance in all material respects with all applicable federal and state
securities laws and the Form 10 shall have been declared effective under the
Exchange Act by the SEC.
7.3 Declaration of Distribution. The Distribution shall have been
---------------------------
declared and the Record Date shall have been set by Imperial Bancorp's Board of
Directors.
7.4 Acceptance for Listing. The IFG Class A Common shall have been
----------------------
accepted for listing for quotation on the New York Stock Exchange.
7.5 Consents and Approvals. All consents of, approvals of, notices
----------------------
to, and filings with, any Authority or any other person or entity necessary to
consummate the transactions contemplated hereby shall have been obtained and be
in full force and effect, other than consents, approvals, notices or filings,
the failure of which to obtain or satisfy would not have a material adverse
effect on IFG or the Bank.
7.6 Credit Agreement. The credit agreements to be entered into by
----------------
Bank and assumed by IFG as contemplated by the Information Statement shall be in
place and all conditions to borrowing thereunder shall have been satisfied.
7.7 Ruling Request. The Ruling shall have been issued and approved by
--------------
the parties hereto.
7.8 Opening IFG Balance Sheet. The parties shall have approved the
-------------------------
Opening IFG Balance Sheet which approval shall be final and binding on the
parties. Such Opening IFG Balance Sheet shall reflect a net book value as
contemplated in
-11-
<PAGE>
the Form 10 which shall equal a net book value of $27,000,000 plus the after-tax
book value of the ICII Stock.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION
OF IFG TO CLOSE
The obligation of IFG to consummate the transactions contemplated
herein shall be subject to the fulfillment, at or before the Closing Date, of
all of the conditions set forth below in this Article VIII. IFG may waive any or
all of such conditions in whole or in part without prior notice; provided,
however, that no such waiver shall constitute a waiver by IFG of any right or
remedy otherwise available to it if the Bank or Imperial Bancorp shall be in
default of any of its representation, warranties or covenants contained in this
Agreement.
8.1 Representations and Warranties. The representations and
------------------------------
warranties of the Bank and Imperial Bancorp contained in this Agreement and in
any Bank Document shall be true on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date and the Bank and
Imperial Bancorp shall have delivered a certificate to IFG to that effect dated
the Closing Date.
8.2 Performance of Covenants. Each obligation of the Bank and
------------------------
Imperial Bancorp to be performed by it on or before the Closing Date pursuant to
the terms of this Agreement and any Bank Document shall have been duly performed
on or before the Closing Date and the Bank and Imperial Bancorp shall have
delivered a certificate to IFG to that effect dated the Closing Date.
8.3 Certain Agreements and Instruments. IFG and Crown shall have
----------------------------------
received at the Closing the agreements, documents and instruments referred to in
Article IV to be delivered to each of them by the Bank and Imperial Bancorp at
the Closing.
ARTICLE IX
CONDITIONS PRECEDENT TO THE OBLIGATION
OF THE BANK AND IMPERIAL BANCORP TO CLOSE
The obligation of the Bank and Imperial Bancorp to consummate the
transactions contemplated herein shall be subject to the fulfillment, at or
before the Closing Date, of all the conditions set forth below in this Article
IX. The Bank and Imperial Bancorp may waive any or all of such conditions in
whole or in part without prior notice; provided, however, that no such waiver
shall constitute a waiver by the Bank or Imperial Bancorp of any right or remedy
otherwise available to either of them if IFG shall be in default of any of its
representations, warranties or covenants contained in this Agreement.
9.1 Representations and Warranties. The representations and
------------------------------
warranties of IFG contained in this Agreement and in any Transferee Document
shall be true on and as of the Closing Date with the same force and effect as
though made on and as of the Closing Date and
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<PAGE>
IFG shall have delivered a certificate to the Bank and Imperial Bancorp to that
effect dated the Closing Date.
9.2 Performance of Covenants. Each of the obligations of IFG to be
------------------------
performed by it on or before the Closing Date pursuant to the terms of this
Agreement and any Transferee Document shall have been duly performed on or
before the Closing Date and IFG shall have delivered a certificate to the Bank
and Imperial Bancorp to that effect dated the Closing Date.
9.3 Certain Agreements and Instruments. Bank shall have received at
----------------------------------
the Closing the agreements, documents and instruments referred to in Article IV
to be delivered to the Bank and Imperial Bancorp by IFG at the Closing.
ARTICLE X
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
OF THE PARTIES
Each representation, warranty, covenant and agreement of any party
hereto contained herein or in any Bank Document or Transferee Document shall
survive the execution and delivery of this Agreement and the Closing.
ARTICLE XI
COVENANTS AND AGREEMENTS OF THE PARTIES AFTER CLOSING
11.1 Competitive Activities. Each of the parties acknowledges that
----------------------
each of them will be in competition with one another from and after the
Effective Time and that there exist no express or implied covenants or
agreements whatsoever regarding competition or use of confidential or
proprietary information in respect of a party's historical activities, except to
the extent such use is prohibited or restricted by applicable Law.
Notwithstanding the foregoing, except as contemplated by Section 3.1, no party
shall hire or otherwise engage in a compensatory relationship with any employee
of any other party for a period of 24 months following the Closing Date.
11.2 Dispute Assistance. If, after the Effective Time, any dispute
------------------
arises between a third party and a party hereto (the "Affected Party"), or its
successors-in-interest, with respect to the business, operations or assets
comprising the Contributed Assets, each party shall cooperate with the Affected
Party, or its successors-in-interest, at no cost to the Affected Party or its
successors-in-interest in the resolution of such dispute; provided, however,
that a party's agreement so to cooperate shall not be deemed an acceptance by
such party of any liability arising from such dispute, as to which the other
provisions of this Agreement shall control. Without limiting the generality of
the foregoing, a party shall make available to the Affected Party or its
successors-in-interest (i) any and all files and business records in a party's
custody or control which, in the reasonable opinion of the Affected Party, or
its successors-in-interest, may be necessary or useful in connection with such
litigation or resolution of such dispute and (ii) any and all individuals
employed by a party whose testimony or knowledge, in the opinion of the Affected
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<PAGE>
Party or its successors-in-interest, may be necessary or useful in such
litigation or resolution of such dispute.
11.3 IFG Employees. As of the Effective Time, IFG or Crown shall hire
-------------
the IFG Employees. As of the Effective Time, stock options held by such
employees to purchase Imperial Bancorp Common Stock shall be canceled and IFG
shall issue to such employees options to acquire shares of IFG Class A Common
Stock, as determined by IFG in its sole discretion. Such options shall be upon
terms and conditions similar to those of the canceled options to acquire
Imperial Bancorp Common Stock, such that the IFG employees receive an economic
position in IFG equivalent to the prior economic position in Imperial Bancorp
attributable to the canceled Imperial Bancorp stock options.
11.4 Insurance. Each of the Bank and Imperial Bancorp covenant and
---------
agree that, following the Effective Time, it shall maintain in full force and
effect all insurance policies applicable to Trust Co., the SBA Division and the
LHO Division until the current expiration dates of such policies. Bank shall
provide IFG with written notification no less than 45 days prior to the
expiration of any such policy.
ARTICLE XII
INDEMNIFICATION
12.1 Indemnification by the Bank. Notwithstanding any other provision
---------------------------
in this Agreement, the Bank shall indemnify, defend and hold harmless (i) IFG
and Crown, (ii) each of their respective successors and assigns, and (iii) each
of their respective Affiliates, shareholders, directors, officers, employees,
agents, attorneys and representatives, from and against any and all losses,
damages, awards, judgments, costs and expenses and other payments including,
without limitation, all costs and expenses of investigating any claim, lawsuit
or arbitration and any appeal therefrom, all reasonable attorneys' fees incurred
in connection therewith, and all amounts paid incident to any compromise or
settlement of any such claim, lawsuit or arbitration (collectively "Losses")
which may be incurred or suffered by any such party and which may arise out of
or result from:
(a) any breach of any representation, warranty, covenant or agreement
of the Bank or Imperial Bancorp contained in this Agreement or in any other Bank
Document;
(b) any Liability other than a Liability assumed by IFG or Crown
pursuant to Section 3.1, including, but not limited to, any Liability arising
from any Transaction Suit and any Liability with respect to any third party
arising out of any actual or alleged misstatement or omission of material fact
by the Bank or Imperial Bancorp in connection with the Form 10, including the
Information Statement set forth therein, ; and
(c) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including, without limitation,
reasonable legal fees and expenses, incurred in enforcing this indemnity.
-14-
<PAGE>
12.2 Indemnification by IFG. Notwithstanding any other provision in
----------------------
this Agreement, IFG shall indemnify, defend and hold harmless (i) Imperial
Bancorp, (ii) the Bank, (iii) each of their respective successors and assigns
(other than IFG and Crown), and (iv) each of their respective Affiliates,
shareholders, directors, officers, employees, agents, attorneys, beneficiaries
and representatives, from and against any and all Losses which may be incurred
or suffered by any such party and which arise out of or result from:
(a) any breach of any representation, warranty, covenant or
agreement of IFG contained in this Agreement or in any other Transferee
Document;
(b) any Liability assumed by IFG or Crown pursuant to Section
3.1;
(c) the operation or conduct of the LHO Division, the SBA
Division or Trust Co. or the ownership of the assets relating thereto and the
other Contributed Assets or any part thereof on, prior to or following the
Effective Time;
(d) any liability with respect to third party arising out of the
formation, syndication, capitalization, licensing, obtaining regulatory
approvals or funding of IFG or Crown, including, without limitation, any actual
or alleged misstatement or omission of material fact in connection with said
formation, syndication, capitalization, licensing, regulatory approval process
or funding of IFG or Crown, except with respect to (i) any Liability arising
from any Transaction Suit, (ii) any Liability with respect to any third party
arising out of any actual or alleged misstatement or omission of material fact
by the Bank or Imperial Bancorp in connection with the Form 10, including the
Information Statement set forth therein, and (iii) any Liability with respect to
any third party arising out of any actual or alleged misstatement or ommission
of material fact by the Bank or Imperial Bancorp in connection with the
formation, syndication, capitalization, licensing, obtaining regulatory
approvals or funding of Crown;
(e) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including, without limitation,
reasonable legal fees and expenses, incurred in enforcing this indemnity.
12.3 Notice to Indemnifying Party. If any party (the "Indemnified
----------------------------
Party") receives notice of any claim or other commencement of any action or
proceeding by a third party with respect to which any other party (or parties)
(the "Indemnifying Party") is obligated to provide indemnification pursuant to
Sections 12.1 or 12.2, the Indemnified Party shall promptly give the
Indemnifying Party, written notice thereof which notice shall specify, if known,
the amount or an estimate of the amount of the Liability arising therefrom;
provided that no delay on the part of the Indemnified Party in giving such
notice shall relieve the Indemnifying Party of any indemnification obligation
hereunder except to the extent that the Indemnifying Party is materially
prejudiced by such delay.
12.4 Defense by Indemnifying Party. In connection with any claim
-----------------------------
giving rise to indemnity hereunder resulting from or arising out of any claim or
legal proceeding by a person who is not a party to this Agreement, the
Indemnifying Party at its sole cost and expense may, upon written notice to the
Indemnified Party delivered within 30 days after receipt by the
-15-
<PAGE>
Indemnifying Party of a notice for a claim for indemnification, assume the
defense of any such claim or legal proceeding using counsel of its choice
(subject to the approval of the Indemnified Party, which approval may not be
unreasonably withheld). The Indemnified Party shall be entitled to participate
in (but not control) the defense of any such action, with its counsel and at its
own expense; provided, however, that if there exists a material conflict of
interest between the Indemnifying Party (or any constituent party thereof) and
the Indemnified Party, the Indemnified Party (or any constituent party thereof)
shall have the right to engage separate counsel, the reasonable costs and
expenses of which shall be paid by the Indemnifying Party, but in no event shall
the Indemnifying Party be liable for the costs and expenses of more than one
such separate counsel (and one local counsel, as necessary). Notwithstanding the
foregoing, the Indemnifying Party shall not, without the prior written consent
of the Indemnified Party, (i) settle or compromise any such claim or litigation
or consent to the entry of any judgment which does not include as an
unconditional term thereof the delivery by the claimant or plaintiff to the
Indemnified Party of a written release from all liability in respect of such
claim or litigation or (ii) settle or compromise any claim or litigation in any
manner that would be reasonably likely to have a material adverse effect on the
Indemnified Party.
12.5 Defense by Indemnified Party. If the Indemnifying Party does not
----------------------------
assume the defense of any such claim or litigation resulting therefrom, the
Indemnified Party may defend against such claim or litigation, after giving
notice of the same to the Indemnifying Party, on such terms as the Indemnified
Party may deem appropriate, and the Indemnifying Party shall be entitled to
participate in (but not control) the defense of such action, with its counsel
and at its own expense; provided, however, that the Indemnified Party may not
compromise or settle any such claim or litigation without the prior written
consent of the Indemnifying Party, which consent shall not be unreasonably
withheld. If the Indemnifying Party thereafter seeks to question the manner in
which the Indemnified Party defended such third-party claim, the Indemnifying
Party shall have the burden to prove by a preponderance of the evidence that the
Indemnified Party did not defend such third-party claim in a reasonably prudent
manner.
12.6 Indemnity for Insured Liabilities. Notwithstanding anything to
---------------------------------
the contrary set forth in this Agreement, no Liability, or part thereof, which
is covered by insurance shall be deemed assumed by IFG or subject to any
indemnity hereunder by IFG to the extent of applicable insurance coverage. It is
the express intention of the parties that no transaction contemplated by this
Agreement eliminate or reduce insurance coverage available to any party hereto
with respect to a Liability.
12.7 Internal Revenue Service Forms. Pursuant to the ''Alternative
------------------------------
Procedure" provided in Section 5 of Revenue Procedure 96-60, 1996-53, I.R.B. 24,
with respect to preparing, filing and furnishing the Internal Revenue Service
Forms W-2, W-3, 941 and W-5, (i) the Bank and IFG shall report, on a
''predecessor-successor" basis as set forth therein, (ii) the Bank shall be
relieved from furnishing Forms W-2 to the IFG Employees and (iii) IFG shall
assume the obligation of IFG to furnish such forms to the IFG Employees for the
full 1998 calendar year.
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<PAGE>
ARTICLE XIII
EXPENSES; PUBLICITY
13.1 Expenses of Transfer. Except as provided in the Tax Sharing
--------------------
Agreement, IFG, on the one hand, and the Bank and Imperial Bancorp, on the other
hand, shall share equally all expenses incurred by all parties hereto in
connection with the negotiation and preparation of this Agreement, the Bank
Documents and the Transferee Documents and the consummation and performance of
the transactions contemplated herein.
13.2 Publicity. No publicity release or announcement concerning this
---------
Agreement or the transactions contemplated herein shall be issued without
advance written approval of the form and substance thereof by all parties
hereto; provided, however, that such restrictions shall not apply to any
disclosure required by regulatory Authorities, applicable Law or the rules of
any securities exchange which may be applicable.
ARTICLE XIV
RESOLUTION OF DISPUTES BY REFERENCE
14.1 In General. Subject to Section 15.3, other than the appointment
----------
of a receiver, or the exercise of other provisional remedies (any and all of
which may be initiated pursuant to applicable law), 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 all other parties that a controversy, dispute
or claim exists), will be settled by a reference proceeding in California in
accordance with the provisions of Section 638 et seq. of the California Code of
-- ---
Civil Procedure, or their successor section ("CCP" ), which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Agreement, including whether such controversy, dispute or claim
is subject to the reference proceeding and except as set forth above, the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court in the County where
the Real Property, if any, is located or Los Angeles County if none (the
"Court").
14.2 Referee; Procedural Matters. The referee shall be a retired
---------------------------
Judge of the Court selected by mutual agreement of the parties, and if they
cannot so agree within forty-five (45) days after the Claim Date, the referee
shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one peremptory challenge pursuant to CCP (S) 170.6. The
referee shall (a) be requested to set the matter for hearing within sixty (60)
days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them, if possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP (S)644
-17-
<PAGE>
in any court in the State of California having jurisdiction. Any party may apply
for a reference proceeding at any time after thirty (30) days following notice
to any other party of the nature of the controversy, dispute or claim, by filing
a petition for a hearing and/or trial.
14.3 Discovery. All discovery permitted by this Agreement shall be
---------
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of a
party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
14.4 Conduct of Proceeding.
---------------------
(a) Except as expressly set forth in this Agreement, the
referee shall determine the manner in which the reference 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 reference proceeding. All proceedings and hearings conducted
before the referee, 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 referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(b) The referee 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 referee 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 referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. 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 referee. 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 difference
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
14.5 Repeal of Legislation. In the event that the enabling
---------------------
legislation which provides for appointment of a referee is repealed (and no
successor statute is enacted), any dispute between the parties that would
otherwise be determined by the reference procedure herein described will be
resolved and determined by arbitration. The arbitration will be conducted by a
retired judge of the Court, in accordance with the California Arbitration Act,
(S)1294.2 of the CCP as amended from time to time. The limitations with respect
to discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
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<PAGE>
ARTICLE XV
MISCELLANEOUS
15.1 Notices. All notices, requests and other communications
-------
hereunder shall be in writing and shall be delivered by courier or other means
of personal service (including by means of a nationally recognized courier
service or a professional messenger service), or sent by telecopy or mailed
first class, postage prepaid, by certified mail, return receipt requested, in
all cases, addressed to:
IFG:
Imperial Financial Group, Inc.
1840 Century Park East 10th Floor
Los Angeles, California 90067
Attention: Robert M. Franko
With copies to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue New York
New York 10153-0119
Attention: Michael Lubowitz, Esq.
and
Allen, Matkins, Leck, Gamble & Mallory LLP
1999 Avenue of the Stars, Suite 1800
Los Angeles, California 90067-6050
Attention: Mark J. Kelson, Esq.
Imperial Bancorp or the Bank:
Imperial Bancorp
9920 South La Cienega Boulevard
Inglewood, California 90301
Attention: Richard M. Baker, General Counsel
With a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard
Suite 1800
Los Angeles, California 90017
Attention: Robert S. Barry, Jr., Esq.
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<PAGE>
All notices, requests and other communications shall be deemed given on the date
of actual receipt or delivery as evidenced by written receipt, acknowledgment or
other evidence of actual receipt or delivery to the address. In case of service
by telecopy, a copy of such notice shall be personally delivered or sent by
registered or certified mail, in the manner set forth above, within three
business days thereafter, Either party hereto may from time to time by notice in
writing served as set forth above designate a different address or a different
or additional person to which all such notices or communications thereafter are
to be given.
15.2 Further Assurances. Each of the parties shall use its reasonable
------------------
and diligent best efforts to proceed promptly with the transactions contemplated
herein, to fulfill the conditions precedent for such party's benefit or to cause
the same to be fulfilled and to execute such further documents and other papers
and perform such further acts as may be reasonably required or desirable to
carry out the provisions hereof and the transactions contemplated herein.
15.3 Attorneys' Fees. If either party shall bring an action against
---------------
the other by reason of any alleged breach of any covenant, provision or
condition hereof, the unsuccessful party shall pay to the prevailing party all
attorneys' fees and costs incurred by the prevailing party, in addition to any
other relief to which it may be entitled.
15.4 Modifications and Amendments; Waivers and Consents. At any time
--------------------------------------------------
prior to the Closing Date the parties may, by written agreement:
(a) amend this Agreement or extend the time for the performance
of any of the obligations or other acts of the other party hereto;
(b) waive any inaccuracies in the representations and
warranties made by the other party contained in this Agreement or any other
agreement or document delivered pursuant to this Agreement; and
(c) waive compliance with any of the covenants or agreements of
the other party contained in this Agreement. However, no such waiver shall
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits a waiver or consent by or
on behalf of any party hereto, such waiver or consent shall be given in writing.
15.5 Entire Agreement. This Agreement (including the exhibits hereto
----------------
and the portions of the Information Statement and Form 10 referred to by this
Agreement) and the agreements, documents and instruments to be executed and
delivered pursuant hereto or thereto (including the Bank Documents and the
Transferee Documents) are intended to embody the final, complete and exclusive
agreement among the parties with respect to the transfer of the Contributed
Assets and related transactions; are intended to supersede all prior agreements,
understandings and representations written or oral, with respect thereto; and
may not be contradicted by evidence of any such prior or contemporaneous
agreement, understanding or representation, whether written or oral.
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15.6 Governing Law and Venue. This Agreement is to be governed by and
-----------------------
construed in accordance with the laws of the state of California applicable to
contracts made and to be performed wholly within such State, and without regard
to the conflicts of laws principles thereof. Each party hereby agrees that any
such court shall have in personam jurisdiction over it, consents to service of
process in any manner prescribed in Section 15.1 or in any other manner
authorized by California law, and agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner specified by law.
15.7 Binding Effect. This Agreement and the rights, covenants,
---------------
conditions and obligations of the respective parties hereto and any instrument
or agreement executed pursuant hereto shall be binding upon the parties and
their respective successors, assigns and legal representatives.
15.8 Counterparts. This Agreement may be executed simultaneously in
------------
any number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. In making proof of
this Agreement it shall not be necessary to produce or account for more than one
counterpart.
15.9 Section Headings. The section headings of this Agreement are for
----------------
convenience of reference only and shall not be deemed to alter or affect any
provision hereof.
15.10 Gender; Tense, Etc. Where the context or construction requires,
------------------
all words applied in the plural shall be deemed to have been used in the
singular, and vice versa; the masculine shall include the feminine and neuter,
and vice versa; and the present tense shall include the past and future tense,
and vice versa.
15.11 Severability. In the event that any provision or any part of
------------
any provision of this Agreement shall be void or unenforceable for any reason
whatsoever, then such provision shall be stricken and of no force and effect.
However, the remaining provisions of this Agreement shall continue in full force
and effect, and to the extent required, shall be modified to preserve their
validity.
15.12 No Third-Party Rights. Nothing in this Agreement, whether
---------------------
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons or entities other than the parties
hereto and their respective successors and assigns, nor is anything in this
Agreement intended to relieve or discharge the obligation or liability of any
third persons or entities to any party to this Agreement, nor shall any
provision give any third persons or entities any right of subrogation or action
against any party to this Agreement.
15.13 Ambiguities. The parties acknowledge that each party and its
-----------
counsel has materially participated in the drafting of this Agreement and
consequently the rule of contract interpretation that ambiguities, if any, in
the writing be construed against the drafter, shall not apply.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
IFG
Imperial Financial Group, Inc.,
a Delaware corporation
By:___________________________
Name:
Title:
CROWN
Crown American Bank,
a California industrial loan corporation
By:___________________________
Name:
Title:
THE BANK
Imperial Bank,
a California banking corporation
By:___________________________
Name:
Title:
IMPERIAL BANCORP
Imperial Bancorp,
a California corporation
By:___________________________
Name:
Title:
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EXHIBIT A
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IFG EMPLOYEES
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EXHIBIT B
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LHO DIVISION CONTRACTS
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EXHIBIT C
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SBA DIVISION CONTRACTS AND MATERIAL ASSETS
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EXHIBIT D
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LOANS NOT ASSUMED
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EXHIBIT E
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LITIGATION
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SERVICES AGREEMENT
This Services Agreement is entered into as of October 1, 1998 by and
between Imperial Bank, a California Banking corporation (the "Bank"), and
Imperial Financial Group, Inc., a Delaware corporation ("IFG")
A. The Bank, IFG and certain other entities are parties to that
certain Capital Contribution Agreement (the "Capital Contribution Agreement"),
dated as of August ___, 1998.
B. Pursuant to the Capital Contribution Agreement, the Bank and IFG
now wish to arrange for the provision of certain services by the Bank to IFG, on
the terms and conditions set forth herein.
For good and valuable consideration, the adequacy of which is hereby
acknowledged, the parties agree as follows:
1. Services: Term. Commencing on the date hereof and continuing for
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a period of 12 months (the "Initial Term"), the Bank will perform the services
(the "Services") enumerated on Exhibit "A" attached hereto for an on behalf of
IFG. Additional services may be added to Exhibit "A" at any time by mutual
agreement of the parties hereto. This Agreement shall automatically renew for
one additional one-year term unless either party delivers written notice to the
other party of its intention not to renew this Agreement at least 60 days prior
to the end of the initial term. Notwithstanding anything to the contrary set
forth herein, IFG may terminate this Agreement or any service then provided on
60 days' prior written notice to the Bank.
2. Compensation. IFG will pay the Bank fees for Services pursuant to
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the Schedule of Fees on Exhibit "B" attached hereto, which fees have been
determined by the parties as representative of fees that would otherwise be paid
by independent third parties on an arms-length basis. The Bank will provide IFG
with an invoice for the Services on a monthly basis in arrears not later than 30
days following the close of each calendar month in which such Services are
rendered. Payment for the Services shall be due upon receipt of the invoice
therefor and may be made in cash or through the maintenance of compensating
balances by IFG or any of its subsidiaries or affiliates.
3. Expenses. IFG shall reimburse the Bank for all reasonable out-of-
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pocket expenses incurred in connection with the services rendered pursuant to
this Agreement including, without limitation, advertising, legal and other
reasonable professional fees; provided, however, that such expenses shall not
exceed $5,000 annually in the aggregate; and provided, further, that the Bank
shall obtain IFG's prior written approval on a case-by-case basis before
incurring legal fees. The Bank will include itemized expenses in the invoice
for Services rendered referred to in Section 2 above.
4. Documentation and Disputes. In the event that any of the Bank's
--------------------------
charges are based upon hourly rates or upon allocation of a combined cost (other
than as specified in Exhibit "B"), IFG will be provided, upon request, with
reasonably detailed documentation supporting the amount charged.
<PAGE>
5. Confidential Information.
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(a) The parties agree: (i) to hold in trust and maintain
confidential, (ii) not to disclose to others without prior written approval from
the other party, (iii) not to use for any purpose, other than such purposes as
may be authorized in writing by the other party, and (iv) to prevent duplication
of and disclosure to any other party, any Information received from the other
party by the receiving party under this Agreement.
(b) "Information" shall mean all results of the Services,
information disclosed by either party after the date hereof, whether orally,
visually, in writing, or in other tangible form, and includes, but is not
limited to, technical information, economic plans, computer information data
bases, and the like in connection with this Agreement.
(c) The foregoing obligations of confidentiality and non-
disclosure shall not apply to any Information to the extent that the obligated
party can show that: (i) such Information is or becomes knowledge generally
available to the public other than through the acts or omissions of the
obligated party; (ii) such Information is or becomes available to the obligated
party on a non-confidential basis from a third party having the legal right to
disclose such Information, (iii) disclosure of such Information is required
under applicable law or regulations or is made pursuant to the request of any
regulatory authority having jurisdiction over the obligated party. Additionally,
the obligation of non-use under Section 5.(a)(iii) above shall not apply to any
Information to the extent the obligated party can show that such Information
relates solely to the historical activities of the other party prior to the date
hereof.
6. Standard of Care. The Bank shall perform the Services for IFG
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with the same degree of care, skill and prudence customarily exercised by the
Bank for its own operations.
7. Furnishing Information and Witnesses; Books and Records.
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(a) Bank agrees to make available to IFG, upon IFG's written
request, Bank's officers, employees and agents as witnesses to the extent that
such persons may reasonably be required in connection with any legal,
administrative or other proceedings relating to the Services in which IFG may
from time to time be involved. IFG agrees to reimburse Bank for its out-of-
pocket expenses incurred in making such officers, employees and agents available
as witnesses.
(b) Bank also agrees to permit IFG and each of its authorized
representatives to enter upon Bank's premises during normal business hours for
the purpose of examining, inspecting or making extracts of any books and records
pertaining to the provision of the Services; provided, however, that the same
shall be conducted without unreasonable interference or disruption to the
business and operations of Bank.
(c) Bank further agrees to maintain books and records pertaining
to the Services and information provided hereunder in accordance with past
practice and internal control procedures and shall deliver all such records to
IFG promptly upon expiration of this Agreement.
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8. Litigation. Bank shall, as soon as it become aware of any
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threatened or potential legal, administrative or other proceedings involving
IFG, promptly notify IFG of such threatened or potential proceeding in writing,
and shall promptly provide to IFG the originals of any and all correspondence
and other documents related thereto that Bank receives.
9. Indemnification. Each of the parties hereto shall indemnify,
---------------
defend and hold harmless the other party hereto and each of its respective
shareholders, directors, officers, employees, agents, attorneys and
representatives from and against all Losses (as defined in the Contribution
Agreement) caused by or arising out of any failure in the performance of its
respective obligations or agreements hereunder. In the event a claim for
indemnification is made hereunder, the procedures set forth in Article XII of
the Contribution Agreement shall govern Neither party shall be liable to the
other party for indirect or consequential damages except with respect to Losses
caused by or arising from the gross negligence or wilfull misconduct of the
indemnifying party.
10. Assignment or Transfer. Neither party shall assign or transfer
----------------------
any of its rights under this Agreement without the prior written approval of the
other party, except no such approval shall be required for an assignment to an
affiliate or a successor to all or a substantial portion of the assets or the
business of either party, provided that such affiliate or successor assumes such
party's obligations hereunder with respect to the rights assigned or
transferred. This Agreement shall be binding on the parties' respective
permitted or approved successors and assigns.
11. Notices. All notices, requests, demands and other communications
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provided for hereunder shall be in writing (including facsimile communications)
and shall be mailed (return receipt requested), sent by facsimile or delivered
by courier or other means of personal service to each party at the address set
forth as follows, and any such notice, request, demand or other communication
shall be effective upon receipt. All payments required in this Agreement shall
be paid to and delivered to the party as provided herein for notice.
If to IFG: Imperial Financial Group, Inc.
1840 Century Park East
10th Floor
Los Angeles, CA 90067
Attn: Robert M. Franko
With copy to: Allen, Matkins, Leck, Gamble & Mallory, LLP
1999 Avenue of the Stars
19th Floor
Los Angeles, CA 90067
Attn: Mark J. Kelson
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<PAGE>
If to the Bank: Imperial Bank
9920 So. La Cienega Blvd.
Inglewood, CA 90301
Attn: Chief Executive Officer
With copy to: Imperial Bank
Legal Department
9920 So. La Cienega Blvd.
Inglewood, CA 90301
Attn: General Counsel
12. Entire Agreement. This Agreement (including the exhibits hereto
----------------
and provisions of the Contribution Agreement incorporated by reference) is
intended to embody the final, complete and exclusive agreement among the parties
with respect to the subject matter hereof; is intended to supersede all prior
agreements, understandings and representations written or oral, with respect
thereto; and may not be contradicted by evidence of any such prior or
contemporaneous agreement, understanding or representation, whether written or
oral.
13. Governing Law and Venue. This Agreement is to be governed by and
-----------------------
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed wholly within such State, and without regard
to the conflicts of laws principles thereof. Any suit brought hereon, whether
in contract, tort, equity or otherwise, shall be brought in the state or federal
courts sitting in Los Angeles County, California, the parties hereto hereby
waiving any claim or defense that such forum is not convenient or proper. Each
party hereby agrees that any such court shall have in personam jurisdiction over
it, consents to service of process in any manner prescribed in Section 10 or in
any other manner authorized by California law, and agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner specified by
law.
14. Binding Effect. This Agreement and the rights, covenants,
--------------
conditions and obligations of the respective parties hereto and any instrument
or agreement executed pursuant hereto shall be binding upon the parties and
their respective successors, assigns and legal representatives.
15. Counterparts. This Agreement may be executed simultaneously in
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any number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. In making proof of
this Agreement it shall not be necessary to produce or account for more than one
counterpart.
16. Section Headings. The section headings of this Agreement are for
----------------
convenience of reference only and shall not be deemed to alter or affect any
provision hereof.
17. Severability. In the event that any provision or any part of any
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provision of this Agreement shall be void or unenforceable for any reason
whatsoever, then such provision
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<PAGE>
shall be stricken and of no force and effect. However, unless such stricken
provision goes to the essence of the consideration bargained for by a party, the
remaining provisions of this Agreement shall continue in full force and effect,
and to the extent required, shall be modified to preserve their validity.
18. No Third-Party Rights. Except as contemplated by Section 9
---------------------
hereof, nothing in this Agreement, whether express or implied, is intended to
confer any rights or remedies under or by reason of this Agreement on any
persons or entities other than the parties to it and their respective successors
and assigns, nor is anything in this Agreement intended to relieve or discharge
the obligation or liability of any third persons or entities to any party to
this Agreement, nor shall any provision give any third persons or entities any
right of subrogation or action over against any party to this Agreement.
19. Ambiguities. The parties acknowledge that each party and its
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counsel has materially participated in the drafting of this Agreement and
consequently the rule of contract interpretation that ambiguities, if any, in
the writing be construed against the drafter, shall not apply.
20. Resolution of Disputes. Any controversy, dispute or claim
----------------------
between the parties arising out of or relating to this Agreement shall be
settled by reference as provided in Article XIV of the Contribution Agreement,
which Article XIV is incorporated herein by this reference.
21. Specific Performance. Bank acknowledges that the remedy at law
--------------------
for any breach or threatened breach of its obligations and duties hereunder will
be inadequate and, accordingly, covenants and agrees that, with respect to any
rights or remedies that IFG may have and regardless of whether such other rights
or remedies may have been previously exercised, IFG is entitled to all such
equitable and injunctive relief as may be available.
22. Attorneys' Fees; Costs and Expenses. In any action or proceeding
-----------------------------------
brought to enforce any provision of this Agreement, the successful party shall
be entitled to recover reasonable attorneys' fees in addition to its costs and
expenses and any other available remedy.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed by the parties'
respective duly authorized representatives as of the date first set forth above.
IMPERIAL BANK, IMPERIAL FINANCIAL GROUP, INC.,
a California banking corporation a Delaware corporation
By:______________________________ By:_____________________________
Name: Name:
Title: Title:
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<PAGE>
EXHIBIT "A"
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SCHEDULE OF SERVICES
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1. Human Resources. The Bank will provide administrative human
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resources support in the areas of payroll, recordkeeping and consultation
services including terminations, discipline, compensation design and
administration, leave of absence administration, training, workers' compensation
and all other day-to-day consultation activities currently being performed for
IFG by the Bank Human Resources Department. Notwithstanding the foregoing, the
Bank will not take any action with respect to termination, discipline or
compensation design without the consent of the chief executive officer or
president of IFG or any person designated by either of them in writing.
2. Audit. The Bank will provide (a) loan review, (b) risk management
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guidance and (c) internal audit services to IFG, Imperial Trust Company, IFG's
Lewis Horowitz Organization Division and Crown American Bank. The internal
audit procedures will be developed in conjunction with IFG, with the
understanding that IFG will have the responsibility of confirming the adequacy
of such audit procedures for its own purposes. The Bank's audit approach will
encompass the following primary stages:
(a) Planning which will include preliminary discussions with
management regarding business strategy, activities and risks; and review of
policies, product background information, prior audit and regulatory reports,
and laws and regulations.
(b) Execution of procedures specifically designed for each
business area to achieve IFG's audit objectives.
(c) Continuous updates to management of progress made during the
audit and those areas requiring immediate or further attention.
(d) Review of audit results with IFG management at a formal exit
conference.
(e) Issuance of a written report detailing all areas requiring
attention and areas of strengths to IFG management at conclusion of the audit.
(f) Review of the business unit's written audit response issued to
IFG's executive management to verify all areas requiring attention have been
properly addressed.
In connection with the Bank's audit services, the Bank has assumed
that the policies and procedures set forth in Exhibit I of the Bank's proposal
letter of September 3, 1997 will be in place. A copy of Exhibit I is attached
to this Agreement and is incorporated herein by this reference.
3. Security. The Bank will provide support and guidance as requested
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by IFG with respect to (a) security issues, (b) Bank Secrecy Act issues, and (c)
disaster recovery planning.
<PAGE>
EXHIBIT "B"
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SCHEDULE OF FEES
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1. Human Resources. IFG will pay the Bank $75 per month per employee
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for all human resource services listed on Exhibit "A". Fees for partial months
will be prorated. Employment search activities will be billed on a per hire
basis with a 20% of base salary charge for all exempt hires and a 10% of base
salary charge for all nonexempt hires, provided, that such payments will only
be made with respect to such hires if a job requisition has been ordered by
IFG, which requisition has been signed by the chief executive officer,
president or chief financial officer of IFG.
2. Audit Services. The fees for loan review, risk management
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guidance and audit services will be $110 per hour for staff personnel and $200
per hour for management personnel.
3. Security Services. The fees for bank security services will be
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$110 per hour.
<PAGE>
EXHIBIT 10.3
TAX SHARING AGREEMENT
TAX SHARING AGREEMENT (the "Agreement") dated as of ___________, 1998 by
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and among IMPERIAL BANCORP, a California corporation ("Imperial"), and IMPERIAL
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FINANCIAL GROUP, INC. ("IFG"), a Delaware corporation and a wholly owned
---
subsidiary of IMPERIAL BANK ("Bank"), which is a wholly owned subsidiary of
----
Imperial.
W I T N E S S E T H
- - - - - - - - - -
WHEREAS Imperial and its subsidiaries are currently members of the Imperial
Consolidated Group (as defined herein);
WHEREAS the Board of Directors of Imperial has determined that the
interests of Imperial's businesses and shareholders would be best served by
distributing to Imperial shareholders, among other things, Bank's entertainment
and specialty finance lending businesses;
WHEREAS Bank will contribute to IFG certain assets held by Bank and IFG
will assume certain liabilities of Bank (the "Contribution");
WHEREAS Imperial and Bank intend to distribute all the shares of IFG common
stock held by Bank, on a pro rata basis, to the holders of the common stock of
Imperial (the "Distribution");
WHEREAS, the parties intend that for U.S. federal income tax purposes the
Contribution and the Distribution shall qualify as tax-free transactions
pursuant to Sections 351, 368(a)(1)(D) and 355 of the Code (as defined herein);
WHEREAS, the parties wish (i) to provide for the payment of tax liabilities
and entitlement to refunds thereof, allocate responsibility for, and cooperation
in, the filing of Tax Returns and provide for certain other matters relating to
Taxes (as defined herein) and (ii) to set forth certain representations,
warranties, covenants and indemnities relating to the preservation of the tax-
free status of the Contribution and the Distribution.
NOW, THEREFORE, in consideration of the mutual promises and undertakings
contained herein, the parties agree as follows:
<PAGE>
1. Definitions.
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(a) General. For purposes of this Agreement, the following terms shall
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have the meanings set forth below:
"Agreement" shall have the meaning set forth in the preamble to this
---------
Agreement.
"Bank" shall have the meaning set forth in the preamble to this
----
Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Combined Return" shall mean a consolidated, combined or unitary income
---------------
Tax Return that includes one or more members of the Imperial Subgroup and one or
more members of the IFG Subgroup.
"Contribution" shall have the meaning set forth in the recitals to this
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Agreement.
"Distribution" shall have the meaning set forth in the recitals to this
------------
Agreement.
"Distribution Date" shall mean the date on which the Distribution
-----------------
occurs.
"IFG" shall have the meaning set forth in the preamble to this
---
Agreement.
"IFG Subgroup" shall mean IFG and its present and future direct and
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indirect subsidiaries.
"Imperial" shall have the meaning set forth in the preamble to this
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Agreement.
"Imperial Consolidated Group" shall mean the affiliated group of
---------------------------
corporations, within the meaning of Section 1504(a) of the Code, of which
Imperial is the common parent, and any member of such group.
"Imperial Subgroup" shall mean each member of the Imperial Consolidated
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Group, other than any member of the IFG Subgroup.
"Indemnified Party" shall mean any Person which is seeking
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indemnification from an Indemnifying Party pursuant to the provisions of this
Agreement.
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<PAGE>
"Indemnifying Party" shall mean any Person from which an Indemnified
------------------
Party is seeking indemnification pursuant to the provisions of this Agreement.
"Independent Accounting Firm" shall mean a nationally recognized
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independent accounting firm, jointly selected by IFG and Imperial; or, if they
cannot agree on such accounting firm, both IFG and Imperial shall submit the
name of a nationally recognized independent accounting firm that has not in the
prior two years provided services worth more than $50,000 to IFG, Imperial, or
their respective affiliates, and the "Independent Accounting Firm" shall mean
the firm selected by lot from these two firms.
"IRS" shall mean the U.S. Internal Revenue Service.
---
"Overpayment Rate" shall mean the annual rate of interest specified in
----------------
Section 6621(a)(1) of the Code (or similar provision of state, local or foreign
tax law, as applicable) for overpayments of Tax.
"Person" shall mean and includes any individual, partnership, joint
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venture, limited liability company, corporation, association, joint stock
company, trust, unincorporated organization or similar entity.
"Post-Distribution Taxable Period" shall mean a taxable period that
--------------------------------
begins after the Distribution Date.
"Pre-Distribution Taxable Period" shall mean a taxable period that ends
-------------------------------
on or before the Distribution Date.
"Present Value Benefit" shall mean the present value (based on a
---------------------
discount rate equal to the short-term applicable federal rate as determined
under Section 1274(d) of the Code at the time of determination, and assuming
that the Indemnified Party will be liable for Taxes at all relevant times at the
maximum marginal rates) of any income tax benefit.
"Proceeding" shall mean any audit or other examination, or any judicial
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or administrative proceeding, relating to liability for or refunds or
adjustments with respect to Taxes.
"Refund" shall mean any refund of Taxes, including any reduction in
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liability for such Taxes by means of a credit, offset or otherwise.
"Ruling Request" shall mean the request by Imperial for an advance
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letter ruling from the IRS with respect to certain Tax
3
<PAGE>
aspects of the Contribution and the Distribution (and related transactions).
"Straddle Period" shall mean a taxable period that includes, but does
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not end on, the Distribution Date.
"Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies
--- -----
or other assessments, including, without limitation, all net income, gross
receipts, capital, sales, use, gains, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation,
property and estimated taxes, customs duties, fees, assessments and charges of
any kind whatsoever, together with any interest and any penalties, fines,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) and shall include any transferee liability in respect of Taxes.
"Tax Liabilities" shall mean all liabilities for Taxes.
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"Tax Returns" shall mean all reports, returns, declaration forms and
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statements filed or required to be filed with respect to Taxes.
"Transaction Tax Returns" shall mean all reports, returns, declaration
-----------------------
forms and statements filed or required to be filed with respect to Transaction
Taxes.
"Transaction Taxes" shall mean all sales, use, license, transfer, and
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other similar taxes or fees (including, without limitation, all real estate,
patent, copyright, and trademark transfer taxes and recording fees) incurred in
connection with the Contribution or Distribution.
"Transaction Related Proceeding" shall mean a Proceeding, to the extent
------------------------------
it relates to the qualification of the Distribution as a tax-free spin-off
pursuant to Section 355 of the Code or to the qualification of the Contribution
as tax-free transactions pursuant to Sections 351 and 368(a)(1)(D) of the Code.
"U.S." shall mean the United States of America.
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(b) Other Definitional Provisions.
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(1) The words "hereof", "herein", and "hereunder" and words of
similar import, when used in this Agreement, shall
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<PAGE>
refer to this Agreement as a whole and not to any particular provision of this
Agreement.
(2) The terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa.
2. Certain Operating Conventions.
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(a) Termination of Taxable Years. For U.S. federal income Tax purposes,
----------------------------
the taxable year of each member of the IFG Subgroup shall end as of the close of
the Distribution Date. Imperial and IFG shall, unless prohibited by applicable
law, take all action necessary or appropriate to close the taxable period of
each member of the IFG Subgroup for all Tax purposes as of the close of the
Distribution Date.
3. Filing of Tax Returns; Payment of Taxes.
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(a) Tax Returns Required to Be Filed Prior to Distribution Date.
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Imperial shall file or cause to be filed all Tax Returns of Imperial and any
member of the Imperial Consolidated Group required to be filed (after giving
effect to any valid extension of time in which to make such filings) prior to
the Distribution Date and shall pay or cause to be paid all Tax Liability due
with respect to such Tax Returns.
(b) Tax Returns for Pre-Distribution Taxable Periods and Straddle
-------------------------------------------------------------
Periods. Imperial shall prepare or cause to be prepared, for Pre-Distribution
- -------
Taxable Periods and Straddle Periods, all (A) Combined Returns and (B) Tax
Returns required to be filed on a separate return basis by any member of the
Imperial Consolidated Group, in each case, which Tax Returns are not required to
be (after giving effect to any valid extensions), and are not, filed on or prior
to the Distribution Date and shall pay or cause to be paid all Tax Liability due
with respect to such Tax Returns. With respect to any Tax Returns described in
(B) relating to a member of the IFG Subgroup, Imperial shall timely file such
Tax Returns with the appropriate Tax authority, pursuant to a power of attorney
executed and delivered to Imperial by IFG pursuant to Section 9(e) hereof, and
shall pay or cause to be paid all Tax Liability due with respect to such Tax
Returns.
(c) Tax Returns for Post-Distribution Taxable Periods. IFG shall be
-------------------------------------------------
responsible for (1) preparing and filing or causing to be prepared and filed all
Tax Returns required to be filed by any member of the IFG Subgroup for any Post-
Distribution Taxable
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<PAGE>
Period and (2) paying or causing to be paid any Tax Liability due with respect
to such Tax Returns. Imperial shall be responsible for (1) preparing and filing
or causing to be prepared and filed all Tax Returns required to be filed by any
member of the Imperial Subgroup for any Post-Distribution Taxable Period and (2)
paying or causing to be paid any Tax Liability due with respect to such Tax
Returns.
(d) Transaction Taxes. Each of Imperial and IFG shall be responsible
-----------------
for preparing and filing or causing to be prepared and filed all Transaction Tax
Returns required to be filed by it and each of Imperial and IFG shall pay or
cause to be paid all Transaction Taxes required to be paid by it.
4. Indemnification for Taxes.
-------------------------
(a) Indemnification by IFG. IFG shall pay, and shall indemnify and
----------------------
hold each member of the Imperial Subgroup and their respective shareholders,
directors, officers, employees, affiliates, agents and successors harmless from
and against, without duplication, (i) all Tax Liabilities which IFG is required
to pay under Section 3, (ii) all Tax Liabilities incurred by any member of the
Imperial Subgroup by reason of the breach by IFG of any of its covenants
hereunder, and (iii) any costs and expenses related to the foregoing (including,
without limitation, reasonable attorneys' fees and expenses).
(b) Liability of IFG Subgroup for Undertaking Certain Transactions.
--------------------------------------------------------------
Notwithstanding any other provision of this Agreement to the contrary, if, as a
result of any event, action, or failure to act wholly or partially within the
control of any member of the IFG Subgroup (including, without limitation, any
event, action, or failure to act that results in a breach of any representation
or in the inaccuracy of any statement made to the IRS in connection with, the
Ruling Request, or any other event related to the acquisition of IFG stock, any
Taxes are imposed on any member of the Imperial Subgroup with respect to any
action taken pursuant to the Distribution and the transactions related to the
Distribution, including without limitation, the transactions that were intended
to be tax-free under Sections 351, 355 and 368 of the Code, then IFG shall
indemnify and hold harmless each member of the Imperial Subgroup with respect to
any such Taxes on an after-tax basis.
(c) Indemnification by Imperial. Imperial shall pay, and shall
---------------------------
indemnify and hold each member of the IFG Subgroup and their respective
shareholders, directors, officers, employees, affiliates, agents and successors
harmless from and against, without duplication, (i) all Tax Liabilities which
Imperial is
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<PAGE>
required to pay under Section 3, (ii) all Tax Liabilities incurred by any member
of the IFG Subgroup by reason of the breach by Imperial of any of its covenants
hereunder and (iii) any costs and expenses related to the foregoing (including,
without limitation, reasonable attorneys' fees and expenses).
(d) Liability of Imperial Subgroup for Undertaking Certain
------------------------------------------------------
Transactions. Notwithstanding any other provision of this Agreement to the
- ------------
contrary, if, as a result of any event, action, or failure to act wholly or
partially within the control of any member of the Imperial Subgroup (including,
without limitation, any event, action, or failure to act that results in a
breach of any representation or in the inaccuracy of any statement made to the
IRS in connection with, the Ruling Request), or any other event related to the
acquisition of Imperial stock, any Taxes are imposed on any member of the IFG
Subgroup with respect to any action taken pursuant to the Distribution and the
transactions related to the Distribution, including without limitation, the
transactions that were intended to be tax-free under Sections 351, 355 and 368
of the Code, then Imperial shall indemnify and hold harmless each member of the
IFG Subgroup with respect to any such Taxes on an after-tax basis.
(e) Payment. If the Indemnifying Party is required to indemnify the
-------
Indemnified Party pursuant to this Section 4, the Indemnified Party shall submit
its calculations of the amount required to be paid pursuant to this Section 4
(which shall be net of the Present Value Benefit realized or realizable by the
Indemnified Party), showing such calculations in sufficient detail so as to
permit the Indemnifying Party to understand the calculations. Subject to the
following sentence, the Indemnifying Party shall pay to the Indemnified Party,
no later than 10 days after the Indemnifying Party receives the Indemnified
Party's calculations, the amount that the Indemnifying Party is required to pay
the Indemnified Party under this Section 4. If the Indemnifying Party disagrees
with such calculations, it must notify the Indemnified Party of its disagreement
in writing within 10 days of receiving such calculations. Any dispute regarding
such calculations shall be resolved in accordance with Section 8 of this
Agreement.
(f) Time Limits. Any claim under this Section 4 with respect to a Tax
-----------
Liability must be made no later than 30 days after the expiration of the
applicable statute of limitations for assessment of such Tax Liability.
(g) No Duplication. No payments pursuant to this Section 4 shall be
--------------
duplicative of any payments under the Capital Contribution Agreement entered
into as of the date hereof or vice
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7
<PAGE>
versa. To the extent that, without regard to this sentence, any Person has a
- -----
right to be indemnified under both this Agreement and such other agreement with
respect to any Tax Liability, such Person's indemnification right with respect
to such Tax Liability shall be governed exclusively by this Agreement.
5. Carrybacks and Carryovers. In the event that any member of the IFG
-------------------------
Subgroup realizes any loss, credit or other Tax attribute in any Post-
Distribution Taxable Period, such member may elect to carry back such loss,
credit or Tax attribute to a prior Imperial Consolidated Group taxable year.
Imperial shall cooperate with IFG in seeking from the appropriate taxing
authority any Refund that reasonably would result from such carryback. IFG
shall be entitled to any Refund (or other Tax benefit) realized by a member of
the Imperial Subgroup (including any interest thereon received from such taxing
authority) attributable to such carryback, within 10 days after such Refund (or
other benefit) is received; provided, however, that Imperial shall be entitled
-------- -------
to Refunds that result from the carryback of a loss, credit or other Tax
attribute by a member of the Imperial Subgroup from a Post-Distribution Taxable
Period to a Pre-Distribution Taxable Period. Except as otherwise provided by
applicable law, if a member of the IFG Subgroup and a member of the Imperial
Subgroup both may carry back a loss or other Tax attribute to the same Imperial
Consolidated Group taxable year, any Refund (or other Tax benefit) resulting
therefrom shall be allocated between IFG and Imperial proportionately based on
the relative amounts of the Refunds (or other Tax benefits) to which the IFG
Subgroup and the Imperial Subgroup, respectively, would have been entitled had
its carrybacks been the only carrybacks to such taxable year. Similarly, IFG
shall be entitled to the benefit, in Post-Distribution Taxable Periods, of any
net operating loss, capital loss, unused investment or foreign tax credit or
other Tax attribute arising in a Pre-Distribution Taxable Period (including with
respect to an affiliated group of which IFG was a member) and properly
apportioned to a member of the IFG Subgroup in accordance with Treasury
Regulation Sections 1.1502-79A and -21T or other applicable law.
6. Refunds of Taxes. Except as provided in Section 5 above, IFG shall be
----------------
entitled to all Refunds relating to Taxes (plus any interest thereon received
with respect thereto from the applicable taxing authority) for which IFG is or
may be liable pursuant to the provisions of Sections 3 and 4 of this Agreement,
and Imperial shall be entitled to all Refunds relating to Taxes (plus any
interest thereon received with respect thereto from the applicable taxing
authority) for which Imperial is or may be
8
<PAGE>
liable pursuant to the provisions of Sections 3 and 4 of this Agreement. A
party receiving a Refund to which another party is entitled pursuant to this
Agreement shall pay the amount to which such other party is entitled within 10
days after the receipt of the refund (plus any interest thereon received with
respect thereto from the applicable taxing authority).
7. Cooperation; Maintenance and Retention of Records. Imperial and IFG
-------------------------------------------------
shall, and shall cause the members of the Imperial Subgroup and the IFG
Subgroup, respectively, to provide the requesting party with such assistance and
documents as may be reasonably requested by such party in connection with (i)
the preparation of any Tax Return, (ii) the conduct of any Proceeding, (iii) any
matter relating to Taxes of any member of the Imperial Consolidated Group, the
Imperial Subgroup or the IFG Subgroup and (iv) any other matter that is a
subject of this Agreement, and the requesting party shall pay any reasonable
out-of-pocket expenses incurred in connection therewith. Imperial and IFG shall
retain or cause to be retained all Tax Returns, schedules and workpapers, and
all material records or other documents relating thereto, until the expiration
of the statute of limitations (including any waivers or extensions thereof) of
the taxable years to which such Tax Returns and other documents relate or until
the expiration of any additional period that any party reasonably requests, in
writing, with respect to specific material records or documents. A party
intending to destroy any material records or documents shall provide the other
party with reasonable advance notice and the opportunity to copy or take
possession of such records and documents. The parties hereto will notify each
other in writing of any waivers or extensions of the applicable statute of
limitations that may affect the period for which the foregoing records or other
documents must be retained.
8. Disputes. If the parties disagree as to the amount of any payment to
--------
be made under, or any other matter arising out of, this Agreement, the parties
shall attempt in good faith to resolve such dispute, and any agreed upon amount
shall be paid to the appropriate party. If such dispute is not resolved within
15 days or such other time period as may be set forth in this Agreement, the
parties shall jointly retain the Independent Accounting Firm to resolve the
dispute. The fees of the Independent Accounting Firm shall be borne equally by
IFG and Imperial, and the decision of such Independent Accounting Firm shall be
final and binding on all parties. Following the decision of the Independent
Accounting Firm, the parties shall each take or cause to be taken any action
that is necessary or
9
<PAGE>
appropriate to implement such decision of the Independent Accounting Firm,
including, without limitation, the prompt payment of underpayments or
overpayments, with interest calculated on such overpayments and underpayments at
the Overpayment Rate from the date such payment was due through the date such
underpayment or overpayment is paid or refunded.
9. Proceedings.
-----------
(a) Notification.
------------
(1) Imperial shall, promptly upon receipt of notice thereof by any
member of the Imperial Subgroup, notify IFG in writing of any communication with
respect to any pending or threatened Proceeding in connection with a Tax
Liability (or an issue related thereto) for which IFG may be responsible
pursuant to this Agreement. Imperial shall include with such notification a
true, correct and complete copy of any written communication, and an accurate
and complete written summary of any oral communication, so received by a member
of the Imperial Subgroup. The failure of Imperial timely to forward such
notification in accordance with the immediately preceding sentence shall not
relieve IFG of its obligation to pay such Tax Liability or indemnify Imperial
therefor, except to the extent that the failure timely to forward such
notification prejudices the ability of IFG to contest such Tax Liability or
increases the amount of such Tax Liability.
(2) IFG shall, promptly upon receipt of notice thereof by any
member of the IFG Subgroup, notify Imperial in writing of any communication with
respect to any pending or threatened Proceeding in connection with a Tax
Liability (or an issue related thereto) for which Imperial may be responsible
pursuant to this Agreement. IFG shall include with such notification a true,
correct and complete copy of any written communication, and an accurate and
complete written summary of any oral communication, so received by a member of
the IFG Subgroup. The failure of IFG timely to forward such notification in
accordance with the immediately preceding sentence shall not relieve Imperial of
its obligation to pay such Tax Liability or indemnify IFG therefor, except to
the extent that the failure timely to forward such notification prejudices the
ability of Imperial to contest such Tax Liability or increases the amount of
such Tax Liability.
(b) Pre-Distribution Taxable Periods and Straddle Periods. Imperial
-----------------------------------------------------
(or such member of the Imperial Subgroup as Imperial shall designate) shall have
the sole right to represent
10
<PAGE>
the interests of the members of the Imperial Consolidated Group, the IFG
Subgroup and the Imperial Subgroup in any Proceeding relating to Taxes of Pre-
Distribution Taxable Periods and Straddle Periods and to employ counsel of its
choice at its expense.
(c) Post-Distribution Taxable Periods. IFG shall have the sole
---------------------------------
right to represent the interests of the IFG Subgroup (or any member thereof) in
any Proceeding relating to Taxes of the IFG Subgroup (or any member thereof) for
a Post-Distribution Taxable Period and to employ counsel of its choice at its
expense. Imperial shall have the sole right to represent the interests of the
Imperial Subgroup (or any member thereof) in any Proceeding relating to Taxes of
the Imperial Subgroup (or any member thereof) for a Post-Distribution Taxable
Period and to employ counsel of its choice at its expense.
(d) Transaction-Related Proceedings. Imperial and IFG shall
-------------------------------
jointly represent the interests of the Imperial Consolidated Group, the IFG
Subgroup and the Imperial Subgroup in any Transaction-Related Proceedings or any
Proceeding relating to Transaction Taxes.
(e) Power of Attorney. Each member of the IFG Subgroup shall
-----------------
execute and deliver to Imperial (or such member of the Imperial Subgroup as
Imperial shall designate) any power of attorney or other document reasonably
requested by Imperial (or such designee) in connection with the filing of Tax
Returns and payment of Taxes as described in Section 3(b) hereof, or any
Proceeding described in Section 9(b) hereof.
10. Payments.
--------
(a) Interest; Method of Payment. Any payment required by this
---------------------------
Agreement that is not made on or before the date provided hereunder shall bear
interest after such date at the Overpayment Rate. All payments made pursuant to
this Agreement shall be made in immediately available funds.
(b) Characterization of Payments. For all Tax purposes, the
----------------------------
parties hereto agree to treat, and to cause their respective affiliates to
treat, (1) any payment required by this Agreement as either a contribution by
Imperial and Bank to IFG or a distribution by IFG to Bank and Imperial, as the
case may be, occurring immediately prior to the Distribution and (2) any payment
of interest or non-federal Taxes by or to a taxing authority as taxable or
deductible, as the case may be, to the party entitled under this Agreement to
retain such payment or
11
<PAGE>
required under this Agreement to make such payment, in either case except as
otherwise mandated by applicable law.
11. Covenants Relating to Ruling Request.
------------------------------------
(a) Imperial and the Imperial Subgroup. (1) Imperial shall comply
----------------------------------
and shall cause each member of the Imperial Subgroup to comply with and
otherwise not take action inconsistent with each representation and statement
made to the IRS in connection with the Ruling Request and (2) until two years
after the Distribution Date, Imperial will cause Imperial and Bank to remain
engaged in the active conduct of a trade or business, as defined in Section
355(b) of the Code.
(b) IFG and the IFG Subgroup. (1) IFG shall comply and shall cause
------------------------
each member of the IFG Subgroup to comply with and otherwise not take action
inconsistent with each representation and statement made to the IRS in
connection with the Ruling Request and (2) until two years after the
Distribution Date, IFG will remain engaged in the active conduct of a trade or
business by reason of owning and operating the business of Entertainment (as
defined in the Ruling Request).
12. Termination of Prior Tax Sharing Agreements. This Agreement shall
-------------------------------------------
take effect on the Distribution Date and shall replace all other agreements,
whether or not written, in respect of any Taxes between or among any members of
the Imperial Subgroup on the one hand and the IFG Subgroup on the other. All
such replaced agreements shall be cancelled as of the Distribution Date to the
extent they relate to any members of the IFG Subgroup, and any rights or
obligations of any members of the Imperial Subgroup or the IFG Subgroup existing
thereunder thereby shall be fully and finally settled without any payment by any
party thereto.
13. Amendment. This Agreement may be amended, modified or supplemented
---------
only by a written agreement signed by all of the parties hereto.
14. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of California, without reference to
choice of law principles, including matters of construction, validity and
performance.
12
<PAGE>
15. Notices. Notices, requests, permissions, waivers, and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if signed by the respective persons giving them (in the case of any
corporation the signature shall be by an officer thereof) and delivered by hand
or by telecopy or on the date of receipt indicated on the return receipt if
mailed (registered or certified, return receipt requested, properly addressed
and postage prepaid):
If to Imperial, to:
Imperial Bancorp
9920 South La Cienega Boulevard
Inglewood, California 90301
Attention: Richard M. Baker, General Counsel
Telephone: 310-417-5929
Telecopy: 310-417-5695
with a copy to:
Loeb & Loeb LLP
1000 Wilshire Boulevard
Suite 1800
Los Angeles, California 90017
Attention: Robert S. Barry, Jr., Esq.
If to IFG, to:
Imperial Financial Group, Inc.
1840 Century Park East
10th Floor
Los Angeles, California 90067
Attention: Robert M. Franko
Telephone: 310-712-8610
Telecopy: 310-712-8661
13
<PAGE>
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Michael E. Labowitz, Esq.
Such names and addresses may be changed by notice given in accordance with this
Section 15.
16. Entire Agreement. This Agreement contains the entire understanding
----------------
of the parties hereto with respect to the subject matter contained herein, and
supersedes and cancels all prior agreements, negotiations, correspondence,
undertakings and communications of the parties, oral or written, respecting such
subject matter.
17. Headings; References. The article, section and paragraph headings
--------------------
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. All references
herein to "Sections" shall be deemed to be references to Sections hereof unless
otherwise indicated.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts and each counterpart shall be deemed to be an original, but all of
which shall constitute one and the same original.
19. Parties in Interest; Assignment; Successor. Neither this Agreement
------------------------------------------
nor any of the rights, interest or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, express or implied,
is intended to confer upon any other Person, other than members of the IFG
Subgroup and the Imperial Subgroup, any rights or remedies under or by reason of
this Agreement.
20. Severability; Enforcement. The invalidity of any portion hereof
-------------------------
shall not affect the validity, force or effect of the remaining portions hereof.
If it is ever held that any restriction hereunder is too broad to permit
enforcement of such
14
<PAGE>
restriction to its fullest extent, each party agrees that a court of competent
jurisdiction may enforce such restriction to the maximum extent permitted by
law, and each party hereby consents and agrees that such scope may be judicially
modified accordingly in any proceeding brought to enforce such restriction.
21. Effective Date. This Agreement shall become effective only upon the
--------------
occurrence of the Distribution Date.
IN WITNESS WHEREOF, each of the parties has caused this Tax Sharing
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first written above.
IMPERIAL BANCORP
By:
-----------------------------------
Name:
Title:
IMPERIAL FINANCIAL GROUP, INC.
By:
-----------------------------------
Name:
Title:
15
<PAGE>
EXHIBIT 10.4
================================================================================
CREDIT AGREEMENT
among
IMPERIAL BANK,
IMPERIAL FINANCIAL GROUP, INC.,
as Borrower,
NATIONSBANK, N.A.,
as Administrative Agent,
NATIONSBANC MONTGOMERY SECURITIES LLC,
as Lead Arranger and Syndication Agent,
and
the Lenders named herein
August 19, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 - Definitions................................................................. 1
Section 1.1 Definitions....................................................... 1
Section 1.2 Other Definitional Provisions..................................... 21
Section 1.3 Accounting Terms and Determinations............................... 21
Section 1.4 Time of Day....................................................... 22
ARTICLE 2 - Revolving Credit Facility................................................... 22
Section 2.1 Revolving Commitments............................................. 22
Section 2.2 Notes............................................................. 23
Section 2.3 Repayment of Revolving Loans...................................... 24
Section 2.4 Use of Proceeds................................................... 24
Section 2.5 Facility Fee...................................................... 24
Section 2.6 Termination or Reduction of Revolving Commitments................. 24
ARTICLE 3 - Letter of Credit Facility................................................... 25
Section 3.1 Commitment to Issue............................................... 25
Section 3.2 Letter of Credit Request Procedure................................ 25
Section 3.3 Letter of Credit Fees............................................. 25
Section 3.4 Funding of Drawings............................................... 26
Section 3.5 Reimbursements.................................................... 26
Section 3.6 Reimbursement Obligations Absolute................................ 27
Section 3.7 Issuer Responsibility............................................. 27
Section 3.8 Cash Collateral................................................... 27
ARTICLE 4 - Interest and Fees........................................................... 28
Section 4.1 Interest Rate..................................................... 28
Section 4.2 Payment Dates..................................................... 28
Section 4.3 Default Interest.................................................. 28
Section 4.4 Conversions and Continuations of Accounts......................... 28
Section 4.5 Computations...................................................... 29
ARTICLE 5 - Administrative Matters...................................................... 29
Section 5.1 Borrowing Procedure............................................... 29
Section 5.2 Minimum Amounts................................................... 29
Section 5.3 Certain Notices................................................... 29
Section 5.4 Prepayments....................................................... 30
Section 5.5 Method of Payment................................................. 31
Section 5.6 Pro Rata Treatment................................................ 31
Section 5.7 Sharing of Payments............................................... 32
Section 5.8 Non-Receipt of Funds by the Administrative Agent.................. 32
Section 5.9 Participation Obligations Absolute; Failure to Fund Participation. 33
ARTICLE 6 - Change in Circumstances..................................................... 33
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Section 6.1 Increased Cost and Reduced Return................................. 33
Section 6.2 Limitation on Libor Accounts...................................... 35
Section 6.3 Illegality........................................................ 35
Section 6.4 Treatment of Affected Accounts.................................... 35
Section 6.5 Compensation...................................................... 36
Section 6.6 Taxes............................................................. 36
Section 6.7 Withholding Tax Exemption......................................... 37
Section 6.8 Replacement of Affected Lender.................................... 38
ARTICLE 7 - Security.................................................................... 38
Section 7.1 Collateral........................................................ 38
Section 7.2 Guaranties........................................................ 39
Section 7.3 New Subsidiaries, New Issuances of Capital Stock.................. 39
Section 7.4 Release of Collateral............................................. 40
Section 7.5 Setoff............................................................ 40
Section 7.6 Collection of Receivables and other Collateral Proceeds........... 41
ARTICLE 8 - Conditions Precedent........................................................ 42
Section 8.1 Initial Loan and Letter of Credit................................. 42
Section 8.2 All Loans and Letters of Credit................................... 47
ARTICLE 9 - Representations and Warranties.............................................. 48
Section 9.1 Corporate Existence............................................... 48
Section 9.2 Financial Condition............................................... 48
Section 9.3 Corporate Action; No Breach....................................... 48
Section 9.4 Operation of Business............................................. 49
Section 9.5 Litigation and Judgments.......................................... 49
Section 9.6 Rights in Properties; Liens....................................... 49
Section 9.7 Enforceability.................................................... 49
Section 9.8 Approvals......................................................... 49
Section 9.9 Debt.............................................................. 50
Section 9.10 Taxes............................................................. 50
Section 9.11 Margin Securities................................................. 50
Section 9.12 ERISA............................................................. 50
Section 9.13 Disclosure........................................................ 50
Section 9.14 Subsidiaries; Capitalization...................................... 51
Section 9.15 Agreements........................................................ 51
Section 9.16 Compliance with Laws.............................................. 51
Section 9.17 Investment Company Act............................................ 51
Section 9.18 Public Utility Holding Company Act................................ 51
Section 9.19 Environmental Matters............................................. 51
Section 9.20 Transaction Documents............................................. 52
Section 9.21 Broker's Fees..................................................... 53
Section 9.22 Employee Matters.................................................. 53
Section 9.23 Solvency.......................................................... 53
Section 9.24 Year 2000 Compliance.............................................. 53
</TABLE>
ii
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
<TABLE>
<S> <C>
ARTICLE 10 - Positive Covenants......................................................... 54
Section 10.1 Reporting Requirements............................................ 54
Section 10.2 Maintenance of Existence; Conduct of Business;
AFMA Membership; Deposit Insurance................................ 56
Section 10.3 Maintenance of Properties......................................... 56
Section 10.4 Taxes and Claims.................................................. 56
Section 10.5 Insurance......................................................... 56
Section 10.6 Inspection Rights................................................. 57
Section 10.7 Keeping Books and Records......................................... 57
Section 10.8 Compliance with Laws.............................................. 57
Section 10.9 Compliance with Agreements........................................ 57
Section 10.10 Further Assurances................................................ 58
Section 10.11 ERISA............................................................. 58
Section 10.12 Trade Accounts Payable............................................ 58
ARTICLE 11 - Negative Covenants......................................................... 58
Section 11.1 Debt.............................................................. 58
Section 11.2 Limitation on Liens and Restrictions on Subsidiaries.............. 59
Section 11.3 Mergers, Etc...................................................... 61
Section 11.4 Restricted Junior Payments........................................ 61
Section 11.5 Investments....................................................... 62
Section 11.6 Limitation on Issuance of Capital Stock........................... 63
Section 11.7 Transactions With Affiliates...................................... 63
Section 11.8 Disposition of Assets............................................. 63
Section 11.9 Lines of Business................................................. 63
Section 11.10 Limitations on Restrictions Affecting Subsidiaries................ 64
Section 11.11 Environmental Protection.......................................... 64
Section 11.12 ERISA............................................................. 64
ARTICLE 12 - Financial Covenants........................................................ 64
Section 12.1 Minimum Adjusted Tangible Net Worth............................... 64
Section 12.2 Interest Coverage Ratio........................................... 64
Section 12.3 Minimum Tangible Net Worth........................................ 65
Section 12.4 Maximum Leverage Ratio............................................ 65
Section 12.5 /[**]............................................................. 65
Section 12.6 /[**]............................................................. 65
Section 12.7 CAB a Well Capitalized Institution................................ 66
ARTICLE 13 - Default.................................................................... 66
Section 13.1 Events of Default................................................. 66
Section 13.2 Remedies.......................................................... 68
Section 13.3 Cash Collateral................................................... 70
Section 13.4 Performance by the Administrative Agent........................... 70
Section 13.5 Setoff............................................................ 70
Section 13.6 Continuance of Default............................................ 70
ARTICLE 14 - The Administrative Agent................................................... 70
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Section 14.1 Appointment, Powers, and Immunities............................... 70
Section 14.2 Reliance by Administrative Agent.................................. 71
Section 14.3 Defaults.......................................................... 71
Section 14.4 Rights as Lender.................................................. 71
Section 14.5 INDEMNIFICATION................................................... 72
Section 14.6 Non-Reliance on Administrative Agent and Other Lenders............ 73
Section 14.7 Resignation of Administrative Agent............................... 73
Section 14.8 Administrative Agent Fee.......................................... 73
Section 14.9 Several Commitments............................................... 73
ARTICLE 15 - Miscellaneous.............................................................. 74
Section 15.1 Expenses.......................................................... 74
Section 15.2 Indemnification................................................... 74
Section 15.3 Limitation of Liability........................................... 75
Section 15.4 No Duty........................................................... 76
Section 15.5 No Fiduciary Relationship......................................... 76
Section 15.6 Equitable Relief.................................................. 76
Section 15.7 No Waiver; Cumulative Remedies.................................... 76
Section 15.8 Successors and Assigns............................................ 76
Section 15.9 Survival.......................................................... 78
Section 15.10 ENTIRE AGREEMENT.................................................. 78
Section 15.11 Amendments and Waivers............................................ 79
Section 15.12 Maximum Interest Rate............................................. 80
Section 15.13 Notices........................................................... 80
Section 15.14 GOVERNING LAW; VENUE; SERVICE OF PROCESS.......................... 81
Section 15.15 Counterparts...................................................... 81
Section 15.16 Severability...................................................... 81
Section 15.17 Headings.......................................................... 81
Section 15.18 Non-Application of Chapter 15 of Texas Credit Code................ 81
Section 15.19 Construction...................................................... 82
Section 15.20 Independence of Covenants......................................... 82
Section 15.21 WAIVER OF JURY TRIAL.............................................. 82
Section 15.22 Confidentiality................................................... 82
</TABLE>
iv
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit Description of Exhibit
------- ----------------------
"A" Revolving Note
"B" Swingline Note
"C" Assignment and Acceptance Agreement
"D" Borrowing Base Certificate
"E" Compliance Certificate
"F" Subsidiary Guaranty
"G" Joinder Agreement
"H" Pledge and Security Agreement
"I" Required Participation Agreement Provisions
INDEX TO SCHEDULES
------------------
Schedule Description of Schedule
-------- -----------------------
1.1A Approved Bonding Companies
1.1B Primary Distributors and Territories
1.1C Existing Letters of Credit
9.5 Litigation and Judgments
9.6 Collateral Matters
9.14 Subsidiaries; Capitalization
9.19 Environmental Matters
9.21 Broker fees
11.1 Debt
11.2 Liens
v
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT (this "Agreement"), dated as of August 19, 1998, is
---------
among IMPERIAL BANK, a bank duly chartered and validly existing under the laws
of the State of California ("IB"), IMPERIAL FINANCIAL GROUP, INC., a Delaware
corporation, (the "Borrower"), each of the banks or other lending institutions
--------
which is or which may from time to time become a signatory hereto or any
successor or assignee thereof pursuant to Section 15.8(b) hereof (individually,
---------------
a "Lender" and, collectively, the "Lenders") and NATIONSBANK, N.A., a national
------ -------
banking association, individually as a Lender and as Fronting Bank and as
administrative agent for itself and the other Lenders (in its capacity as
administrative agent, together with its successors in such capacity, the
"Administrative Agent"); provided, however, that after consummation of the
- ---------------------
Distribution, IB shall have no liabilities or Obligations under this Agreement
or any of the other Loan Documents.
R E C I T A L S:
---------------
IB and the Borrower have requested that the Lenders extend credit to IB and
the Borrower in the form of a revolving credit facility and a letter of credit
facility. The Lenders are willing to extend such credit to IB and the Borrower
upon the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE
Definitions
-----------
Section 1.1 Definitions. As used in this Agreement, the following terms
-----------
have the following meanings:
"Account" means either a Base Rate Account or a Libor Account.
-------
"Adjusted EBITDA" means, for any period (the "Subject Period") and any
--------------- --------------
Person, the total of the following calculated without duplication on a
consolidated basis for such period: (a) the Borrower's EBITDA; plus (b) on a
----
pro forma basis, the EBITDA attributable to all Subsidiaries or assets acquired
during such Subject Period, in each case for any portion of such Subject Period
occurring prior to the date of the acquisition of such Subsidiary or assets;
minus (c) the EBITDA of the Borrower and each Subsidiary attributable to all
- -----
Subsidiaries or assets disposed of during such Subject Period, in each case for
any portion of such Subject Period occurring prior to the date of the disposal
of such Subsidiary or assets.
"Adjusted Libor Rate" means, for any Libor Account for any Interest Period
-------------------
therefor, the rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) determined by the Administrative Agent to be equal to the quotient
obtained by dividing (a) the Libor Rate for such
CREDIT AGREEMENT - Page 1
<PAGE>
Libor Account for such Interest Period by (b) 1 minus the Reserve Requirement
for such Libor Account for such Interest Period.
"Adjusted Net Income" means, for any period and any Person, such Person's
-------------------
consolidated net income (or loss) determined in accordance with GAAP, but
excluding: (a) the income of any other Person (other than its subsidiaries) in
which such Person or any of it subsidiaries has an ownership interest, unless
received by such Person or its subsidiary in a cash distribution; (b) any after-
tax gains or losses attributable to an asset disposition; and (c) to the extent
not included in clauses (a) and (b) above, any after-tax extraordinary, non-cash
----------- ---
or nonrecurring gains.
"Adjusted Tangible Net Worth" means, at the time of determination and
---------------------------
without duplication: (a) the Tangible Net Worth of the Borrower and its
Subsidiaries, minus (b) the value of the Borrower's investment in ICII capital
-----
stock (or any proceeds or derivatives thereof), determined in accordance with
GAAP, net of deferred income taxes associated with such investment, plus (c) the
----
current market value (determined based upon the most recent closing bid price)
on the securities exchange upon which such shares are registered on the date of
determination of the shares of common stock of ICII that are owned of record by
the Borrower.
"Administrative Agent" has the meaning set forth in the introductory
--------------------
paragraph of this Agreement.
"Affiliate" means, as to any Person, any other Person (a) that directly or
---------
indirectly, through one or more intermediaries, controls or is controlled by, or
is under common control with, such Person; (b) that directly or indirectly
beneficially owns or holds ten percent (10%) or more of any class of voting
stock of such Person; or (c) ten percent (10%) or more of the voting stock of
which is directly or indirectly beneficially owned or held by the Person in
question. The term "control" means the possession, directly or indirectly, of
the power to direct or cause direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise; provided, however, in no event shall the Administrative Agent or any
-------- --------
Lender be deemed an Affiliate of the Borrower or any Subsidiaries. For the
avoidance of doubt, after giving effect to the Distribution, IB, Imperial
Bancorp and their respective subsidiaries will not be deemed to be Affiliates of
the Borrower and its Subsidiaries.
"Agency Account" means an account of the Borrower maintained by it with a
--------------
Clearing Bank pursuant to an Agency Account Agreement.
"Agency Account Agreement" means any agreement (if required pursuant to
------------------------
Section 7.6) among the Borrower, the Administrative Agent and a Clearing Bank,
- -----------
in form and substance reasonably satisfactory to the Administrative Agent, which
designates an Agency Account for the deposit of checks and items constituting
proceeds of receivables or any other payments made in respect of any Collateral,
and establishes the terms for transferring balances therein to the
Administrative Agent.
"Agreement" has the meaning set forth in the introductory paragraph of this
---------
Agreement, as the same may be amended or otherwise modified.
CREDIT AGREEMENT - Page 2
<PAGE>
"Agreement Date" means the date this Agreement is executed and delivered by
--------------
the parties hereto, which is August 19, 1998, the date of this Agreement.
"Applicable Law" means , with respect to any Person, all provisions of
--------------
constitutions, statutes, rules, regulations and orders of any Governmental
Authority applicable to such Person or its property, including, without
limitation, all orders and decrees of all courts and arbitrators in proceedings
or actions to which such Person is a party and all Environmental Laws.
"Applicable Lending Office" means, for each Lender and for each Type of
-------------------------
Account, the "Lending Office" of such Lender (or of an affiliate of such Lender)
designated for such Type of Account on the signature pages hereof or such other
office of such Lender (or an affiliate of such Lender) as such Lender may from
time to time specify to the Administrative Agent and the Borrower by written
notice in accordance with the terms hereof as the office by which its Accounts
of such Type are to be made and maintained.
"Applicable Rate" has the meaning set forth in Section 4.1 hereof.
--------------- -----------
"Approved Bonding Company" means a bonding company listed on Schedule 1.1A
------------------------ -------------
hereto acceptable to the Administrative Agent in the exercise of its absolute
discretion as of the date of determination and such additional bonding companies
as the Administrative Agent may agree to add to or decide to delete from such
list in the exercise of its absolute discretion; provided, that the
--------
Administrative Agent shall give the Borrower five (5) Business Days advance
written notice of its decision to delete a bonding company from said Schedule
--------
1.1A; and provided, further, that written deletion of a bonding company shall be
- ---- -------- -------
prospective only and shall not cause an Eligible LHO Loan included in the
Borrowing Base at the time of such deletion to be removed from the Borrowing
Base unless the Administrative Agent in the exercise of its reasonable business
------
judgment determines that reinsurance arrangements in respect of such bonding
company are inadequate to insure the timely performance of such bonding
company's obligations in respect of an Eligible LHO Loan and so advises the
Borrower, in which event such Eligible LHO Loan will be removed from the
Borrowing Base.
"Assignment and Acceptance" means an assignment and acceptance entered into
-------------------------
by a Lender and its assignee and accepted by the Administrative Agent pursuant
to Section 15.8(b) hereof, in substantially the form of Exhibit "C" hereto.
--------------- -----------
"Bankruptcy Code" has the meaning set forth in Section 13.1(f).
--------------- ---------------
"Base Rate" means, for any day, the rate per annum equal to the higher of
---------
(a) the Federal Funds Rate for such day plus one and forty-five hundredths of
one percent (1.45%), and (b) the Prime Rate for such day. Any change in the
Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be
effective on the effective date of such change in the Prime Rate or Federal
Funds Rate.
CREDIT AGREEMENT - Page 3
<PAGE>
"Base Rate Account" means a portion of a Loan that bears interest at a rate
-----------------
based upon the Base Rate.
"Borrower" has the meaning set forth in the introductory paragraph of this
--------
Agreement.
"Borrowing Base" means the sum of (a) fifty percent (50%) of the current
--------------
market value determined based upon the most recent closing bid price on the
securities exchange upon which such shares are registered on the date of
determination (or, if such price is not available, as the Administrative Agent
may determine in the exercise of its reasonable business judgment) of the shares
of common stock of ICII that are owned of record by the Borrower and pledged and
delivered to the Administrative Agent (for the benefit of Lenders) as part of
the Collateral, up to a maximum of One Hundred Million Dollars ($100,000,000),
plus (b) eighty-five percent (85%) of Eligible LHO Loans (in each case after
- ----
first deducting one hundred percent (100%) of the principal amount of Permitted
Participations sold in respect of such loans) at the lesser of the unpaid
principal balance thereof or the fair market value thereof determined by the
Administrative Agent in the exercise of its reasonable business judgment;
provided, however, that from and after an Early Termination Event and so long as
- -------- -------
the same shall continue to exist, Eligible LHO Loans shall be limited to such
Loans made or firmly committed to be advanced by the Borrower prior to the
existence of such Early Termination Event unless ratified after such event has
been cured or no longer exists.
"Borrowing Base Certificate" means a certificate, signed by an authorized
--------------------------
representative of the Borrower, in substantially the form attached hereto as
Exhibit "D".
- ----------
"Business Day" means (a) any day excluding Saturday, Sunday and any day
------------
which either is a legal holiday under the laws of the States of California, New
York or Texas or is a day on which banking institutions located in any such
States are closed, and (b), with respect to all borrowings, payments,
Conversions, Continuations, Interest Periods, and notices in connection with
Loans subject to Libor Accounts, any day which is a Business Day described in
clause (a) above and which is also a day on which dealings in Dollar deposits
are carried out in the London interbank market.
"CAB" means Crown American Bank, a thrift and loan company duly organized
---
and validly existing under the laws of the State of California.
"Capital Lease Obligations" means, as to any Person, the obligations of
-------------------------
such Person to pay rent or other amounts under a lease of (or other agreement
conveying the right to use) real and/or personal property, which obligations are
required to be classified and accounted for as a capital lease on a balance
sheet of such Person under GAAP. For purposes of this Agreement, the amount of
such Capital Lease Obligations shall be the capitalized amount thereof,
determined in accordance with GAAP.
"Cash Collateral" means Collateral consisting of cash or Cash Equivalents
---------------
on which the Administrative Agent, for the benefit of the Credit Parties, has a
first priority Lien.
CREDIT AGREEMENT - Page 4
<PAGE>
"Cash Equivalents" means, with respect to any Person:
----------------
(a) marketable direct obligations issued or unconditionally
guaranteed by the U.S. or issued by any agency thereof and backed by the
full faith and credit of the U.S., in each case maturing within one (1)
year from the date of acquisition thereof; and
(b) certificates of deposit issued in Dollar denominations and
maturing within one (1) year from the date of issuance thereof issued by
any commercial bank organized under the laws of the U.S. or any state
thereof or the District of Columbia having combined capital and surplus of
not less than Five Hundred Million Dollars ($500,000,000) and, unless
issued by the Administrative Agent or a Lender, not subject to set-off or
offset rights in favor of such bank arising from any banking relationship
with such bank.
"Change of Control" means the occurrence of either of the following events:
-----------------
(a) any Person or group of related Persons that currently holds less than five
percent (5%) shall have acquired beneficial ownership of more than twenty
percent (20%) of the outstanding voting shares of the Borrower (within the
meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended, and the applicable rules and regulations thereunder); or (b) during any
period of twelve (12) consecutive months, commencing after the date of this
Agreement, individuals who on the first day of such period were directors of the
Borrower (together with any replacement or additional directors who were
nominated or elected by a majority of directors then in office) cease to
constitute a majority of the Board of Directors of the Borrower.
"Clearing Bank" means IB and any other banking institution with which an
-------------
Agency Account has been established pursuant to an Agency Account Agreement.
"Closing Date" means the date that the first Loan is made hereunder, which
------------
must occur no later than October 7, 1998.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Collateral" means all Property of any nature whatsoever upon which a Lien
----------
is created or purported to be created by any Loan Document as security for the
Obligations or any portion thereof.
"Commitment Percentage" means, as to any Lender, the percentage equivalent
---------------------
of the amount of the Revolving Commitment of such Lender divided by the
aggregate amount of all the Revolving Commitments of all of the Lenders.
"Compliance Certificate" means a certificate in substantially the form of
----------------------
Exhibit "E" hereto acceptable to the Administrative Agent, properly completed
- -----------
and executed by the chief financial officer of the Borrower.
"Continue", "Continuation", and "Continued" shall refer to the continuation
-------- ------------ ---------
pursuant to Section 4.5 hereof of a Libor Account from one Interest Period to
-----------
the next Interest Period.
CREDIT AGREEMENT - Page 5
<PAGE>
"Contract Rate" has the meaning specified in Subsection 15.12(a).
------------- -------------------
"Convert", "Conversion", and "Converted" shall refer to a conversion
------- ---------- ---------
pursuant to Section 4.4 or Article 6 of one Type of Account into another Type of
----------- ----------
Account.
"Credit Party" means each of the Administrative Agent, the Fronting Bank
------------
and the Lenders, and "Credit Parties" means all of such Persons, collectively.
"Debt" means as to any Person at any time (without duplication): (a) all
----
obligations of such Person for borrowed money; (b) all obligations of such
Person evidenced by bonds, notes, debentures, or other similar instruments; (c)
all obligations of such Person to pay the deferred purchase price of property or
services, except trade accounts payable of such Person arising in the ordinary
course of business that are not past due by more than ninety (90) days or that
are being contested in good faith by appropriate proceedings diligently pursued
and for which adequate reserves have been established to the satisfaction of the
Administrative Agent; (d) all Capital Lease Obligations of such Person; (e) all
Debt or other obligations of others Guaranteed by such Person; (f) all
obligations secured by a Lien existing on property owned by such Person, whether
or not the obligations secured thereby have been assumed by such Person or are
non-recourse to the credit of such Person; provided, however, that the amount of
such Debt of any Person described in this clause (f) shall, for purposes of this
Agreement, be deemed to be equal to the lesser of (i) the aggregate unpaid
amount of such Debt or (ii) the fair market value of the property or asset
encumbered, as determined by the Administrative Agent in its reasonable
discretion; (g) all reimbursement obligations of such Person (whether contingent
or otherwise) in respect of letters of credit, bankers' acceptances, surety or
other bonds and similar instruments (including those outstanding with respect to
Letters of Credit); (h) all liabilities of such Person in respect of unfunded
vested benefits under any Plan (excluding obligations to deliver stock in
respect of stock options or stock ownership plans); (i) all vested obligations
of such Person for the payment of money under any noncompete, consulting or
similar arrangements providing for the deferred payment of the purchase price
for an acquisition consummated prior to the date hereof; and (j) net amounts
payable under Hedge Agreements.
"Default" means an Event of Default or the occurrence of an event or
-------
condition which with notice or lapse of time or both would become an Event of
Default.
"Default Rate" means, in respect of any principal of any Loan, any
------------
Reimbursement Obligation, or any other amount payable by the Borrower under any
Loan Document which is not paid when due (whether at stated maturity, by
acceleration, or otherwise), a rate per annum during the period commencing on
the due date until such amount is paid in full equal to the sum of two percent
(2%) plus the Applicable Rate for Base Rate Accounts as in effect from time to
time (provided, that if such amount in default is principal of a Loan subject to
--------
a Libor Account and the due date is a day other than the last day of an Interest
Period therefor, the "Default Rate" for such principal shall be, for the period
from and including the due date and to but excluding the last day of the
Interest Period therefor, two percent (2%) plus the interest rate for such
Account for such
CREDIT AGREEMENT - Page 6
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
Interest Period as provided in Section 4.1, and, thereafter, the rate provided
-----------
for above in this definition).
"Distribution" means the distribution by Imperial Bancorp, a California
------------
corporation, to its shareholders of all of the outstanding shares of Class A
common stock, par value $0.01 per share, of IFG and the contribution by IB to
IFG of (i) all of the assets and liabilities relating to The Lewis Horwitz
Organization, a division of IB, (ii) all of the common stock of CAB, (iii) all
of the common stock of ITC, and (iv) all of the common stock owned by IB in
ICII, all as more fully described in the Form 10.
"Distribution Documents" means, with respect to the Distribution, the Form
----------------------
10 and all documentation executed pursuant to or contemplated by the terms
thereof and all documentation executed and delivered to consummate the
Distribution, as the same may be amended or otherwise modified from time to
time.
"Dollars" and "$" mean lawful money of the United States of America.
------- -
"Domestic Subsidiary" means each Subsidiary formed under the laws of the
-------------------
United States of America or any State thereof.
"Early Termination Event" shall mean an event described in clause (b) of
-----------------------
the definition of "Termination Date" (but without the ninety (90) day delay
provided therein).
"EBITDA" means, for any period and any Person, the total of the following
------
calculated without duplication for such Person on a consolidated basis for such
period: (a) Adjusted Net Income; plus (b) any provision for (or less any
----
benefit from) income or franchise taxes deducted in determining Adjusted Net
Income; plus (c) Interest Expense deducted in determining Adjusted Net Income;
----
plus (d) amortization and depreciation expense deducted in determining Adjusted
- ----
Net Income; plus (e) other noncash charges deducted in determining consolidated
----
net income and not already deducted in accordance with clause (d) above or
----------
clauses (b) and (c) of the definition of Adjusted Net Income; minus (f) noncash
- ----------- --- -----
credits included in determining consolidated Adjusted Net Income and not already
excluded in accordance with the definition of Adjusted Net Income.
"Eligible Assignee" has the meaning specified in Subsection 15.8(b)(i).
----------------- ---------------------
"Eligible LHO Loans" /[**]
------------------
CREDIT AGREEMENT - Page 7
<PAGE>
not used to finance an x-rated movie or comparable adult oriented programming;
(d) such LHO Loan complies with the Borrower's underwriting standards delivered
to the Administrative Agent prior to the Closing Date (none of which may be
amended, altered or otherwise changed without the Administrative Agent's
consent, which may be granted or denied in its absolute discretion); (e) unless
otherwise agreed to by Required Lenders, the outstanding principal plus
----
committed undrawn principal amount owing to or committed by the Borrower of each
such LHO Loan does not exceed Ten Million Dollars ($10,000,000) and no more than
three (3) thereof shall have outstanding principal plus committed undrawn
principal owing to or committed by the Borrower in excess of Five Million Five
Hundred Thousand Dollars ($5,500,000); provided, however, that in the event that
-------- -------
the Borrower gives the Administrative Agent written notice that it desires to
make or commit to make an LHO Loan in excess of Ten Million Dollars
($10,000,000) or more than three (3) thereof in excess of Five Million Five
Hundred Thousand Dollars ($5,500,000) (each an "Excess Loan"), the Required
Banks shall be deemed to have consented to such Excess Loan unless the
Administrative Agent notifies the Borrower to the contrary within eight (8)
Business Days of the receipt of notice of such proposed Excess Loan; and
provided, further, however that within ninety (90) days of the making of any
- -------- -------
such Excess Loan, consented to (or deemed consented to) by Required Banks, the
Borrower shall have assigned or participated out (without recourse) to other
lenders the excess portion of such Excess Loan in order to cause or shall
otherwise have caused the Borrower again to be in compliance with this clause
(e) as if such consent to the Excess Loan had been denied and, in the event that
the Borrower does not assign or participate such excess portion within such
ninety (90) day period, the excess portion of the Excess Loan shall not
constitute an Eligible LHO Loan for purposes of the Borrowing Base; (f) the
value of the distribution rights for the unsold Primary Territories with respect
to the programming to be developed through the proceeds of such LHO Loan
(determined by the Borrower in the exercise of its reasonable business judgment
based on historical criteria consistent with past practices) must exceed 1.50
times the amount of the gap exposure for such LHO Loan; (g) such LHO Loan's loan
documentation is in form and substance customary in the motion picture industry,
pursuant to which all other parties having rights in the applicable picture
which are senior to or pari passu with the Borrower shall either (i) subordinate
---- -----
their rights to the Borrower, or (ii) enter into customary non-disturbance or
intercreditor agreements with the Borrower whereby the Borrower's lien will not
be disturbed by any action taken by such other person, and such documentation
will provide the Borrower usual, customary and effective remedies against the
LHO Loan debtor upon the occurrence of a default in payment by the LHO Loan
debtor; (h) all intellectual property rights of the LHO Loan debtor shall
expressly be subject to the Lien of the Borrower and any assignees thereof
(including the Administrative Agent and any purchaser upon the enforcement of
the Lenders' Liens); (i) the Borrower has ownership of and title to such LHO
Loan subject to no Lien, claim or encumbrance, except for one or more Permitted
Participations and the Lien of the Administrative Agent for the benefit of the
Lenders; and (j) the notes evidencing such LHO Loan are pledged and delivered to
the Administrative Agent for the benefit of the Lenders within 5 Business Days
of the funding of such LHO Loan. For purposes of determining the outstanding
principal plus committed undrawn principal owing to or committed by the Borrower
----
as noted above, principal amounts and unfunded commitments participated by the
Borrower to other Persons with recourse (limited to the extent of such recourse)
to the Borrower shall be deemed owed to or committed by the Borrower.
CREDIT AGREEMENT - Page 8
<PAGE>
"Environmental Laws" means any and all federal, state, and local laws,
------------------
regulations, and requirements pertaining to health, safety, or the environment,
as such laws, regulations, and requirements may be amended or supplemented from
time to time.
"Environmental Liabilities" means, as to any Person, all liabilities,
-------------------------
obligations, responsibilities, Remedial Actions, losses, damages, punitive
damages, consequential damages, treble damages, costs, and expenses, (including,
without limitation, all fees, disbursements and expenses of counsel, expert and
consulting fees and costs of investigation and feasibility studies), fines,
penalties, sanctions, and interest incurred as a result of any claim or demand,
by any Person, whether based in contract, tort, implied or express warranty,
strict liability, criminal or civil statute, including any Environmental Law,
permit, order or agreement with any Governmental Authority or other Person,
arising from environmental, health or safety conditions or the Release or
threatened Release of a Hazardous Material into the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and the regulations issued thereunder.
"ERISA Affiliate" means any corporation or trade or business which is a
---------------
member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Borrower or is under common control (within
the meaning of Section 414(c) of the Code) with the Borrower.
"Event of Default" has the meaning specified in Section 13.1.
---------------- ------------
"Existing Indebtedness" means that certain divisional indebtedness of LHO
---------------------
in an aggregate principal amount not to exceed One Hundred Thirty Five Million
Dollars ($135,000,000) to IB, in respect of LHO Loans outstanding as of the
Closing Date all of which is to be repaid on the Closing Date.
"Existing Letters of Credit" means the outstanding letters of credit
--------------------------
identified on Schedule 1.1C previously issued by IB for the account of certain
-------------
LHO credit facilities.
"Facility Fee Rate" means forty-five hundredths of one percent (0.45%) per
-----------------
annum for the period from the Agreement Date to the Closing Date and thirty
hundredths of one percent (0.30%) per annum thereafter.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
------------------
upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day; provided that (a) if such day is not a Business Day, the Federal Funds Rate
--------
for such day shall be such rate on such transactions on the next preceding
Business Day as so published on the next succeeding Business Day, and (b) if no
such rate is so published on such next succeeding Business Day, the Federal
Funds Rate for such day shall be the average rate charged to the
CREDIT AGREEMENT - Page 9
<PAGE>
Administrative Agent (in its individual capacity) on such day on such
transactions as determined by the Administrative Agent.
"Fiscal Quarters" means the three (3) month periods falling in each Fiscal
---------------
Year ending March 31, June 30, September 30, and December 31.
"Fiscal Year" means a twelve (12) month period ending December 31.
-----------
"Form 10" means the Form 10 General Form for Registration of Securities
-------
pursuant to Section 12(b) or 12(g) of The Securities Exchange Act of 1934 filed
by Imperial Financial Group, Inc. pursuant to such Act, as the same may be
amended, modified or supplemented on or prior to the Closing Date.
"Fronting Bank" means NationsBank, N.A. or such other Lender which is a
-------------
commercial bank as the Borrower and NationsBank, N.A. may mutually designate
from time to time which agrees to be the issuer of a Letter of Credit.
"GAAP" means generally accepted accounting principles, applied on a
----
"consistent basis" (as such phrase is interpreted in accordance with Section 1.3
-----------
hereof), as set forth in Opinions of the Accounting Principles Board of the
American Institute of Certified Public Accountants and/or in statements of the
Financial Accounting Standards Board and/or their respective successors and
which are applicable in the circumstances as of the date in question.
"gap" means the "gap" as described in the description of Loan Types in Form
10.
"Gap LHO Loans" means Eligible LHO Loans that constitute Gap Loans as
-------------
described in the description of Loan Types in Form 10.
"Government Requirements" means the requirements of any Governmental
-----------------------
Authority necessary or desirable for the consummation of any of the Related
Transactions.
"Governmental Authority" means any nation or government, any state or
----------------------
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory, or administrative functions of or pertaining to
government.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
---------
such Person directly or indirectly guaranteeing any Debt or other obligation of
any other Person or indemnifying such other Person for an obligation and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Debt or other
obligation (whether arising by virtue of partnership arrangements, by agreement
to keep-well, to purchase assets, goods, securities or services, to take-or-pay,
or to maintain financial statement conditions or otherwise) or (b) entered into
for the purpose of assuring in any other manner the obligee of such Debt or
other obligation of the payment thereof or to protect the obligee against loss
in respect thereof (in whole
CREDIT AGREEMENT - Page 10
<PAGE>
or in part), provided that the term Guarantee shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Guarantee of any guaranteeing Person shall be deemed to be the lesser of (i) an
amount equal to the stated or determinable amount of the primary obligation in
respect of which such Guarantee is made or (ii) the maximum amount for which
such guaranteeing Person may be liable pursuant to the terms of the instrument
embodying such Guarantee, unless such primary obligation and the maximum amount
for which such guaranteeing Person may be liable are not stated or determinable,
in which case the amount of such Guarantee shall be such guaranteeing Person's
maximum reasonably anticipated liability in respect thereof as mutually
determined by the Borrower and the Administrative Agent in good faith. The term
"Guarantee" used as a verb has a corresponding meaning.
"Guaranties" means the Subsidiary Guaranties, and any and all amendments,
----------
modifications, supplements, renewals, extensions or restatements thereof.
"Hazardous Material" means any substance, product, waste, pollutant,
------------------
material, chemical, contaminant, constituent, or other material which is or
becomes listed, regulated, or addressed under any Environmental Law as a result
of its hazardous or toxic nature.
"Hedge Agreements" means any and all agreements, devices or arrangements
----------------
designed to protect the Borrower from the fluctuations of interest rates,
exchange rates or forward rates applicable to its assets, liabilities or
exchange transactions, including, but not limited to, dollar-denominated or
cross-currency interest rate exchange agreements, forward currency exchange
agreements, interest rate cap, swap or collar protection agreements, and forward
rate currency or interest rate options, as the same may be amended or modified
and in effect from time to time, and any and all cancellations, buy backs,
reversals, terminations or assignments of any of the foregoing.
"ICII" means Imperial Credit Industries, Inc., a corporation duly organized
----
and validly existing under the laws of the State of California.
"ICII Anti-Dilution and Dilution Event Notice Agreement" means the
------------------------------------------------------
agreement between ICII and the Borrower dated July 17, 1998, pursuant to which
ICII agrees to give the Borrower as soon as ICII becomes aware thereof, notice
of any event or condition that could result in the Borrower having less than
twenty-five percent (25%) voting control of ICII and granting to the Borrower
rights to participate in any such event to the extent necessary to avoid such
dilution in voting control.
"IFG" means Imperial Financial Group, Inc., a Delaware corporation.
---
"Intellectual Property" means any U.S., Canadian or other foreign patents,
---------------------
patent applications, trademarks, trade names, service marks, brand names, logos
and other trade designations (including unregistered names and marks), trademark
and service mark registrations and applications, copyrights and copyright
registrations and applications, inventions, invention disclosures, protected
formulae, formulations, processes, methods, trade secrets, computer software,
computer programs and source codes, manufacturing research and similar technical
information,
CREDIT AGREEMENT - Page 11
<PAGE>
engineering know-how, customer and supplier information, assembly and test data
drawings or royalty rights.
"Interest Expense" means, for any period and for any Person, the sum of (a)
----------------
interest expense of such Person (including, without limitation, the interest
component of Capital Lease Obligations) calculated without duplication on a
consolidated basis for such period in accordance with GAAP, plus (b) expenses
----
paid under interest rate Hedge Agreements during such period, minus (c) payments
-----
received under interest rate Hedge Agreements during such period.
"Interest Period" means with respect to any Libor Accounts, each period
---------------
commencing on the date such Account is established or Converted from a Base Rate
Account or the last day of the next preceding Interest Period with respect to
such Libor Account, and ending on the numerically corresponding day in the
first, second, third or sixth calendar month thereafter, as the Borrower may
select as provided in Section 4.4 or 5.1, except that each such Interest Period
----------- ---
which commences on the last Business Day of a calendar month (or on any day for
which there is no numerically corresponding day in the appropriate subsequent
calendar month) shall end on the last Business Day of the appropriate subsequent
calendar month. Notwithstanding the foregoing: (a) each Interest Period which
would otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or if such succeeding Business Day falls in the next
succeeding calendar month, on the next preceding Business Day); (b) any Interest
Period which would otherwise extend beyond the Termination Date shall end on
such Termination Date; (c) no more than six (6) Interest Periods shall be in
effect at the same time; and (d) no Interest Period for any Libor Account shall
have a duration of less than one (1) month and, if the Interest Period would
otherwise be a shorter period, the related Libor Account shall not be available
hereunder.
"Investments" has the meaning specified in Section 11.5.
----------- ------------
"ITC" means Imperial Trust Company, a licensed trust company duly organized
---
and validly existing under the laws of the State of California.
"Joinder Agreement" means an agreement which has been or will be executed
-----------------
by a Subsidiary adding it as a party to the Guaranty and the Security Documents,
in substantially the form of Exhibit "G" hereto, as the same may be amended or
-----------
otherwise modified.
"Lender" has the meaning set forth in the introductory paragraph of this
------
Agreement.
"Letter of Credit Liabilities" means, at any time, the sum of (a) the
----------------------------
aggregate undrawn face amount of all outstanding Letters of Credit plus (b) all
----
unreimbursed drawings under Letters of Credit.
"Letters of Credit" has the meaning specified in Section 3.1.
----------------- -----------
"Letter of Credit Agreement" means, with respect to each Letter of Credit
--------------------------
to be issued by the Fronting Bank therefor, the letter of credit application and
reimbursement agreement which such
CREDIT AGREEMENT - Page 12
<PAGE>
Fronting Bank requires to be executed by the Borrower in connection with the
issuance of such Letter of Credit.
"LHO" means The Lewis Horwitz Organization, a division of IB to be
---
contributed as a division of IFG pursuant to the Distribution.
"LHO Loans" means loans made by LHO directly to producers of motion
---------
pictures and television shows that constitute Gap LHO Loans or Traditional LHO
Loans.
"LHO Loan Collateral" means motion pictures, films, television broadcasts
-------------------
or shows, distribution agreements, sales agency agreements, completion
guaranties, physical properties, manuscripts, exposed film, developed film,
positives, negatives, prints and all other property and collateral, allied,
ancillary and subordinate rights of every kind and nature, insurance and
insurance policies, rights to produce, renew, sell, distribute and exhibit,
rents, revenues, income, compensation and all other rights, remedies, powers and
privileges at any time securing LHO Loans of every name and nature.
"Libor Account" means a portion of a Loan that bears interest at a rate
-------------
based upon the Adjusted Libor Rate.
"Libor Rate" means, for any Libor Account for any Interest Period therefor,
----------
the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
appearing on Telerate Page 3750 (or any successor page) as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period. If for any reason such rate is not
available, the term "Libor Rate" shall mean, for any Libor Account for any
Interest Period therefor, the rate per annum (rounded upwards, if necessary, to
the nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in Dollars at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period
for a term comparable to such Interest Period; provided, however, if more than
-------- -------
one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be
the arithmetic mean of all such rates (rounded upwards, if necessary, to the
nearest 1/100 of 1%).
"Libor Rate Margin" means one and forty-five hundredths of one percent
-----------------
(1.45%).
"Lien" means any lien, mortgage, security interest, tax lien, pledge,
----
charge, hypothecation, assignment, preference, priority, or other encumbrance of
any kind or nature whatsoever (including, without limitation, any conditional
sale or title retention agreement), whether arising by contract, operation of
law, or otherwise.
"Loan Documents" means this Agreement, the Notes, the Security Documents,
--------------
the Letters of Credit, the Letter of Credit Agreements, the Joinder Agreements,
any Hedge Agreement between the Borrower or any of its Subsidiaries and any
Lender, the escrow agreement referred to in Section 8.1(a)(xxi) hereof, and all
-------------------
other agreements, documents and instruments now or hereafter executed
CREDIT AGREEMENT - Page 13
<PAGE>
and/or delivered pursuant to or in connection with any of the foregoing, and any
and all amendments, modifications, supplements, renewals, extensions or
restatements thereof; provided, however, that the term Loan Documents does not
-------- -------
include the documentation evidencing LHO Loans.
"Loan Party" means (a) the Borrower including, upon consummation of the
----------
Distribution, IFG as successor to IB's Obligations hereunder ; (b) each of the
Subsidiaries of the Borrower (whether existing on or after the Closing Date);
and (c) any other Person who is or becomes a party to any agreement, document or
instrument that Guarantees or secures payment or performance of the Obligations
or any part thereof.
"Loans" means Revolving Loans and Swingline Advances.
-----
"Lockbox" means a U.S. post office box specified in, or pursuant to, an
-------
Agency Account Agreement or a Lockbox Agreement.
"Lockbox Agreement" means any agreement established between the
-----------------
Administrative Agent, the Borrower and a Clearing Bank concerning the
establishment of a Lockbox for the receipt and collection of checks and other
items constituting proceeds of Collateral.
"Lock-Up Agreement" means the agreement dated August 3, 1998, by and
-----------------
between the Borrower and Bear Stearns & Co., Inc. pursuant to which the Borrower
obtains voting control over certain shares of common stock of ICII.
"Major Distributors" means the distributors designated as such on Schedule
------------------ --------
1.1B hereto.
- ----
"Material Adverse Effect" means any material adverse effect, or the
-----------------------
occurrence of any event or the existence of any condition that could reasonably
be expected to have a material adverse effect, on (a) the prospects, business or
financial condition or performance of the Borrower and its Subsidiaries, taken
as a whole, or of the Borrower, CAB or ITC on an individual basis, (b) the
ability of such Person to pay and perform the Obligations for which such Person
is responsible when due, or (c) the validity or enforceability of (i) any of the
Loan Documents, (ii) any Lien created or purported to be created by any of the
Loan Documents or the required priority of any such Lien, or (iii) the rights
and remedies of the Administrative Agent or the Lenders under any of the Loan
Documents.
"Maximum Rate" means, at any time and with respect to any Lender, the
------------
maximum rate of nonusurious interest under applicable law that such Lender may
charge the Borrower. The Maximum Rate shall be calculated in a manner that
takes into account any and all fees, payments, and other charges contracted for,
charged or received in connection with the Loan Documents that constitute
interest under applicable law. Each change in any interest rate provided for
herein based upon the Maximum Rate resulting from a change in the Maximum Rate
shall take effect without notice to the Borrower at the time of such change in
the Maximum Rate. For purposes of determining the Maximum Rate under Texas law
to the extent applicable, if at all, the applicable rate ceiling shall be the
indicated rate ceiling described in, and computed in accordance with, the Texas
Credit Code.
CREDIT AGREEMENT - Page 14
<PAGE>
"Multiemployer Plan" means a multiemployer plan defined as such in Section
------------------
3(37) of ERISA to which contributions have been made by the Borrower or any
ERISA Affiliate and which is covered by Title IV of ERISA.
"NationsBank" means NationsBank, N.A.
-----------
"Notes" means the Revolving Notes and the Swingline Note referred to in
-----
Section 2.2.
- -----------
"Obligations" means any and all (a) obligations, indebtedness, and
-----------
liabilities of the Borrower to the Administrative Agent and the Lenders, or any
of them, arising pursuant to any of the Loan Documents, whether now existing or
hereafter arising, whether direct, indirect, fixed, contingent, liquidated,
unliquidated, joint, several, or joint and several, including, without
limitation, the obligation of the Borrower to repay the Loans, the Reimbursement
Obligations, interest on the Loans and Reimbursement Obligations, and all fees,
costs, and expenses (including attorneys' fees) provided for in the Loan
Documents, and (b) obligations, indebtedness and liabilities of the Borrower
under Hedge Agreements that it may enter into with NationsBank, or any other
Person, if and to the extent that such Hedge Agreements are permitted in
accordance with Section 11.1(i).
---------------
"Outstanding Revolving Credit" means, at any time of determination, the sum
----------------------------
of (a) the aggregate amount of Revolving Loans (including Swingline Advances)
then outstanding; plus (b) the aggregate amount of Letter of Credit Liabilities
(or when calculated with respect to a Lender, including the Administrative Agent
as a Lender, such Lender's pro rata share of the Revolving Loans then
outstanding and participation or other interests in such Letter of Credit
Liabilities).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
----
succeeding to all or any of its functions under ERISA.
"Permitted Liens" means the Liens permitted by Section 11.2.
--------------- ------------
"Permitted Participations" means participation interests in LHO Loans
------------------------
which: (a) are without recourse to or residual liability of the Borrower for the
portion thereof that has been participated; and (b) contain provisions
substantially in the form attached hereto as Exhibit I.
---------
"Person" means any individual, corporation, business trust, association,
------
company, partnership, joint venture, Governmental Authority, or other entity.
"Plan" means any employee benefit plan established or maintained by the
----
Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA.
"Pledge and Security Agreement" means the pledge and security agreement of
-----------------------------
the Borrower and the Subsidiaries that are party to the Subsidiary Guaranty, in
substantially the form of Exhibit "H", as the same may be modified pursuant to
----------
one or more Joinder Agreements and as the same may be otherwise modified from
time to time.
CREDIT AGREEMENT - Page 15
<PAGE>
"Prepayment Borrowing Base" means the sum of (a) sixty-five percent (65%)
-------------------------
of the current market value determined based upon the most recent closing bid
price on the securities exchange upon which such shares are registered on the
date of determination (or, if such price is not available, as the Administrative
Agent may determine in the exercise of its reasonable business judgment) of the
shares of common stock of ICII that are owned of record by the Borrower and
pledged and delivered to Administrative Agent (for the benefit of Lenders) as
part of the Collateral, up to a maximum of One Hundred Million Dollars
($100,000,000), plus (b) eighty-five percent (85%) of Eligible LHO Loans (in
----
each case after first deducting one hundred percent (100%) of the principal
amount of Permitted Participations sold in respect of such loans) at the lesser
of the unpaid principal balance thereof or the fair market value thereof
determined by the Administrative Agent in the exercise of its reasonable
business judgment; provided, however, that from and after an Early Termination
-------- -------
Event and so long as the same shall continue to exist, Eligible LHO Loans shall
be limited to such Loans made or firmly committed to be advanced by the Borrower
prior to the existence of such Early Termination Event unless ratified after
such event has been cured or no longer exists.
"Pre-sold Primary Contracts" means Pre-sold Primary Contracts as described
--------------------------
in the description of Loan Types in Form 10 with and for Primary Distributors
and Territories; provided, however, that no more than four (4) Eligible LHO
-------- -------
Loans or twelve percent (12%) of all Eligible LHO Loans shall be distributed
through any one distributor other than a Major Distributor.
"Prime Rate" means the per annum rate of interest established from time to
----------
time by NationsBank as its prime rate, which rate may not be the lowest rate of
interest charged by NationsBank to its customers.
"Primary Distributors and Territories" means the United States of America
------------------------------------
and the distributors and countries listed on Schedule 1.1B hereto provided that
------------- --------
no distributor or country may be added to said Schedule 1.1B without the consent
-------------
of the Administrative Agent, which may be given or denied in its sole
discretion; and provided, further, that the Administrative Agent may determine
-------- -------
in its sole discretion to delete distributors or countries from said Schedule
--------
1.1B; provided, however, that in the event that the Borrower gives the
- ---- -------- -------
Administrative Agent written notice that it desires to add a distributor or
country to said Schedule 1.1B, the Administrative Agent shall be deemed to have
-------------
consented to such addition unless it notifies the Borrower to the contrary
within fifteen (15) Business Days of the receipt of such proposed addition (and
during such fifteen (15) Business Day period (or shorter period if such addition
is denied), the Borrower may include in Eligible LHO Loans, LHO Loans supported
by distribution contracts for such new distributor not involving more than Five
Hundred Thousand Dollars ($500,000) in the aggregate per new distributor or
Three Million Dollars ($3,000,000) in the aggregate per new country); and
provided, further, however, that the Administrative Agent shall give the
- -------- ------- -------
Borrower five (5) days advance written notice of its decision to delete a
distributor or country from said Schedule 1.1B provided that the deletion of a
------------- --------
distributor or country shall be prospective only and shall not cause an Eligible
LHO Loan included in the Borrowing Base at the time of such deletion to be
removed from the Borrowing Base unless the affected distributor is in default of
------
any of its contractual obligations included in any
CREDIT AGREEMENT - Page 16
<PAGE>
Eligible LHO Loan documentation or is subject to any proceedings of the nature
described in Section 13.1(e) or (f) hereof (as if such distributor were a Loan
----------------------
Party) in which case that portion of each Eligible LHO Loan for which the
affected distributor has distribution rights will be removed from the Borrowing
Base.
"Principal Office" means the principal office of the Administrative Agent,
----------------
located at 901 Main Street, 66th Floor, Dallas, Texas.
"Pro Forma Balance Sheet and Calculations" means the unaudited pro forma
----------------------------------------
combined balance sheet of the Borrower and its Subsidiaries which give effect to
the Related Transactions occurring on or about the Closing Date consistent with
the Form 10, reflecting accounting adjustments for the Distribution and such
other information relating to the Related Transactions as the Administrative
Agent may require, including, without limitation, a pro forma calculation of
EBITDA for IFG and its Subsidiaries for the twelve-month period ended December
31, 1997 (or such more recent twelve-month period required by the Administrative
Agent), certified by the chief financial officer of IFG and in form acceptable
to the Administrative Agent.
"Prohibited Transaction" means any transaction set forth in Section 406 or
----------------------
407 of ERISA or Section 4975(c)(1) of the Code for which there does not exist a
statutory or administrative exemption.
"Projections" means the Borrower's forecasted consolidated: (a) balance
-----------
sheets; (b) profit and loss statements; (c) cash flow statements; and (d)
capitalization statements, all materially consistent with the Borrower's
historical financial statements, together with appropriate supporting details
and a statement of underlying assumptions.
"Property" means property or assets of all kinds, real, personal or mixed,
--------
tangible or intangible (including, without limitation, all rights relating
thereto), whether owned or acquired on or after the Closing Date.
"Quarterly Payment Date" means the last day of March, June, September and
----------------------
December of each year, the first of which shall be September 30, 1998.
"Register" has the meaning specified in Subsection 15.8(c).
-------- ------------------
"Regulation D" means Regulation D of the Board of Governors of the Federal
------------
Reserve System as the same may be amended or supplemented from time to time.
"Regulatory Change" means, with respect to any Lender, any change after the
-----------------
date of this Agreement in United States federal, state, or foreign laws or
regulations (including Regulation D) or the adoption or making after such date
of any interpretations, directives, or requests applying to a class of lenders
including such Lender of or under any United States federal or state, or any
foreign, laws or regulations (whether or not having the force of law) by any
court or governmental or monetary authority charged with the interpretation or
administration thereof.
CREDIT AGREEMENT - Page 17
<PAGE>
"Reimbursement Obligations" means all indebtedness, liabilities and
-------------------------
obligations of the Borrower to reimburse the Administrative Agent for any demand
for payment or drawing under a Letter of Credit in accordance with Subsection
----------
3.5.
- ---
"Related Transactions" means the Distribution, the execution and delivery
--------------------
of the Transaction Documents, the funding of the Loans on the Closing Date, and
the payment of all fees, costs and expenses associated with the foregoing.
"Release" means, as to any Person, any release, spill, emission, leaking,
-------
pumping, injection, deposit, disposal, disbursement, leaching, or migration of
Hazardous Materials into the indoor or outdoor environment or into or out of
property owned by such Person, including, without limitation, the movement of
Hazardous Materials through or in the air, soil, surface water, ground water, or
property in violation of Environmental Laws.
"Remedial Action" means all actions required under applicable Environmental
---------------
Laws to (a) cleanup, remove, treat, or otherwise address Hazardous Materials in
the indoor or outdoor environment, (b) prevent the Release or threat of Release
or minimize the further Release of Hazardous Materials, or (c) perform pre-
remedial studies and investigations and post-remedial monitoring and care but
shall not include such actions taken in the normal course of business and in
material compliance with Environmental Laws.
"Required Lenders" means Lenders having (a) more than sixty percent (60%)
----------------
of the Revolving Commitments or (b) if the Revolving Commitments have
terminated or have otherwise been fulfilled, more than sixty percent (60%) of
the outstanding principal amount of the Loans and participations in the Letters
of Credit; provided that at any time that NationsBank's Commitment Percentage or
--------
percentage of outstanding Loans or in Letters of Credit shall be less than
twenty-seven percent (27%), the percentages specified in (a) and (b) above shall
be reduced to more than fifty percent (50%).
"Reportable Event" means any of the events set forth in Section 4043 of
----------------
ERISA for which the 30-day notice requirement has not been waived by the PBGC.
"Reserve Requirement" means, at any time, the maximum rate at which
-------------------
reserves (including, without limitation, any marginal, special, supplemental, or
emergency reserves) are required to be maintained under regulations issued from
time to time by the Board of Governors of the Federal Reserve System (or any
successor) by member banks of the Federal Reserve System against, in the case of
Libor Accounts, "Eurocurrency liabilities" (as such term is used in Regulation
D). Without limiting the effect of the foregoing, the Reserve Requirement shall
reflect any other reserves required to be maintained by such member banks with
respect to (i) any category of liabilities which includes deposits by reference
to which the Adjusted Libor Rate is to be determined, or (ii) any category of
extensions of credit or other assets which include Libor Accounts. The Adjusted
Libor Rate shall be adjusted automatically on and as of the effective date of
any change in the Reserve Requirement.
CREDIT AGREEMENT - Page 18
<PAGE>
"Revolving Commitment" means, as to each Lender, the obligation of such
--------------------
Lender to make advances of funds and purchase participation interests in (or
with respect to the Fronting Bank as a Lender, hold other interests in) Letters
of Credit in an aggregate principal amount at any one time outstanding up to but
not exceeding the amount set forth opposite the name of such Lender on the
signature pages hereto (or if applicable, the most recent Assignment and
Acceptance executed by it) under the heading "Revolving Commitment", as the same
may be reduced or terminated pursuant to Section 2.6, Section 5.4 or Section
----------- ----------- -------
13.2. The aggregate amount of all the Revolving Commitments as of the Closing
- ----
Date equals One Hundred Thirty-Five Million Dollars ($135,000,000).
"Revolving Loans" means, as to any Lender, the advances made by such Lender
---------------
pursuant to Section 2.1.
-----------
"Revolving Notes" means the revolving promissory notes provided for by
---------------
Section 2.2 and all amendments or other modifications thereof.
- -----------
"Securities" means any stock, shares, options, warrants, voting trust
----------
certificates, or other instruments evidencing an ownership interest or a right
to acquire an ownership interest in a Person or any bonds, debentures, notes or
other evidences of indebtedness for borrowed money, secured or unsecured.
"Security Agreements" means security agreements, pledge agreements,
-------------------
securities pledge agreements, debenture pledge agreements, hypothecs, bank act
security documents, and other agreements, documents or instruments evidencing or
creating a Lien as security for the Obligations or any portion thereof in form
and substance satisfactory to the Administrative Agent executed by the Borrower
and each of its Subsidiaries and any other Loan Party, dated the Closing Date or
a subsequent date (in the case of Subsidiaries acquired after the Closing Date),
in favor of the Administrative Agent for the benefit of the Administrative Agent
and the Lenders, and any such agreement, document or instrument executed
pursuant to Article 7 hereof, and any and all amendments, modifications,
---------
supplements, renewals, extensions or restatements thereof.
"Security Documents" means the Guaranties and the Security Agreements, as
------------------
they may be amended, modified, supplemented, renewed, extended or restated from
time to time, and any and all other agreements, deeds of trust, mortgages,
chattel mortgages, security agreements, pledges, guaranties, assignments of
proceeds, assignments of income, assignments of contract rights, assignments of
partnership interests, assignments of royalty interests, or other collateral
assignments, completion or surety bonds, standby agreements, subordination
agreements, undertakings and other agreements, documents, instruments and
financing statements now or hereafter executed and/or delivered by any Loan
Party in connection with or as security or assurance for the payment or
performance of the Obligations or any part thereof.
"Solvent" means, with respect to any Person as of the date of any
-------
determination, that on such date (a) the fair value of the Property of such
Person (both at fair valuation and at present fair saleable value) is greater
than the total liabilities, including, without limitation, contingent
liabilities,
CREDIT AGREEMENT - Page 19
<PAGE>
of such Person, (b) the present fair saleable value of the assets of such Person
is not less than the amount that will be required to pay the probable liability
of such Person on its debts as they become absolute and matured, (c) such Person
is able to realize upon its assets and pay its debts and other liabilities,
contingent obligations and other commitments as they mature in the normal course
of business, (d) such Person does not intend to, and does not believe that it
will, incur debts or liabilities beyond such Person's ability to pay as such
debts and liabilities mature, and (e) such Person is not engaged in business or
a transaction, and is not about to engage in business or a transaction, for
which such Person's Property would constitute unreasonably small capital after
giving due consideration to current and anticipated future capital requirements
and current and anticipated future business conduct and the prevailing practice
in the industry in which such Person is engaged. In computing the amount of
contingent liabilities at any time, such liabilities shall be computed at the
amount which, in light of the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an actual or
matured liability.
"Subsidiary" means any corporation (or other entity) of which at least a
----------
majority of the outstanding shares of stock (or other ownership interests)
having by the terms thereof ordinary voting power to elect a majority of the
board of directors (or similar governing body) of such corporation (or other
entity) (irrespective of whether or not at the time stock (or other ownership
interests) of any other class or classes of such corporation (or other entity)
shall have or might have voting power by reason of the happening of any
contingency) is at the time directly or indirectly owned or controlled by the
Borrower and/or one or more of the Subsidiaries of the Borrower.
"Subsidiary Guaranty" means the guaranty of the Subsidiaries (other than
-------------------
CAB and ITC) in favor of the Administrative Agent and the Lenders, in
substantially the form of Exhibit "F", as the same may be modified pursuant to
-----------
one or more Joinder Agreements and as the same may be otherwise modified from
time to time.
"Swingline Advances" has the meaning specified in Section 2.1(a).
------------------ --------------
"Swingline Note" means the swingline promissory note provided for by
--------------
Section 2.2 and all amendments and other modifications thereof.
- -----------
"Tangible Net Worth" means, at the time of determination and without
------------------
duplication, the remainder of (a) all amounts which, in conformity with GAAP,
would be included as shareholders' equity on a consolidated balance sheet of the
Borrower and its Subsidiaries minus (b) all amounts which, in conformity with
-----
GAAP, would be classified as intangible assets on a consolidated balance sheet
of the Borrower and its Subsidiaries, including, without limitation, unamortized
debt discount and expense, unamortized deferred charges, unamortized
organizational costs, goodwill, and unamortized value of the Lock-Up Agreement.
"Tax Ruling" means the Tax Ruling dated February 24, 1998, issued by the
----------
Internal Revenue Service to Richard N. Bailine of KPMG Peat Marwick, L.L.P.,
ruling that the Distribution would be a tax-free transaction, as more fully set
forth therein.
CREDIT AGREEMENT - Page 20
<PAGE>
"Taxes" has the meaning specified in Section 6.6.
----- -----------
"Termination Date" means the earlier of (a) August 18, 2000 or (b) ninety
----------------
(90) days after the first to occur of any of the following events: (i) the
Borrower shall fail to beneficially own for purposes of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, at least twenty-five percent (25%)
of the outstanding common stock of ICII, (ii) the occurrence of a "Merger Event"
or a "Tender Event" described in the Lock-Up Agreement or the Lock-Up Agreement
is terminated, amended, altered or assigned by any party thereto without the
prior approval of the Administrative Agent (to be granted or denied in its
absolute discretion) or any party thereto shall ever become subject to any
proceeding described in Section 13.1(e) or (f), (iii) ICII shall fail to comply
----------------------
with the ICII Anti-Dilution and Dilution Event Notice Agreement or shall give
notice of a dilution event thereunder that may result in the Borrowing failing
to meet the requirements of clause (i) above, (iv) there shall be an increase in
the percentage beneficial ownership of voting securities of ICII required to be
owned or controlled by the Borrower to entitle the Borrower to the presumption
of control under Section 2(a)(9) of the Investment Company Act of 1940 and the
Borrower shall fail to own or control such increased percentage of ICII voting
securities, (v) the representation and warranty contained in Section 9.17 hereof
------------
shall be untrue in any respect, or (vi) the Securities Exchange Commission shall
notify the Borrower or ICII that it is challenging or instituting any action to
challenge the exemption from registration under the Investment Company Act of
1940 of any of the Borrower, ICII or any Subsidiary of the Borrower or ICII or
otherwise asserts that the Borrower, ICII or any such Subsidiary is not in
compliance with such Act; provided, however, that if within such ninety (90) day
-------- -------
period the Borrower cures such Early Termination Event or such Early Termination
Event otherwise ceases to exist, in each case to the satisfaction of Required
Lenders, and no subsequent additional Early Termination shall have occurred and
shall continue to exist, then the Termination Date shall again mean the earlier
of (a) August 18, 2000, or (b) ninety (90) days after the first to occur of any
Early Termination Event.
"Total Liabilities" means, at the time of determination and without
-----------------
duplication, all amounts which, in conformity with GAAP, would be included in
total liabilities on a consolidated balance sheet of the Borrower and its
Subsidiaries plus, without duplication: (a) Debt or other obligations of others
guaranteed by such Person; (b), all reimbursement obligations of such Person
(whether contingent or otherwise) in respect of letters of credit, bankers'
acceptances, surety or other bonds and similar instruments (including those
outstanding with respect to Letters of Credit); (c) all liabilities of such
Person in respect of unfunded vested benefits under any Plan; and (d) net
liabilities in respect of Hedge Agreements.
"Traditional LHO Loans" means Eligible LHO Loans that constitute
---------------------
Traditional Loans as described in the description of Loan Types in Form 10.
"Transaction Documents" means the Distribution Documents and the Loan
---------------------
Documents.
"Type" shall mean either type of Account (i.e., a Base Rate Account or
----
Libor Account).
CREDIT AGREEMENT - Page 21
<PAGE>
"UCC" means the Uniform Commercial Code as in effect in the State of Texas
---
and/or any other jurisdiction, the laws of which may be applicable to or in
connection with the creation, perfection or priority of any Lien on any Property
created pursuant to any Security Document.
"U.S." means the United States of America.
----
"Wholly-Owned Subsidiary" means any Subsidiary that (i) is owned 100% by
-----------------------
the Borrower and/or a Subsidiary, and (ii) is organized under the laws of a
state within the United States of America.
"Year 2000 Compliant" has the meaning set forth in Section 9.24 hereof.
------------------- ------------
"Year 2000 Problem" has the meaning set forth in Section 9.24 hereof.
----------------- ------------
Section 1.2 Other Definitional Provisions. All definitions contained in
-----------------------------
this Agreement are equally applicable to the singular and plural forms of the
terms defined. The words "hereof", "herein", and "hereunder" and words of
similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Unless otherwise
specified, all Article and Section references pertain to this Agreement. Terms
used herein that are defined in the UCC, unless otherwise defined herein, shall
have the meanings specified in the UCC.
Section 1.3 Accounting Terms and Determinations. Except as otherwise
-----------------------------------
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Administrative Agent and the
Lenders hereunder shall be prepared, in accordance with GAAP, on a "consistent
basis" with those used in the preparation of the financial statements referred
to in Section 9.2. All calculations made for the purposes of determining
-----------
compliance with the provisions of this Agreement shall be made by application of
GAAP, on a "consistent basis" with those used in the preparation of the
financial statements referred to in Section 9.2. Accounting principles are
-----------
applied on a "consistent basis" when the accounting principles applied in a
current period are comparable in all material respects to those accounting
principles applied in a preceding period. Changes in the application of
accounting principles which do not have a material impact on calculating the
financial covenants herein shall be deemed comparable in all material respects
to accounting principles applied in a preceding period. To enable the ready and
consistent determination of compliance by the Borrower with its obligations
under this Agreement, the Borrower will not change the manner in which either
the last day of its Fiscal Year or the last days of the first three Fiscal
Quarters of its Fiscal Years is calculated without the prior written consent of
the Required Lenders. In the event any changes in accounting principles
required by GAAP, recommended by the Borrower's certified public accountants or
requested by the Borrower (or that the Borrower otherwise requests and the
Administrative Agent and Required Lenders agree to accept, such agreement not
unreasonably to be denied) and implemented by the Borrower occur and such
changes result in a change in the method of the calculation of financial
covenants under this Agreement, then the Borrower, the Administrative Agent and
the Required Lenders agree to enter into negotiations in order to amend such
provisions of this Agreement so as to equitably reflect such changes with the
desired result that
CREDIT AGREEMENT - Page 22
<PAGE>
the criteria for evaluating such covenants shall be the same after such changes
as if such changes had not been made. Until such time as such an amendment shall
have been executed and delivered by the Administrative Agent, the Borrower and
the Required Lenders, all financial covenants, standards and terms in this
Agreement shall continue to be calculated or construed as if such changes had
not occurred.
Section 1.4 Time of Day. Unless otherwise indicated, all references in
-----------
this Agreement to times of day shall be references to Dallas, Texas time.
ARTICLE 2
Revolving Credit Facility
-------------------------
Section 2.1 Revolving Commitments. Subject to the terms and conditions of
---------------------
this Agreement, each Lender who has agreed to provide a Revolving Commitment
severally agrees to make advances to IB prior to the Distribution and thereafter
to the Borrower (who shall assume all Obligations of IB as part of the
Distribution and IB shall be released therefrom concurrently therewith) from
time to time from and including the Closing Date to but excluding the
Termination Date in an aggregate principal amount at any time outstanding up to
but not exceeding the amount of such Lender's Revolving Commitment as then in
effect; provided, however, (a) the Outstanding Revolving Credit applicable to a
-------- -------
Lender shall not at any time exceed such Lender's Revolving Commitment, minus
-----
such Lender's Commitment Percentage times the amount available to be drawn
against Letters of Credit and minus such Lender's Commitment Percentage of the
-----
Swingline Advances then outstanding, (b) the Outstanding Revolving Credit of all
of the Lenders shall not at any time exceed the aggregate Revolving Commitments,
minus the amount available to be drawn against Letters of Credit and minus the
-----
Swingline Advances then outstanding; provided, however, that the aggregate to
-------- -------
the Loans requested, Swingline Advances then outstanding and amounts
available to be drawn against Letters of Credit) shall not exceed the Borrowing
Base. It is expressly understood and agreed that the Lenders may and at present
intend to use the Borrowing Base as a maximum ceiling on Revolving Credit Loans
to the Borrower; provided, however, that it is agreed that should the Revolving
-------- -------
Credit Loans exceed the ceiling so determined or any other limitation set forth
in this Agreement, such Revolving Credit Loans shall nevertheless constitute
secured Obligations and, as such, shall be entitled to all benefits thereof and
security therefor. Subject to the foregoing limitations, and the other terms and
provisions of this Agreement, the Borrower may borrow, prepay and reborrow
hereunder the amount of the Revolving Commitments and may establish Base Rate
Accounts and Libor Accounts thereunder and, until the Termination Date, the
Borrower may Continue Libor Accounts established under the Revolving Loans or
Convert Accounts established under the Revolving Loans of one Type into Accounts
of the other Type. Accounts of each Type under the Revolving Loan made by each
Lender shall be established and maintained at such Lender's Applicable Lending
Office for Revolving Loans of such Type. Notwithstanding anything to the
contrary contained in this Agreement, the Borrower may from time to time
request, and NationsBank may at its discretion from time to time advance (but
shall in no event be obligated to advance), Revolving Loans which are to be
funded solely by NationsBank (the "Swingline Advances"); provided, however, that
------------------ -------- -------
(i) the aggregate principal amount of the Swingline Advances outstanding
CREDIT AGREEMENT - Page 23
<PAGE>
at any time shall not exceed Twenty Million Dollars ($20,000,000) and the
aggregate principal amount of the Revolving Loans outstanding at any time
(inclusive of the Swingline Advances minus the amount available to be drawn
-----
against Letters of Credit) shall not exceed the aggregate principal amount of
the Revolving Commitments minus the amount available to be drawn against Letters
-----
of Credit, (ii) the Borrower shall pay interest on all Swingline Advances at an
interest rate equal to the Federal Funds Rate plus one and five hundred seventy-
five thousandths of one percent (1.575%), (iii) the Outstanding Revolving Credit
shall never exceed the Borrowing Base, and (iv) NationsBank shall give the
Administrative Agent and each Lender written notice of the aggregate outstanding
principal amount of the Swingline Advances upon the written request of the
Administrative Agent or any Lender (but no more often than once every calendar
quarter). Furthermore, upon one Business Day's prior written notice given by
NationsBank to the Administrative Agent and the other Lenders at any time and
from time to time (including, without limitation, at any time following the
occurrence of a default or an Event of Default) and, in any event, without
notice on the Business Day immediately preceding the Termination Date, each
Lender (including, without limitations, NationsBank) severally agrees, as
provided in the first sentence of this Section 2.1, and notwithstanding anything
-----------
to the contrary contained in this Agreement, any Default or Event of Default or
the inability or failure of the Borrower or any of its Subsidiaries or any other
Loan Party to satisfy any condition precedent to funding any of the Revolving
Loans contained in Article 8 (which conditions precedent shall not apply to this
---------
sentence), to make a Revolving Loan, in the form of a Base Rate Account, in an
amount equal to its Commitment Percentage of the aggregate principal amount of
the Swingline Advances then outstanding, and the proceeds of such Revolving
Loans shall be promptly paid by the Administrative Agent to NationsBank and
applied as a repayment of the aggregate principal amount of the Swingline
Advances then outstanding.
Section 2.2 Notes. The Revolving Loans made by a Lender shall, if
-----
requested by a Lender, be evidenced by a single promissory note of the Borrower
in substantially the form of Exhibit "A" hereto, payable to the order of such
----------
Lender, in the maximum principal amount equal to its Revolving Commitment as
originally in effect (or, if greater, its Revolving Commitment thereafter
increased) and otherwise duly completed provided, however, that the Swingline
-------- -------
Advances made by NationsBank shall be evidenced by a single promissory note of
the Borrower in the maximum original principal amount of Twenty Million Dollars
($20,000,000) payable to the order of NationsBank in substantially the form of
Exhibit B hereto, dated the Closing Date.
- ---------
Section 2.3 Repayment of Revolving Loans. The Revolving Loans will be
----------------------------
repaid as follows:
(a Whether or not any Default or Event of Default has occurred, the
outstanding principal amount of all Revolving Loans is due and payable, and
shall be repaid by the Borrower in full, not later than the Termination Date;
and
(b If at any time the aggregate unpaid principal amount of the
Outstanding Credit Loans exceeds the Prepayment Borrowing Base in effect at such
time, the Borrower shall repay Swingline Advances (first) and the Revolving
Credit Loans in an amount sufficient to reduce the aggregate unpaid principal
amount of the Outstanding Revolving Credit by an amount equal to such excess,
together with accrued and unpaid interest on the amount so repaid to the date of
repayment.
CREDIT AGREEMENT - Page 24
<PAGE>
Section 2.4 Use of Proceeds. Subject to the terms of this Agreement, the
---------------
proceeds of the Revolving Loans shall be used by the Borrower (i)
contemporaneously with the Distribution to refinance the Existing Indebtedness,
(ii) to fund LHO Loans, (iii) for general corporate purposes arising in the
ordinary course of business of the Borrower and its Subsidiaries, (iv) for the
payment of Reimbursement Obligations and (v) to fund Investments specifically
permitted (and not prohibited) by this Agreement.
Section 2.5 Facility Fee. The Borrower agrees to pay to the Administrative
------------
Agent for the account of each Lender a facility fee on the daily average amount
(whether used or unused) of such Lender's Revolving Commitment for the period
from and including the Closing Date to and including the Termination Date, at a
per annum rate equal to the Facility Fee Rate, computed on the basis of a year
of 360 days and the actual number of days elapsed (including the first day but
excluding the last day). Accrued facility fees under this Section 2.5 shall be
-----------
payable in arrears on each Quarterly Payment Date and on the Termination Date.
Section 2.6 Termination or Reduction of Revolving Commitments. The Borrower
-------------------------------------------------
shall have the right to terminate fully or to reduce in part the unused portion
of the Revolving Commitments at any time and from time to time, provided that:
--------
(a) the Borrower shall not have the right to terminate or reduce in part any
unused portion of the Revolving Commitments that could or may be required to be
advanced by the Lenders to refinance Swingline Advances then outstanding; (b)
the Borrower shall give the Administrative Agent at least one (1) Business Day
notice of each such termination or reduction as provided in Section 5.3 hereof;
-----------
and (c) each partial reduction shall be in an aggregate amount at least equal to
Ten Million Dollars ($10,000,000) or a greater multiple of One Million Dollars
($1,000,000). The Revolving Commitments may not be reinstated after they have
been terminated or reduced.
ARTICLE 3
Letter of Credit Facility
-------------------------
Section 3.1 Commitment to Issue. The Borrower may utilize the Revolving
-------------------
Commitments by requesting that the Fronting Bank issue, and the Fronting Bank,
subject to the terms and conditions of this Agreement, shall issue standby
letters of credit for the Borrower's account (such letters of credit being
hereinafter referred to as the "Letters of Credit", which may be for the benefit
-----------------
of a subsidiary); provided, however, (i) the aggregate amount of outstanding
-------- -------
Letter of Credit Liabilities shall not at any time exceed Forty-five Million
Dollars ($45,000,000); (ii) the Outstanding Revolving Credit shall not at any
time exceed the maximum amount prescribed by Section 2.1; (iii) the Outstanding
-----------
Revolving Credit applicable to any Lender shall not at any time exceed the
maximum amount for a Lender prescribed by Section 2.1; and (iv) the Outstanding
-----------
Revolving Credit shall not exceed the Borrowing Base. Upon the date of issue of
a Letter of Credit, the Administrative Agent shall be deemed, without further
action by any party hereto, to have sold to each other Lender who holds a
Revolving Commitment, and each such other Lender shall be deemed, without
further action by any party hereto, to have purchased from the Administrative
Agent, a participation to the extent of such Lender's Commitment Percentage
(calculated with
CREDIT AGREEMENT - Page 25
<PAGE>
respect to the Revolving Commitments only) in such Letter of Credit and the
related Letter of Credit Liabilities. Upon termination of the Revolving
Commitments, any Letter of Credit then outstanding which has been fully cash
collateralized to the satisfaction of the Administrative Agent and the Fronting
Bank shall no longer be considered a "Letter of Credit" as defined in this
Agreement and any participating interest heretofore granted by the Fronting Bank
to the Lenders holding Revolving Commitments in such Letter of Credit shall be
deemed terminated but the letter of credit fees payable hereunder shall continue
to accrue to the Fronting Bank with respect to such Letter of Credit until the
expiry thereof.
Section 3.2 Letter of Credit Request Procedure. Except for Letters of
----------------------------------
Credit issued on the Closing Date (including any thereof issued as a backup to
Existing Letters of Credit), the Borrower shall give the Administrative Agent at
least three (3) Business Days prior notice (effective upon receipt) specifying
the date of each Letter of Credit and the nature of the transactions to be
supported thereby. Upon receipt of such notice the Administrative Agent shall
promptly notify the Fronting Bank and each other Lender who holds a Revolving
Commitment of the contents thereof and of such Lender's Commitment Percentage
(calculated based on the Revolving Commitments only) of the amount of the
proposed Letter of Credit. Each Letter of Credit shall be payable in Dollars,
must support a transaction entered into in the ordinary course of business of
the Borrower or its Subsidiaries, must be reasonably satisfactory in form and
substance to the Administrative Agent and the Fronting Bank, and shall be issued
pursuant to such documentation as the Administrative Agent and the Fronting Bank
may reasonably require, including, without limitation, the Fronting Bank's
standard form Letter of Credit Agreement; provided, that, in the event of any
--------
conflict between the terms of such agreement and the other Loan Documents, the
terms of the other Loan Documents shall control.
Section 3.3 Letter of Credit Fees. The Borrower will pay to the
---------------------
Administrative Agent for the account of each Lender who holds a Revolving
Commitment a letter of credit fee on such Lender's Commitment Percentage of the
daily average amount available for drawings under the Letters of Credit, such
letter of credit fee (i) to be paid in arrears on the first Quarterly Payment
Date occurring after the date of the issuance of the first Letter of Credit and
on each Quarterly Payment Date thereafter until the date of expiration or
termination of all Letters of Credit and (ii) to be calculated at a rate per
annum equal to the Libor Rate Margin applicable to the Revolving Loans on the
basis of a year of 360 days and the actual number of days elapsed (including the
first day but excluding the last day). After receiving any payment of any
letter of credit fees under this clause (c), the Administrative Agent will
promptly pay to each Lender that holds a Revolving Commitment the letter of
credit fees then due such Lender. The Borrower will also pay to the Fronting
Bank for its account only a fronting fee on the daily average amount available
to be drawn under all outstanding Letters of Credit, such fronting fee (i) to be
paid in arrears on the first Quarterly Payment Date occurring after the date of
the issuance of the first Letter of Credit and on each Quarterly Payment Date
thereafter until the date of expiration or termination of all Letters of Credit
and (ii) to be calculated as set forth in that certain letter dated August __,
1998, from NationsBank to the Borrower, as the same may be amended from time to
time. The Borrower will also pay to the Fronting Bank, for its account only,
all customary fees for amendments to and processing of the Letters of Credit.
CREDIT AGREEMENT - Page 26
<PAGE>
Section 3.4 Funding of Drawings. Upon receipt from the beneficiary of any
-------------------
Letter of Credit of any demand for payment or other drawing under such Letter of
Credit, the Fronting Bank shall promptly so notify the Administrative Agent and
the Administrative Agent shall promptly so notify the Borrower and each Lender
that holds a Revolving Commitment as to the amount to be paid as a result of
such demand or drawing and the respective payment date. Not later than 2:00
p.m. on the applicable payment date if the Borrower has not reimbursed the
Fronting Bank for the amount paid as a result of such demand or drawing, each
Lender will make available to the Administrative Agent, at the Principal Office,
in immediately available funds, an amount equal to such Lender's Commitment
Percentage of the amount to be paid as a result of such demand or drawing which
has not been reimbursed even if the conditions to a Loan under Article 8 hereof
---------
have not been satisfied and the Administrative Agent shall promptly pay such
amounts to the Fronting Bank.
Section 3.5 Reimbursements. The Borrower shall be irrevocably and
--------------
unconditionally obligated to immediately reimburse the Fronting Bank (through
the Administrative Agent) for any amounts paid by the Fronting Bank upon any
demand for payment or drawing under any Letter of Credit, without presentment,
demand, protest, or other formalities of any kind. All payments on the
Reimbursement Obligations shall be made to the Administrative Agent not later
than 2:00 p.m. on the date of the corresponding payment under the Letter of
Credit by the Fronting Bank; provided, that the Administrative Agent has
provided notice to the Borrower prior to 11:00 a.m. on such day that such
payment is due. In the event such notice is received after 11:00 a.m. on a
Business Day, such payment shall be due not later than 1:00 p.m. on the next
succeeding Business Day. Subject to the other terms and conditions of this
Agreement, such reimbursement may be made by the Borrower requesting a Revolving
Loan in accordance with Section 5.1 hereof, the proceeds of which shall be
-----------
credited against the Borrower's Reimbursement Obligations. The Administrative
Agent will pay to each Lender participating in a Letter of Credit such Lender's
Commitment Percentage (calculated based on the Revolving Commitments only) of
all amounts received from the Borrower for application in payment, in whole or
in part, to the Reimbursement Obligation in respect of any Letter of Credit, but
only to the extent such Lender has made payment to the Administrative Agent in
respect of such Letter of Credit pursuant to Section 3.4.
-----------
Section 3.6 Reimbursement Obligations Absolute. The Reimbursement
----------------------------------
Obligations of the Borrower under this Agreement shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of the Loan Documents under all circumstances whatsoever and the
Borrower hereby waives any defense to the payment of the Reimbursement
Obligations based on any circumstance whatsoever, including without limitation,
in either case, the following circumstances: (i) any lack of validity or
enforceability of any Letter of Credit or any other Loan Document; (ii) the
existence of any claim, set-off, counterclaim, defense or other rights which any
Loan Party or any other Person may have at any time against any beneficiary of
any Letter of Credit, the Fronting Bank, the Administrative Agent, any Lender or
any other Person, whether in connection with any Loan Document or any unrelated
transaction; (iii) any statement, draft or other documentation presented under
any Letter of Credit proving to be forged, fraudulent, invalid or insufficient
in any respect or any statement therein being untrue or inaccurate in any
respect whatsoever; (iv) payment by the Fronting Bank under any Letter of Credit
against presentation of a draft or other document that does not comply with the
terms of such Letter of Credit; or (v) any other circumstance whatsoever,
whether or not similar to any of the foregoing.
CREDIT AGREEMENT - Page 27
<PAGE>
Section 3.7 Issuer Responsibility. The Borrower assumes all risks of the
---------------------
acts or omissions of any beneficiary of any Letter of Credit with respect to its
use of such Letter of Credit. Neither the Fronting Bank, the Administrative
Agent nor any Lender nor any of their respective officers or directors shall
have any responsibility or liability to the Borrower or any other Person for:
(i) the failure of any draft to bear any reference or adequate reference to any
Letter of Credit, or the failure of any documents to accompany any draft at
negotiation, or the failure of any Person to surrender or to take up any Letter
of Credit or to send documents apart from drafts as required by the terms of any
Letter of Credit, or the failure of any Person to note the amount of any
instrument on any Letter of Credit, each of which requirements, if contained in
any Letter of Credit itself, it is agreed may be waived by the Fronting Bank;
(ii) errors, omissions, interruptions or delays in transmission or delivery of
any messages; (iii) the validity, sufficiency or genuineness of any draft or
other document, or any endorsement(s) thereon, even if any such draft, document
or endorsement should in fact prove to be in any and all respects invalid,
insufficient, fraudulent or forged or any statement therein is untrue or
inaccurate in any respect; (iv) the payment by the Fronting Bank to the
beneficiary of any Letter of Credit against presentation of any draft or other
document that does not comply with the terms of the Letter of Credit; or (v) any
other circumstance whatsoever in making or failing to make any payment under a
Letter of Credit. Anything herein to the contrary notwithstanding, the Borrower
shall have a claim against the Fronting Bank, and the Fronting Bank shall be
liable to the Borrower, to the extent of any direct (but not indirect,
consequential or punitive) damages suffered by the Borrower which the Borrower
proves in a final nonappealable judgment were caused by (i) the Fronting Bank's
misconduct or gross negligence in determining whether documents presented under
any Letter of Credit complied with the terms thereof or (ii) the Fronting Bank's
willful failure to pay under any Letter of Credit after presentation to it of
documentation strictly complying with the terms and conditions of such Letter of
Credit. The Fronting Bank may accept documents that appear on their face to be
in order, without responsibility for further investigation, regardless of any
notice or information to the contrary.
Section 3.8 Cash Collateral. If any Letter of Credit is outstanding on the
---------------
Termination Date, then on or prior to such Termination Date, the Borrower shall,
promptly on demand by the Administrative Agent, deposit with the Administrative
Agent, for the ratable benefit of the Credit Parties, with respect to each
Letter of Credit then outstanding, as the Administrative Agent shall specify,
Cash Collateral in an amount necessary to reimburse the Credit Parties for
payments made by the Credit Parties resulting from any drawing under such Letter
of Credit or under any reimbursement or guaranty agreement with respect thereto.
Such Cash Collateral shall be held by the Administrative Agent for the benefit
of the Credit Parties, as security for, and to provide for the payment of, the
Reimbursement Obligations. In addition, the Administrative Agent may at any
time after the Termination Date apply any or all of such Cash Collateral to the
payment of any or all of the Secured Obligations then due and payable.
ARTICLE 4
Interest and Fees
-----------------
CREDIT AGREEMENT - Page 28
<PAGE>
Section 4.1 Interest Rate. The Borrower shall pay to the Administrative
-------------
Agent for the account of each Lender interest on the unpaid principal amount of
each Loan made by such Lender for the period commencing on the date of such Loan
to but excluding the date such Loan is due, at a fluctuating rate per annum
equal to the Applicable Rate. The term "Applicable Rate" means:
---------------
(a) during the period that such Loans or portions thereof are
subject to a Base Rate Account, the Base Rate; and
(b) during the period that such Loans or portions thereof are
subject to a Libor Account, the Adjusted Libor Rate plus the Libor Rate
Margin.
Section 4.2 Payment Dates. Accrued interest on the Loans shall be due and
-------------
payable as follows: (i) in the case of Loans subject to Base Rate Accounts, on
each Quarterly Payment Date and on the Termination Date; (ii) in the case of
Loans subject to Libor Accounts and with respect to each such Account, on (A)
the last day of the Interest Period with respect thereto, (B) in the case of an
Interest Period greater than three months, at three-month intervals after the
first day of such Interest Period, and (C) on the Termination Date.
Section 4.3 Default Interest. Notwithstanding the foregoing, upon the
----------------
occurrence and during the continuance of an Event of Default, the Borrower will
pay to the Administrative Agent for the account of each Lender interest at the
applicable Default Rate on any principal of any Loan made by such Lender, any
Reimbursement Obligation, and (to the fullest extent permitted by law) any other
amount payable by the Borrower under any Loan Document to or for the account of
the Administrative Agent or such Lender.
Section 4.4. Conversions and Continuations of Accounts. Subject to Section
----------------------------------------- -------
5.2 hereof, the Borrower shall have the right from time to time to Convert all
- ---
or part of any Base Rate Account in existence under a Loan (other than a
Swingline Advance) into a Libor Account under the same Loan or to continue Libor
Accounts in existence under a Loan as Libor Accounts under the same
Loan, provided that: (a) the Borrower shall give the Administrative Agent
--------
notice of each such Conversion or Continuation as provided in Section 5.3
-----------
hereof; (b) subject to Section 6.3 hereof, a Libor Account may only be Converted
-----------
on the last day of the Interest Period therefor; and (c) except for Conversions
into Base Rate Accounts, no Conversions or Continuations shall be made without
the consent of the Administrative Agent and the Required Lenders while a Default
has occurred and is continuing.
Section 4.5 Computations. Interest and fees payable by the Borrower
------------
hereunder and under the other Loan Documents shall be computed on the basis of a
year of 360 days and the actual number of days elapsed (including the first day
but excluding the last day) in the period for which interest is payable unless
such calculation would result in a rate that exceeds the Maximum Rate, in which
case interest shall be calculated on the basis of a year of 365 or 366 days, as
the case may be.
ARTICLE 5
Administrative Matters
----------------------
CREDIT AGREEMENT - Page 29
<PAGE>
Section 5.1 Borrowing Procedure. The Borrower shall give the
-------------------
Administrative Agent, and the Administrative Agent will give the Lenders, notice
of each borrowing under the Commitments in accordance with Section 5.3 hereof.
-----------
Not later than 1:00 p.m. on the date specified for each borrowing under the
applicable Commitment, each Lender obligated with respect to such Commitment
will make available the amount of the Loan to be made by it on such date to the
Administrative Agent, at the Principal Office, in immediately available funds,
for the account of the Borrower. The amounts received by the Administrative
Agent shall, subject to the terms and conditions of this Agreement, be made
available to the Borrower by 3:00 p.m. at the Borrower's direction by
transferring the same, in immediately available funds by wire transfer,
automated clearinghouse debit or interbank transfer to (a) a bank account of the
Borrower designated by the Borrower in writing or (b) a Person or Persons
designated by the Borrower in writing. Without limiting the other terms and
conditions of this Agreement, at the time of each borrowing hereunder the
Borrower must be current in the delivery of all Compliance Certificates and
Borrowing Base Certificates required to be delivered to the Administrative Agent
and the Lenders pursuant to this Agreement.
Section 5.2 Minimum Amounts. Except for prepayments and Conversions
---------------
pursuant to Section 5.4(a) and Article 6 hereof, each Base Rate Account
-------------- ---------
applicable to a Loan and each prepayment of principal of a Loan shall be in a
minimum principal amount of One Million Dollars ($1,000,000) or any larger
amount in increments of One Hundred Thousand Dollars ($100,000 ) or in the case
of Swingline Advances in a minimum principal amount of Five Hundred Thousand
Dollars ($500,000) or any larger amounts in increments of Fifty Thousand Dollars
($50,000). Each LIBOR Account applicable to a Loan shall be in a minimum
principal amount of Five Million Dollars ($5,000,000) or any larger amount in
increments of One Hundred Thousand Dollars ($100,000).
Section 5.3 Certain Notices. Notices by the Borrower to the Administrative
---------------
Agent of terminations or reductions of Commitments, of borrowings and
prepayments of Loans and of Conversion and Continuations of Accounts shall be
irrevocable and shall be effective only if received by the Administrative Agent
not later than 11:00 a.m. on the Business Day prior to (or, with respect to Base
Rate Accounts, on) the date of the relevant termination, reduction, borrowing,
Conversion, Continuation or other repayment specified below:
<TABLE>
<CAPTION>
=========================================================================================================
Notice Number of Business Days Prior
<S> <C>
Termination or reduction of Commitments 1
- ---------------------------------------------------------------------------------------------------------
Borrowing of Loans subject to Base Rate Accounts, prepayment or
repayment of Loans subject to Base Rate Accounts, Conversions into Base 0
Rate Accounts or Swingline Advances
- ---------------------------------------------------------------------------------------------------------
Borrowing, prepayment or repayment of Loans subject to Libor Accounts, 3
Conversions into or Continuations as Libor Accounts
=========================================================================================================
</TABLE>
CREDIT AGREEMENT - Page 30
<PAGE>
Notwithstanding the forgoing, the Borrower may give an effective notice of
borrowing of Revolving Loans subject to Base Rate Accounts if the proceeds will
be used to satisfy Reimbursement Obligations in accordance with Section 3.5 not
-----------
later than 12:00 noon on the Business Day of the proposed borrowing. Any
notices of the type described in this Section 5.3 which are received by the
-----------
Administrative Agent after the applicable time set forth above on a Business Day
shall be deemed to be received and shall be effective on the next Business Day.
Each such notice of termination or reduction shall specify the applicable
Commitments to be affected and the amount of the Commitments to be terminated or
reduced. Each such notice of borrowing, Conversion, Continuation, or prepayment
shall specify (a) the Loans to be borrowed or prepaid or the Accounts to be
Converted or Continued; (b) the amount (subject to Section 5.2 hereof) to be
-----------
borrowed (and with respect to Base Rate Accounts, whether any of such Base Rate
Accounts will be Swingline Advances), Converted, Continued or prepaid; (c) in
the case of a Conversion, the Type of Account to result from such Conversion;
(d) in the case of a borrowing, the Type of Account or Accounts to be applicable
to such borrowing and the amounts thereof; (e) in the event a Libor Account is
selected, the duration of the Interest Period therefor; and (f) the date of
borrowing, Conversion, Continuation, or prepayment (which shall be a Business
Day). Any notices by the Borrower of the type described in this Section 5.3 may
-----------
be made orally or in writing and, if made orally, must be confirmed in writing
not more than two (2) Business Days after the notice is given. The
Administrative Agent shall notify the Lenders of the contents of each such
notice on the date of its receipt of the same or, if received on or after the
applicable time set forth above on a Business Day, on the next Business Day. In
the event the Borrower fails to select the Type of Account applicable to a Loan,
or the duration of any Interest Period for any Libor Account, within the time
period and otherwise as provided in this Section 5.3, such Account (if
-----------
outstanding as a Libor Account) will be automatically Converted into a Base Rate
Account on the last day of the preceding Interest Period for such Account or (if
outstanding as a Base Rate Account) will remain as, or (if not then outstanding)
will be made as, a Base Rate Account. The Borrower may not borrow any Loans
subject to a Libor Account, Convert any Base Rate Accounts into Libor Accounts,
or Continue any Libor Account as a Libor Account if the Applicable Rate for such
Libor Accounts would exceed the Maximum Rate.
Section 5.4 Prepayments.
-----------
(a) Mandatory. If at any time the Outstanding Revolving Credit
---------
exceeds the aggregate Revolving Commitments or the Prepayment Borrowing
Base, the Borrower shall, within one (1) Business Day after the occurrence
thereof, prepay outstanding Swingline Advances (first) and the Outstanding
Revolving Loans by the amount of the excess, such prepayments of
Outstanding Revolving Loans to be applied first to Base Rate Accounts and
thereafter to LIBOR Accounts with the shortest remaining Interest Periods.
(b) Optional. Subject to Section 5.2 hereof and the provisions of
-------- -----------
this clause (b), the Borrower may, at any time and from time to time
----------
without premium or penalty upon prior notice to the Administrative Agent as
specified in Section 5.3 hereof, prepay or repay any Loan in full or in
-----------
part. Loans subject to a Libor Account may be prepaid or repaid only on the
last day of the Interest Period applicable thereto unless (i) the Borrower
pays to the Administrative Agent for the account of the applicable Lenders
any amounts due under Section 6.5 hereof as a result of such prepayment or
-----------
repayment or (ii) after giving effect to
CREDIT AGREEMENT - Page 31
<PAGE>
such prepayment or repayment, the aggregate principal amount of the Libor
Accounts applicable to the Loan being prepaid or repaid having Interest
Periods that end after such payment date shall be equal to or less than the
principal amount of such Loan after such prepayment or repayment.
Section 5.5 Method of Payment. Except as otherwise expressly provided
-----------------
herein, all payments of principal, interest, and other amounts to be made by the
Borrower or any other Loan Party under the Loan Documents shall be made to the
Administrative Agent at the Principal Office for the account of each Lender's
Applicable Lending Office in Dollars and in immediately available funds, without
setoff, deduction, or counterclaim, not later than 1:00 p.m. on the date on
which such payment shall become due (each such payment made after such time on
such due date to be deemed to have been made on the next succeeding Business
Day). The Borrower shall, at the time of making each such payment, specify to
the Administrative Agent the sums payable under the Loan Documents to which such
payment is to be applied (and in the event that the Borrower fails to so
specify, or if an Event of Default has occurred and is continuing, the
Administrative Agent may apply such payment to the Obligations in such order and
manner as it may elect in its sole discretion, subject to Section 5.6 hereof and
-----------
provided that when applying any such amounts to any Loans, Loans subject to Base
Rate Accounts shall be prepaid in full prior to any application to Loans subject
to Libor Accounts) provided however, that, unless NationsBank expressly agrees
-------- -------
to the contrary, such payment shall be applied first to any outstanding
Swingline Advances until such advances are paid in full. Upon the occurrence
and during the continuation of an Event of Default, all proceeds of any
Collateral, all funds from time to time on deposit in any Concentration Account
or any collection account referred to in Section 10.3 and all other funds of the
------------
Borrower or any Guarantor in the possession of the Administrative Agent or any
Lender (subject to Section 5.7), may be applied by the Administrative Agent to
-----------
the Obligations in such order and manner as the Administrative Agent may elect,
subject to Section 5.4 provided however, that, unless NationsBank expressly
----------- -------- -------
agrees to the contrary, such proceeds and funds shall be applied first to any
outstanding Swingline Advances until such advances are paid in full. Each
payment received by the Administrative Agent under any Loan Document for the
account of a Lender shall be paid to such Lender by 3:00 p.m. on the date the
payment is deemed made to the Administrative Agent in immediately available
funds, for the account of such Lender's Applicable Lending Office. Whenever any
payment under any Loan Document shall be stated to be due on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day, and
such extension of time shall in such case be included in the computation of the
payment of interest and commitment fee, as the case may be.
Section 5.6 Pro Rata Treatment. Except to the extent otherwise provided
------------------
herein: (a) each Loan shall be made by the Lenders holding Commitments for such
Loan, each payment of commitment fees under Sections 2.5 hereof and letter of
------------
credit fees under Subsection 3.3 hereof shall be made for the account of the
--------------
Lenders holding Revolving Commitments, and each termination or reduction of the
Commitments shall be applied to the Commitments of the Lenders holding the
applicable Commitments, pro rata according to their respective Commitment
Percentages (calculated with respect to the Commitments for the Loans in
question only); (b) the making, Conversion, and Continuation of Accounts of a
particular Type (other than Conversions provided for by Section 6.4 hereof)
-----------
shall be made pro rata among the Lenders holding Accounts of such Type according
to their respective Commitment Percentages (calculated with respect to the
Commitments for the Loans in
CREDIT AGREEMENT - Page 32
<PAGE>
question only); (c) each payment and prepayment of principal of or interest on
Loans or Reimbursement Obligations by the Borrower shall be made to the
Administrative Agent for the account of the Administrative Agent or the Lenders
holding such Loans or Reimbursement Obligations (or participation interests
therein) pro rata in accordance with the respective unpaid principal amounts of
such Loans or participation interests held by the Administrative Agent or such
Lenders; provided that as long as no default in the payment of interest exists,
--------
payments of interest made when Lenders are holding different types of Accounts
applicable to the same Loan as a result of the application of Section 6.4, shall
-----------
be made to the Lenders in accordance with the amount of interest owed to each;
and (d) the Lenders holding Revolving Commitments (other than the Administrative
Agent) shall purchase from the Administrative Agent participations in the
Letters of Credit to the extent of their respective Commitment Percentages
(calculated with respect to the Revolving Commitments only). If at any time
payment, in whole or in part, of any amount distributed by the Administrative
Agent hereunder is rescinded or must otherwise be restored or returned by the
Administrative Agent as a preference, fraudulent conveyance or otherwise under
any bankruptcy, insolvency or similar law, then each Person receiving any
portion of such amount agrees, upon demand, to return the portion of such amount
it has received to the Administrative Agent.
Section 5.7 Sharing of Payments. If a Lender shall obtain payment of any
-------------------
principal of or interest on any of the Obligations due to such Lender hereunder
directly (and not through the Administrative Agent) through the exercise of any
right of set-off, banker's lien, counterclaim or similar right, or otherwise, it
shall promptly purchase from the other Lenders participations in the Obligations
held by the other Lenders in such amounts, and make such other adjustments from
time to time as shall be equitable to the end that all the Lenders shall share
the benefit of such payment pro rata in accordance with the unpaid principal of
and interest on the Obligations then due to each of them. To such end, all of
the Lenders shall make appropriate adjustments among themselves (by the resale
of participations sold or otherwise) if all or any portion of such excess
payment is thereafter rescinded or must otherwise be restored. The Borrower
agrees, to the fullest extent it may effectively do so under applicable law,
that any Lender so purchasing a participation in the Obligations held by the
other Lenders may exercise all rights of set-off, banker's lien, counterclaim,
or similar rights with respect to such participation as fully as if such Lender
were a direct holder of Obligations in the amount of such participation. Nothing
contained herein shall require any Lender to exercise any such right or shall
affect the right of any Lender to exercise, and retain the benefits of
exercising, any such right with respect to any other indebtedness or obligation
of the Borrower.
Section 5.8 Non-Receipt of Funds by the Administrative Agent. Unless the
------------------------------------------------
Administrative Agent shall have been notified by a Lender or the Borrower (the
"Payor") prior to the date on which such Lender is to make payment to the
-----
Administrative Agent hereunder or the Borrower is to make a payment to the
Administrative Agent for the account of one or more of the Lenders, as the case
may be (such payment being herein called the "Required Payment"), which notice
----------------
shall be effective upon receipt, that the Payor does not intend to make the
Required Payment to the Administrative Agent, the Administrative Agent may
assume that the Required Payment has been made and may, in reliance upon such
assumption (but shall not be required to), make the amount thereof available to
the intended recipient on such date and, if the Payor has not in fact made the
Required Payment to the Administrative Agent, (a) the recipient of such payment
shall, on
CREDIT AGREEMENT - Page 33
<PAGE>
demand, pay to the Administrative Agent the amount made available to it together
with interest thereon in respect of the period commencing on the date such
amount was so made available by the Administrative Agent until the date the
Administrative Agent recovers such amount at a rate per annum equal to the
Federal Funds Rate for such period, and (b) the Administrative Agent shall be
entitled to offset against any and all sums to be paid to such recipient, the
amount calculated in accordance with the foregoing clause (a).
----------
Section 5.9 Participation Obligations Absolute; Failure to Fund
---------------------------------------------------
Participation. The obligations of a Lender holding a Revolving Commitment to
- -------------
fund its participation in the Letters of Credit in accordance with the terms
hereof shall be absolute, unconditional and irrevocable and shall be performed
strictly in accordance with the terms of the Loan Documents under all
circumstances whatsoever, including without limitation, the following
circumstances: (a) any lack of validity of any Loan Document; (b) the
occurrence of any Default; (c) the existence of any claim, set-off,
counterclaim, defenses or other rights which such Lender, any Loan Party, or any
other Person may have; (d) the occurrence of any event that has or could
reasonably be expected to have a Material Adverse Effect on the Borrower or any
other Loan Party; (e) the failure of any condition to a Loan under Article 8
---------
hereof to be satisfied; (f) the fact that after giving effect to the funding of
the participation the Outstanding Revolving Credit may exceed the aggregate
Revolving Commitments; or (g) any other circumstance whatsoever, whether or not
similar to any of the foregoing. If a Lender fails to fund its participation in
a Letter of Credit as required hereby, such Lender shall, subject to the
foregoing proviso, remain obligated to pay to the Administrative Agent the
amount it failed to fund on demand together with interest thereon in respect of
the period commencing on the date such amount should have been funded until the
date the amount was actually funded to the Administrative Agent at a rate per
amount equal to the Federal Funds Rate for such period and the Administrative
Agent shall be entitled to offset against any and all sums to be paid to such
Lender hereunder the amount due the Administrative Agent under this sentence.
ARTICLE 6
Change in Circumstances
-----------------------
Section 6.1 Increased Cost and Reduced Return.
---------------------------------
(a) Increased Cost. If, after the date hereof, any Regulatory Change
--------------
or compliance by any Lender (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any
Governmental Authority, central bank, or comparable agency:
(i) shall subject such Lender (or its Applicable Lending Office)
to any tax, duty, or other charge with respect to any Libor Accounts,
its Notes, or its obligation to make Libor Accounts, or change the
basis of taxation of any amounts payable to such Lender (or its
Applicable Lending Office) under this Agreement or its Notes in
respect of any Libor Accounts (other than franchise taxes or taxes
imposed on or measured by the net income of such Lender by the
jurisdiction in
CREDIT AGREEMENT - Page 34
<PAGE>
which such Lender is organized, has its principal office or such
Applicable Lending Office or is doing business);
(ii) shall impose, modify, or deem applicable any reserve,
special deposit, assessment, or similar requirement (other than the
Reserve Requirement utilized in the determination of the Adjusted
Libor Rate) relating to any extensions of credit or other assets of,
or any deposits with or other liabilities or commitments of, such
Lender (or its Applicable Lending Office), including the Commitments
of such Lender hereunder; or
(iii) shall impose on such Lender (or its Applicable Lending
Office) or the London interbank market any other condition affecting
this Agreement or its Notes or any of such extensions of credit or
liabilities or commitments;
and the result of any of the foregoing is to increase the cost to such Lender
(or its Applicable Lending Office) of making, Converting into, Continuing, or
maintaining any Libor Accounts or to reduce any sum received or receivable by
such Lender (or its Applicable Lending Office) under this Agreement or its Notes
with respect to any Libor Accounts, then the Borrower shall pay to such Lender
on demand such amount or amounts as will compensate such Lender for such
increased cost or reduction. If any Lender requests compensation by the
Borrower under this Section 6.1(a), the Borrower may, by notice to such Lender
--------------
(with a copy to the Administrative Agent), suspend the obligation of such Lender
to make or maintain Libor Accounts, or to Convert Base Rate Accounts into Libor
Accounts, until the event or condition giving rise to such request ceases to be
in effect (in which case the provisions of Section 6.4 shall be applicable);
-----------
provided that such suspension shall not affect the right of such Lender to
- --------
receive the compensation so requested.
(b) Capital Adequacy. If, after the date hereof, any Lender shall
----------------
have determined that any Regulatory Change has or would have the effect of
reducing the rate of return on the capital of such Lender or any corporation
controlling such Lender as a consequence of such Lender's obligations hereunder
to a level below that which such Lender or such corporation could have achieved
but for such adoption, change, request, or directive (taking into consideration
its policies with respect to capital adequacy) by an amount deemed by such
Lender to be material, then from time to time upon demand, the Borrower shall
pay to such Lender such additional amount or amounts as will compensate such
Lender for such reduction.
(c) Claims under this Section 6.1. Each Lender shall promptly (and,
-----------------------------
if reasonably able to do so, within 180 days after first receiving knowledge
thereof) notify the Borrower and the Administrative Agent of any event of which
it has knowledge, occurring after the date hereof, which will entitle such
Lender to such compensation pursuant to this Section 6.1 and will designate a
-----------
different Applicable Lending Office if such designation will avoid the need for,
or reduce the amount of, such compensation and will not, in the judgment of such
Lender, be otherwise disadvantageous to it. Any Lender claiming compensation
under this Section shall furnish to the Borrower and the Administrative Agent a
statement
CREDIT AGREEMENT - Page 35
<PAGE>
setting forth the additional amount or amounts to be paid to it hereunder
which shall be conclusive in the absence of manifest error. In determining
such amount, such Lender may use any reasonable averaging and attribution
methods.
Section 6.2 Limitation on Libor Accounts. If on or prior to the first day
----------------------------
of any Interest Period for any Libor Account:
(a) the Administrative Agent determines (which determination shall be
conclusive) that by reason of circumstances affecting the relevant market,
adequate and reasonable means do not exist for ascertaining the Libor Rate
for such Interest Period; or
(b) the Required Lenders determine (which determination shall be
conclusive) and notify the Administrative Agent that the Adjusted Libor
Rate will not adequately and fairly reflect the cost to the Lenders of
funding Libor Accounts for such Interest Period;
then the Administrative Agent shall give the Borrower prompt notice thereof
specifying the amounts or periods, and so long as such condition remains in
effect, the Lenders shall be under no obligation to make additional Libor
Accounts, Continue Libor Accounts, or to Convert Base Rate Accounts into Libor
Accounts and the Borrower shall, on the last day(s) of the then current Interest
Period(s) for the outstanding Libor Accounts, either prepay such Libor Accounts
or Convert such Libor Accounts into Base Rate Accounts in accordance with the
terms of this Agreement.
Section 6.3 Illegality. Notwithstanding any other provision of this
----------
Agreement, in the event that it becomes unlawful for any Lender or its
Applicable Lending Office to make, maintain, or fund Libor Accounts hereunder,
then such Lender shall promptly notify the Borrower thereof and such Lender's
obligation to make or Continue Libor Accounts and to Convert Base Rate Accounts
into Libor Accounts shall be suspended until such time as such Lender may again
make, maintain, and fund Libor Accounts (in which case the provisions of Section
6.4 shall be applicable).
- ---
Section 6.4 Treatment of Affected Accounts. If the obligation of any Lender
------------------------------
to make a particular Libor Account or to Continue, or to Convert Base Rate
Accounts into, Libor Accounts shall be suspended pursuant to Sections 6.1 or 6.3
-------------------
hereof (Accounts of such Type being herein called "Affected Accounts"), such
-----------------
Lender's Affected Accounts shall be automatically Converted into Base Rate
Accounts on the last day(s) of the then current Interest Period(s) for the
Affected Accounts (or, in the case of a Conversion required by Section 6.3
-----------
hereof, on such earlier date as such Lender may specify to the Borrower with a
copy to the Administrative Agent) and, unless and until such Lender gives notice
as provided below that the circumstances specified in Sections 6.1 or 6.3 hereof
-------------------
that gave rise to such Conversion no longer exist:
(a) to the extent that such Lender's Affected Accounts have been so
Converted, all payments and prepayments of principal that would otherwise
be applied to such Lender's Affected Accounts shall be applied instead to
its Base Rate Accounts; and
(b) all Accounts that would otherwise be made or Continued by such
Lender as Libor Accounts shall be made or Continued instead as Base Rate
Accounts, and all Accounts
CREDIT AGREEMENT - Page 36
<PAGE>
of such Lender that would otherwise be Converted into Libor Accounts shall
be Converted instead into (or shall remain as) Base Rate Accounts.
If such Lender gives notice to the Borrower (with a copy to the Administrative
Agent) that the circumstances specified in Sections 6.1 or 6.3 hereof that gave
-------------------
rise to the Conversion of such Lender's Affected Accounts no longer exist (which
such Lender agrees to do promptly upon such circumstances ceasing to exist) at a
time when Libor Accounts made by other Lenders are outstanding, such Lender's
Base Rate Accounts shall be automatically Converted, on the first day(s) of the
next succeeding Interest Period(s) for such other Lender's outstanding Libor
Accounts, to the extent necessary so that, after giving effect thereto, all
Accounts held by the Lenders holding Libor Accounts and by such Lender are held
pro rata (as to principal amounts, Types, and Interest Periods) in accordance
with their respective Commitment Percentages.
Section 6.5 Compensation. Upon the request of any Lender, the Borrower
------------
shall pay to such Lender such amount or amounts as shall be sufficient (in the
reasonable opinion of such Lender) to compensate it for any loss, cost, or
expense incurred by it as a result of:
(a) any payment, prepayment, or Conversion by the Borrower of a
Libor Account for any reason (including, without limitation, the
acceleration of the Loans pursuant to Section 13.2) on a date other than
------------
the last day of the Interest Period for such Libor Account; or
(b) any failure by the Borrower for any reason (including, without
limitation, the failure of any condition precedent specified in Article 8
---------
to be satisfied) to borrow, Convert, Continue, or prepay a Libor Account on
the date for such borrowing, Conversion, Continuation, or prepayment
specified in the relevant notice of borrowing, prepayment, Continuation, or
Conversion under this Agreement.
Section 6.6 Taxes.
-----
(a) Withholding Taxes. Except as otherwise provided in this
-----------------
Agreement (and subject to Section 6.7), any and all payments by any Loan Party
-----------
to or for the account of any Lender or the Administrative Agent hereunder or
under any other Loan Document shall be made free and clear of and without
deduction for any and all present or future taxes, duties, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding, in the case of each Lender and each Administrative Agent, taxes
- ---------
imposed on or measured by its income, and franchise taxes imposed on it, by the
jurisdiction under the laws of which such Lender (or its Applicable Lending
Office) or such Administrative Agent (as the case may be) is organized, located
or doing business or any political subdivision thereof (all such non-excluded
taxes, duties, levies, imposts, deductions, charges, withholdings, and
liabilities being hereinafter referred to as "Taxes"). If a Loan Party shall be
-----
required by law to deduct any Taxes from or in respect of any sum payable under
any Loan Document to any Lender or the Administrative Agent, (i) the sum payable
shall be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
-------
6.6) such Lender or such Administrative Agent receives an
- ---
CREDIT AGREEMENT - Page 37
<PAGE>
amount equal to the sum it would have received had no such deductions been
made, (ii) the applicable Loan Party shall make such deductions, (iii) the
applicable Loan Party shall pay the full amount deducted to the relevant
taxing authority or other authority in accordance with applicable law, and
(iv) the applicable Loan Party shall furnish to the Administrative Agent
the original or a certified copy of a receipt evidencing payment thereof.
(b) Stamp Taxes, Etc. In addition, the Borrower agrees to pay any and
----------------
all present or future stamp or documentary taxes and any other excise or
property taxes or charges or similar levies which arise from any payment
made under this Agreement or any other Loan Document or from the execution
or delivery of, or otherwise with respect to, this Agreement or any other
Loan Document (hereinafter referred to as "Other Taxes").
-----------
(c) TAX INDEMNIFICATION. THE BORROWER AGREES TO INDEMNIFY EACH LENDER
-------------------
AND THE ADMINISTRATIVE AGENT PARTY FOR THE FULL AMOUNT OF TAXES AND OTHER
TAXES (INCLUDING, WITHOUT LIMITATION, ANY TAXES OR OTHER TAXES IMPOSED OR
ASSERTED BY ANY JURISDICTION ON AMOUNTS PAYABLE UNDER THIS SECTION 6.6)
-----------
PAID BY SUCH LENDER (AS THE CASE MAY BE) AND ANY LIABILITY (INCLUDING
PENALTIES, INTEREST AND EXPENSES) ARISING THEREFROM OR WITH RESPECT
THERETO.
Section 6.7 Withholding Tax Exemption. Each Lender and Administrative Agent
-------------------------
organized under the laws of a jurisdiction outside the United States, on or
prior to the date of its execution and delivery of this Agreement in the case of
each Lender listed on the signature pages hereof and on or prior to the date on
which it becomes a Lender in the case of each other Lender, and from time to
time thereafter if requested in writing by the Borrower or the Administrative
Agent (but only so long as such Lender remains lawfully able to do so), shall
provide the Borrower and the Administrative Agent with (a) if such Lender is a
"bank" within the meaning of Section 881(c)(3)(A) of the Code, (i) Internal
Revenue Service Form 1001 or 4224, as appropriate, or any successor form
prescribed by the Internal Revenue Service, certifying that such Lender is
entitled to benefits under an income tax treaty to which the United States is a
party which reduces to zero the rate of withholding tax on payments of interest
or certifying that the income receivable pursuant to this Agreement is
effectively connected with the conduct of a trade or business in the United
States, (ii) Internal Revenue Service Form W-8 or W-9, as appropriate, or any
successor form prescribed by the Internal Revenue Service, and (iii) any other
form or certificate required by any taxing authority (including any certificate
required by Sections 871(h) and 881(c) of the Internal Revenue Code), certifying
that such Lender is entitled to a complete exemption from tax on payments
pursuant to any of the Loan Documents or (b) if such Lender is not a "bank"
within the meaning of Section 881(c)(3)(A) of the Code, a Form W-8, or any
subsequent versions thereof or successors thereto (and, if such non-U.S. Lender
delivers a Form W-8, a certificate representing that such non-U.S. Lender is not
a bank for purposes of Section 881(c) of the Code, is not a 10-percent
shareholder (within the meaning of Section 871(h)(3)(B) of the Code of the
Borrower and is not a controlled foreign corporation related to the Borrower
(within the meaning of Section 864(d)(4) of the Code)), properly completed and
duly executed by such non-U.S. Lender claiming complete exemption from United
States Federal withholding tax on payments of interest by the Borrower under
this Agreement
CREDIT AGREEMENT - Page 38
<PAGE>
and the other Loan Documents. For any period with respect to which a Lender has
failed to provide the Borrower and the Administrative Agent with the appropriate
form pursuant to this Section 6.7 and thereby to establish complete exemption
-----------
from United States withholding tax (unless such failure to establish complete
exemption from United States withholding tax is due to a change in treaty, law,
or regulation occurring subsequent to the date on which a form originally was
required to be provided), (A) the applicable Loan Party shall deduct all
required Taxes from any amounts payable to such Lender under any Loan Document,
(B) the applicable Loan Party shall pay the full amount allocated to the
relevant taxing authority or other authority in accordance with applicable law,
(C) the applicable Loan Party shall furnish to the Administrative Agent the
original or a certified copy of a receipt evidencing payment thereof and (D)
such Lender shall not be entitled to an indemnification or increases in the sum
payable under Sections 6.6 or 14.5 with respect to Taxes imposed by the United
------------ ----
States; provided, however, that should a Lender, which is otherwise exempt from
-------- -------
or subject to a reduced rate of withholding tax, become subject to Taxes because
of its failure to deliver a form required hereunder, the Borrower shall take
such steps as such Lender shall reasonably request to assist such Lender to
recover such Taxes.
Section 6.8 Replacement of Affected Lender. Within ninety (90) days after
------------------------------
receipt by the Borrower of written notice and demand from any Lender for any
payment under the terms of Section 6.1 or Section 6.6, or within ninety (90)
----------- -----------
days of the Borrower becoming aware that a Lender has become insolvent, or its
assets subject to a receiver, liquidator, trustee, custodian or other similar
Person or it or its assets are otherwise subject to insolvency proceedings,
then, subject to this Section 6.8, the Borrower may, at its option notify the
-----------
Administrative Agent and such Lender (the "Affected Lender") of its intention to
---------------
obtain, at the Borrower's expense, a replacement Lender ("Replacement Lender")
------------------
to purchase the Affected Lender's Loans and its obligations under the Loan
Documents. Subject to this Section 6.8, the Borrower shall, within ninety (90)
-----------
days following the delivery of such notice from the Borrower cause the
Replacement Lender to purchase (and the Affected Lender hereby agrees to sell
and convey to such Replacement Lender) the Loans of the Affected Lender and
assume the Affected Lender's Commitment and obligations hereunder in accordance
with the terms of an Assignment and Acceptance for cash in an aggregate amount
equal to the aggregate unpaid principal of the Loans held by such Affected
Lender, all unpaid interest and commitment fees accrued thereon, and all other
Secured Obligations owed to such Affected Lender including amounts owed under
Sections 6.1 or 6.6. Notwithstanding the foregoing, (i) the Borrower shall
- ------------ ---
continue to be obligated to pay to the Affected Lender in full all amounts then
demanded and due under Sections 6.1 or 6.6 in accordance with the terms thereof,
------------ ---
(ii) neither the Administrative Agent nor any Lender shall have any obligation
to find a Replacement Lender, (iii) the Replacement Lender must be acceptable to
the Administrative Agent in its sole discretion and (iv) NationsBank, N.A. may
not be replaced under this Section 6.8 without its consent.
-----------
ARTICLE 7
Security
--------
Section 7.1 Collateral.
----------
CREDIT AGREEMENT - Page 39
<PAGE>
(a) To secure the full and complete payment and performance of the
Obligations, the Borrower shall, and shall cause each of its Subsidiaries,
other than the Foreign Subsidiaries, to, on or before the Closing Date,
grant to the Administrative Agent for the benefit of the Administrative
Agent and the Lenders a perfected, first priority Lien on all of its right,
title and interest in and to the following Property, whether now owned or
hereafter acquired, and the proceeds and products thereof, pursuant to the
Security Documents:
(i) all capital stock of each of the Subsidiaries of the
Borrower owned as of the Closing Date or thereafter acquired by the
Borrower or any Subsidiary of the Borrower;
(ii) each Lockbox and Agency Account and any cash or other
moneys credited thereto or retained therein;
(iii) all capital stock of ICII or any other Person owned as of
the Closing Date or thereafter acquired by the Borrower or any
Subsidiary of the Borrower; and
(iv) all LHO Loans outstanding as of the Closing Date or
thereafter at any time existing, together with all LHO Loan Collateral
therefor.
The Borrower covenants that none of the capital stock to be pledged in
accordance with this Section 7.1 shall be subject to any transfer restrictions,
-----------
shareholders' agreement or other restriction except for such restrictions under
Applicable Laws and such restrictions, if any, as may be reasonably acceptable
to the Administrative Agent. In connection with and in addition to the
foregoing, the Borrower and its Subsidiaries shall execute and/or deliver such
Security Documents and further agreements, documents and instruments (including,
without limitation, the LHO Loan notes, stock certificates, stock powers,
endorsements, collateral assignments, and financing statements) as the
Administrative Agent may reasonably request in order for it to obtain and
maintain the perfected, first priority Liens to be granted in accordance with
this Section 7.1.
-----------
Section 7.2 Guaranties. Each Subsidiary of the Borrower, other than CAB and
----------
ITC, in existence on the Closing Date shall guarantee payment and performance of
the Obligations pursuant to the Subsidiary Guaranty.
Section 7.3 New Subsidiaries, New Issuances of Capital Stock.
------------------------------------------------
Contemporaneously with the creation or acquisition of any Subsidiary of the
Borrower after the Closing Date, the Borrower shall, and shall cause each of its
Subsidiaries to:
(a) grant or cause to be granted to the Administrative Agent, for
the benefit of the Administrative Agent and the Lenders, a perfected, first
priority security interest in all capital stock or other ownership
interests in or indebtedness of such Subsidiary owned by the Borrower or
any Subsidiary of the Borrower (to the extent such capital stock or other
ownership interests or indebtedness are already not so pledged to the
Administrative Agent and the creation of a Lien thereon is not prohibited
by Applicable Law); and
CREDIT AGREEMENT - Page 40
<PAGE>
(b) cause each such Subsidiary to guarantee the payment and
performance of the Obligations by executing and delivering to the
Administrative Agent an appropriate Guaranty.
Contemporaneously with the issuance of any additional capital stock of any of
the Subsidiaries of the Borrower after the Closing Date, the Borrower shall, and
shall cause each of its Subsidiaries and other appropriate Persons (as
applicable) to, grant or cause to be granted to the Administrative Agent, for
the benefit of the Administrative Agent and the Lenders, a perfected, first
priority security interest in all capital stock or other ownership interests in
such Subsidiary owned by any shareholder of any Subsidiary of the Borrower, the
Borrower or any Subsidiary of the Borrower (to the extent such capital stock or
other ownership interests are already not so pledged to the Administrative
Agent). The Borrower covenants that none of the capital stock to be pledged in
accordance with this Section 7.3 shall be subject to any transfer restriction,
-----------
shareholders' agreement or other restriction except for such restrictions under
Applicable Laws and such restrictions, if any, as may be reasonably acceptable
to the Administrative Agent. In connection with and in addition to the
foregoing, the Borrower and its Subsidiaries shall execute and/or deliver such
further agreements, documents and instruments (including, without limitation,
the LHO Loan notes, stock certificates, stock powers, endorsements, collateral
assignments, and financing statements) as the Administrative Agent may
reasonably request in order for it to obtain and maintain the perfected, first
priority Liens to be granted in accordance with this Section 7.3.
-----------
Section 7.4 Release of Collateral. Upon any sale, transfer or other
---------------------
disposition of Collateral that is expressly permitted under Section 11.8 and
------------
upon five Business Days prior written request by the Borrower, the
Administrative Agent shall execute at the Borrower's expense such documents as
may be necessary to evidence the release by the Administrative Agent of its
Liens on such Collateral being sold, transferred or otherwise disposed of;
provided, however, that (a) the Administrative Agent shall not be required to
- -------- -------
release any Lien on any Collateral if a Default shall have occurred and be
continuing, (b) the Administrative Agent shall not be required to execute any
such document on terms which, in the Administrative Agent's opinion, would
expose the Administrative Agent to liability or create any obligation not
reimbursed by the Borrower or entail any consequences other than the release of
such Lien without recourse or warranty, and (c) such release shall not in any
manner discharge, affect or impair any of the Obligations or any of the
Administrative Agent's Liens on any Collateral retained by the Borrower or any
of its Subsidiaries, including, without limitation, its Liens on the proceeds of
any such sale, transfer or other disposition.
Section 7.5 Setoff. If an Event of Default shall have occurred and be
------
continuing, each Lender is hereby authorized at any time and from time to time,
without notice to the Borrower or any other Person (any such notice being hereby
expressly waived by the Borrower and the other Loan Parties), to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by such Lender
to or for the credit or the account of the Borrower or any other Loan Party
against any and all of the Obligations of the Borrower or such other Loan Party
now or hereafter existing under this Agreement, any of such Lender's Notes or
any other Loan Document, irrespective of whether or not the Administrative Agent
or such Lender shall have made any demand under this Agreement, any of such
Lender's Note or any such other Loan Document and although such Obligations may
be unmatured. Each Lender
CREDIT AGREEMENT - Page 41
<PAGE>
agrees promptly to notify the Borrower (with a copy to the Administrative Agent)
after any such setoff and application, provided that the failure to give such
--------
notice shall not affect the validity of such setoff and application. The rights
and remedies of each Lender hereunder are in addition to other rights and
remedies (including, without limitation, other rights of setoff) which such
Lender may have.
Section 7.6 Collection of Receivables and other Collateral Proceeds.
--------------------------------------------------------
(a) The Borrower will cause all monies, checks, notes, drafts and
other payments relating to or constituting proceeds of trade accounts
receivable or other Collateral to be forwarded to a Lockbox for deposit in
an Agency Account in accordance with the procedures set out in the
corresponding Agency Account Agreement. The Borrower will promptly cause
all monies, checks, notes, drafts and other payments relating to or
constituting proceeds of other receivables, of any other Collateral and of
any trade accounts receivable that are not forwarded to a Lockbox, to be
transferred to or deposited in an Agency Account. In particular, the
Borrower will:
(i) advise each account debtor on accounts receivable to
address all remittances with respect to amounts payable on account
thereof to a specified Lockbox;
(ii) advise each other account debtor that makes payment to the
Borrower by wire transfer, automated clearinghouse transfer or similar
means to make payment directly to an Agency Account; and
(iii) stamp or otherwise mark all invoices relating to accounts
receivable with a legend satisfactory to the Administrative Agent
indicating that payment is to be made to the Borrower via a specified
Lockbox.
(b) At the request of the Administrative Agent upon the occurrence
and during the continuance of a Default, the Borrower and the Administrative
Agent shall cause all collected balances in each Agency Account to be
transmitted daily by wire transfer, depository transfer check or other means in
accordance with the procedures set forth in the corresponding Agency Account
Agreement, to the Administrative Agent at its Principal Office:
(i) for application, on account of the Obligations, as provided
in Section 2.3 and Section 13.2, such credits to be entered as of the
------- --- ------------
Business Day they are received if they are received prior to 1:30 p.m.
(Dallas, Texas time); and
(ii) with respect to the balance, so long as no Event of Default
has occurred and is continuing, for transfer by wire transfer or
depository transfer check to a disbursement account of the Borrower.
CREDIT AGREEMENT - Page 42
<PAGE>
(c) Any monies, checks, notes, drafts or other payments referred to
in subsection (a) of this Section 7.6 which, notwithstanding the terms of
-------------- -----------
such subsection, are received by or on behalf of the Borrower will be held
in trust for the Administrative Agent and will be delivered to the
Administrative Agent or a Clearing Bank, as promptly as possible, in the
exact form received, together with any necessary endorsements for
application by the Administrative Agent directly to the Secured Obligations
or, if applicable, for deposit in the Agency Account maintained with a
Clearing Bank and processing in accordance with the terms of this Agreement
and the corresponding Agency Account Agreement.
ARTICLE 8
Conditions Precedent
--------------------
Section 8.1 Initial Loan and Letter of Credit. The obligation of each
---------------------------------
Lender to make its initial Loan and the obligation of the Administrative Agent
to issue the initial Letters of Credit (including any thereof issued in
replacement for or as backing to Existing Letters of Credit) are subject to the
following conditions precedent:
(a) Deliveries. The Administrative Agent shall have received on or
----------
before the Closing Date and on or before the day of any such Loan or Letter
of Credit all of the following, each dated (unless otherwise indicated) the
Closing Date, in form and substance satisfactory to the Administrative
Agent:
(i) Resolutions; Authority. Resolutions of the Board of
----------------------
Directors of each Loan Party certified by its Secretary or an
Assistant Secretary which authorize its execution, delivery, and
performance of the Transaction Documents to which it is or is to be a
party.
(ii) Incumbency Certificate. A certificate of incumbency
----------------------
certified by the Secretary or an Assistant Secretary of each Loan
Party certifying the names of its officers (A) who are authorized to
sign the Transaction Documents to which it is or is to be a party
(including the certificates contemplated herein) together with
specimen signatures of each such officer and (B) who will, until
replaced by other officers duly authorized for that purpose, act as
its representative for the purposes of signing documentation and
giving notices and other communications in connection with this
Agreement and the transactions contemplated hereby.
(iii) Organizational Documents. The articles of incorporation of
------------------------
each Loan Party certified by the Secretary of State of the state of
its incorporation and dated a current date.
(iv) Bylaws. The bylaws of each Loan Party certified by its
------
Secretary or an Assistant Secretary.
CREDIT AGREEMENT - Page 43
<PAGE>
(v) Governmental Certificates. Certificates of the appropriate
-------------------------
government officials of the state of incorporation of each Loan Party as to
its existence and, to the extent applicable, good standing and certificates
of the appropriate government officials of each state in which each Loan
Party's principal business office is located, as to each Loan Party's
qualification to do business and good standing in such state, all dated a
current date.
(vi) Notes. The Notes executed by the Borrower dated the date
-----
hereof.
(vii) Guaranties. The Guaranties executed by each Domestic
----------
Subsidiary of the Borrower (other than CAB and ITC).
(viii) Lien Search Reports. UCC, tax and judgment Lien search reports
-------------------
listing all documentation on file against the Borrower and the Subsidiaries
in the central filing locations of each jurisdiction in which any such
party's principal business office is located and in the local filing
offices of each jurisdiction in which such principal business office is
located.
(ix) Termination of Liens. Duly executed UCC-3 termination
--------------------
statements, mortgage releases and such other documentation as shall be
necessary to terminate or release all Liens other than those permitted by
Section 11.2 hereof.
------------
(x) Pledge and Security Agreements. Pledge and Security Agreements
------------------------------
executed by the Borrower and each of its Subsidiaries (other than CAB and
ITC);
(xi) Stock Certificates; Notes. The stock certificates representing
all of the issued and outstanding capital stock of each of the Subsidiaries
of the Borrower and representing all of the capital stock of ICII required
to be pledged in accordance with 7.1(a)(iii), in each case accompanied by
appropriate instruments of transfer or stock powers signed in blank (as
appropriate), and all promissory notes evidencing LHO Loans, accompanied by
appropriate endorsements thereto and collateral assignments of the LHO Loan
Collateral, executed by the holder(s) of such promissory notes to and in
favor of the Administrative Agent;
(xii) Financing Statements. Financing statements and all other
--------------------
requisite filing documents executed by the Loan Parties necessary to
perfect the Liens created pursuant to the Security Documents;
(xiii) Solvency Certificate; Contribution Agreement. Certification
--------------------------------------------
from the Chief Executive Officer and the Chief Financial Officer of the
Borrower, demonstrating that, concurrently with and after giving effect to
the Loans and the Related Transactions, each of the Borrower and each of
its Subsidiaries is Solvent on a consolidated and consolidating basis;
CREDIT AGREEMENT-Page 44
<PAGE>
(xiv) Form 10; Tax Ruling Consents. Copies of the final Form 10 and
----------------------------
the final Tax Ruling and of all material consents or waivers (other than
consents or waivers previously delivered to the Administrative Agent and
certified by a Loan Party as being true and correct copies) necessary for
the execution, delivery and performance by each of the Loan Parties of the
Loan Documents and the Related Transactions to which it is a party, as the
Administrative Agent may require, which consents shall be certified by a
Responsible Officer of the applicable Loan Party as true and correct copies
of such consents as of the Closing Date;
(xv) Permits. Copies of all material Permits (other than Permits
-------
previously delivered to the Administrative Agent and certified by a Loan
Party as being true and correct copies) affecting the Borrower or any of
its Subsidiaries in connection with its businesses or any of the Properties
owned or leased by it, and evidence satisfactory to the Administrative
Agent that the Borrower and its Subsidiaries are able to conduct their
businesses with the use of such permits in full force and effect;
(xvi) Insurance Policies. Certificates of insurance summarizing the
------------------
insurance policies of the Borrower and the Subsidiaries required by this
Agreement and reflecting the Administrative Agent as additional insured
under such policies, together with proof of Federal Deposit Insurance
Company insurance coverage for CAB;
(xvii) Opinion of Counsel. Opinions of legal counsel to the Borrower
------------------
and the Subsidiaries from such jurisdictions and as to such matters as the
Administrative Agent may reasonably request, including, without limitation,
as to perfection and priority of the Administrative Agent's Lien on the
Collateral for the benefit of the Lenders (including, without limitation,
that a pledge of LHO Loan notes is effective to entitle the pledgee to the
benefits of the collateral securing such notes), as to exemption from the
registration requirement of the Investment Company Act of 1940, as to the
enforceability and effectiveness of the ICII Anti-Dilution and Dilution
Event Notice Agreement and the Lock-Up Agreement and as to the tacking by
IFG of IB's holding period for ICII stock, together with an opinion of
counsel to ICII as to exemption of ICII from the registration requirements
of the Investment Company Act of 1940;
(xviii) Certain Fees. The fees set forth in those certain letters
------------
dated August 18, 1998, from NationsBank and NationsBanc Montgomery
Securities LLC to the Borrower, as the same may be amended from time to
time.
(xix) Transaction Documents. Copies of the executed Distribution
---------------------
Documents, including, without limitation, the approvals, consents and the
other documentation required to be delivered under the terms thereof. All
certificates and opinions (if any) delivered in connection with such
Transaction Documents shall be addressed to the Administrative Agent and
Lenders or accompanied by a written authorization from the Person
delivering such certificate or opinion stating that the
CREDIT AGREEMENT-Page 45
<PAGE>
Administrative Agent and the Lenders may rely on such document as though it
were addressed to it.
(xx) Employment Agreements and Life Insurance. Copies of all
----------------------------------------
employment contracts or other compensation arrangements between the
Borrower or any of its Subsidiaries and their respective executive
officers.
(xxi) Letter of Direction: Escrow Agreement. A letter of direction
-------------------------------------
from the Borrower addressed to the Administrative Agent with respect to the
disbursement of the proceeds of the Loans, together with an escrow letter
agreement from IB in the event that the initial Loan is delivered in escrow
(prior to consummation of the Distribution) to a deposit account maintained
by NationsBank subject to direction of the Administrative Agent.
(xxii) Borrowing Base Certificate; Pro Forma Balance Sheet and
-------------------------------------------------------
Calculations; Compliance Certificate. A Borrowing Base Certificate
------------------------------------
calculating the Borrowing Base as of the Closing Date, the Pro Forma
Balance Sheet and Calculations, and a Compliance Certificate demonstrating
compliance with Article 12.
----------
(xxiii) Financial Statements. The Combined Financial Statements of
--------------------
the Borrower and its Subsidiaries for the fiscal years ended December 31 in
each of 1996 and 1997, including balance sheets, income and cash flow
statements audited by independent public accountants of recognized national
standing and prepared in conformity with GAAP in form acceptable to the
Administrative Agent.
(xxiv) Underwriting Standards. Copies of LHO's and CAB's loan
----------------------
underwriting standards (other than small business administration or other
governmental guidelines or manuals), servicing procedures and credit
policies as in effect on the Closing Date consistent with historical
practices.
(b) Attorneys' Fees and Expenses. The costs and expenses (including
----------------------------
attorneys' fees) referred to in Section 15.1 hereof for which statements have
------------
been presented shall have been paid in full;
(c) Consummation of Distribution. The Distribution shall have been, or
----------------------------
shall be, consummated on or before the Closing Date pursuant to and
substantially as described in the Distribution Documents and the Tax Ruling and
in compliance with all applicable law and regulatory approvals;
(d) Payment of Existing Indebtedness; Cancellation of CAB Facility. The
--------------------------------------------------------------
Existing Indebtedness shall be paid or satisfied in full utilizing the proceeds
of the initial Loans to be made under this Agreement and the loan facility
evidenced by the $30,000,000 Promissory Note dated May 29, 1998, from IB and CAB
to NationsBank shall be paid and
CREDIT AGREEMENT - Page 46
<PAGE>
satisfied in full and all obligations of NationsBank to make any loans or
advances in respect thereof shall have been cancelled;
(e) Government Approvals. All approvals necessary to the Distribution
--------------------
and the other transactions contemplated by the Distribution Documents shall
have been obtained or the waiting period thereunder shall have expired
without adverse action and all other required consents or requirements of
any Governmental Authority shall have been obtained or complied with;
(f) Compliance with Laws. As of the Closing Date, each Person that is
--------------------
a party to this Agreement, any of the other Loan Documents or any of the
Related Transactions shall have complied with all Governmental Requirements
necessary to consummate the transactions contemplated by this Agreement,
the other Loan Documents and such Related Transactions;
(g) No Prohibitions. No Governmental Requirement shall prohibit the
---------------
consummation of the transactions contemplated by this Agreement, any other
Loan Document or any Related Transactions, and no order, judgment or decree
of any Governmental Authority or arbitrator shall, and no litigation or
other proceeding shall be pending or threatened which would, enjoin,
prohibit, restrain or otherwise adversely affect in any material manner the
consummation of the transactions contemplated by this Agreement, the other
Loan Documents and such Related Transactions or otherwise have a Material
Adverse Effect on the Borrower or any other Loan Party;
(h) No Material Adverse Change. As of the Closing Date, no amendment
--------------------------
to or other change not approved by the Administrative Agent to the Form 10
shall have occurred after the Agreement Date and no material adverse change
shall have occurred with respect to the condition (financial or otherwise),
results of operations, business, operations, capitalization, assets,
liabilities or prospects of the Borrower or any of its Subsidiaries since
December 31, 1997, and the Administrative Agent shall be satisfied that the
economic performance of the Borrower and each of its Subsidiaries to the
Closing Date is not materially different from the economic projections for
the Borrower and each of its Subsidiaries through the Closing Date that
were previously submitted to the Administrative Agent;
(i) No Material Litigation. As of the Closing Date, no action, suit,
----------------------
investigation or proceeding shall be pending or threatened before any
court, arbitrator or any Governmental Authority that purports to affect the
Borrower, IFG or the Subsidiaries of the Borrower or IFG or any transaction
contemplated by the Transaction Documents that could result in a Material
Adverse Effect as to any of them or that could have an adverse effect on
the ability of the Borrower, IFG or any Subsidiary of the Borrower or IFG
to perform their Obligations under the Loan Documents;
(j) Compliance With Financial Obligations. As of the Closing Date,
-------------------------------------
and after giving effect to the Disposition, each of the Borrower, IFG and
the Subsidiaries of the
CREDIT AGREEMENT - Page 47
<PAGE>
Borrower and IFG shall be in compliance with all of their respective
existing financial obligations;
(k) Financial Markets. As of the Closing Date, there shall not have
-----------------
occurred any disruptive or adverse change in the financial or capital
markets generally which the Administrative Agent in their sole reasonable
discretion, deems material in connection with the syndication of the Loans;
(l) Due Diligence. Completion of the Administrative Agent's due
-------------
diligence review of the Borrower and its Subsidiaries in scope and
substance satisfactory to the Administrative Agent in its sole discretion
and receipt and review, in connection therewith with results satisfactory
to the Administrative Agent and its counsel, of information regarding
litigation, tax, accounting, labor, insurance, pension liabilities (actual
or contingent), real estate leases, material contracts, debt agreements,
property ownership, and contingent liabilities of the Borrower and its
Subsidiaries;
(m) Lock-Up Agreement. The Borrower shall have entered into the
-----------------
Lock-Up Agreement satisfactory to the Administrative Agent in its absolute
discretion giving the Borrower voting control of such number of shares of
ICII common stock as is necessary so that, together with the shares of
common stock of ICII owned by the Borrower, the Borrower shall have
absolute voting control of no less than twenty-six percent (26%) of the
voting equity interests in ICII for a period of no less than twenty-nine
(29) months from and after the Closing Date.
(n) Collection Procedures. The Lockbox, Lockbox Agreement, Agency
---------------------
Account and Agency Account Agreement arrangements contemplated by
Section 7.6 shall have been established and shall be in full force and
-----------
effect.
(o) Additional Documentation. The Administrative Agent shall have
------------------------
received such additional approvals, opinions, or other documentation as the
Administrative Agent may reasonably request.
Section 8.2 All Loans and Letters of Credit. The obligation of each
-------------------------------
Lender to make any Loan (including the initial Loan) and the obligation of the
Administrative Agent to issue any Letter of Credit (including any initial Letter
of Credit) are subject to the following additional conditions precedent:
(a) No Default. No Default shall have occurred and be continuing, or
----------
would result from such Loan or Letter of Credit;
(b) Representations and Warranties. All of the representations and
------------------------------
warranties contained in Article 9 hereof and in the other Loan Documents
----------
shall be true and correct in all material respects on and as of the date of
such Loan or Letter of Credit with the same force and effect as if such
representations and warranties had been made on and as of such
CREDIT AGREEMENT - Page 48
<PAGE>
date except to the extent that such representations and warranties relate
specifically to another date; and
(c) Borrowing Base Certificate. Delivery of a Borrowing Base
--------------------------
Certificate calculating the Borrowing Base as of the date of such Loan.
Each notice of borrowing by the Borrower hereunder, and each request for the
issuance of a Letter of Credit, shall constitute a representation and warranty
by the Borrower that the conditions precedent set forth in Subsections 8.2(a)
------------------
and 8.2(b) hereof have been satisfied (both as of the date of such notice and,
------
unless the Borrower otherwise notifies the Administrative Agent prior to the
date of such borrowing or Letter of Credit, as of the date of such borrowing or
Letter of Credit).
ARTICLE 9
Representations and Warranties
------------------------------
To induce the Administrative Agent and the Lenders to enter into this
Agreement, the Borrower represents and warrants to the Administrative Agent and
the Lenders that the following statements are, and, after giving effect to the
Related Transactions, will be true, correct and complete effective upon
consummation of the Distribution and the substitution of IFG as the Borrower:
Section 9.1 Corporate Existence. The Borrower and each Subsidiary is
-------------------
(a) a corporation duly organized, validly existing, and in good standing under
the laws of the jurisdiction of its incorporation; (b) has all requisite power
and authority to own its assets and carry on its business as now being or as
proposed to be conducted; and (c) is qualified to do business in all
jurisdictions in which the nature of its business makes such qualification
necessary and where failure to so qualify would have a Material Adverse Effect.
Each Loan Party has the power and authority to execute, deliver, and perform its
respective obligations under the Transaction Documents to which it is or may
become a party.
Section 9.2 Financial Condition.
-------------------
(a) Financial Statements. The Borrower has delivered to the
--------------------
Administrative Agent the audited combined financial statements for the
Borrower as of, and for the each of the fiscal year periods ending,
respectively, December 31, 1995 (other than a balance sheet), December 31,
1996 and December 31, 1997 (the "Audited Statements"). All combined
------------------
financial statements concerning the Borrower and its Subsidiaries have been
prepared in accordance with GAAP, and present fairly, the financial
condition of the Borrower and its Subsidiaries, as of the respective dates
indicated therein and the results of operations for the respective periods
indicated therein. Neither the Borrower nor any of its Subsidiaries has any
material contingent liabilities, liabilities for taxes, unusual forward or
long-term commitments, or unrealized or anticipated losses from any
unfavorable commitments except as referred to or reflected in such
financial statements. There has been no Material Adverse Effect in respect
of the Borrower since the effective date of the Audited Statements.
CREDIT AGREEMENT - Page 49
<PAGE>
(b) Projections. The Projections delivered to the
-----------
Administrative Agent have been and will be prepared by the Borrower in
light of the past operation of the business of the Borrower and its
Subsidiaries. The Projections represent, as of the date thereof, a
good faith estimate by the Borrower and its senior management of the
financial conditions and performance of the Borrower and its
Subsidiaries based on assumptions believed to be reasonable at the
time made.
Section 9.3 Corporate Action; No Breach. The execution, delivery, and
---------------------------
performance by each Loan Party of the Transaction Documents to which each is or
may become a party and compliance with the terms and provisions hereof and
thereof have been duly authorized by all requisite action on the part of each
Loan Party and do not and will not (a) violate or conflict with, or result in a
breach of, or require any consent under (i) the articles of incorporation,
partnership agreements or bylaws of any Loan Party, (ii) any applicable law,
rule, or regulation or any order, writ, injunction, or decree of any
Governmental Authority or arbitrator, or (iii) any agreement or instrument to
which any Loan Party is a party or by which any of them or any of their property
is bound or subject, or (b) constitute a default under any such agreement or
instrument, or result in the creation or imposition of any Lien upon any of the
revenues or assets of any Loan Party.
Section 9.4 Operation of Business. The Borrower and each of the
---------------------
Subsidiaries possess all licenses, permits, franchises, patents, copyrights,
trademarks, and tradenames, or rights thereto, necessary to conduct their
respective businesses substantially as now conducted and as presently proposed
to be conducted, and the Borrower and each of the Subsidiaries are not in
violation of any valid rights of others with respect to any of the foregoing
where such violation could reasonably be expected to have a Material Adverse
Effect.
Section 9.5 Litigation and Judgments. Except as set forth in Schedule
------------------------ --------
9.5, to the Borrower's knowledge there is no action, suit, investigation, or
- ---
proceeding before or by any Governmental Authority or arbitrator pending or
threatened against or affecting (a) the Borrower or any Subsidiary or (b) any of
the Related Transactions which could reasonably be expected to have a Material
Adverse Effect. As of the Closing Date, except as set forth in Schedule 9.5,
------------
there are no outstanding judgments against the Borrower or any of its
Subsidiaries.
Section 9.6 Rights in Properties; Liens. The Borrower and each
---------------------------
Subsidiary have good title to or valid leasehold interests in their respective
properties and assets, real and personal, including, as of the Closing Date,
the properties, assets, and leasehold interests reflected in the financial
statements described in Section 9.2 hereto, and none of such properties, assets,
-----------
or leasehold interests of the Borrower or any Subsidiary is subject to any Lien,
except as permitted by Section 11.2 hereto. Except as disclosed on Schedule
------------ --------
9.6(a), as of the Closing Date, neither the Borrower nor any of its Subsidiaries
- ------
owns any material right, title or interest in any real Properties. Except as
disclosed on Schedule 9.6(b), as of the Closing Date, neither the Borrower nor
---------------
any of its Subsidiaries owns any right, title or interest of a material nature
in Intellectual Property. As of the Closing Date, Schedule 9.6(c) sets forth the
---------------
locations of all of the offices and other places of business of the Borrower and
its Subsidiaries and the locations of all of the material Properties of the
Borrower and its Subsidiaries, as well as the identities of the Borrower and its
Subsidiaries who conduct business or own Properties at such locations and the
identities of the predecessor entities
CREDIT AGREEMENT - Page 50
<PAGE>
who previously conducted business or owned Properties at such locations and
whose capital stock or assets were acquired by the Borrower or its Subsidiaries.
The Lenders' Lien on the Collateral required by Article 7 constitutes a
---------
perfected first priority Lien subject only to Permitted Liens.
Section 9.7 Enforceability. The Loan Documents and the Transaction
--------------
Documents to which any Loan Party is a party, when delivered, shall constitute
the legal, valid, and binding obligations of the applicable Loan Party,
enforceable against the applicable Loan Party in accordance with their
respective terms, except as limited by bankruptcy, insolvency, or other laws of
general application relating to the enforcement of creditors' rights and general
principles of equity.
Section 9.8 Approvals. No authorization, approval, or consent of,
---------
and no filing or registration with, any Governmental Authority or third party is
or will be necessary for the execution, delivery, or performance by any Loan
Party of the Transaction Documents to which each is or may become a party or for
the validity or enforceability thereof except for such authorizations,
approvals, consents, filings and registrations which have been obtained and are
described in Form 10.
Section 9.9 Debt. Neither the Borrower nor any Subsidiary has any
----
Debt, except as permitted by Section 11.1 hereto.
------------
Section 9.10 Taxes. Except as disclosed in Form 10, the Borrower and
-----
each Subsidiary have filed all material tax returns (federal, state, and local)
required to be filed, including all material income, franchise, employment,
property, and sales tax returns, and have paid all of their respective material
liabilities for taxes, assessments, governmental charges, and other levies that
are due and payable other than those being contested in good faith by
appropriate proceedings diligently pursued for which adequate reserves have been
established in accordance with GAAP. Except as disclosed in Form 10, the
Borrower knows of no pending investigation of the Borrower or any Subsidiary by
any taxing authority with respect to any liability for tax or of any pending but
unassessed tax liability of the Borrower or any Subsidiary.
Section 9.11 Margin Securities. Neither the Borrower nor any
-----------------
Subsidiary (other than CAB) is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulations T, U, or X of the Board
of Governors of the Federal Reserve System), and no part of the proceeds of any
Loan will be used to purchase or carry any margin stock or to extend credit to
others for the purpose of purchasing or carrying margin stock.
Section 9.12 ERISA. The Borrower and each Subsidiary are in
-----
compliance with all applicable provisions of ERISA. Neither a Reportable Event
nor a Prohibited Transaction has occurred and is continuing with respect to any
Plan. No notice of intent to terminate a Plan has been filed, nor has any Plan
been terminated. No circumstances exist which constitute grounds entitling the
PBGC to institute proceedings to terminate, or appoint a trustee to administer,
a Plan, nor has the PBGC instituted any such proceedings. Neither the Borrower
nor any ERISA Affiliate has completely or partially withdrawn from a
Multiemployer Plan. The Borrower and each ERISA Affiliate have met their minimum
funding requirements under ERISA with respect to all of their Plans. The present
value of all vested benefits under each Plan do not exceed the fair market value
CREDIT AGREEMENT - Page 51
<PAGE>
of all Plan assets allocable to such benefits, as determined on the most recent
valuation date of the Plan and in accordance with ERISA. Neither the Borrower
nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA
(other than liability for the payment of PBGC premiums in the ordinary course of
business).
Section 9.13 Disclosure. All factual information furnished by or on
----------
behalf of the Borrower or any Subsidiary in writing to the Administrative Agent
or any Lender (including, without limitation, all information contained in the
Transaction Documents) for purposes of or in connection with this Agreement, the
other Transaction Documents or any transaction contemplated herein or therein
is, and all other such factual information hereafter furnished by or on behalf
of the Borrower or any Subsidiary to the Administrative Agent or any Lender, are
and will be true and accurate in all material respects on the date as of which
such information is dated or certified and not incomplete by omitting to state
any fact necessary to make such information not misleading in any material
respect at such time in light of the circumstances under which such information
was provided.
Section 9.14 Subsidiaries; Capitalization. As of the Closing Date and
----------------------------
after giving effect to the Related Transactions, the Borrower has no
Subsidiaries other than those listed in Section I of Schedule 9.14 hereto. As
-------------
of the Closing Date and after giving effect to the Related Transactions, Section
I of Schedule 9.14 sets forth the jurisdiction of incorporation or organization
-------------
of each Subsidiary, the percentage of the Borrower's or another Subsidiary's
ownership of the outstanding voting stock (or other ownership interests) of each
Subsidiary and the authorized, issued and outstanding capital stock (or other
ownership interests) of the Borrower and each Subsidiary. All of the
outstanding capital stock of the Borrower and each Subsidiary has been validly
issued, is fully paid, is nonassessable and has not been issued in violation of
any preemptive or similar rights. Except as disclosed in Section III of
Schedule 9.14, there are (a) no outstanding subscriptions, options, warrants,
- -------------
calls, or rights (including preemptive rights) to acquire, and no outstanding
securities or instruments convertible into, capital stock of the Borrower or any
Subsidiary, and (b) no shareholder agreements, voting trusts or similar
agreements in effect and binding on any shareholder of the Borrower or a
Subsidiary or the capital stock of the Borrower or a Subsidiary. All shares of
capital stock of the Borrower and each Subsidiary were issued in compliance with
all applicable state and federal securities laws.
Section 9.15 Agreements. Neither the Borrower nor any Subsidiary is
----------
a party to any indenture, loan, or credit agreement, or to any lease or other
agreement or instrument, or subject to any charter or corporate restriction that
could have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is
in default in any respect in the performance, observance, or fulfillment of any
of the obligations, covenants, or conditions contained in any agreement or
instrument to which it is a party where such default could reasonably be
expected to cause a Material Adverse Effect.
Section 9.16 Compliance with Laws. Neither the Borrower nor any
--------------------
Subsidiary is in violation of any law, rule, regulation, order, or decree of any
Governmental Authority or arbitrator except for unintentional violations which
could not reasonably be expected to have a Material Adverse Effect.
CREDIT AGREEMENT - Page 52
<PAGE>
Section 9.17 Investment Company Act. None of the Borrower, any
----------------------
Subsidiary or ICII is required to register as an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
Section 9.18 Public Utility Holding Company Act. Neither the Borrower
----------------------------------
nor any Subsidiary is a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company" or a "public utility"
within the meaning of the Public Utility Borrower Company Act of 1935, as
amended.
Section 9.19 Environmental Matters. Except as disclosed on Schedule
---------------------
9.19:
(a) The Borrower, each Subsidiary, and all of their respective
properties, assets, and operations are in strict compliance with all
Environmental Laws where the failure so to be could reasonably be
expected to have a Material Adverse Effect. The Borrower is not aware
of, nor has the Borrower received notice of, any past, present, or
future conditions, events, activities, practices, or incidents which
may interfere with or prevent the compliance or continued compliance
of the Borrower and its Subsidiaries with all Environmental Laws;
(b) The Borrower and each Subsidiary have obtained and
maintained, and are in material compliance with, all material permits,
licenses, and authorizations that are required under applicable
Environmental Laws;
(c) No Hazardous Materials exist on, about, or within or have
been used, generated, stored, transported, disposed of on, or Released
from any of the properties or assets of the Borrower or any Subsidiary
(other than lubricants, cleaning solutions and similar materials used
for maintenance in the ordinary course of business). The use which the
Borrower and the Subsidiaries make and intend to make of their
respective properties and assets will not result in the use,
generation, storage, transportation, accumulation, disposal, or
Release of any Hazardous Material on, in, or from any of their
properties or assets (other than lubricants, cleaning solutions and
similar materials used for maintenance in the ordinary course of
business);
(d) Neither the Borrower nor any of the Subsidiaries nor any of
their respective currently or previously owned or leased properties or
operations is subject to any outstanding or threatened order from or
agreement with any Governmental Authority or other Person or subject
to any judicial or administrative proceeding with respect to (i)
failure to comply with Environmental Laws, (ii) Remedial Action, or
(iii) any Environmental Liabilities arising from a Release or
threatened Release;
(e) There are no conditions or circumstances associated with the
currently or previously owned or leased properties or operations of
the Borrower or any of the Subsidiaries that could give rise to any
Environmental Liabilities that could reasonably be expected to have a
Material Adverse Effect;
(f) Neither the Borrower nor any of the Subsidiaries is a
treatment, storage, or disposal facility requiring a permit under the
Resource Conservation and Recovery Act, 42
CREDIT AGREEMENT - Page 53
<PAGE>
U.S.C. (S) 6901 et seq., regulations thereunder or any comparable provision
of state law. The Borrower and the Subsidiaries are in compliance with all
applicable financial responsibility requirements of all Environmental Laws;
(g) Neither the Borrower nor any of the Subsidiaries has filed
or failed to file any notice required under applicable Environmental Law
reporting an unauthorized Release; and
(h) No Lien of record arising under any Environmental Law has
attached to any property or revenues of the Borrower or the Subsidiaries.
Section 9.20 Transaction Documents. As of the Closing Date, the Borrower
---------------------
has delivered to the Administrative Agent a complete and correct copy of the
Transaction Documents, each such Transaction Document is in full force and
effect and no material term or condition thereof has been amended or otherwise
waived except for such amendments and waivers approved by the Administrative
Agent (which the Administrative Agent may give without the consent of the
Lenders), none of the parties thereto has failed to perform any material
obligation thereunder, and each of the representations and warranties given
therein is true and correct on and as of the Closing Date. The Distribution
will be completed in strict compliance with the Transaction Documents.
Section 9.21 Broker's Fees. Except as disclosed on Schedule 9.21, no
------------- -------------
broker's or finder's fee, commission or similar compensation will be payable
with respect to the Related Transactions by the Borrower or any Subsidiary.
Except as disclosed on Schedule 9.21, no other similar fees or commissions will
-------------
be payable by the Borrower or any Subsidiary for any other services rendered to
the Borrower or any Subsidiary ancillary to the Related Transaction.
Section 9.22 Employee Matters. As of the Closing Date, (a) neither the
----------------
Borrower nor any Subsidiary, nor any of their respective employees is subject to
any collective bargaining agreement, (b) no petition for certification or union
election is pending with respect to the employees of the Borrower or any
Subsidiary and no union or collective bargaining unit has sought such
certification or recognition with respect to the employees of the Borrower or
any Subsidiary and (c) there are no strikes, slowdowns, work stoppages or
controversies pending or, to the best knowledge of the Borrower after due
inquiry, threatened between the Borrower or any Subsidiary and its respective
employees.
Section 9.23 Solvency. As of and from and after the date of this
--------
Agreement and after giving effect to the consummation of the Related
Transactions, the Borrower and each of the Subsidiaries individually and on a
consolidated basis: (a) owns and will own assets the fair saleable value of
which are (i) greater than the total amount of liabilities (including contingent
liabilities) and (ii) greater than the amount that will be required to pay the
probable liabilities of its then existing debts as they become absolute and
matured considering all financing alternatives and potential asset sales
reasonably available to it; (b) has capital that is not unreasonably small in
relation to its business as presently conducted or any contemplated or
undertaken transaction; and (c) does not intend to incur and does not believe
that it will incur debts beyond its ability to pay such debts as they become
due.
Section 9.24 Year 2000 Compliance.
--------------------
CREDIT AGREEMENT - Page 54
<PAGE>
(a) The Borrower has (i) undertaken a detailed review and assessment of
all areas within the business and operations of it and its Subsidiaries that
could be adversely affected by the "Year 2000 Problem" (that is, the risk that
-----------------
computer applications used by the Borrower or its Subsidiaries may be unable to
recognize and perform properly date-sensitive functions involving certain dates
prior to and any date after December 31, 1999), (ii) developed a detailed plan
and timeline for addressing the Year 2000 Problem on a timely basis, and (iii)
to date, implemented that plan in accordance with that timetable. The Borrower
reasonably anticipates that all computer applications that are material to the
business and operations of it and its Subsidiaries will on a timely basis be
able to perform properly date-sensitive functions for all dates before and after
January 1, 2000 (that is, be "Year 2000 Compliant").
-------------------
(b) The Borrower has made inquiry of each of the key suppliers, vendors
and customers of it and its Subsidiaries as to whether such Persons will on a
timely basis be Year 2000 Compliant in all material respects and, on the basis
of that inquiry, believes that all such Persons will be so compliant. For
purposes hereof, "key suppliers, vendors and customers" refers to those
suppliers, vendors and customers of the Borrower and its Subsidiaries the
business failure of which would with reasonable probability be expected to have
a Material Adverse Effect.
ARTICLE 10
Positive Covenants
------------------
The Borrower covenants and agrees that, from and after the effectiveness of
the Distribution and as long as the Obligations or any part thereof are
outstanding or any Lender has any Commitment hereunder or any Letter of Credit
remains outstanding, it will perform and observe the following positive
covenants:
Section 10.1 Reporting Requirements. The Borrower will furnish to the
----------------------
Administrative Agent and each Lender:
(a) Annual Financial Statements. As soon as available, and in any
---------------------------
event within ninety (90) days after the end of each Fiscal Year of the
Borrower, beginning with the Fiscal Year ending December 31, 1998, (i) a
copy of the annual audited financial statements of the Borrower and its
Subsidiaries for such Fiscal Year containing, on a consolidated basis,
balance sheets and statements of income, shareholders' equity, and cash
flows as at the end of such Fiscal Year and for the Fiscal Year then ended,
in each case setting forth in comparative form the figures for the
preceding Fiscal Year, all in reasonable detail and audited on an
unqualified basis by independent certified public accountants of recognized
standing selected by the Borrower and reasonably acceptable to the
Administrative Agent, to the effect that such report has been prepared in
accordance with GAAP together with any management letter or other materials
delivered by such accountants; and (ii) a copy of the annual unaudited
report of the Borrower and its Subsidiaries for such Fiscal Year
containing, on a consolidating basis, balance sheets and statements of
income, as at the end of such Fiscal Year and for the Fiscal Year then
ended, in each case setting forth in comparative form
CREDIT AGREEMENT - Page 55
<PAGE>
the figures for the preceding Fiscal Year, and in reasonable detail
certified by the president, chief executive officer or chief financial
officer of the Borrower to have been prepared in accordance with GAAP and
to fairly present the financial condition and results of operation of the
Borrower and such significant business divisions, on a consolidating basis
at the date and for the Fiscal Year then ended;
(b) Quarterly Financial Statements. As soon as available, and in any
------------------------------
event within forty-five (45) days after the end of each of the first three
Fiscal Quarters beginning with the Fiscal Quarter ending March 31, 1998, a
copy of unaudited financial statements of the Borrower and its Subsidiaries
as of the end of such period and for the portion of the Fiscal Year then
ended containing, on a consolidated and consolidating basis, balance sheets
and statements of income, in each case setting forth in comparative form
the figures for the corresponding period of the preceding Fiscal Year, all
in reasonable detail certified by the president, chief executive officer or
chief financial officer of the Borrower to have been prepared in accordance
with GAAP and to fairly present the financial condition and results of
operations of the Borrower and its Subsidiaries on a consolidated and
consolidating basis, at the date and for the periods indicated therein,
subject to year-end audit adjustments;
(c) Compliance Certificate. As soon as available, and in any event
----------------------
within forty-five (45) days after the end of each of the first three Fiscal
Quarters and accompanying the annual financial statements delivered in
accordance with Subsection 10.1 (a), a Compliance Certificate, together
with schedules setting forth the calculations supporting the computations
therein;
(d) Notice of Litigation. Promptly after receipt by the Borrower or
--------------------
any Subsidiary of notice of the commencement thereof, notice of all
actions, suits, and proceedings before any Governmental Authority or
arbitrator affecting the Borrower or any Subsidiary which, if determined
adversely to the Borrower or such Subsidiary, could reasonably be expected
to have a Material Adverse Effect;
(e) Notice of Default or Early Termination Event. As soon as possible
--------------------------------------------
and in any event within two (2) Business Days after the chief executive
officer, president, chief financial officer, any vice president, secretary,
assistant secretary, treasurer or any assistant treasurer of the Borrower
has knowledge of the occurrence of a Default or an Early Termination Event,
a written notice setting forth the details of such Default or Early
Termination Event and the action that the Borrower has taken and proposes
to take with respect thereto;
(f) ERISA Reports. Promptly after the filing or receipt thereof,
-------------
copies of all reports, including annual reports, and notices which the
Borrower or any Subsidiary files with or receives from the PBGC or the U.S.
Department of Labor under ERISA; and as soon as possible and in any event
within two (2) Business Days after the Borrower or any Subsidiary knows or
has reason to know that any Reportable Event or Prohibited Transaction has
occurred with respect to any Plan or that the PBGC or the Borrower or any
Subsidiary has instituted or will institute proceedings under Title IV of
ERISA to terminate any Plan, a certificate of the chief financial officer
of the Borrower setting forth the details as to such
CREDIT AGREEMENT - Page 56
<PAGE>
Reportable Event or Prohibited Transaction or Plan termination and the
action that the Borrower proposes to take with respect thereto;
(g) Notice of Material Adverse Effect. As soon as possible and in
---------------------------------
any event within two (2) Business Days of the discovery of any event or
condition that could reasonably be expected to have a Material Adverse
Effect with respect to the Borrower or any Loan Party or CAB, written
notice thereof ;
(h) Proxy Statements, Etc. As soon as available, one copy of each
---------------------
financial statement, report, notice or proxy statement sent by the Borrower
or any Subsidiary to its stockholders generally and one copy of each
regular, periodic or special report, registration statement, or prospectus
filed by the Borrower or any Subsidiary with any securities exchange or the
Securities and Exchange Commission or any successor agency;
(i) Borrowing Base Certificate. After the Closing Date, the
Borrower shall deliver to the Administrative Agent on the first Business
Day of each week and concurrently with any sale of a Permitted
Participation, a Borrowing Base Certificate prepared as of the close of
business on the last Business Day of the previous week in form acceptable
to the Administrative Agent. The Borrower shall also deliver to the
Administrative Agent a Borrowing Base Certificate, prepared as of the date
of delivery, on the date each Loan is made and on any date that the current
market value (determined based upon the most recent closing bid price) of
the shares of common stock of ICII that are owned of record by the Borrower
have reduced by fifteen percent (15%) or more from the market value thereof
as most recently reported in a Borrowing Base Certificate delivered
pursuant to this Section 10.1(i).
---------------
(j) General Information. Promptly, such other information
-------------------
concerning the Borrower, any Subsidiary, and any Approved Bonding Company
as the Administrative Agent or any Lender may from time to time reasonably
request.
Section 10.2 Maintenance of Existence; Conduct of Business; AFMA
---------------------------------------------------
Membership; Deposit Insurance. Except as permitted by Section 10.3, the Borrower
- -----------------------------
will, and will cause each Subsidiary to, preserve and maintain its corporate
existence and all of its leases, privileges, licenses, permits, franchises,
qualifications, and rights that are necessary in the ordinary conduct of its
business. The Borrower will, and will cause each Subsidiary to, conduct its
business in an orderly and efficient manner in accordance with good business
practices. The Borrower will preserve and maintain its membership with full
privileges in the American Film Marketing Association. The Borrower shall at all
times cause CAB to maintain Deposit insurance coverage from the Federal Deposit
Insurance Company.
Section 10.3 Maintenance of Properties. The Borrower will, and will cause
-------------------------
each Subsidiary to, maintain, keep, and preserve all of its material properties
necessary in the conduct of its business in good working order and condition,
ordinary wear and tear excepted.
CREDIT AGREEMENT - Page 57
<PAGE>
Section 10.4 Taxes and Claims. The Borrower will, and will cause each
----------------
Subsidiary to, pay or discharge at or before maturity or before becoming
delinquent (a) all taxes, levies, assessments, and governmental charges imposed
on it or its income or profits or any of its property, and (b) all lawful claims
for labor, material, and supplies, which, if unpaid, might become a Lien upon
any of its property; provided, however, that neither the Borrower nor any
Subsidiary shall be required to pay or discharge any tax, levy, assessment, or
governmental charge (i) which is being contested in good faith by appropriate
proceedings diligently pursued, and for which adequate reserves in accordance
with GAAP have been established or (ii) if the failure to pay the same would not
result in a Lien on the property of the Borrower or any Subsidiary. The Borrower
will take all actions necessary to cause the Distribution to be completed as a
tax-free transaction as contemplated by the Tax Ruling.
Section 10.5 Insurance. Each of the Loan Parties will, and will cause
---------
each of its Subsidiaries to, keep insured by financially sound and reputable
insurers all property of a character usually insured by responsible corporations
engaged in the same or a similar business similarly situated against loss or
damage of the kinds and in the amounts customarily insured against by such
corporations or entities (with customary deductibles and self-insurance) and
carry such other insurance as is usually carried by such corporations or
entities.
Such insurance shall be written by financially responsible companies
selected by the Borrower that either (i) have an A.M. Best Rating of "A" or
better and are in a financial size category of "VI" or larger, or (ii) are
reasonably acceptable to the Administrative Agent (including LLOYD'S, 1 Lime
Street, London, England EC3M 7HA). Each policy referred to in this Section 10.5
------------
shall provide that it will not be canceled, amended or reduced except after not
less than thirty (30) days' prior written notice to the Administrative Agent and
shall also provide that the interests of the Administrative Agent and the
Lenders shall not be invalidated or reduced by any act, omission or negligence
of the Borrower or any of its Subsidiaries. The Borrower will advise the
Administrative Agent promptly of any policy cancellation, reduction or
amendment. For purposes hereof, the term "Peril" shall mean, collectively,
-----
fire, lightning, flood, windstorm, hail, explosion, riot and civil commotion,
vandalism and malicious mischief, damage from aircraft, vehicles and smoke and
other perils covered by the "all-risk" endorsement then in use in the
jurisdictions where the Properties of the Borrower and its Subsidiaries are
located.
(b) The Borrower will cause each insurance recovery (other than any
portion of an insurance recovery payable to a landlord to repair or replace
Property leased by the Borrower or any of its Subsidiaries) payable by any
insurance company to be deposited promptly with the Administrative Agent as
security for the Obligations if a Default has then occurred and is continuing.
(c) If a Default shall have occurred and be continuing, the Borrower
will cause all proceeds of insurance paid on account of the loss of or damage to
any Property of the Borrower or any of its Subsidiaries and all awards of
compensation for any Property of the Borrower or any of its Subsidiaries taken
by condemnation or eminent domain to be paid directly to the Administrative
Agent to be applied against or held as security for the Obligations, at the
election of the Administrative Agent and the Required Lenders.
CREDIT AGREEMENT - Page 58
<PAGE>
Section 10.6 Inspection Rights. Each of the Loan Parties will, and will
-----------------
cause each of its Subsidiaries to, permit representatives and agents of the
Administrative Agent and each Lender, during normal business hours and upon
reasonable notice to the Borrower, to examine, copy and make extracts from its
books and records, to visit and inspect its Properties and to discuss its
business, operations and financial condition with its officers and independent
certified public accountants. The Borrower will authorize its accountants in
writing (with a copy to the Administrative Agent) to comply with this Section
10.6. The Administrative Agent or its representatives may, at any time and from
time to time at the Borrower's expense, conduct field exams for such purposes as
the Administrative Agent may reasonably request.
Section 10.7 Keeping Books and Records. The Borrower will, and will cause
-------------------------
each Subsidiary to, maintain proper books of record and account in which full,
true, and correct entries in conformity with GAAP shall be made of all dealings
and transactions in relation to its business and activities.
Section 10.8 Compliance with Laws. The Borrower will, and will cause each
--------------------
Subsidiary to, comply in all material respects with all applicable laws
(including, without limitation, all Environmental Laws and the Investment
Company Act of 1940), rules, regulations, orders, and decrees of a material
nature of any Governmental Authority or arbitrator other than any such laws,
rules, regulations, orders, and decrees contested by appropriate actions or
proceedings diligently pursued, if adequate reserves in conformity with GAAP.
Section 10.9 Compliance with Agreements. The Borrower will, and will cause
--------------------------
each Subsidiary to, comply with all agreements, contracts, and instruments
binding on it or affecting its properties or business other than such
noncompliance which could not reasonably be expected to have a Material Adverse
Effect.
Section 10.10 Further Assurances.
------------------
(a) Further Assurance. The Borrower will, and will cause each
-----------------
Subsidiary to, execute and deliver pursuant to this clause (a) such further
documentation and take such further action as may be reasonably requested
by the Administrative Agent to carry out the provisions and purposes of the
Loan Documents.
(b) Subsidiary Joinder. Within ten (10) days after the end of each
------------------
Fiscal Quarter, the Borrower shall cause each Domestic Subsidiary created
or acquired during the Fiscal Quarter then ending to execute and deliver to
the Administrative Agent a Joinder Agreement and such other documentation
as the Administrative Agent may reasonably request to cause such Subsidiary
to evidence and otherwise implement the guaranty for the repayment of the
Obligations contemplated by this Agreement.
Section 10.11 ERISA. The Borrower will, and will cause each Subsidiary to,
-----
comply with all minimum funding requirements and all other material requirements
of ERISA, if applicable, so as not to give rise to any liability which could
have a Material Adverse Effect.
CREDIT AGREEMENT - Page 59
<PAGE>
Section 10.12 Trade Accounts Payable. Each of the Loan Parties will,
----------------------
and will cause the Borrower and each of its Subsidiaries to, pay all trade
accounts payable before the same become more than 90 days past due, except (a)
trade accounts payable contested in good faith or (b) trade accounts payable in
an aggregate amount not to exceed at any time outstanding Two Hundred Fifty
Thousand Dollars ($250,000) and with respect to which no proceeding to enforce
collection has been commenced or, to the knowledge of any Loan Party,
threatened.
ARTICLE 11
Negative Covenants
------------------
The Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or any Lender has any Commitment hereunder or any
Letter of Credit remains outstanding, it will perform and observe the following
negative covenants:
Section 11.1 Debt. The Borrower will not, and will not permit any
----
Subsidiary to, incur, create, assume, or permit to exist any Debt (other than
Debt to be paid in full concurrently with the Closing Date), except:
(a) Debt to the Lenders pursuant to the Loan Documents;
(b) Debt described on Schedule 11.1 hereto, and any extensions,
-------------
renewals or refinancings of such existing Debt so long as (i) the principal
amount of such Debt after such renewal, extension or refinancing shall not
exceed the principal amount of such Debt which was outstanding immediately
prior to such renewal, extension or refinancing and (ii) such Debt shall
not be secured by any assets other than assets securing such Debt, if any,
prior to such renewal, extension or refinancing;
(c) Debt of a Subsidiary (other than CAB or ITC) to the Borrower or
another Subsidiary;
(d) Debt of CAB to the Borrower not in excess of One Million Dollars
($1,000,000) in the aggregate at any time outstanding evidenced by a note
pledged to the Administrative Agent for the benefit of the Lenders.
(e) Guaranties incurred in the ordinary course of business with
respect to surety and appeal bonds, performance and return-of-money bonds
and other similar obligations including those of the type otherwise
described in Section 11.2(f);
(f) Debt of the Borrower or any Subsidiary constituting purchase
money Debt (including Capital Lease Obligations) incurred after the Closing
Date not to exceed One Million Dollars ($1,000,000) in the aggregate at any
time outstanding secured by purchase money Liens permitted by Section
-------
11.2(g);
-------
CREDIT AGREEMENT - Page 60
<PAGE>
(g) Debt constituting obligations to reimburse worker's compensation
insurance companies for claims paid by such companies on the Borrower's or
a Subsidiaries' behalf in accordance with the policies issued to the
Borrower and the Subsidiaries;
(h) Debt secured by the Liens permitted by clauses (d) and (e) of
Section 11.2;
------------
(i) Debt arising under, created by and consisting of Hedge
Agreements, provided, (i) such Hedge Agreements shall have been entered
--------
into for the purpose of hedging actual risk and not for speculative
purposes and (ii) that each counterparty to such Hedge Agreement shall be a
Lender or an Affiliate of a Lender acceptable to the Administrative Agent
that is rated in one of the two highest rating categories of Standard and
Poors Corporation or Moody's Investors Service, Inc. provided that the
--------
Administrative Agent may approve other counterparties in its absolute
discretion provided, further that the Debt to such other counterparties
-------- -------
shall not be included as part of the Obligations and shall not be entitled
to the benefits of any of the Collateral; and
(j) Debt consisting of time or other deposits opened at CAB by its
customers in the ordinary course of CAB's business, Debt of CAB with
respect to Federal Home Loan Bank loans, federal funds, brokered deposits,
repurchase agreements customary in CAB's business and other usual and
customary sources of funding reasonably acceptable to the Administrative
Agent.
Section 11.2 Limitation on Liens and Restrictions on Subsidiaries. The
----------------------------------------------------
Borrower will not, and will not permit any Subsidiary to, incur, create, assume,
or permit to exist any Lien upon any of its property, assets, or revenues,
whether now owned or hereafter acquired, except the following:
(a) Liens described on Schedule 11.2 hereto, and any extensions,
renewals or refinancings of the Debt secured by such Liens as permitted
under Subsection 11.1(b), provided that (i) no such Lien is expanded to
cover any additional property (other than after acquired title in or on
such property and proceeds of the existing collateral) after the Closing
Date and (ii) no such Lien is spread to secure any additional Debt after
the Closing Date other than Debt permitted by Section 11.1(b);
(b) Liens in favor of the Administrative Agent for the benefit of the
Administrative Agent and each Lender (or an Affiliate thereof in the case
of Hedge Agreements) pursuant to the Loan Documents;
(c) Encumbrances consisting of easements, zoning restrictions, or
other restrictions on the use of real property that do not (individually or
in the aggregate) materially detract from the value of the assets
encumbered thereby or materially impair the ability of the Borrower or the
Subsidiaries to use such assets in their respective businesses;
(d) Liens for taxes, assessments, or other governmental charges (but
excluding Environmental Liens or Liens under ERISA) that are not delinquent or
which are being
CREDIT AGREEMENT - Page 61
<PAGE>
contested in good faith and for which adequate reserves have been established in
accordance with GAAP;
(e) Liens of mechanics, materialmen, warehousemen, carriers, landlords or
other similar statutory Liens securing obligations that are not overdue or are
being contested in good faith by appropriate proceedings diligently pursued and
for which adequate reserves have been established in accordance with GAAP and
are incurred in the ordinary course of business;
(f) Liens resulting from deposits to secure payments of worker's
compensation, unemployment insurance or other social security programs or to
secure the performance of tenders, statutory obligations, leases, insurance
contracts, surety and appeal bonds, bids and other contracts incurred in the
ordinary course of business (other than for payment of Debt);
(g) Liens for purchase money obligations and Liens securing Capital Lease
Obligations; provided that: (i) the Debt secured by any such Lien is permitted
--------
under Section 11.1(f) hereof; and (ii) any such Lien encumbers only the asset so
---------------
purchased or leased;
(h) Any attachment or judgment Lien not constituting an Event of Default;
(i) Any interest or title of a licensor, lessor or sublessor under any
license or lease incurred in the ordinary course of business;
(j) Liens against equipment arising from precautionary UCC financing
statement filings regarding operating leases entered into by the Borrower and
the Subsidiaries in the ordinary course of business;
(k) Nonconsensual Liens in favor of banking institutions arising as a
matter of law and encumbering the deposits (including the right of setoff) held
by such banking institutions in the ordinary course of business; and
(l) Liens on LHO Loan Collateral in favor of guilds, completion guarantors
and other parties to LHO Loan Collateral documentation usual and customary in
the motion picture industry so long as the same are subordinated to the Liens in
favor of the Borrower (and to the Administrative Agent for the benefit of the
Lenders as pledgee of the LHO Loan notes) on terms usual and customary in the
motion picture industry.
Section 11.3 Mergers, Etc. The Borrower will not, and will not permit any
------------
Subsidiary to, become a party to a merger or consolidation, or purchase or
otherwise acquire all or a substantial part of the business or assets of any
Person or all or a substantial part of the business or assets of a division or
branch of a Person or any shares, equity Securities or other evidence of
beneficial ownership of any Person, or wind-up, dissolve, or liquidate itself;
provided that as long as no Default exists or would result therefrom and
provided the Borrower gives the Administrative Agent and the Lenders prior
written notice:
CREDIT AGREEMENT - Page 62
<PAGE>
(i) A Subsidiary (other than CAB or ITC) may wind-up, dissolve or
liquidate if (a) its assets are transferred to the Borrower or a Wholly-
Owned Subsidiary and (b) the Loan Party acquiring the assets complies with
its obligations under Section 10.9 simultaneously with such acquisitions;
------------
(ii) Any Subsidiary (other than CAB or ITC) may merge or
consolidate with the Borrower (provided the Borrower is the surviving
entity) or with any Wholly-Owned Subsidiary (provided the Wholly-Owned
Subsidiary is the surviving entity); and
(iii) The Borrower may make Investments permitted by Section 11.5.
------------
Section 11.4 Restricted Junior Payments. The Borrower will not and will not
--------------------------
permit any Subsidiary to directly or indirectly declare, order, pay, make or set
apart any sum for (a) any dividend or other distribution, direct or indirect, on
account of any shares of any class of stock of the Borrower or any Subsidiary
now or hereafter outstanding; (b) any redemption, conversion, exchange,
retirement, sinking fund or similar payment, purchase or other acquisition for
value, direct or indirect, of any shares of any class of stock of the Borrower
or any Subsidiary now or hereafter outstanding; or (c) any payment made to
retire, or to obtain the surrender of, any outstanding warrants, options or
other rights to acquire shares of any class of stock of the Borrower or any
Subsidiaries now or hereafter outstanding except:
(i) Subsidiaries may make, declare and pay dividends and make
other distributions with respect to their capital stock to the Borrower or
Wholly-Owned Subsidiaries of the Borrower;
(ii) The Borrower may declare and pay dividends on any class of its
capital stock payable solely in shares of common stock of the Borrower; and
(iii) The Borrower may make, declare and pay cash dividends with
respect to its common stock as long as no Default exists or would result
therefrom on either the date such dividends are declared or paid.
Section 11.5 Investments. The Borrower will not, and will not permit any
-----------
Subsidiary (other than CAB solely for liquidity management or interest rate risk
management purposes in the ordinary course of business) to, make or permit to
remain outstanding any advance, loan, extension of credit, or capital
contribution to or investment in any Person, or purchase or own any stocks,
bonds, notes, debentures, or other securities of any Person, or be or become a
joint venturer with or partner of any Person (all the foregoing, herein
"Investments"), except:
-----------
(a) The Borrower and the Subsidiaries may make equity investments
in and may make loans to Subsidiaries (in the case of loans, as permitted
by Section 11.1) and may acquire new Subsidiaries (subject to the
------------
requirements of Section 11.3) provided that total additional Investments in
------------
Subsidiaries after the Closing Date shall never exceed Two and
CREDIT AGREEMENT - Page 63
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request
for confidential treatment. A complete copy of this document has been
supplied to the Securities and Exchange Commission under separate cover.
One-Half Million Dollars ($2,500,000) in the aggregate at any time
outstanding (exclusive of earnings retained by such Subsidiaries after the
Closing Date);
(b) Readily marketable direct obligations of the United States of
America or any agency thereof with maturities of one year or less (two
years or less in the case of ITC) from the date of acquisition;
(c) Fully insured certificates of deposit with maturities of one year
or less from the date of acquisition issued by any commercial bank
operating in the United States of America having capital and surplus in
excess of Two Hundred Fifty Million Dollars ($250,000,000);
(d) Commercial paper of a domestic issuer or debt Securities of a
domestic issuer if at the time of purchase such paper or debt Securities of
such issuer is rated A-1 or P-1 or better by Standard and Poors Corporation
or Moody's Investors Service, Inc. or any successor thereto, respectively,
in the case of commercial paper, or A or better in the case of debt and
shares of any mutual fund company substantially all the assets of which
consist of cash and the Investments of the type described in clauses (c),
-----------
(d) and this clause (e);
--- ----------
(e) Advances to officers, directors and employees for business
expenses incurred in the ordinary course of business;
(f) The Subsidiaries may acquire and own any Investments of any
Person received in connection with the bankruptcy or reorganization of
suppliers and customers and in connection with the settlement of delinquent
obligations of, and disputes with, customers and suppliers arising in the
ordinary course of business;
(g) Advances, loans or extensions of credit made in the ordinary
course of business of the Borrower's, LHO's, CAB's and ITC's business
consistent with past practices provided that no material change in the
underwriting standards of the Borrower, LHO or CAB from those in effect on
the Closing Date shall be adopted or implemented without the Administrative
Agent's prior approval in its sole discretion;
(h) /[**]
(i) /[**]
CREDIT AGREEMENT - Page 64
<PAGE>
(j) Any Investments required to be made by ITC in accordance
with mandatory requirements of Governmental Authorities or in accordance
with mandatory Government Requirements.
Section 11.6 Limitation on Issuance of Capital Stock. The Borrower will
---------------------------------------
not permit any Subsidiary to, at any time issue, sell, assign, or otherwise
dispose of (a) any of its capital stock, (b) any securities exchangeable for or
convertible into or carrying any rights to acquire any of its capital stock, or
(c) any option, warrant, or other right to acquire any of its capital stock.
Section 11.7 Transactions With Affiliates. The Borrower will not, and
----------------------------
will not permit any Subsidiary to, enter into any transaction, including,
without limitation, the purchase, sale, or exchange of property or the rendering
of any service, with any Affiliate of the Borrower or such Subsidiary, except
(i) transaction between or among the Borrower and its Wholly-Owned Subsidiaries
and (ii) in the ordinary course of and pursuant to the reasonable requirements
of the Borrower's or such Subsidiary's business and upon fair and reasonable
terms no less favorable to the Borrower or such Subsidiary than would be
obtained in a comparable arms-length transaction with a Person not an Affiliate
of the Borrower or such Subsidiary.
Section 11.8 Disposition of Assets. The Borrower will not, and will not
---------------------
permit any Subsidiary to, sell, lease, assign, transfer, exchange, distribute,
or otherwise voluntarily dispose of: (a) any of its accounts receivable; (b)
any substantial portion of the consolidated assets of the Borrower and its
Subsidiaries; (c) all or any portion of its investment or ownership interest in
CAB, ITC or ICII; or (d) any other assets other than (i) dispositions of LHO
Loans, SBA Loans or participations therein in the ordinary course of business
consistent with past practices and for full and fair consideration.
Section 11.9 Lines of Business. The Borrower and its Subsidiaries will
-----------------
not engage in any line or lines of business activity other than the businesses
in which they are engaged on the date hereof or a business reasonably related
thereto. The Borrower will not permit any Subsidiary to engage in any line or
lines of business activity other than the businesses in which the Borrower and
its Subsidiaries are engaged on the date hereof or a business reasonably related
thereto.
Section 11.10 Limitations on Restrictions Affecting Subsidiaries. Neither
--------------------------------------------------
the Borrower nor any Subsidiary shall enter into or assume any material
agreement (other than the Loan Documents) prohibiting the creation or assumption
of any Lien upon its material properties or assets, whether now owned or
hereafter acquired. Except for mandatory restrictions imposed by Governmental
Authorities or as provided herein, the Borrower will not and will not permit any
Subsidiaries directly or indirectly to create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any kind
on the ability of any Subsidiary to: (A) pay dividends or make any other
distribution on any of such Subsidiary's capital stock owned by the Borrower or
any
CREDIT AGREEMENT - Page 65
<PAGE>
other Subsidiary; (B) pay any Debt owed to the Borrower or any other Subsidiary;
(C) make loans or advances to any Subsidiary; or (D) transfer any of its
property or assets to any Subsidiary.
Section 11.11 Environmental Protection. The Borrower will not, and will
------------------------
not permit any of its Subsidiaries to, (a) use (or permit any tenant to use) any
of its Properties for the handling, processing, storage, transportation or
disposal of any Hazardous Material except in compliance with applicable
Environmental Laws, (b) generate any Hazardous Material except in compliance
with applicable Environmental Laws, (c) conduct any activity that is likely to
cause a Release or threatened Release of any Hazardous Material in violation of
any Environmental Law, or (d) otherwise conduct any activity or use any of its
Properties in any manner, that violates or is likely to violate any
Environmental Law or create any Environmental Liabilities for which the Borrower
or any of its Subsidiaries would be responsible.
Section 11.12 ERISA. The Borrower will not, and will not permit any of
-----
its Subsidiaries to:
(a) allow, or take (or permit any ERISA Affiliate to take) any action
which would cause, any unfunded or unreserved liability for benefits under
any Plan (exclusive of any Multiemployer Plan) to exist or to be created;
or
(b) with respect to any Multiemployer Plan, allow, or take (or permit
any ERISA Affiliate to take) any action which would cause, any unfunded or
unreserved liability for benefits under any Multiemployer Plan to exist or
to be created, either individually as to any such Plan or in the aggregate
as to all such Plans.
ARTICLE 12
Financial Covenants
-------------------
The Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding or any Lender has any Commitment hereunder or any
Letter of Credit remains outstanding, it will perform and observe the following
financial covenants:
Section 12.1 Minimum Adjusted Tangible Net Worth. The Borrower shall
-----------------------------------
never permit the Adjusted Tangible Net Worth of the Borrower and its
Subsidiaries at any time to be less than $125,000,000.
Section 12.2 Interest Coverage Ratio. As of the end of each Fiscal
-----------------------
Quarter, the Borrower shall not permit the ratio of (a) Adjusted EBITDA for the
twelve (12) month period then ending (or for the period from the Closing Date to
the end of such Fiscal Quarter for the first four such Fiscal Quarters after the
Closing Date) minus net income attributable to direct or indirect investment of
-----
the Borrower in Persons other than Subsidiaries during such period to (b)
Interest Expense, to be less than 1.35 to 1.00.
CREDIT AGREEMENT - Page 66
<PAGE>
Information below, marked with [**], has been omitted pursuant to a request for
confidential treatment. A complete copy of this document has been supplied to
the Securities and Exchange Commission under separate cover.
Section 12.3 Minimum Tangible Net Worth. The Borrower shall never permit
--------------------------
the Tangible Net Worth of the Borrower and its Subsidiaries minus the value of
-----
the Borrower's investment in ICII capital stock (or any proceeds or derivatives
thereof), determined in accordance with GAAP, net of deferred income taxes
associated with such investment, at any time to be less than (a) the greater of
Twelve Million Dollars ($12,000,000) or eighty-five percent (85%) of the amount
which, as of the Closing Date, in conformity with GAAP, would be included as
shareholders' equity on a consolidated balance sheet for the Borrower and its
Subsidiaries, plus (b) eighty-five (85%) of the consolidated net income (but
----
without deduction for net losses) of the Borrower and its Subsidiaries for each
reporting period after the Closing Date, determined in accordance with GAAP,
less any portion thereof attributable to the Borrower's investment in ICII
capital stock (or any proceeds or derivatives thereof), net of income taxes
associated with such investment income, plus (c) 85% of all capital
----
contributions to the Borrower after the Closing Date.
Section 12.4 Maximum Leverage Ratio. The Borrower shall never permit the
----------------------
ratio of (a) Total Liabilities which are outstanding as of any date to (b)
Adjusted Tangible Net Worth to be greater than 1.45 to 1.00.
Section 12.5 /[**]
Section 12.6 /[**]
Section 12.7 CAB a Well Capitalized Institution. The Borrower shall
----------------------------------
cause CAB at all times to be "Well Capitalized" under the capital adequacy
regulations or guidelines applicable to
CREDIT AGREEMENT - Page 67
<PAGE>
CAB which have been adopted by the appropriate federal banking agency under
Section 78 of the Federal Deposit Insurance Act, 12 U.S.C. Section 1831o.
ARTICLE 13
Default
-------
Section 13.1 Events of Default. Each of the following shall be deemed an
-----------------
"Event of Default":
----------------
(a) The Borrower shall fail to pay (i) when due any principal of any
Loan or any Reimbursement Obligation payable under any Loan Document or any
part thereof; or (ii) within two (2) days after the date payment thereof is
required under any Loan Document, any interest or fees with respect to any
Loan or any other Obligation or any part thereof, or any indebtedness,
liability or obligation under any Hedge Agreement.
(b) Any representation, warranty or certification made or deemed made
by any Loan Party (or any of their respective officers) in any Loan
Document or in any certificate, report, notice, or financial statement
furnished at any time in connection with any Loan Document shall be false,
misleading, or erroneous in any material respect when made or deemed to
have been made.
(c) Any Loan Party shall fail to perform, observe, or comply with any
covenant, agreement, or term contained in Section 10.1 (for two (2) days
------------
beyond the due date in the case of Subsections 10.1(a), (b) and (h), but
--------------------------------
with no grace period for any other Subsection thereof), Article 11 or
----------
Article 12 of this Agreement.
----------
(d) Any Loan Party shall fail to perform, observe, or comply with any
other agreement, or term contained in any Loan Document (other than covenants
described in Subsections 13.1(a) through 13.1(c)) and such failure shall
------------------------------------
continue for a period of twenty (20) days after the earlier of (i) the date the
Administrative Agent provides the Borrower with notice thereof or (ii) the date
the Borrower should have notified the Administrative Agent thereof in accordance
with Subsection 10.1(e) hereof.
------------------
(e) Any Loan Party shall (i) apply for or consent to the appointment
of, or the taking of possession by, a receiver, custodian, trustee, examiner,
liquidator or the like of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of its creditors, (iii)
commence a voluntary case under the United States Bankruptcy Code (as now or
hereafter in effect, the "Bankruptcy Code"), (iv) institute any proceeding or
---------------
file a petition seeking to take advantage of any other law relating to
bankruptcy, insolvency, reorganization, liquidation, dissolution, winding-up, or
composition or readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case under the Bankruptcy Code, (vi) admit in writing its
inability to, or be generally unable to pay its debts as such debts
CREDIT AGREEMENT - Page 68
<PAGE>
become due, or (vii) take any corporate action for the purpose of effecting any
of the foregoing.
(f) A proceeding or case shall be commenced, without the application,
approval or consent of the applicable Loan Party in any court of competent
jurisdiction, seeking (i) its reorganization, liquidation, dissolution,
arrangement or winding-up, or the composition or readjustment of its debts,
(ii) the appointment of a receiver, custodian, trustee, examiner,
liquidator or the like of such Loan Party or of all or any substantial part
of its property, or (iii) similar relief in respect of such Loan Party
under any law relating to bankruptcy, insolvency, reorganization, winding-
up, or composition or adjustment of debts, and such proceeding or case
shall continue undismissed, or an order, judgment or decree approving or
ordering any of the foregoing shall be entered and continue unstayed and in
effect, for a period of thirty (30) or more days; or an order for relief
against any Loan Party shall be entered in an involuntary case under the
Bankruptcy Code.
(g) Any Loan Party shall fail within a period of thirty (30) days
after the commencement thereof to discharge or obtain a stay of any
attachment, sequestration, forfeiture, or similar proceeding or proceedings
involving an aggregate amount in excess of One Million Dollars ($1,000,000)
against any of its assets or properties.
(h) A final judgment or judgments for the payment of money in excess
of One Million Dollars ($1,000,000) in the aggregate (to the extent not
paid or fully covered by insurance acknowledged by a carrier reasonably
acceptable to the Administrative Agent) shall be rendered by a court or
courts against any Loan Party and the same shall not be discharged (or
provision shall not be made for such discharge), or a stay of execution
thereof shall not be procured, within sixty (60) days from the date of
entry thereof and the relevant Loan Party shall not, within said period of
sixty (60) days, or such longer period during which execution of the same
shall have been stayed, appeal therefrom and cause the execution thereof to
be stayed during such appeal.
(i) Any Loan Party shall fail to pay when due any principal of or
interest on any Debt (beyond the period of grace, if any) if the aggregate
principal amount of the affected Debt equals or exceeds One Million Dollars
($1,000,000) (other than the Obligations), or the maturity of any such Debt
shall have been accelerated, or any such Debt shall have been required to
be prepaid prior to the stated maturity thereof or any event shall have
occurred with respect to any Debt in the aggregate principal amount equal
to or in excess of One Million Dollars ($1,000,000) that permits any holder
or holders of such Debt or any Person acting on behalf of such holder or
holders to accelerate the maturity thereof or require any prepayment
thereof.
(j) This Agreement or any Security Document shall cease to be in full
force and effect or shall be declared null and void or the validity or
enforceability thereof shall be contested or challenged by any Loan Party or any
Loan Party shall deny that it has any further liability or obligation under any
of the Loan Documents or any Lien created or purported to be created by the Loan
Documents shall for any reason cease to be or fail to be a valid, first priority
perfected Lien (except for Permitted Liens, if any, which are expressly
CREDIT AGREEMENT - Page 69
<PAGE>
permitted by the Loan Documents to have priority over the Liens in favor of
the Administrative Agent) upon any of the Collateral purported to be
covered thereby.
(k) Any of the following events shall occur or exist with respect to
the Borrower or any ERISA Affiliate: (i) any Prohibited Transaction
involving any Plan; (ii) any Reportable Event with respect to any Plan;
(iii) the filing under Section 4041 of ERISA of a notice of intent to
terminate any Plan or the termination of any Plan; (iv) any event or
circumstance that might constitute grounds entitling the PBGC to institute
proceedings under Section 4042 of ERISA for the termination of, or for the
appointment of a trustee to administer, any Plan, or the institution by the
PBGC of any such proceedings; or (v) complete or partial withdrawal under
Section 4201 or 4204 of ERISA from a Multiemployer Plan or the
reorganization, insolvency, or termination of any Multiemployer Plan; and
in each case above, such event or condition, together with all other events
or conditions, if any, have subjected or could in the reasonable opinion of
the Administrative Agent subject the Borrower or any of its Subsidiaries to
any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the
PBGC, or otherwise (or any combination thereof) which in the aggregate
could reasonably be expected to exceed One Million Dollars ($1,000,000).
(l) The Internal Revenue Service shall notify the Borrower that it is
challenging or institutes any action to challenge the tax-free nature of
the Distribution or otherwise asserts that the Distribution is not in
compliance with the Tax Ruling.
(m) There shall have occurred a Change of Control.
(n) The occurrence of any Material Adverse Effect with respect to the
Borrower or any other Loan Party.
Section 13.2 Remedies. If any Event of Default shall occur and be
--------
continuing, the Administrative Agent may (and if directed by Required Lenders,
shall) do any one or more of the following:
(a) Acceleration. By notice to the Borrower, declare all outstanding
------------
principal of and accrued and unpaid interest on the Notes and all other
amounts payable by the Borrower under the Loan Documents immediately due
and payable, and the same shall thereupon become immediately due and
payable, without further notice, demand, presentment, notice of dishonor,
notice of acceleration, notice of intent to accelerate, protest, or other
formalities of any kind, all of which are hereby expressly waived by the
Borrower except as where required by the specific terms of this Agreement
or the other Loan Documents;
(b) Termination of Commitments. Terminate the Revolving Commitments,
--------------------------
including, without limitation, the obligation of the Administrative Agent
to issue Letters of Credit, without notice to the Borrower or any
Subsidiary;
(c) Judgment. Reduce any claim to judgment;
--------
CREDIT AGREEMENT - Page 70
<PAGE>
(d) Foreclosure. Foreclose or otherwise enforce any Lien granted
-----------
to the Administrative Agent for the benefit of the Administrative Agent and
each Lender to secure payment and performance of the Obligations in
accordance with the terms of the Loan Documents;
(e) Purchase of LHO Loans. The Lenders may purchase one or more
---------------------
LHO Loans for a purchase price equal to the Borrowing Base value thereof
with such purchase price to be applied against the Obligations in such
order as the Administrative Agent may determine, with the Borrower
retaining a subordinated participation interest in such purchased LHO Loans
equal to the excess of the principal amount of such LHO Loans over the
purchase price therefor, such retained participation interest to constitute
proceeds of the Collateral subject to the Lien in favor of the
Administrative Agent for the benefit of the Lenders, such purchase and sale
and such continuing Lien to be evidenced by documentation and subject to
terms and conditions satisfactory to the Administrative Agent in its
absolute discretion;
(f) Rights. Exercise any and all rights and remedies afforded by
------
the laws of the State of Texas or any other jurisdiction governing any of
the Loan Documents, by equity, or otherwise; and
(g) Application of Proceeds. All proceeds from each sale of, or
-----------------------
other realization upon, all or any part of the Collateral following an
Event of Default shall be applied or paid over as follows:
(i) First: to the payment of all costs and expenses
-----
incurred inconnection with such sale or other realization, including
reasonable attorneys' fees;
(ii) Second: to the payment of the Obligations (with the
------
Borrower remaining liable for any deficiency) as the Administrative
Agent may elect; and
(iii) Third: the balance (if any) of such proceeds shall be
-----
paid to the Borrower, subject to any duty imposed by law, or otherwise
to whomsoever shall be entitled thereto.
THE BORROWER SHALL REMAIN LIABLE AND WILL PAY, ON DEMAND, ANY DEFICIENCY
REMAINING IN RESPECT OF THE OBLIGATIONS, TOGETHER WITH INTEREST THEREON AT A
RATE PER ANNUM EQUAL TO THE HIGHEST RATE THEN PAYABLE HEREUNDER ON SUCH
OBLIGATIONS, WHICH INTEREST SHALL CONSTITUTE PART OF THE OBLIGATIONS.
provided, however, that, upon the occurrence of an Event of Default under
- -------- -------
Subsections 13.1(e) or 13.1(f) hereof, the Commitments of all of the Lenders
- ------------------- --------
shall automatically terminate (including, without limitation, the obligation of
the Fronting Bank to issue Letters of Credit), and the outstanding principal of
and accrued and unpaid interest on the Notes and all other amounts payable by
the Borrower under the Loan Documents shall thereupon become immediately due and
payable without notice, demand, presentment, notice of dishonor, notice of
acceleration, notice of intent to
CREDIT AGREEMENT - Page 71
<PAGE>
accelerate, protest, or other formalities of any kind, all of which are hereby
expressly waived by the Borrower.
Section 13.3 Cash Collateral. If an Event of Default shall have occurred
---------------
and be continuing, the Borrower shall, if requested by the Administrative Agent
or Required Lenders, pledge to the Administrative Agent as security for the
Obligations, pursuant to agreements in form and substance satisfactory to the
Administrative Agent, an amount of Cash Collateral equal to the then outstanding
Letter of Credit Liabilities, such funds to be held in an interest bearing cash
collateral account at the Administrative Agent without any right of withdrawal
by the Borrower.
Section 13.4 Performance by the Administrative Agent. Upon the
---------------------------------------
occurrence of a Default, if any Loan Party shall fail to perform any agreement
in accordance with the terms of the Loan Documents, the Administrative Agent
may, at the direction of Required Lenders, perform or attempt to perform such
agreement on behalf of the Loan Party. In such event, the Borrower shall, at the
request of the Administrative Agent, promptly pay any amount expended by the
Administrative Agent or the Lenders in connection with such performance or
attempted performance to the Administrative Agent at the Principal Office,
together with interest thereon at the Default Rate applicable to Base Rate
Accounts from and including the date of such expenditure to but excluding the
date such expenditure is paid in full. Notwithstanding the foregoing, it is
expressly agreed that neither the Administrative Agent nor any Lender shall have
any liability or responsibility for the performance of any obligation of any
Loan Party under any Loan Document.
Section 13.5 Setoff. If an Event of Default shall have occurred and be
------
continuing, each Lender is hereby authorized at any time and from time to time,
without notice to the Borrower (any such notice being hereby expressly waived by
the Borrower), to set off and apply any and all deposits (general, time, demand,
provisional or final) at any time held and other indebtedness at any time owing
by such Lender to or for the credit or the account of the Borrower against any
and all of the obligations of such party now or hereafter existing under any
Loan Document, irrespective of whether or not the Administrative Agent or such
Lender shall have made any demand under such Loan Documents and although such
obligations may be unmatured. Each Lender agrees promptly to notify the
Borrower (with a copy to the Administrative Agent) after any such setoff and
application, provided that the failure to give such notice shall not affect the
validity of such setoff and application. The rights and remedies of each Lender
hereunder are in addition to other rights and remedies (including, without
limitation, other rights of setoff) which such Lender may have.
Section 13.6 Continuance of Default. For purposes of all Loan
----------------------
Documents, a Default shall be deemed to have continued and exist until the
Administrative Agent shall have actually received evidence satisfactory to the
Administrative Agent that such Default shall have been remedied.
ARTICLE 14
The Administrative Agent
------------------------
Section 14.1 Appointment, Powers, and Immunities. Each Lender hereby
-----------------------------------
irrevocably appoints and authorizes NationsBank to act as its agent under this
Agreement and the other Loan
CREDIT AGREEMENT - Page 72
<PAGE>
Documents with such powers and discretion as are specifically delegated to the
Administrative Agent by the terms of this Agreement and the other Loan
Documents, together with such other powers as are reasonably incidental thereto.
The Administrative Agent (which term as used in this sentence and in
Section 14.5 and the first sentence of Section 14.6 hereof
- ------------ ------------
shall include its Affiliates (including NationsBanc Montgomery Securities LLC)
and its own and its Affiliates' officers, directors, employees, and agents): (a)
shall not have any duties or responsibilities except those expressly set forth
in the Loan Documents and shall not be a trustee or fiduciary for any Lender;
(b) shall not be responsible to the Lenders for any recital, statement,
representation, or warranty (whether written or oral) made in or in connection
with any Loan Document or any certificate or other document referred to or
provided for in, or received by any of them under, any Loan Document, or for the
value, validity, effectiveness, genuineness, enforceability, or sufficiency of
any Loan Document, or any other document referred to or provided for therein or
for any failure by any Loan Party or any other Person to perform any of its
obligations thereunder; (c) shall not be responsible for or have any duty to
ascertain, inquire into, or verify the performance or observance of any
covenants or agreements by any Loan Party or the satisfaction of any condition
or to inspect the property (including the books and records) of any Loan Party
or any of its Affiliates; (d) shall not be required to initiate or conduct any
litigation or collection proceedings under any Loan Document; and (e) shall not
be responsible for any action taken or omitted to be taken by it under or in
connection with any Loan Document, except for its own gross negligence or
willful misconduct. The Administrative Agent may employ agents and attorneys-in-
fact and shall not be responsible for the negligence or misconduct of any such
agents or attorneys-in-fact selected by it with reasonable care.
Section 14.2 Reliance by Administrative Agent. The Administrative Agent
--------------------------------
shall be entitled to rely upon any certification, notice, instrument, writing,
or other communication (including, without limitation, any thereof by telephone
or telecopy) believed by it to be genuine and correct and to have been signed,
sent or made by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel (including counsel for any Loan Party),
independent accountants, and other experts selected by the Administrative Agent.
The Administrative Agent may deem and treat the payee of any Note as the holder
thereof for all purposes hereof unless and until the Administrative Agent
receives and accepts an Assignment and Acceptance executed in accordance with
Section 15.8 hereof. As to any matters not expressly provided for by this
- ------------
Agreement, the Administrative Agent shall not be required to exercise any
discretion or take any action, but shall be required to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the instructions of the Required Lenders, and such instructions shall be
binding on all of the Lenders; provided, however, that the Administrative Agent
-------- -------
shall not be required to take any action that exposes the Administrative Agent
to personal liability or that is contrary to any Loan Document or applicable
law.
Section 14.3 Defaults. The Administrative Agent shall not be deemed to
--------
have knowledge or notice of the occurrence of a Default unless the
Administrative Agent has received written notice from a Lender or the Borrower
specifying such Default and stating that such notice is a "Notice of Default".
In the event that the Administrative Agent receives such a notice of the
occurrence of a Default, the Administrative Agent shall give prompt notice
thereof to the Lenders. The
CREDIT AGREEMENT - Page 73
<PAGE>
Administrative Agent shall take such action with respect to such Default as it
shall deem appropriate or as shall reasonably be directed by the Required
Lenders.
Section 14.4 Rights as Lender. With respect to its Commitment and the
----------------
Loans made by it, NationsBank (and any successor acting as the Administrative
Agent) in its capacity as a Lender hereunder shall have the same rights and
powers hereunder as any other Lender and may exercise the same as though it were
not acting as the Administrative Agent, and the term "Lender" or "Lenders"
shall, unless the context otherwise indicates, include the Administrative Agent
in its individual capacity. NationsBank (and any successor acting as the
Administrative Agent) and its Affiliates may (without having to account therefor
to any Lender) accept deposits from, lend money to, make investments in, provide
services to, and generally engage in any kind of lending, trust, or other
business with any Loan Party or any of their respective Affiliates as if it were
not acting as the Administrative Agent, and NationsBank (and any successor
acting as the Administrative Agent) and its Affiliates may accept fees and other
consideration from any Loan Party or any of their respective Affiliates for
services in connection with this Agreement or otherwise without having to
account for the same to the Lenders.
SECTION 14.5 INDEMNIFICATION. THE LENDERS AGREE TO INDEMNIFY THE
---------------
ADMINISTRATIVE AGENT (TO THE EXTENT NOT REIMBURSED UNDER SECTION 15.1 OR SECTION
------------- -------
15.2, BUT WITHOUT LIMITING THE OBLIGATIONS OF THE BORROWER UNDER SUCH SECTIONS)
- ----
RATABLY IN ACCORDANCE WITH THEIR RESPECTIVE COMMITMENT PERCENTAGES, FOR ANY AND
ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS,
SUITS, COSTS, EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES), OR DISBURSEMENTS
OF ANY KIND AND NATURE WHATSOEVER THAT MAY BE IMPOSED ON, INCURRED BY OR
ASSERTED AGAINST THE ADMINISTRATIVE AGENT (INCLUDING BY ANY LENDER) IN ANY WAY
RELATING TO OR ARISING OUT OF ANY TRANSACTION DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED THEREBY OR ANY ACTION TAKEN OR OMITTED BY THE ADMINISTRATIVE AGENT
UNDER ANY TRANSACTION DOCUMENT; PROVIDED THAT NO LENDER SHALL BE LIABLE FOR ANY
--------
OF THE FOREGOING TO THE EXTENT THEY ARE FOUND IN A FINAL, NON-APPEALABLE
JUDGMENT RENDERED BY A COURT OF COMPETENT JURISDICTION TO HAVE ARISEN FROM THE
GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF, THE PERSON TO BE INDEMNIFIED. WITHOUT
LIMITING ANY PROVISION OF ANY LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE
PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE
INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES,
CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES
(INCLUDING ATTORNEYS' FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR
CONTRIBUTORY NEGLIGENCE OF SUCH PERSON. WITHOUT LIMITATION OF THE FOREGOING,
EACH LENDER AGREES TO REIMBURSE THE ADMINISTRATIVE AGENT PROMPTLY UPON DEMAND
FOR ITS RATABLE SHARE (CALCULATED BASED ON THE COMMITMENT PERCENTAGES) OF ANY
COSTS OR EXPENSES PAYABLE BY THE BORROWER UNDER SECTION 15.1 TO THE EXTENT
------------
CREDIT AGREEMENT - Page 74
<PAGE>
THAT THE ADMINISTRATIVE AGENT IS NOT PROMPTLY REIMBURSED FOR SUCH COSTS AND
EXPENSES BY THE BORROWER. IN THE CASE OF AN INVESTIGATION, LITIGATION OR OTHER
PROCEEDING TO WHICH THE INDEMNITY IN THIS SECTION 14.5 APPLIES, SUCH INDEMNITY
------------
SHALL BE EFFECTIVE WHETHER OR NOT SUCH INVESTIGATION, LITIGATION OR PROCEEDING
IS BROUGHT BY THE BORROWER, ITS DIRECTORS, SHAREHOLDERS OR CREDITORS OR ANY
PARTY ENTITLED TO INDEMNIFICATION HEREUNDER OR ANY OTHER PERSON AND WHETHER OR
NOT THE TRANSACTIONS CONTEMPLATED HEREBY ARE CONSUMMATED.
Section 14.6 Non-Reliance on Administrative Agent and Other Lenders.
------------------------------------------------------
Each Lender agrees that it has, independently and without reliance on the
Administrative Agent or any other Lender, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Loan Parties and decision to enter into this Agreement and that it will,
independently and without reliance upon the Administrative Agent or any other
Lender, and based on such documents and information as it shall deem appropriate
at the time, continue to make its own analysis and decisions in taking or not
taking action under the Loan Documents. Except for notices, reports, and other
documents and information expressly required to be furnished to the Lenders by
the Administrative Agent hereunder, the Administrative Agent shall not have any
duty or responsibility to provide any Lender with any credit or other
information concerning the affairs, financial condition, or business of any Loan
Party or any of their Affiliates that may come into the possession of the
Administrative Agent or any of its Affiliates.
Section 14.7 Resignation of Administrative Agent. The Administrative
-----------------------------------
Agent may resign at any time by giving notice thereof to the Lenders and the
Borrower. Upon any such resignation, the Required Lenders shall have the right
to appoint a successor Administrative Agent, which successor agent shall be
subject to the approval of the Borrower, which approval shall not be
unreasonably withheld, conditioned or delayed. If no successor Administrative
Agent shall have been so appointed by the Required Lenders and shall have
accepted such appointment within thirty (30) days after the retiring
Administrative Agent's giving of notice of resignation, then the retiring
Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent which shall be a commercial bank organized under the laws
of the United States of America having combined capital and surplus of at least
$100,000,000, which successor agent shall be subject to the approval of the
Borrower, which approval shall not be unreasonably withheld, conditioned or
delayed. Upon the acceptance of any appointment as the Administrative Agent
hereunder by a successor, such successor shall thereupon succeed to and become
vested with all the rights, powers, discretion, privileges, and duties of the
retiring Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations hereunder. After any retiring
Administrative Agent's resignation hereunder as the Administrative Agent, the
provisions of this Article 14 shall continue in effect for its benefit in
----------
respect of any actions taken or omitted to be taken by it while it was acting as
the Administrative Agent.
Section 14.8 Administrative Agent Fee. The Borrower agrees to pay to
------------------------
the Administrative Agent on the date hereof and on each anniversary of the date
hereof the administrative fee described
CREDIT AGREEMENT - Page 75
<PAGE>
in that certain letter dated February 11, 1998 from NationsBank and NationsBanc
Montgomery Securities LLC to the Borrower, as the same may be amended from time
to time.
Section 14.9 Several Commitments. The Commitments and other obligations
-------------------
of the Lenders under any Loan Document are several. The default by any Lender in
making a Loan in accordance with its Commitment shall not relieve the other
Lenders of their obligations under any Loan Document. In the event of any
default by any Lender in making any Loan, each nondefaulting Lender shall be
obligated to make its Loan but shall not be obligated to advance the amount
which the defaulting Lender was required to advance hereunder. No Lender shall
be responsible for any act or omission of any other Lender.
ARTICLE 15
Miscellaneous
-------------
Section 15.1 Expenses. The Borrower hereby agrees to pay promptly after
--------
presentation of supporting documentation without duplication: (a) all reasonable
costs and expenses of the Administrative Agent arising in connection with the
preparation, negotiation, execution, and delivery of the Transaction Documents
and all amendments or other modifications to the Transaction Documents,
including, without limitation, the reasonable fees and expenses of legal counsel
for the Administrative Agent, Jenkens & Gilchrist, a Professional Corporation;
(b) all reasonable costs and expenses of the Administrative Agent arising in
connection with assignments permitted by Section 15.8 , including, without
------------
limitation, the reasonable fees and expenses of legal counsel for the
Administrative Agent; (c) all reasonable fees, costs and expenses of the
Administrative Agent arising in connection with any Letter of Credit, including
the Administrative Agent's customary fees for amendments, transfers and drawings
on Letters of Credit; (d) all costs and expenses of the Administrative Agent in
connection with any Default and the enforcement of any Loan Document or
collection of the Obligations, including, without limitation, the fees and
expenses of legal counsel for the Administrative Agent; (e) all fees, costs and
expenses of any Lender arising in connection with an Event of Default and the
enforcement of any Loan Document or collection of the Obligations during the
continuance of an Event of Default; provided, however, that all Lenders (other
-------- -------
than the Administrative Agent) shall be limited to the legal fees and expenses
of one counsel for all Lenders unless such representation shall result in a
conflict of interest, in which case the Borrower shall pay the fees, costs and
expenses of as many counsel as necessary to avoid conflicts among the Lenders;
(f) all transfer, stamp, documentary, or other similar taxes, assessments, or
charges (including the "Taxes" and any penalties or interest) levied by any
-----
Governmental Authority in respect of any Loan Document or the transactions
contemplated hereby; (g) all reasonable costs, expenses, assessments, and other
charges incurred in connection with any filing, registration, recording, or
perfection of any security interest or other Lien contemplated by any Loan
Document; and (h) all other reasonable costs and expenses incurred by the
Administrative Agent in connection with any Transaction Document. The fees and
expenses of legal counsel for the Administrative Agent that the Borrower has
agreed to pay hereunder include the fees and expenses of legal counsel for the
Administrative Agent arising in connection with advice given to the
Administrative Agent as to its rights and responsibilities hereunder.
CREDIT AGREEMENT - Page 76
<PAGE>
SECTION 15.2 INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE
---------------
ADMINISTRATIVE AGENT, NATIONSBANC MONTGOMERY SECURITIES LLC, THE FRONTING BANK
AND EACH LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS,
DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS
AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS,
DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING REASONABLE ATTORNEYS' FEES) TO
WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR
RELATE TO (A) ANY BREACH BY ANY LOAN PARTY OF ANY REPRESENTATION, WARRANTY,
COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE TRANSACTION DOCUMENTS, (B)
THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY
HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE ASSETS OF
THE BORROWER OR ANY SUBSIDIARY, (C) THE USE OR PROPOSED USE OF ANY LETTER OF
CREDIT OR ANY PAYMENT OR FAILURE TO PAY WITH RESPECT TO ANY LETTER OF CREDIT,
(D) ANY AND ALL STAMP, FILING OR SIMILAR TAXES (INCLUDING THE "TAXES" AND ANY
INTEREST OR PENALTY) LEVIES, DEDUCTIONS, AND CHARGES IMPOSED ON THE
ADMINISTRATIVE AGENT OR ANY LENDER IN RESPECT OF ANY LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY, OR (E) ANY INVESTIGATION, LITIGATION, OR OTHER
PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION,
LITIGATION, OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING, THE
TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY; PROVIDED THAT
--------
THE PERSON ENTITLED TO BE INDEMNIFIED UNDER THIS SECTION SHALL NOT BE
INDEMNIFIED FROM OR HELD HARMLESS AGAINST ANY LOSSES, LIABILITIES, CLAIMS,
DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS OR EXPENSES (INCLUDING
ATTORNEYS' FEES) FOUND IN A FINAL, NON-APPEALABLE JUDGMENT RENDERED BY A COURT
OF COMPETENT JURISDICTION TO HAVE ARISEN OUT OF OR RESULTED FROM ITS GROSS
NEGLIGENCE OR ITS WILLFUL MISCONDUCT. WITHOUT LIMITING ANY PROVISION OF ANY LOAN
DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO
BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS
AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS,
DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS' FEES) ARISING OUT OF OR
RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON. IN THE CASE
OF AN INVESTIGATION, LITIGATION OR OTHER PROCEEDING TO WHICH THE INDEMNITY IN
THIS SECTION 15.2 APPLIES, SUCH INDEMNITY SHALL BE EFFECTIVE WHETHER OR NOT SUCH
------------
INVESTIGATION, LITIGATION OR PROCEEDING IS BROUGHT BY THE BORROWER, ITS
DIRECTORS, SHAREHOLDERS OR CREDITORS OR ANY PARTY ENTITLED TO INDEMNIFICATION
HEREUNDER OR ANY OTHER PERSON AND WHETHER OR NOT THE TRANSACTIONS CONTEMPLATED
HEREBY ARE CONSUMMATED.
CREDIT AGREEMENT - Page 77
<PAGE>
Section 15.3 Limitation of Liability. None of the Administrative Agent,
-----------------------
any Lender, or any Affiliate, officer, director, employee, attorney, or agent
thereof shall have any liability with respect to the Borrower, and, by the
execution of the Loan Documents to which it is a party, each other Loan Party,
hereby waives, releases, and agrees not to sue any of them upon, any claim for
any special, indirect, incidental, consequential or punitive damages suffered or
incurred by any Loan Party in connection with, arising out of, or in any way
related to any of the Transaction Documents, or any of the transactions
contemplated by any of the Transaction Documents.
Section 15.4 No Duty. All attorneys, accountants, appraisers, and other
-------
professional Persons and consultants retained by the Administrative Agent or any
Lender shall have the right to act exclusively in the interest of the
Administrative Agent and the Lenders and shall have no duty of disclosure, duty
of loyalty, duty of care, or other duty or obligation of any type or nature
whatsoever to the Borrower, any Subsidiary or any of the Borrower's shareholders
or any other Person.
Section 15.5 No Fiduciary Relationship. The relationship between the
-------------------------
Loan Parties on the one hand and the Administrative Agent and each Lender on the
other is solely that of debtor and creditor, and neither the Administrative
Agent nor any Lender has any fiduciary or other special relationship with any
Loan Parties, and no term or condition of any of the Transaction Documents shall
be construed so as to deem the relationship between the Loan Parties on the one
hand and the Administrative Agent and each Lender on the other to be other than
that of debtor and creditor.
Section 15.6 Equitable Relief. The Borrower recognizes that in the event
----------------
any Loan Party fails to pay, perform, observe, or discharge any or all of the
obligations under the Transaction Documents, any remedy at law may prove to be
inadequate relief to the Administrative Agent and the Lenders. The Borrower
therefore agrees that the Administrative Agent and the Lenders, if the
Administrative Agent or the Required Lenders so request, shall be entitled to
temporary and permanent injunctive relief in any such case without the necessity
of proving actual damages.
Section 15.7 No Waiver; Cumulative Remedies. No failure on the part of
------------------------------
the Administrative Agent or any Lender to exercise and no delay in exercising,
and no course of dealing with respect to, any right, power, or privilege under
any Loan Document shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power, or privilege under any Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, power, or privilege. The rights and remedies provided for in the Loan
Documents are cumulative and not exclusive of any rights and remedies provided
by law.
Section 15.8 Successors and Assigns.
----------------------
(a) Binding Effect. This Agreement shall be binding upon and
--------------
inure to the benefit of the parties hereto and their respective successors
and assigns. The Borrower may not assign or transfer any of its rights or
obligations hereunder or under any other Loan Document without the prior
written consent of the Administrative Agent and all of the Lenders.
CREDIT AGREEMENT - Page 78
<PAGE>
(b) Assignment. Each Lender may assign to one or more Persons
----------
all or a portion of its rights and obligations under this Agreement
(including, without limitation, all or a portion of its Loans, its Note,
and its Commitment); provided, however, that
-------- -------
(i) each such assignment shall be to an Eligible Assignee.
"Eligible Assignee" means (A) a Lender; (B) an Affiliate of a
-----------------
Lender or, with respect to any Lender that is a fund that invests
in bank loans, any other fund that invests in bank loans and is
managed by the same investment advisor as such Lender (herein a
"Related Fund"); and (C) any other Person approved by the
------------
Administrative Agent and, unless an Event of Default has occurred
and is continuing at the time any assignment is effected in
accordance with this Section 15.8, the Borrower, such approval not
------------
to be unreasonably withheld, conditioned, or delayed by the
Borrower and such approval to be deemed given by the Borrower if no
objection is received by the assigning Lender and the
Administrative Agent from the Borrower within five (5) Business
Days after notice of such proposed assignment has been provided by
the assigning Lender to the Borrower; provided, however, that
-------- -------
neither the Borrower nor an Affiliate of the Borrower shall qualify
as an Eligible Assignee;
(ii) except in the case of an assignment to another Lender
or an assignment of all of a Lender's rights and obligations under
this Agreement or an assignment by a Lender to one of its Related
Funds, any such partial assignment shall be in an amount at least
equal to Five Million Dollars ($5,000,000) and any partial
assignment to a Related Fund shall be in an amount at least equal
to One Million Dollars ($1,000,000);
(iii) each such assignment by a Lender shall be of a
constant, and not varying, percentage of all of its rights and
obligations under this Agreement; and
(iv) the parties to such assignment shall execute and
deliver to the Administrative Agent for its acceptance an
Assignment and Acceptance, together with any Note subject to such
assignment and a processing fee of $3,500.
Upon execution, delivery, and acceptance of such Assignment and Acceptance,
the assignee thereunder shall be a party hereto and, to the extent of such
assignment, have the obligations, rights, and benefits of a Lender
hereunder and the assigning Lender shall, to the extent of such assignment,
relinquish its rights and be released from its obligations under this
Agreement. Upon the consummation of any assignment pursuant to this
Section, the assignor, the Administrative Agent and the Borrower shall upon
return of the assignor's notes, if any, make appropriate arrangements so
that, if required, new Notes are issued to the assignor and the assignee.
If the assignee is not incorporated under the laws of the United States of
America or a state thereof, it shall deliver to the Borrower and the
Administrative Agent certification as to exemption from deduction or
withholding of Taxes in accordance with Section 6.7.
-----------
CREDIT AGREEMENT - Page 79
<PAGE>
(c) Register. The Administrative Agent shall maintain at its
--------
Principal Office a copy of each Assignment and Acceptance delivered to and
accepted by it and a register for the recordation of the names and
addresses of the Lenders and the Commitment of, and principal amount of the
Loans owing to, each Lender from time to time (the "Register"). The entries
--------
in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Administrative Agent and the Lenders
may treat each Person whose name is recorded in the Register as a Lender
hereunder for all purposes of this Agreement. The Register shall be
available for inspection by the Borrower or any Lender at any reasonable
time and from time to time upon reasonable prior notice. Upon its receipt
of an Assignment and Acceptance executed by the parties thereto, together
with any Note or Notes subject to such assignment and payment of the
processing fee, the Administrative Agent shall, if such Assignment and
Acceptance has been completed, (i) accept such Assignment and Acceptance,
(ii) record the information contained therein in the Register and (iii)
give prompt notice thereof to the parties thereto.
(d) Participations. Each Lender may sell participations to
--------------
one or more Persons in all or a portion of its rights and obligations under
this Agreement (including all or a portion of its Commitment and its
Loans); provided, however, that (i) such Lender's obligations under this
-------- -------
Agreement shall remain unchanged, (ii) such Lender shall remain solely
responsible to the other parties hereto for the performance of such
obligations, (iii) the participant Article 6 (to the extent that the Lender
---------
selling such participation would have been entitled thereto) and the right
of set-off contained in Section 13.5, and (iv) the Borrower shall continue
------------
to deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement, and such Lender shall
retain the sole right to enforce the obligations of the Borrower relating
to its Loans and to approve any amendment, modification, waiver or consent
of any provision of any Loan Document (other than amendments,
modifications, waivers or consents of the types relating to the Loan or
Commitment participated in under Section 15.11(a)).
-----------------
(e) Pledge to Federal Reserve. Notwithstanding any other
-------------------------
provision set forth in this Agreement, any Lender may at any time assign
and pledge all or any portion of its Loans to any Federal Reserve Bank as
collateral security pursuant to Regulation A and any Operating Circular
issued by such Federal Reserve Bank. No such assignment shall release the
assigning Lender from its obligations hereunder.
(f) Delivery of Information. Any Lender may furnish any
-----------------------
information concerning the Borrower or any Subsidiaries in the possession
of such Lender from time to time to assignees and participants (including
prospective assignees and participants) subject to such Persons agreeing to
being bound by the provisions of Section 15.22.
-------------
Section 15.9 Survival. All representations and warranties made in any
--------
Loan Document or in any document, statement, or certificate furnished in
connection with any Loan Document shall survive the execution and delivery of
the Loan Documents and no investigation by the Administrative Agent or any
Lender or any closing shall affect the representations and warranties
CREDIT AGREEMENT - Page 80
<PAGE>
or the right of the Administrative Agent or any Lender to rely upon them.
Without prejudice to the survival of any other obligation of the Borrower
hereunder, the obligations under Article 6 hereof and Sections 14.5, 15.1 and
--------- -------------------
15.2 hereof shall survive repayment of the Notes and termination of the
- ----
Commitments and the Letters of Credit.
SECTION 15.10 ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES, AND THE OTHER
----------------
LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE
PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE
PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES
THERETO.
Section 15.11 Amendments and Waivers. Any provision of any Loan Document
----------------------
may be amended or waived, any consent to any departure by any Loan Party
therefrom may be granted and the Administrative Agent may agree to changes to
the Lock-Up Agreement described in clause (b)(i) of the definition of
Termination Date if, but only if, such amendment, waiver or consent is in
writing and is signed by the Borrower and the Required Lenders (and, if Article
-------
14 or the rights or duties of the Administrative Agent are affected thereby, by
- --
the Administrative Agent); provided that no such amendment, waiver or consent
--------
applicable to:
(a) a Loan, Letter of Credit or Commitment which has the effect of:
(i) increasing such Commitment,
(ii) reducing the principal of or rate of interest on such
Loan or any Reimbursement Obligation relating to such Letter of
Credit or any fees or other amounts payable hereunder with
respect to such Loan, Letter of Credit or Commitment,
(iii) postponing any date fixed for the payment of any
scheduled installment of principal of or interest on such Loan or
any Reimbursement Obligation relating to such Letter of Credit or
any fees or other amounts payable hereunder with respect to such
Loan, Letter of Credit or Commitment or changing any optional or
mandatory prepayment provision applicable to such Loan or Letter
of Credit, or
(iv) postponing any date fixed for termination of such
Commitment
shall be effective unless also signed by each Lender holding (with respect
to Letters of Credit either directly or through a participation under
Section 3.1) the Loan, Letter of Credit or Commitment of the type being
-----------
modified; and
CREDIT AGREEMENT - Page 81
<PAGE>
(b) any change (including a waiver) in:
(i) the definition of Required Lenders or the provisions
of this Section 15.11; or
-------------
(ii) the conditions specified in Article 8 hereof, or
---------
(iii) which has the effect of releasing any Loan Party in a
transaction which is not otherwise permitted hereby, or
(iv) releases of all or substantially all of the
Collateral,
(v) releases of all or substantially all of the
Guaranties, or
(iv) changes the definition of "Borrowing Base" or
"Prepayment Borrowing Base" or changes the advance rates under
the Borrowing Base;
shall not be effective unless signed by all Lenders;
Section 15.12 Maximum Interest Rate.
---------------------
(a) No interest rate specified in any Loan Document shall at any
time exceed the Maximum Rate. If at any time the interest rate (the
"Contract Rate") for any Obligation shall exceed the Maximum Rate,
-------------
thereby causing the interest accruing on such Obligation to be limited to
the Maximum Rate, then any subsequent reduction in the Contract Rate for
such Obligation shall not reduce the rate of interest on such Obligation
below the Maximum Rate until the aggregate amount of interest accrued on
such Obligation equals the aggregate amount of interest which would have
accrued on such Obligation if the Contract Rate for such Obligation had at
all times been in effect.
(b) No provision of any Loan Document shall require the payment
or the collection of interest in excess of the maximum amount permitted by
applicable law. If any excess of interest in such respect is hereby
provided for, or shall be adjudicated to be so provided, in any Loan
Document or otherwise in connection with this loan transaction, the
provisions of this Section shall govern and prevail and neither the
Borrower nor the sureties, guarantors, successors, or assigns of the
Borrower shall be obligated to pay the excess amount of such interest or
any other excess sum paid for the use, forbearance, or detention of sums
loaned pursuant hereto. In the event any Lender ever receives, collects, or
applies as interest any such sum, such amount which would be in excess of
the maximum amount permitted by applicable law shall be applied as a
payment and reduction of the principal of the Obligations; and, if the
principal of the Obligations has been paid in full, any remaining excess
shall forthwith be paid to the Borrower. In determining whether or not the
interest paid or payable exceeds the Maximum Rate, the Borrower and each
Lender shall, to the extent permitted by applicable law, (a) characterize
any non-principal payment as an expense, fee, or premium rather than as
interest, (b) exclude voluntary prepayments and the effects thereof, and
(c) amortize, prorate, allocate, and spread in equal or unequal parts the
CREDIT AGREEMENT - Page 82
<PAGE>
total amount of interest throughout the entire contemplated term of the
Obligations so that interest for the entire term does not exceed the
Maximum Rate.
Section 15.13 Notices. All notices and other communications provided for
-------
in any Loan Document to which any Loan Party is a party shall be given or made
in writing (except as otherwise permitted by Section 5.3) and telecopied, mailed
-----------
by certified mail return receipt requested, or delivered to the intended
recipient at the "Address for Notices" specified below its name on the signature
pages hereof or with respect to any Loan Party, at the "Address for Notices"
specified below the Borrower's name on the signature pages hereof, or with
respect to a Lender not a party to this Agreement on the Closing Date, in its
Assignment and Acceptance, or, as to any party at such other address as shall be
designated by such party in a notice to each other party given in accordance
with this Section. Except as otherwise provided in any Loan Document, all such
communications shall be deemed to have been duly given when transmitted by
telecopy, subject to telephone confirmation of receipt, or when personally
delivered or, in the case of a mailed notice, three (3) Business Days after
being duly deposited in the mails, in each case given or addressed as aforesaid;
provided, however, notices to the Administrative Agent pursuant to Section 2.7
-----------
or 5.3 hereof shall not be effective until received by the Administrative Agent.
---
SECTION 15.14 GOVERNING LAW; VENUE; SERVICE OF PROCESS. THIS AGREEMENT
----------------------------------------
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. ANY ACTION OR
PROCEEDING AGAINST THE BORROWER UNDER OR IN CONNECTION WITH THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN ANY TEXAS STATE COURT LOCATED IN
DALLAS OR FEDERAL COURT IN THE NORTHERN DISTRICT OF TEXAS. THE BORROWER
IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF SUCH COURTS, AND (B)
WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH
ACTION OR PROCEEDING BROUGHT IN SUCH COURT OR THAT SUCH COURT IS AN INCONVENIENT
FORUM. THE BORROWER AGREES THAT SERVICE OF PROCESS UPON IT MAY BE MADE BY
CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS ADDRESS
SPECIFIED OR DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 15.13 OF
-------------
THIS AGREEMENT. NOTHING IN THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL
AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE
AGENT OR ANY LENDER TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR
WITH RESPECT TO ANY OF ITS PROPERTY IN COURTS IN OTHER JURISDICTIONS. ANY ACTION
OR PROCEEDING BY ANY LOAN PARTY AGAINST THE ADMINISTRATIVE AGENT OR ANY LENDER
SHALL BE BROUGHT ONLY IN A COURT LOCATED IN DALLAS, TEXAS.
CREDIT AGREEMENT - Page 83
<PAGE>
Section 15.15 Counterparts. 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 agreement.
Section 15.16 Severability. Any provision of any Loan Document held by a
------------
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of any Loan Document and the effect thereof shall be
confined to the provision held to be invalid or illegal.
Section 15.17 Headings. The headings, captions, and arrangements used in
--------
this Agreement are for convenience only and shall not affect the interpretation
of this Agreement.
Section 15.18 Non-Application of Chapter 15 of Texas Credit Code. The
--------------------------------------------------
provisions of Chapter 15 of the Texas Credit Code (relating to certain revolving
credit facilities) are specifically declared by the parties hereto not to be
applicable to any Loan Documents or to the transactions contemplated thereby.
Section 15.19 Construction. The Borrower, each Loan Party (by its
------------
execution of the Loan Documents to which it is a party), the Administrative
Agent and each Lender acknowledges that each of them has had the benefit of
legal counsel of its own choice and has been afforded an opportunity to review
the Loan Documents with its legal counsel and that the Loan Documents shall be
construed as if jointly drafted by the parties thereto.
Section 15.20 Independence of Covenants. All covenants under the Loan
-------------------------
Documents shall be given independent effect so that if a particular action or
condition is not permitted by any of such covenants, the fact that it would be
permitted by an exception to, or be otherwise within the limitations of, another
covenant shall not avoid the occurrence of a Default if such action is taken or
such condition exists.
SECTION 15.21 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY
--------------------
APPLICABLE LAW, EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND EXPRESSLY
WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM
(WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO
ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE
ACTIONS OF THE ADMINISTRATIVE AGENT OR ANY LENDER IN THE NEGOTIATION,
ADMINISTRATION, OR ENFORCEMENT THEREOF.
Section 15.22 Confidentiality. Each Lender agrees to keep confidential
---------------
any information obtained by it from any Loan Party or its agents or
representatives pursuant hereto and the other Loan Documents identified as
confidential in writing at the time of delivery in accordance with such Lender's
customary practices and agrees that it will only use such information in
connection with the transactions contemplated by this Agreement and not disclose
any of such information other than (a) to such Lender's officers, directors,
employees, representatives, attorneys, agents or affiliates who are advised of
the confidential nature of such information, (b) to the extent such information
presently is or hereafter becomes available to such Lender on a non-confidential
basis from any
CREDIT AGREEMENT - Page 84
<PAGE>
source or as such information that is in the public domain at the time of
disclosure, (c) to the extent disclosure is required by law, regulation,
subpoena or judicial order or process (provided that notice of such requirement
or order shall be promptly furnished to the Borrower unless such notice is
legally prohibited) or requested or required by bank regulators or auditors or
any administrative body, commission, or other Governmental Authority to whose
jurisdiction such Lender may be subject, (d) to assignees or participants or
potential assignees or participants or to professional advisors or direct or
indirect contractual counterparts in swap agreements provided in each case such
Person agrees to be bound by the provisions of this Subsection 15.22, (e) to the
----------------
extent required in connection with any litigation between any Loan Party and any
Lender with respect to the Loans or this Agreement and the other Loan Documents,
(f) to rating agencies, their employees, representatives, attorneys, agents or
affiliates who are advised of the confidential nature of such information and
(g) with the Borrower's prior written consent.
CREDIT AGREEMENT - Page 85
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
IMPERIAL BANK
By:_________________________________
Name:_______________________________
Title:______________________________
Address for Notices to IB:
Imperial Bank
9920 S. LaCienega Blvd., Suite 636
Inglewood, California 90301
Attention: Richard M. Baker
Telephone: (310) 417-5929
Telecopier: (310) 417-5695
IMPERIAL FINANCIAL GROUP, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Address for Notices the Borrower:
Imperial Financial Group, Inc.
1840 Century Park East, 10th Floor
Los Angeles, California 90067
Attention: Brian Nocco
Telephone: (310) 712-8646
Telecopier: (310) 201-4933
CREDIT AGREEMENT
<PAGE>
NATIONSBANK, N.A.,
as Administrative Agent and as a Lender
By:____________________________________
Name: Elizabeth Kurilecz
Title: Senior Vice President
Address for Notices:
-------------------
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Elizabeth Kurilecz
Telephone: (214) 508-0975
Telecopier: (214) 508-0604
Lending Office for Base Rate Accounts
and Libor Accounts:
-------------------
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Elizabeth Kurilecz
Telephone: (214) 508-0975
Telecopier: (214) 508-0604
CREDIT AGREEMENT
<PAGE>
Revolving Commitment: NATIONSBANK, N.A.,
- --------------------
as a Lender
By:______________________________
Name: Elizabeth Kurilecz
Title: Senior Vice President
Address for Notices:
-------------------
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Elizabeth Kurilecz
Telephone: (214) 508-0975
Telecopier: (214) 508-0604
Lending Office for Base Rate Accounts
and Libor Accounts:
-------------------
NationsBank, N.A.
901 Main Street, 66th Floor
Dallas, Texas 75202
Attention: Elizabeth Kurilecz
Telephone: (214) 508-0975
Telecopier: (214) 508-0604
CREDIT AGREEMENT
<PAGE>
EXHIBIT 10.8
[LETTERHEAD OF IMPERIAL FINANCIAL GROUP]
August __, 1998
Mr. G. Louis Graziadio, III
Dear Louis:
I am pleased to confirm our offer and your acceptance of the position of
Co-Chairman of the Board and CEO, Imperial Financial Group, Inc. located at our
Century City office, and reporting to the Board of Directors of Imperial
Financial Group, Inc.
The terms of our offer are:
. Your title will be Co-Chairman and CEO, Imperial Financial Group,
Inc. You shall devote such time, energy and ability to the business,
affairs and interests of Imperial Financial Group, Inc. as is
reasonably necessary to carry out your duties, but you shall not be
required to provide full-time services to Imperial Financial Group,
Inc.
. You may serve as an Officer or Director with any corporation or other
business enterprise. If your service as an officer or director of
another company involves the business of Imperial Financial Group,
Inc., you will notify the Board of Directors.
. You will receive a semi-monthly salary of $4,666.66 which computes
on an annualized basis to $100,000.00.
. You will receive a $1,500.00 monthly auto allowance which will be
included in your semi-monthly paycheck.
. You will be eligible to receive a bonus which will be based on the
performance of Imperial Financial Group, Inc. as determined by the
Imperial Financial Group Compensation Committee.
. You have received options to purchase 575,000 shares of Imperial
Financial Group, Inc. "B" stock which will be granted at a strike
prices previously authorized by the Imperial Financial Group, Inc.
Board of Directors. These 10-year option will be exercisable in
accordance with the terms previously authorized by the Imperial
Financial Group, Inc. Board of Directors and is subject to the
provisions in the approved Imperial Financial Group, Inc. 1997 Share
Incentive Plan. Upon a "change of control" of Imperial Financial
Group, Inc. as defined in the 1997 Share Incentive Plan, the stock
options will fully vest and convert to options to purchase Imperial
Financial Group, Inc. "A" stock.
<PAGE>
G. Louis Graziadio
August __, 1998
Page 2
. You may be eligible to receive additional options on shares of
Imperial Financial Group, Inc. as decided by the Stock Option
Committee.
. You will be eligible to participate in the Imperial Financial
Group, Inc. Deferred Compensation Plan, if adopted by the Imperial
Financial Group, Inc. Board of Directors.
. Should your employment be involuntarily terminated during the
first year following the date hereof, for any reason other than
good cause, you will receive a severance package equal to 24
months base salary. Should your employment be involuntarily
terminated at any time thereafter, for any reason other than good
cause, you will receive a severance package equal to two months of
base salary for each month you have served after the date hereof,
less all base salary payments received to date following the date
hereof.
. Should your relationship with Imperial Financial Group, Inc. be
terminated due to either merger or acquisition by a third party,
your total severance shall include the following: a) Three year's
salary continuation paid in a lump sum at termination date or a
salary continuation; b) Three year's current target bonus paid in
a lump sum at termination date, c) Outplacement services at a
company selected by Imperial Financial Group; d) Full benefits
throughout the severance period; e) This severance provision is
contingent upon the agreement of a total mutual release of all
known and unknown claims other than for indemnity as officer and
employee; and f) An excise tax gross-up for any and all 280g
penalties. Such severance shall be in lieu of and not in addition
to the severance described in the preceding paragraph.
. You may continue to be covered by our available Medical and Dental
Plans.
. You may continue to be eligible to participate in our 401K and
profit Sharing plans.
This letter supersedes any and all discussions or communication and any future
modifications or amendments must be in writing and signed by both you and the
company. This letter, however, does not create a contractual relationship
between you and Imperial Financial Group, Inc.. Should you accept this offer,
the relationship between you and Imperial Financial Group, Inc. is and at all
times will be an "at will" relationship; either you or Imperial Financial
Group, Inc. may terminate employment, and its accompanying compensation and
benefits, at any time, with or without cause, and with or without notice.
You and Imperial Financial Group, Inc., in order to obtain a prompt
determination as to rights and avoid the lengthy delay in court actions, agree
to binding arbitration of any claims or controversies related to the employee's
employment, or termination thereof, whether sounding in contract, tort or
statute, in accordance with the then effective rules of JAMS/Endispute. The
consideration for this agreement is the mutual exchange of promises to
arbitrate. You and Imperial Financial Group, Inc. consent to the jurisdiction of
the Superior or Municipal Courts of Los Angeles and of the United States
District Court for the Central District of California for all purposes in
connection with the arbitration. You and Imperial Financial Group, Inc. agree to
incorporate Section 1283.05 of the California Code of Civil Procedure, as that
statute exists as of the date of execution of this letter, into this letter.
Notwithstanding said incorporation of Section 1283.05, this agreement shall be
governed by the provisions of the Federal Arbitration Act (9 U.S.C. Section 1 et
--
seq.) You and Imperial Financial Group, Inc. consent that any process, notice
- ---
<PAGE>
G. Louis Graziadio
August __, 1998
Page 3
of motion, or other application to any courts and any paper in connection with
arbitration may be served by certified mail, return receipt requested or by
personal delivery to the other side provided a reasonable time for appearance is
allowed.
We are very pleased to have you as Co-Chairman and CEO of Imperial Financial
Group, Inc., and are confident you will make a significant contribution to the
organization.
Sincerely,
IMPERIAL FINANCIAL GROUP, INC.
- -----------------------------------
George L. Graziadio, II
Chairman of the Board
Acknowledged:
- ------------------------------------ ----------------
G. Louis Graziadio, III Date
<PAGE>
EXHIBIT 10.9
[LETTERHEAD OF IMPERIAL FINANCIAL GROUP]
August __, 1998
Mr. Robert M. Franko
Dear Robert:
We are pleased to confirm our offer and your acceptance of the position of
President, Imperial Financial Group, Inc. located at our Century City office,
and reporting to Louis Graziadio, Co-Chairman of the Board and CEO. This offer
is contingent upon the successful completion of the spin off of Imperial
Financial Group, Inc.
The terms of our offer are:
. Your title will be President, Imperial Financial Group, Inc.
. You will receive a semi-monthly base salary of $8,333.33 which
computes on an annualized basis to $200,000.00.
. You will receive a $1,500.00 monthly auto allowance which will be
included in your semi-monthly paycheck.
. You will be eligible to receive an annual bonus of up to 100% of your
annual base salary which will be based on your performance against
objectives and the performance of Imperial Financial Group, Inc., as
determined by the Imperial Financial Group compensation committee.
. You have received options to purchase 525,000 shares of Imperial
Financial Group, Inc. "B" stock at the strike prices previously
authorized by the Imperial Financial Group, Inc. Board of Directors.
These 10-year options will be exercisable in accordance with the terms
previously authorized by the Imperial Financial Group, Inc. Board of
Directors and is subject to the provisions in the approved Imperial
Financial Group, Inc. 1997 Share Incentive Plan. Upon a "change of
control" of Imperial Financial Group, Inc. as defined in the 1997
Share Incentive Plan, the stock options will fully vest and, to the
extent legally permissible convert to options to purchase Imperial
Financial Group, Inc. "A" stock.
. You may be eligible to receive additional options on shares of
Imperial Financial Group, Inc. "B" stock, as decided by the Imperial
Financial Group, Inc. Stock Option Committee, in its discretion.
<PAGE>
Robert Franko
August __, 1998
Page 2
. You will be eligible to participate in the Imperial Financial
Group, Inc. Deferred Compensation Plan, if adopted by the Imperial
Financial Group, Inc. Board of Directors.
. Should your employment be involuntarily terminated on or prior to
12/31/99 for any reason other than good cause, you will receive a
severance package equivalent to twelve months of your base salary
plus your target bonus pro-rated through date of termination paid
in standard semi-monthly payments. Payment of your pro-rated target
bonus amount shall be based on both your date of termination, and
your performance against pro-rated annualized objectives, as
defined by Imperial Financial Group's Compensation Committee.
Should your employment be involuntarily terminated anytime after
12-31-99, for any reason other than good cause, you will receive a
severance package equivalent to six months of your base salary plus
your target bonus pro-rated through date of termination. Payment of
your pro-rated target bonus amount shall be based on both your date
of termination, and your performance against pro-rated annualized
objectives, as defined by Imperial Financial Group's Compensation
Committee and shall be paid in standard semi-monthly payments.
Should your employment be terminated for good cause, you shall be
paid salary and benefits through the date of termination, and
Imperial Financial Group, Inc., shall have no obligation to you.
. Should your relationship with Imperial Financial Group, Inc. be
terminated due to either merger or acquisition by a third party,
your total severance shall include the following: a) Three year's
salary continuation paid in a lump sum at termination date or a
salary continuation; b) Three year's current target bonus paid
in a lump sum at termination date, c) Outplacement services at
a company selected by Imperial Financial Group; d) Full benefits
throughout the severance period; e) This severance provision is
contingent upon the agreement of a total mutual release of all
known and unknown claims other than for indemnity as officer and
employee; and f) An excise tax gross-up for any and all 280g
penalties. Such severance shall be in lieu of and not in addition
to the severance described in the preceding paragraph.
. You are eligible for four weeks of paid vacation per year. Should
your employment with Imperial Financial Group, Inc. terminate, the
calculation of your unused accrued vacation will be based on
established company procedures in effect at the time of your
termination. Vacation is accrued at the rate of 6.66 hours per pay
period.
. You may continue to be covered by our available Medical and Dental
Plans.
. You may continue to be eligible to participate in our 401K and
Profit Sharing Plans.
This letter supersedes any and all discussions or communications and any future
modifications or amendments must be in writing and signed by both you and the
company. The relationship between you and Imperial Financial Group, Inc. is and
at all times will be an "at will" employment relationship; either you or
Imperial Financial Group, Inc. may terminate employment, and its accompanying
compensation and benefits, at will, with or without cause, and with or without
notice. This at will relationship can only be changed by an individualized
written agreement executed by you and the Co-Chairman and CEO of Imperial
Financial Group, Inc. Further, the terms and conditions of your employment are
within Imperial Financial Group's, Inc. sole and absolute discretion and may be
modified at any time as the Company deems necessary to the operation of its
business.
<PAGE>
Robert Franko
August __, 1998
Page 3
To the fullest extent allowed by law, you and Imperial Financial Group, Inc., in
order to obtain a prompt determination as to rights and avoid the lengthy delay
in court actions, agree to binding arbitration of any claims or controversies
related to the employee's employment, or termination thereof, whether sounding
in contract, tort or statute, in accordance with the then effective rules of
JAMS/Endispute. The consideration for this agreement is the mutual exchange of
promises to arbitrate. You and Imperial Financial Group, Inc. consent to the
jurisdiction of the Superior or Municipal Courts of Los Angeles and of the
United States District Court for the Central District of California for all
purposes in connection with the arbitration. You and Imperial Financial Group,
Inc. agree to incorporate Section 1283.05 of the California Code of Civil
Procedure, as that statute exists as of the date of execution of this letter,
into this letter. Notwithstanding said incorporation of Section 1283.05, this
agreement shall be governed by the provisions of the Federal Arbitration Act (9
U.S.C. Section 1 et seq.). You and Imperial Financial Group, Inc. consent that
any process, notice of motion, or other application to any courts and any paper
in connection with arbitration may be served by certified mail, return receipt
requested or by personal delivery to the other side provided a reasonable time
for appearance is allowed.
We are very pleased to have you as President of Imperial Financial Group, Inc.,
and are confident you will make a significant contribution to our organization.
Sincerely,
IMPERIAL FINANCIAL GROUP, INC.
__________________________________
George L. Graziadio, II
Chairman of the Board
Acknowledged:
________________________ __________________
Robert Franko Date
<PAGE>
EXHIBIT 10.11
CONSULTING AGREEMENT
--------------------
This Agreement is made and entered into as of November 1, 1991, by and
between Imperial Bank, a California banking corporation, ("Bank") and Second
Southern Corp. ("Consultant"), in connection with services to be provided to
Bank by Consultant in the identification and implementation of an opportunity
to raise capital for the benefit of Bank in connection with Bank's mortgage
banking and thrift and loan activities which may be consolidated into a new
company.
Consultant has brought to the attention of Bank potential opportunities
from time to time and has expended his time, effort and funds towards defining
and perfecting such opportunities. Consultant has identified a specific
potential transaction involving the Bank's Mortgage Division and Thrift
subsidiary, and has performed sufficient market analysis and preliminary
feasibility studies at its own cost and risk to provide Bank with the
opportunity to assess the potential viability of the project. Consultant has
offered and Bank has agreed that Consultant will pursue the matter,
in coordination with designated Bank management, on a successful efforts basis
with Bank being responsible only to third party costs and an agreed amount of
overhead reimbursement absent the closing of a successful transaction.
In order to pursue opportunities in connection with Bank's mortgage banking
and thrift and loan activities and ongoing activities as hereinafter specified,
Bank desires to engage Consultant effective as of the date hereof, and
Consultant is willing to provide services to Bank involving the collection and
analysis of relevant information, preparation of marketing oriented materials,
selection of, negotiation with and coordination of appropriate professionals
(legal, accounting and investment banking) to assist in the process leading to a
potential securities offering or offerings ("Transaction") of a new company (the
"Company") to raise capital to the benefit of Bank, and to provide ongoing
advice and services with reference to the maximization of Bank's investment in
Company over an extended period of time.
In consideration of the mutual covenants and conditions hereof, the parties
agree as follows:
1. Bank hereby engages Consultant and Consultant hereby agrees to perform
services for Bank in connection with the Transaction and on an ongoing basis
hereafter.
2. Consultant will be reimbursed for its costs in connection with
providing the services hereunder on the basis of a payment of $12,500 per month
for the time commitment of Consultant, it's employees and affiliates from the
date hereof through the consummation of a Transaction or notice from Bank to
Consultant to terminate its services. Consultant shall bill Bank monthly,
including a detail of any ordinary and necessary out-of-pocket expenses incurred
by Consultant in addition to its normal overhead cost, which costs shall be paid
by Bank in addition to the monthly amount specified above.
<PAGE>
3. In the event a Transaction is consummated within one year from the date
hereof, Bank shall pay to Consultant, in consideration of the services rendered
and to be rendered in formatting and organizing the Company, analyzing and
selecting financial alternatives, managing consultants and professionals, and
providing ongoing services involving oversight of and advice in reference to
Bank's investment in the Company for a period of ten (10) years from the date
hereof, a fee equal to $175,000 payable upon a Transaction, plus an Incentive
fee of 2.5 percent of the realized pretax gains received by Bank when, as and if
realized by Bank from Bank's disposition of securities issued by the Company.
For purposes of this incentive fee, Bank shall be considered to have sold an
amount equal to 20% of any securities holdings of the Company after any initial
public offering as of January 1, 1997, 1998, 1999, 2000 and 2001, at a price
equal to the arithmetic average of the daily average stock price of the Company
as reported by the NASD during the preceding year, and Bank shall pay
compensation based on such presumed sale to the extent that actual sales of
Company securities by Bank during the preceding years have not been equal to or
greater than the volume of presumed sales specified.
4. In the event Bank distributes the securities of the Company to its
parent or an affiliate, and the recipient of the securities agrees to assume
Bank's fee obligations under this Agreement, no compensation shall be due
Consultant out of this Agreement as a result of such transfer so long as the
Bank remains secondarily liable for such payments. Any other distribution of
Company securities by Bank shall be considered a sale at the average price as
would be applicable to a presumed sale provided for above.
5. Bank agrees to cooperate with Consultant in the providing of its
services hereunder and Consultant shall be an independent contractor working
under the general direction of Bank, but without the requirement of dedicating
any particular personnel or specific hours of services in connection with this
Agreement. Bank acknowledges that Consultant or its affiliates are Directors
of Imperial Bank and/or Imperial Bancorp, Bank's parent, and that this
relationship has been disclosed to Bank and to the Boards of Directors of both
Bank and Imperial Bancorp, and this Agreement has been submitted to and approved
by the respective Boards of both corporations without the participation of
either G. Louis Graziadio III or Robert Muehlenbeck.
6. Any provision of this Agreement which is prohibited or unenforceable in
any applicable jurisdiction shall, as to such jurisdiction, not be in effect to
the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or thereof or affecting the validity or
enforceability of such provision in any other jurisdiction. No amendment or
waiver of any provision of this Agreement, nor consent to any departure by
either party therefrom, shall in any event be effective unless the same shall be
in writing and signed by an authorized representative of the other party and any
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which it is given. All rights and remedies of the
parties hereunder shall, except as otherwise specifically provided herein, be
cumulative and non-exclusive of any
2
<PAGE>
rights or remedies which either may have under any other agreement or
instrument, by ascertion of law, or otherwise. This Agreement shall become
effective when it is executed by both parties and thereafter shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns, except that Consultant shall not have the right to assign its rights,
obligations or interests hereunder with the prior written consent of Bank.
Consultant's obligation to provide continuing services hereunder shall terminate
upon the death or permanent disability of G. Louis Graziadio, III. 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.
7. In the event of any dispute arising out of or in connection with this
Agreement, and any documents executed pursuant hereto, the prevailing party, in
addition to any other amounts which it may be entitled to, shall be entitled to
recover from the other party reasonable attorneys' fees and court costs as shall
be awarded in the resolution of such dispute.
This Agreement is executed by or on behalf of the parties by duly
authorized representatives as of the date first set forth above.
IMPERIAL BANK
By: /s/ Norman P. Creighton
-------------------------------
Norman P. Creighton, President
and Chief Executive Officer
SECOND SOUTHERN CORP.
By: /s/ G. Louis Graziadio, III
--------------------------------
G. Louis Graziadio, III
3
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income available to stockholder $ 5,919,000 $ 38,644,000 $ 15,160,000
============== ============== ==============
Weighted average shares of common stock outstanding 18,224,024 18,782,675 19,398,542
============== ============== ==============
Basic Earnings Per Share $ 0.32 $ 2.06 $ 0.78
============== ============== ==============
Diluted Earings Per Share:
Net income available to stockholder $ 5,919,000 $ 38,644,000 $ 15,160,000
============== ============== ==============
Weighted average shares of common stock outstanding 18,224,024 18,782,675 19,398,542
Effect of dilutive securities on number of incremental
shares of outstanding common stock options 122,690 225,896 505,555
-------------- -------------- --------------
Adjusted weighted average shares 18,346,714 19,008,571 19,904,097
============== ============== ==============
Diluted Earnings Per Share $ 0.32 $ 2.03 $ 0.76
============== ============== ==============
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 JUN-30-1998
<CASH> 5,245 2,813 10,448
<SECURITIES> 1,179 6,027 3,507
<RECEIVABLES> 80,688 142,656 152,506
<ALLOWANCES> 2,629 4,486 4,855
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 306 551 1,442
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 149,348 227,983 250,616
<CURRENT-LIABILITIES> 52,502 115,745 123,900
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 96,846 112,238 126,716
<TOTAL-LIABILITY-AND-EQUITY> 149,348 227,983 250,616
<SALES> 84,905 57,181 23,903
<TOTAL-REVENUES> 84,905 57,181 23,903
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 16,833 27,449 11,868
<LOSS-PROVISION> 1,781 2,558 736
<INTEREST-EXPENSE> 1,973 3,277 2,831
<INCOME-PRETAX> 64,318 23,897 8,468
<INCOME-TAX> 25,674 8,737 3,572
<INCOME-CONTINUING> 38,644 15,160 4,896
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 38,644 15,160 4,896
<EPS-PRIMARY> 0 0 0
<EPS-DILUTED> 0 0 0
</TABLE>
