<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
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)
**3.1 Form of Amended and Restated Certificate of Incorporation of Imperial Financial Group,
Inc.
**3.2 Form of Amended and Restated Bylaws of Imperial Financial Group, Inc.
**4 Specimen form of certificate representing Class A Common Stock of 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
**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 Employment Agreement of G. Louis Graziadio, III
***10.9 Employment Agreement of Robert M. Franko
**10.10 Employment Agreement dated as of July 23, 1997 between Imperial Bank 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
*** To be filed by amendment
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.
By:/s/ Robert M. Franko
---------------------------------
Name: Robert M. Franko
Title: President
March 13, 1998
5
<PAGE>
ANNEX A
[IMPERIAL BANCORP LETTERHEAD]
, 1998
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 , 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 ,
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]
, 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 MARCH 13, 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 , 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 will conduct, among other businesses,
the Bank's small business lending, (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 December 31, 1997) in Imperial Credit Industries, Inc., a publicly
traded, diversified specialty finance company.
Subject to the satisfaction of certain conditions, the Distribution will be
effective on or about , 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. Application will be made to list the Company
Class A Common Stock 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
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ITEM PAGE
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SUMMARY OF CERTAIN INFORMATION............................................ 1
INTRODUCTION.............................................................. 11
THE TRANSACTIONS.......................................................... 12
RISK FACTORS.............................................................. 15
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 21
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......................................................... 29
DIVIDEND POLICY........................................................... 31
CAPITALIZATION............................................................ 32
SELECTED COMBINED FINANCIAL DATA.......................................... 33
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA............................... 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 39
BUSINESS.................................................................. 55
MANAGEMENT................................................................ 86
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK........... 89
EXECUTIVE COMPENSATION.................................................... 90
DESCRIPTION OF CAPITAL STOCK.............................................. 96
CREDIT FACILITIES......................................................... 97
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW................................... 98
LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS..... 102
ADDITIONAL INFORMATION.................................................... 103
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 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 December 31,
1997, approximately 23.0% of the common stock of Imperial Credit Industries,
Inc. ("ICII"), a publicly traded, diversified specialty finance company.
The Company's LHO division is a leading provider of senior, secured financing
for independent motion picture and television production. During the years
ended December 31, 1997 and 1996, the Company originated 59 loans and 39 loans,
respectively, in an aggregate principal amount of approximately $98 million and
$56 million, respectively. During the same periods, the LHO division, through
Imperial Bank, issued letters of credit totalling approximately $19 million and
$39 million, respectively. Total revenue for the LHO division for the years
ended December 31, 1997 and 1996 was $5.7 million and $4.0 million,
respectively, representing 11.1% and 4.9%, respectively, of the Company's total
revenue for such periods. Net income for the LHO division for both the years
ended December 31, 1997 and 1996 was $1.3 million, representing 8.5% and 3.3%,
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 December 31, 1997
and 1996, the aggregate outstanding principal amount of the Company's small
business loans was approximately $40 million and $28 million, respectively. The
aggregate principal amount of loans originated for the years ended December 31,
1997 and 1996 was approximately $49 million and $39 million, respectively.
Total revenue for CAB for the years ended December 31, 1997 and 1996 was $6.1
million and $5.0 million, respectively, representing 11.8% and 6.1%,
respectively, of the Company's total revenue for such periods. Net income for
CAB for the years ended December 31, 1997 and 1996 was $0.8 million and
$1.2 million, respectively, representing 5.0% and 3.2%, 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 years ended December 31, 1997 and 1996 was $8.4
million and $8.1 million, respectively,
1
<PAGE>
representing 16.3% and 10.0%, respectively, of the Company's total revenue for
such periods. Net income for ITC for the years ended December 31, 1997 and 1996
was $1.0 million and $1.1 million, respectively, representing 6.3% and 2.8%,
respectively, of the Company's net income for such periods. At December 31,
1997 and 1996, the Company maintained total assets under administration of
approximately $8.7 billion and $7.5 billion, respectively. ITC was the
fourteenth largest licensed trust company in California at December 31, 1997
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 years ended December
31, 1997 and 1996, ICII generated total revenues of $308.7 million and $256.9
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 years
ended December 31, 1997 and 1996 was $31.2 million and $64.1 million,
respectively, representing 60.8% and 79.0%, respectively, of the Company's
total revenue for such periods. Net income related to the Company's ownership
of ICII stock for the years ended December 31, 1997 and 1996 was $12.2 million
and $35.1 million, respectively, representing 80.2% and 90.7%, 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.
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
2
<PAGE>
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
first half 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 believe that
contributing the stock of ICII to the
Company in connection with the
Transactions will satisfy these concerns
of the Federal Reserve Board and the FDIC
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."
Shares to be Distributed........
Approximately 19,648,075 shares of
Company Class A Common Stock (based on
39,296,151 shares of Bancorp Common Stock
outstanding on February 15, 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 or
as stock dividends to holders of Company
Class B Common Stock. 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
3
<PAGE>
Class A Common Stock on the fifth
anniversary of the Distribution Date. 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 , 1998.
Distribution Date............... , 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
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 and initially
finance CAB's small business lending
activities. Following the initial
financing arrangements, the Company
expects that CAB's primary source of
funding for its lending activities will
be through deposits. The Company expects
that the Credit Facilities will be
composed of revolving credit facilities
in the aggregate amount of $170 million,
including a letter of credit
4
<PAGE>
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 and internal
audit and loan review to be provided by
the Bank to the Company. In addition,
certain directors and officers of 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. Application will be made to list
the Company Class A Common Stock on the
New York Stock Exchange (the "NYSE")
under the symbol "IFG." See "Listing and
Trading of the Common Stock."
5
<PAGE>
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 at December 31, 1993 and 1994 have been derived from the
unaudited combined financial statements of the Company not 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>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <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
Equity in net income
of Imperial Credit
Industries, Inc.
("ICII").............. 7,898 2,388 5,652 21,444 20,260
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
---------- ---------- ---------- ---------- ----------
Total revenue........ 31,667 15,502 20,627 81,151 51,346
---------- ---------- ---------- ---------- ----------
Personnel expense...... 3,388 4,338 4,827 6,153 9,315
Other expenses......... 4,357 4,515 5,568 10,680 18,134
---------- ---------- ---------- ---------- ----------
Total expenses....... 7,745 8,853 10,395 16,833 27,449
---------- ---------- ---------- ---------- ----------
Income before income
taxes and
extraordinary item.. 23,922 6,649 10,232 64,318 23,897
Income taxes........... 10,129 2,821 4,313 25,674 8,737
---------- ---------- ---------- ---------- ----------
Income before
extraordinary item.. 13,793 3,828 5,919 38,644 15,160
Extraordinary item--
gain on
extinguishment of
ICII debt, net of
taxes................. -- 370 -- -- --
---------- ---------- ---------- ---------- ----------
Net income........... $ 13,793 $ 4,198 $ 5,919 $ 38,644 $ 15,160
========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding(1):
Basic................ 17,301,446 17,640,080 18,224,024 18,782,675 19,398,542
Diluted.............. 17,391,309 17,738,940 18,346,714 19,008,571 19,904,097
Pro forma earnings per
share(2):
Basic................ $ 0.80 $ 0.24 $ 0.32 $ 2.06 $ 0.78
Diluted.............. $ 0.79 $ 0.24 $ 0.32 $ 2.03 $ 0.76
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale.... $ 2,579 $ 1,648 $ 2,648 $ 5,531 $ 3,763
Loans held for
investment, net....... 36,847 26,369 75,518 72,528 134,407
Investment in stock of
ICII.................. 27,445 30,934 36,126 57,736 75,001
Total assets........... 75,456 69,650 125,030 149,348 227,983
Borrowings from
Imperial Bank......... 13,889 -- 49,897 6,184 77,934
Total liabilities...... 25,370 15,406 66,829 52,502 115,745
Stockholder's equity... 50,086 54,244 58,201 96,846 112,238
</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.
(2) 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>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA:
Loans originated:
LHO................... $40,206 $25,857 $70,224 $55,951 $ 97,854
SBA................... 11,164 21,204 21,533 38,792 49,092
------- ------- ------- ------- --------
Total............... $51,370 $47,061 $91,757 $94,743 $146,946
======= ======= ======= ======= ========
Trust assets under
administration (in
millions).............. $ 6,617 $ 5,704 $ 6,781 $ 7,532 $ 8,716
======= ======= ======= ======= ========
SELECTED RATIOS:
Average equity to
average assets......... 16.56% 70.74% 63.37% 56.02% 54.00%
Return on average
common equity.......... 30.00 8.02 10.32 49.51 14.66
Return on average
assets................. 4.97 5.67 6.54 27.74 7.92
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%
Allowance for loan
losses as a percentage
of non-accrual loans... 37.48 47.79 56.89 53.42 102.54
Net charge-offs as a
percentage of average
loans held for
investment............. 0.62 0.26 1.21 0.87 0.66
</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 years
presented. The summary unaudited pro forma balance sheet data reflect the
Transactions as if they occurred at December 31, 1996 and 1997. 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 approximately $124 million 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>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income after provision for loan
losses..................................... $ 4,019 $ 6,667 $ 5,793
Equity in net income of ICII................ 5,652 21,444 20,260
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
---------- ---------- ----------
Total revenue............................. 20,546 80,785 48,381
---------- ---------- ----------
Personnel expense........................... 4,827 6,153 9,315
Other expenses.............................. 5,568 10,680 18,134
---------- ---------- ----------
Total expenses............................ 10,395 16,833 27,449
---------- ---------- ----------
Income before income taxes................ 10,151 63,952 20,932
Income taxes................................ 4,279 25,518 7,492
---------- ---------- ----------
Net income................................ $ 5,872 $ 38,434 $ 13,440
========== ========== ==========
Weighted average number of shares
outstanding(1):............................
Basic .................................... 18,224,024 18,782,675 19,398,542
Diluted .................................. 18,346,714 19,008,571 19,904,097
Pro forma earnings per share:
Basic .................................... $ 0.32 $ 2.05 $ 0.69
Diluted .................................. $ 0.32 $ 2.02 $ 0.68
</TABLE>
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 5,245 $ 2,813
Securities available for sale, at fair value........ 1,179 6,027
Loans held for sale................................. 5,531 3,763
Loans held for investment, net...................... 63,304 128,614
Investment in stock of ICII ........................ 57,736 75,001
Other assets........................................ 6,885 5,733
-------- --------
Total assets...................................... $139,880 $221,951
======== ========
Line of credit ..................................... $ 43,622 $124,310
Income taxes payable................................ 39,728 29,984
Other liabilities................................... 5,978 7,962
-------- --------
Total liabilities................................... 89,328 162,256
Stockholder's equity.............................. 50,552 59,695
-------- --------
Total liabilities and stockholder's equity........ $139,880 $221,951
======== ========
</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 will contribute to CAB all of the assets relating
to the Bank's small business lending division and CAB will assume all of the
liabilities relating thereto. After the contribution of such assets to, and
the assumption of such liabilities by, CAB, 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
December 31, 1997, 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."
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 , 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.
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.
11
<PAGE>
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, Inc. ("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 during the first half 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.
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.
12
<PAGE>
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. No action has been taken by the FDIC
on the application in contemplation of consummation of the Contribution and
Distribution.
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 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."
13
<PAGE>
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."
14
<PAGE>
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 December 31, 1997, 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. 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 years ended December 31, 1997 and 1996, ICII generated total
revenues of $308.7 million and $256.9 million, respectively. Total revenue
related to the Company's ownership of ICII stock for the years ended December
31, 1997 and 1996 was $31.2 million and $64.1 million, respectively,
representing 60.8% and 79.0%, respectively, of the Company's total revenue for
such periods. Net income related to the Company's ownership of ICII stock for
the years ended December 31, 1997 and 1996 was $12.2 million and $35.1
million, respectively, representing 80.2% and 90.7%, 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. Accordingly, it is unlikely that the Company
will sell a significant amount of its ICII shares. 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 years ended December 31, 1997 and
1996 would have been reduced by approximately 77% and 32%, respectively.
Although the Company intends to continue to own in excess of 20% 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,
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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. 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 agreements 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 Agreements."
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."
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RISKS PARTICULAR TO 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 December 31, 1997, approximately $8.7 million in aggregate principal
amount of loans in the Company's portfolio were 30 days or more delinquent,
including $4.4 million of which were no longer accruing interest.
Additionally, as of December 31, 1997, the Company was in the process of
liquidating other assets with a net book value of approximately $0.9 million
which previously constituted collateral for certain of the Company's loans.
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.
In addition, a substantial percentage of the Company's financings made in
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."
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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 December 31, 1997, approximately 32% 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 December 31, 1997, the Company's combined balance sheet reflected
approximately $4.6 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 year ended December 31, 1997, approximately 97% 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.
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."
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CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 70% and 78% of the aggregate principal amount of loans
originated by the Company through LHO and CAB during the years ended December
31, 1997 and 1996, 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."
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,
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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.
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
Application will be made to list the Company Class A Common Stock 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
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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 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."
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.
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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.
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LISTING AND TRADING OF THE COMMON STOCK
Application will be made to list the Company Class A Common Stock on the
NYSE 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 , 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."
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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. On January 9, 1998, the FDIC approved
the Company's Application for Federal Deposit Insurance for CAB, subject to,
among other things, satisfaction of various conditions, including CAB's
capitalization as part of the Contribution. Upon being capitalized, CAB will
be a member of the FDIC and its deposit accounts will be insured by the Bank
Insurance Fund of the FDIC. Among the factors considered by the FDIC in
reviewing such application were the following: the qualifications and
background of management and the board of directors, the proposed plan of
business, including the nature and extent of CAB's lending and deposit-
gathering activities, the adequacy of CAB's policies and operating procedures,
the adequacy of its premises, economic and demographic considerations and the
need for an additional depository financial institution in the market areas to
be served by CAB, the projected financial condition of CAB and its earnings
prospects and the adequacy of CAB's capital structure. 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 depositary 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
December 31, 1997, 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 will require
notice to, and nondisapproval of, the FDIC under the Change in Bank Control
Act. Any persons or groups of affiliated persons who are deemed to control
Bancorp or may be deemed to control the Company by virtue of their ownership
of a sufficient amount of the common stock of Bancorp or the Class A Common
Stock of the Company may also be required to file a notice under the Change in
Bank Control Act either as a consequence of the Contribution or on the basis
that such persons or groups are deemed to have acquired control as a result of
the Distribution.
A notice under the Change in Bank Control Act and regulations promulgated
thereunder ("Notice") must contain information on the identity, history,
business background and experience of each acquiror; a statement of each
acquiror's assets and liabilities; the terms and conditions of the proposed
acquisition and the manner in
25
<PAGE>
which the acquisition is to be made; the identity, source and amount of the
consideration used or to be used in making the acquisition; any plans or
proposals to liquidate the bank, sell its assets or merge or to make any other
major change in its business or corporate structure or management; the
identification of any person employed, retained or to be compensated by the
acquiring party or on his behalf to make solicitations or recommendations to
stockholders, copies of all invitations or tenders, and any additional
information.
Upon receiving any Notice, the FDIC is required to conduct an investigation
of the competence, experience, integrity and financial ability of each person
named in the Notice and to make an independent determination of the accuracy
and completeness of the information supplied in the Notice with respect to any
such person.
The FDIC is also required to forward a copy of the Notice to the California
Department of Financial Institutions (the "DFI"), which is the appropriate
state depository institution supervisory agency, and to allow 30 days within
which the views and recommendations of such state agency may be submitted. The
FDIC is required to give due consideration to the views of such state agency
in determining whether to disapprove any proposed acquisition. The FDIC is
also required to publish, or cause the publication of, the name of the insured
depository institution and the proposed acquiror and to solicit public comment
on the proposed acquisition, particularly from persons in the geographic area
where the depository institution proposed to be acquired is located, before
final consideration of such notice by the agency.
In considering a Notice, the FDIC is empowered to disapprove any proposed
acquisition if it concludes that the proposed acquisition would have certain
anticompetitive effects, if the financial condition of any acquiring person is
such as might jeopardize the financial stability of the depository institution
or prejudice the interests of the depositors of the depository institution, if
the competence, experience or integrity of any acquiring person or of any of
the proposed management personnel indicates that it would not be in the
interest of the depositors of the depository institution or in the interest of
the public, if any acquiring person fails to furnish required information or
if the FDIC determines that the proposed transaction would result in an
adverse effect on the Bank Insurance Fund.
The 60-day period for action on a Notice may be extended once for a 30-day
period in the FDIC discretion and, in addition, under certain circumstances
set forth in the statute, for up to two additional 45-day periods. The 60-day
period for action commences upon the FDIC's determination that a Notice is
complete.
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. In order to avoid the
uncertainty inherent in such an after-the-fact determination, it is the
Company's and Bancorp's intention to seek written confirmation from the
Federal Reserve Board prior to the Distribution that the divestiture by the
Bank of its investment in ICII in accordance with the Distribution will be
considered an effective divestiture.
Safety and Soundness Considerations. The Bank and the Company intend to
formally advise the FDIC and the DFI of the terms and conditions of the
transfer of 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 intend to make a formal submission and to seek the non-objection of
each of the foregoing regulatory agencies to such transfers.
SBA Lender Approvals. The SBA Division of the Bank has approvals from the
SBA to originate SBA loans under the Guaranteed Participant, Certified Lender
and Preferred Lender programs. Application has been made to the SBA on behalf
of CAB to secure such approvals as are necessary for CAB to offer SBA loans
under all three of the foregoing levels of lender participation. The Company
expects to receive these SBA approvals on or prior to the capitalization of
CAB.
26
<PAGE>
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 November 12, 1997, the DFI
approved the issuance to CAB of an industrial loan company license, subject
to, among other things, completion of the capitalization of CAB, which will
permit CAB to conduct its industrial loan business as described below. Prior
to approving this issuance, the DFI, which was created effective as of July 1,
1997 and which succeeded to the California Department of Corporations'
regulatory authority over industrial loan companies, reviewed, among other
factors, CAB's plan of business, including its proposed lending and deposit-
generating activities, the adequacy of its capital, its proposed operating
policies, the qualifications of management and the need for an additional
depository financial institution to serve the designated market area. 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 will require 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 will also require the written consent of the DFI under the
California Industrial Loan Law.
The California Industrial Loan Law provides that the DFI is required to
consent or decline to do so within 60 days of the filing of a completed
application. The determination as to whether an application is completed is
based on a determination by the regulatory agency involved.
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.
In considering an application filed under the California Acquisition of
Control Law, the DFI is required to disapprove any proposed acquisition if it
concludes that the proposed acquisition would have certain
27
<PAGE>
anticompetitive effects, if the financial condition of any acquiring person
might jeopardize the financial stability of the bank or controlling person or
prejudice the interests of the depositors, creditors or shareholders of the
bank or the controlling person, if plans or proposals to liquidate the bank or
the controlling person, to sell the assets of the bank or the controlling
person, to merge or consolidate the bank or the controlling person or to make
any other major change in the business, corporation structure or management of
the bank or the controlling person are not fair and reasonable to the
depositors, creditors and shareholders of the bank or controlling person, if
the competence, experience or integrity of any acquiring person or of any of
the proposed management personnel indicates that it would not be in the
interest of the depositors, creditors or shareholders of the bank or
controlling person or in the interest of the public, if any acquiring person
fails to furnish required information or if the DFI determines that the
proposed transaction is unfair or unjust or inequitable to the bank or the
controlling person or to the depositors, creditors or shareholders of the bank
or the controlling person. If the DFI finds that the foregoing factors are not
present, the DFI must approve the proposed acquisition of control.
Any application for approval to acquire control of a bank or of a
controlling person which is not denied or approved within a period of 60 days
after such application is filed shall be deemed to be approved on the first
day thereafter. An application for such approval is deemed filed with the DFI
at the time when the complete application, including any amendments or
supplements, containing all the information in the form required by the DFI,
is received. On December 29, 1997, the Company filed an application for the
approval of the DFI for the acquisition of control of ITC by the Company.
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."
28
<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. This will be accomplished by
the Bank contributing to CAB all of the assets relating to the Bank's small
business lending division and the assumption by CAB of all of the liabilities
relating thereto. After the contribution of such assets to, and assumption of
such liabilities by, CAB, 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 and CAB will
assume 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 Agreements."
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."
29
<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 $15 million plus the
after-tax book value of the ICII stock held by the Company.
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 additional one-year terms unless either party delivers
written notice to the other party of its intention not to renew within 60 days
at the end of the then current term. The principal services to be provided by
the Bank to the Company will include human resources support in payroll,
record keeping and other employee benefit areas and audit 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.
30
<PAGE>
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."
31
<PAGE>
CAPITALIZATION
The following table, which is unaudited, sets forth, as of December 31,
1997, the capitalization of the Company, as adjusted to reflect the
Distribution and the incurrence by the Company of approximately $124 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 DECEMBER 31, 1997
------------------------------------
PRO FORMA PRO FORMA
ACTUAL ADJUSTMENTS (2) AS ADJUSTED
-------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Credit Facilities......................... $ -- $124,310 $124,310
Borrowings from Imperial Bank............. 77,934 (77,934) --
-------- -------- --------
Total borrowings........................ 77,934 46,376 124,310
-------- -------- --------
Stockholder's equity
Class A common stock, par value $0.01
per share, 50 million shares
authorized, approximately 19,648,075
shares issued and outstanding (as
adjusted)(1)........................... -- 196 196
Class B common stock, par value $0.01
per share, 10 million shares
authorized, no shares issued and
outstanding(1) ........................ -- -- --
Contribution by Imperial Bank........... 1,597 (196) 1,401
Unrealized gain on securities available
for sale, net of taxes................. 231 -- 231
Retained earnings....................... 110,410 (52,543) 57,867
-------- -------- --------
Total stockholder's equity............ 112,238 (52,543) 59,695
-------- -------- --------
Total capitalization.................. $190,172 $ (6,167) $184,005
======== ======== ========
</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 December 31, 1997 in accordance with the Contribution Agreement. See
"Relationship and Agreements Among the Company, the Bank and Bancorp After
the Distribution" and "Credit Facilities."
32
<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, 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>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Interest on loans.... $ 4,408 $ 4,228 $ 6,726 $ 10,629 $ 14,355
Other interest
income.............. 102 131 153 158 235
---------- ---------- ---------- ---------- ----------
Total interest
income............ 4,510 4,359 6,879 10,787 14,590
Interest expense .... 1,195 256 1,287 1,973 3,277
---------- ---------- ---------- ---------- ----------
Net interest
income............ 3,315 4,103 5,592 8,814 11,313
Provision for loan
losses.............. 633 -- 1,492 1,781 2,558
---------- ---------- ---------- ---------- ----------
Net interest income
after provision
for loan losses... 2,682 4,103 4,100 7,033 8,755
---------- ---------- ---------- ---------- ----------
Trust fees........... 5,667 6,857 8,385 7,744 7,967
Gain on sale of SBA
loans............... 411 1,724 1,813 3,561 3,944
Equity in net income
of ICII ............ 7,898 2,388 5,652 21,444 20,260
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
---------- ---------- ---------- ---------- ----------
Total revenue...... 31,667 15,502 20,627 81,151 51,346
---------- ---------- ---------- ---------- ----------
Expenses:
Personnel expense.... 3,388 4,338 4,827 6,153 9,315
Other expenses....... 4,357 4,515 5,568 10,680 18,134
---------- ---------- ---------- ---------- ----------
Total expenses..... 7,745 8,853 10,395 16,833 27,449
---------- ---------- ---------- ---------- ----------
Income before
income taxes...... 23,922 6,649 10,232 64,318 23,897
Income taxes......... 10,129 2,821 4,313 25,674 8,737
---------- ---------- ---------- ---------- ----------
Net income......... $ 13,793 $ 4,198 $ 5,919 $ 38,644 $ 15,160
========== ========== ========== ========== ==========
Weighted average
number of shares
outstanding(1):
Basic................ 17,301,446 17,640,080 18,224,024 18,782,675 19,398,542
Diluted.............. 17,391,309 17,738,940 18,346,714 19,008,571 19,904,097
Pro forma earnings per
share(2):
Basic................ $ 0.80 $ 0.24 $ 0.32 $ 2.06 $ 0.78
Diluted.............. $ 0.79 $ 0.24 $ 0.32 $ 2.03 $ 0.76
</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.
(2) 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.
33
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 1,002 $ 1,896 $ 2,272 $ 5,245 $ 2,813
Securities available for
sale, at fair value.......... 2,005 1,753 1,437 1,179 6,027
Receivable from Imperial
Bank......................... -- 2,236 -- -- --
Loans held for sale........... 2,579 1,648 2,648 5,531 3,763
Loans held for investment,
net.......................... 36,847 26,369 75,518 72,528 134,407
Investment in stock of ICII .. 27,445 30,934 36,126 57,736 75,001
Other assets.................. 5,578 4,814 7,029 7,129 5,972
------- ------- -------- -------- --------
Total assets................. $75,456 $69,650 $125,030 $149,348 $227,983
======= ======= ======== ======== ========
Borrowings from Imperial
Bank......................... $13,889 $ -- $ 49,897 $ 6,184 $ 77,934
Income taxes payable.......... 7,722 9,996 12,876 40,340 29,837
Other liabilities............. 3,759 5,410 4,056 5,978 7,974
------- ------- -------- -------- --------
Total liabilities............ 25,370 15,406 66,829 52,502 115,745
Stockholder's equity.......... 50,086 54,244 58,201 96,846 112,238
------- ------- -------- -------- --------
Total liabilities and
stockholder's equity......... $75,456 $69,650 $125,030 $149,348 $227,983
======= ======= ======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 1995 1996 1997
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL DATA:
Loans originated:
LHO......................... $40,206 $25,857 $ 70,224 $ 55,951 $ 97,854
SBA......................... 11,164 21,204 21,533 38,792 49,092
------- ------- -------- -------- --------
Total..................... $51,370 $47,061 $91,757 $94,743 $146,946
======= ======= ======== ======== ========
Trust assets under
administration (in
millions).................... $ 6,617 $ 5,704 $ 6,781 $ 7,532 $ 8,716
======= ======= ======== ======== ========
SELECTED RATIOS:
Average equity to average
assets....................... 16.56% 70.74% 63.37% 56.02% 54.00%
Return on average common
equity....................... 30.00 8.02 10.32 49.51 14.66
Return on average assets...... 4.97 5.67 6.54 27.74 7.92
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%
Allowance for loan losses as
a percentage of non-accrual
loans........................ 37.48 47.79 56.89 53.42 102.54
Net charge-offs as a
percentage of average loans
held for investment.......... 0.62 0.26 1.21 0.87 0.66
</TABLE>
34
<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 will conduct, among
other businesses, the Company's small business lending, (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 December 31, 1997) in ICII, a publicly traded, diversified
specialty finance company. 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."
35
<PAGE>
PRO FORMA COMBINED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
------------------------------------- ------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA ACTUAL ADJUSTMENTS 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 (224)(1)(2) 1,063 1,973 72(1)(2) 2,045
---------- ----- ---------- ---------- ----- ----------
Net interest
income.......... 5,592 (525) 5,067 8,814 (940) 7,874
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 (81) 4,019 7,033 (366) 6,667
---------- ----- ---------- ---------- ----- ----------
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 (81) 20,546 81,151 (366) 80,785
---------- ----- ---------- ---------- ----- ----------
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 (81) 10,151 64,318 (366) 63,952
Income taxes...... 4,313 (34)(3) 4,279 25,674 (156)(3) 25,518
---------- ----- ---------- ---------- ----- ----------
Net income...... $ 5,919 $ (47) $ 5,872 $ 38,644 $(210) $ 38,434
========== ===== ========== ========== ===== ==========
Weighted average
number of shares
outstanding(7):
Basic............. 18,224,024 18,224,024 18,782,675 18,782,675
Diluted........... 18,346,714 18,346,714 19,008,571 19,008,571
Pro forma earnings
per share:
Basic............. $ 0.32 $ 0.32(8) $ 2.06 $ 2.05(8)
========== ========== ========== ==========
Diluted........... $ 0.32 $ 0.32(8) $ 2.03 $ 2.02(8)
========== ========== ========== ==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
ACTUAL ADJUSTMENTS 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 2,695 (1)(2) 5,972
---------- ---------------- -------------
Net interest
income.......... 11,313 (3,277) 8,036
Provision for
loan losses....... 2,558 (315)(1) 2,243
---------- ---------------- -------------
Net interest
income after
provision for
loan losses..... 8,755 (2,962) 5,793
---------- ---------------- -------------
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 (2,965) 48,381
---------- ---------------- -------------
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 (2,965) 20,932
Income taxes...... 8,737 (1,245)(3) 7,492
---------- ---------------- -------------
Net income...... $ 15,160 $(1,720) $ 13,440
========== ================ =============
Weighted average
number of shares
outstanding(7):
Basic............. 19,398,542 19,398,542
Diluted........... 19,904,097 19,904,097
Pro forma earnings
per share:
Basic............. $ 0.78 $ 0.69(8)
========== =============
Diluted........... $ 0.76 $ 0.68(8)
========== =============
</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
-------------------------------- --------------------------------
PRO PRO
ACTUAL ADJUSTMENTS FORMA ACTUAL ADJUSTMENTS FORMA
-------- ----------- -------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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 -- 5,531 3,763 -- 3,763
Loans held for
investment, net......... 72,528 (9,224)(4) 63,304 134,407 (5,793)(4) 128,614
Investment in stock of
ICII.................... 57,736 -- 57,736 75,001 -- 75,001
Premises and equipment,
net..................... 306 -- 306 551 -- 551
Excess servicing fees
receivable.............. 3,294 -- 3,294 -- -- --
Mortgage servicing
rights.................. -- -- -- 1,914 -- 1,914
Other assets............. 3,529 (244)(4) 3,285 3,507 (239)(4) 3,268
-------- ------- -------- -------- -------- --------
Total assets............ $149,348 $(9,468) $139,880 $227,983 $ (6,032) $221,951
======== ======= ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
Line of credit........... $ -- $43,622 (5) $ 43,622 $ -- $124,310 (5) $124,310
Borrowings from Imperial
Bank.................... 6,184 (6,184)(5) -- 77,934 (77,934)(5) --
Income taxes payable..... 40,340 (612)(4) 39,728 29,837 147 (4) 29,984
Other liabilities........ 5,978 -- 5,978 7,974 (12)(4) 7,962
-------- ------- -------- -------- -------- --------
Total liabilities....... 52,502 36,826 89,328 115,745 46,511 162,256
STOCKHOLDER'S EQUITY
Common stock............. -- -- -- -- 196 (9) 196
Contribution by Imperial
Bank.................... 1,597 -- 1,597 1,597 (196)(9) 1,401
Unrealized gain on
securities available for
sale, net of taxes...... (1) -- (1) 231 -- 231
Retained earnings........ 95,250 (46,294)(6) 48,956 110,410 (52,543)(6) 57,867
-------- ------- -------- -------- -------- --------
Total stockholder's
equity................. 96,846 (46,294) 50,552 112,238 (52,543) 59,695
-------- ------- -------- -------- -------- --------
Total liabilities and
stockholder's equity... $149,348 $(9,468) $139,880 $227,983 $ (6,032) $221,951
======== ======= ======== ======== ======== ========
</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 proposed Credit
Facilities terms 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 95
basis points plus loan and other fees for the $140 million credit facility
and LIBOR plus 60 basis points plus loan and other fees for the $30
million credit facility. The estimated effective interest rate for the
years ended December 31, 1995, 1996 and 1997 was 7.69%, 7.20% and 7.39%,
respectively, as compared to 6.93%, 6.46% and 6.48% 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 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."
(5) Reflects borrowings under the proposed Credit Facilities and repayment of
borrowings from the Bank. See "Credit Facilities."
(6) 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 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."
(7) 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.
(8) 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.
(9) Reflects issuance of 19,648,075 shares (based on 39,296,151 shares of
Bancorp Common Stock outstanding at February 15, 1998) on the date of the
Distribution.
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
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 (iv) 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.
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
39
<PAGE>
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 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, ICII completed an initial
public offering of its subsidiary, Franchise Mortgage Acceptance Company, and
recorded a pre-tax gain of $53.4 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."
On December 31, 1997, the fair value of ICII common stock was $20.50 per
share, representing a pre-tax unrealized gain of the Company's investment of
over $108 million. The Company currently has no plans to realize such gains in
the future.
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 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.
40
<PAGE>
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 Corp., an entity wholly-owned by
the chief executive officer of the Company ("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 prior to certain specified dates, the agreements require that
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." 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 agreement remains an obligation of the Company as of
December 31, 1997. Based on the daily average market price for the year ended
December 31, 1997 of $21.34 per share, less 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
41
<PAGE>
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.
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
42
<PAGE>
$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%.
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>
43
<PAGE>
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.
44
<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>
FOR THE YEAR ENDED DECEMBER 31, ICII AND
1995 CAB LHO ITC OTHER COMBINED
- ------------------------------- ------- ------- ------ -------- --------
<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>
FOR THE YEAR ENDED DECEMBER 31, ICII AND
1996 CAB LHO ITC OTHER COMBINED
- ------------------------------- ------- ------- ------ -------- --------
<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
------- ------- ------ ------- --------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, ICII AND
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
------- ------- ------ ------- --------
</TABLE>
45
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
General
The table below summarizes cash flows generated by and used in operating
activities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING CASH INCOME
Interest received............................ $ 6,553 $ 10,781 $ 14,714
Trust fees received.......................... 7,937 7,856 8,114
Other income................................. 655 1,371 4,305
-------- -------- --------
Total........................................ 15,145 20,008 27,133
-------- -------- --------
OPERATING CASH EXPENSE
Cash operating expenses...................... 10,219 11,803 23,793
Taxes paid................................... 680 -- 2,446
Interest paid................................ -- -- --
-------- -------- --------
Total........................................ 10,899 11,803 26,239
-------- -------- --------
Net operating cash flow...................... 4,246 8,205 894
Cash (used in) provided by other payables and
receivables................................. (3,105) 4,918 (16,994)
Cash (used in) provided by loans held for
sale........................................ (1,000) (2,883) 1,768
-------- -------- --------
Net cash provided by (used in) operating ac-
tivities.................................... $ 141 $ 10,240 $(14,332)
======== ======== ========
Net cash (used in) provided by investing ac-
tivities.................................... $(50,358) $ 36,446 $(59,850)
======== ======== ========
Net cash provided by (used in) financing ac-
tivities.................................... $ 50,593 $(43,713) $ 71,750
======== ======== ========
</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 $20.2 million for the year ended December 31, 1997. After
the Distribution, the Company will make tax and interest payments which will
affect its operating cash flow.
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.
46
<PAGE>
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
The Company is in the process of establishing the Credit Facilities with
third party financial institutions. In order for the Bank to replace certain
deposit liabilities used to fund the IFG Business, the Bank, along with the
Company, will be party to the Credit Facilities. The Company anticipates that
these facilities will consist of a $140 million two-year revolving credit
facility for the Company's operations other than CAB and a $30 million 364-day
revolving credit facility for CAB operations. The $140 million facility will
be syndicated and will include a $45 million sublimit for the issuance of
standby and commercial letters of credit. The lenders under the $140 million
facility will require that the lenders be 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. It is expected that the
$140 million credit facility will bear interest at an annual rate equal to
.95% over the London Interbank Offering Rate for dollar deposits ("LIBOR") or
.95% over an alternative base rate which will be the greater of the lead
lender's prime rate and the Federal funds rate plus .50%. The CAB facility
will require that the lenders be granted, among other things, a first priority
security interest in the SBA loans. The borrowing base will be comprised of
80% of eligible SBA loans. It is expected that the CAB facility will bear
interest at an annual rate equal to .60% over LIBOR, .725% over the Federal
funds rate or at an alternative base rate which will be the greater of the
lender's prime rate and the Federal funds rate plus .50%. It is not expected
that the CAB facility will be syndicated. The Company will also be charged
loan and other fees under the Credit Facilities.
It is also expected that the Credit Facilities will include financial
covenants such as maintenance of a minimum tangible net worth, maintenance of
maximum indebtedness, minimum interest coverage ratio for the Company and
maximum and minimum capital ratio levels for CAB. The Credit Facilities will
also require the Company or CAB to make customary representations and
warranties prior to each borrowing and will include customary affirmative and
negative operating covenants and events of default.
Prior to the Distribution, the Bank will borrow approximately $124 million
(as determined at December 31, 1997) under the Credit Facilities in order to
replace certain deposit liabilities used to fund loans made through LHO and
CAB. 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
47
<PAGE>
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."
Through December 31, 1997, the Company recognized 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.
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.
48
<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,
--------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans held for investment by type:
LHO........................................... $47,691 $44,906 $ 98,313
CAB........................................... 18,259 20,277 34,032
ICII related mortgage loans................... 11,104 9,974 6,548
------- ------- --------
Total (1)................................... 77,054 75,157 138,893
------- ------- --------
Allowance for loan losses by type:
LHO........................................... (727) (1,163) (2,656)
CAB........................................... (420) (716) (1,075)
ICII related mortgage loans................... (389) (750) (755)
------- ------- --------
Total....................................... (1,536) (2,629) (4,486)
------- ------- --------
Net loans held for investment by type:
LHO........................................... 46,964 43,743 95,657
CAB........................................... 17,839 19,561 32,957
ICII related mortgage loans................... 10,715 9,224 5,793
------- ------- --------
Net loans held for investment............... $75,518 $72,528 $134,407
======= ======= ========
</TABLE>
- --------
(1) 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,
----------------------------------
1995 1996 1997
---------- ---------- ----------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Entertainment loans........ $ 727 47% $1,163 44% $2,656 59%
Small business loans....... 420 28 716 27 1,075 24
Residential mortgage
loans(1).................. 389 25 750 29 755 17
------ --- ------ --- ------ ---
Total.................... $1,536 100% $2,629 100% $4,486 100%
====== === ====== === ====== ===
</TABLE>
- --------
(1) As part of the Contribution Agreement, the Bank will retain these loans.
49
<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 December 31, 1997, the recorded investment in loans for which impairment
has been recognized 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 for which impairment
had been recognized 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.
At December 31, 1995, the recorded investment in loans for which impairment
had been recognized totaled $2.7 million, all of which was on nonaccrual
status. A significant portion, $2.2 million, of the impaired loans was secured
by real estate. The $2.7 million of impaired loans did not require a specific
allowance. Impaired loans averaged $1.8 million in 1995.
During the years ended December 31, 1997, 1996 and 1995, approximately
$167,000, $203,000 and $56,000 of interest income, respectively, was
recognized on impaired loans.
At December 31, 1997, 1996 and 1995, there were no restructured loans.
Nonaccrual loans totaled $4.4 million, $4.9 million and $2.7 million at
December 31, 1997, 1996 and 1995, respectively. There was no recorded interest
receivable on nonaccrual loans at December 31, 1997, 1996 and 1995. Interest
income foregone on nonaccrual loans approximated $296,000, $375,000 and
$232,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, 1996 and 1995, approximately 71%, 60% and 62%,
respectively, of the Company's loan portfolio was issued to customers in the
movie production industry.
At December 31, 1997, 1996 and 1995, a majority of the Company's loan
portfolio consisted of borrowers geographically located in California.
50
<PAGE>
Detailed information regarding nonaccrual loans and real estate and other
assets owned, net is presented below:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1995 1996 1997
------ ------ ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
LHO.................................................. $ 488 $1,193 $ --
CAB.................................................. -- 914 3,571
ICII related mortgage loans (1)...................... 2,212 2,814 804
------ ------ ------
Total nonaccrual loans............................. 2,700 4,921 4,375
------ ------ ------
Real estate and other assets owned:
LHO.................................................. -- -- 666
CAB.................................................. 57 -- 45
ICII related mortgage loans (1)...................... 1,083 187 162
------ ------ ------
Less: valuation allowance.............................. (145) -- --
------ ------ ------
Real estate and other assets owned, net................ 995 187 873
------ ------ ------
Total nonperforming assets............................. $3,695 $5,108 $5,248
====== ====== ======
Allowance for loan losses as a percentage of total
nonaccrual loans...................................... 56.89% 53.42% 102.54%
Total nonaccrual loans as a percentage of loans held
for investment........................................ 3.50 6.55 3.15
Total nonperforming assets as a percentage of total as-
sets.................................................. 2.96 3.42 2.30
</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
December 31, 1997, future additions to the allowance will be subject to
continuing evaluation of inherent risk in the loan portfolio.
51
<PAGE>
The following table summarizes changes in the allowance for loan losses at
the dates indicated:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Balance, beginning of year........... $ 626 $ 1,536 $ 2,629
Loans charged off:
LHO................................ 209 561 359
CAB................................ -- 60 132
ICII related mortgage loans (1) ... 404 212 359
------------ ------------ ------------
Total loans charged off.......... 613 833 850
------------ ------------ ------------
Recoveries of loans previously
charged off:
LHO................................ 8 137 25
CAB................................ 1 8 75
ICII related mortgage loans (1) ... 22 -- 49
------------ ------------ ------------
Total loan recoveries............ 31 145 149
------------ ------------ ------------
Net loans charged off................ 582 688 701
------------ ------------ ------------
Provision (reversal) for loan losses:
LHO................................ 767 859 1,828
CAB................................ 281 348 415
ICII related mortgage loans (1).... 444 574 315
------------ ------------ ------------
Total provision for loan losses.. 1,492 1,781 2,558
------------ ------------ ------------
Balance, end of year................. $ 1,536 $ 2,629 $ 4,486
============ ============ ============
Ratio of net charge-offs to average
loans held for investment........... 1.21% 0.87% 0.66%
Ratio of allowance for loan losses to
loans held for investment........... 1.99 3.50 3.23
Ratio of provision for loan losses to
net charge-offs..................... 256.36 258.87 364.91
</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 December
31, 1997, 1996 and 1995 was $3.8 million, $5.5 million and $2.6 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.
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
52
<PAGE>
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.
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-earnings
assets................. $108,063 $5,278 $5,365 $6,452 $8,233 $20,072 $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.
53
<PAGE>
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.
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>
- --------
(1) Includes net loan fees amounting to $1.3 million, $1.6 million, and $2.6
million at December 31, 1995, 1996, and 1997, 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.
54
<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 December 31, 1997, approximately 23.0% of the common stock of Imperial
Credit Industries, Inc. ("ICII").
For the years ended December 31, 1997 and 1996, LHO originated $97.9 million
and $56.0 million in loans, respectively. During the same periods, LHO,
through the Bank, issued letters of credit totalling $19.1 million and $39.2
million, respectively. For the years ended December 31, 1997 and 1996, CAB
originated $49.1 million and $38.8 million in loans, respectively; and at
December 31, 1997 and 1996, ITC had trust assets under administration of $8.7
billion and $7.5 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. During the years ended
December 31, 1997 and 1996, the Company originated 59 loans and 39 loans,
respectively, in an aggregate principal amount of approximately $98 million
and $56 million, respectively. During the same periods, the LHO division,
through the Bank, issued letters of credit totalling approximately $19 million
and $39 million, respectively. Total revenue for the LHO division for the
years ended December 31, 1997 and 1996 was $5.7 million and $4.0 million,
respectively, representing 11.1% and 4.9%, respectively, of the Company's
total revenue for such periods. Net income for the LHO division for both the
years ended December 31, 1997 and 1996 was $1.3 million, representing 8.5% and
3.3%, 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
55
<PAGE>
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. 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
56
<PAGE>
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 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;
57
<PAGE>
. 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 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 years
ended December 31, 1997 and 1996 was approximately $1.66 million and $1.45
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
58
<PAGE>
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 1996 and 1997.
<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
Gap Loans
Year ended December 31, 1996........... 21 $35,735 35.7%
Year ended December 31, 1997........... 36 73,024 45.7
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
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
</TABLE>
The interest rate charged on most loans made through LHO are variable rates
tied to published prime rates. The average margin on such loans during the
periods presented above was prime plus 2%. 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 was 14.2% in each year.
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. 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,
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<PAGE>
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 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
60
<PAGE>
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 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.
61
<PAGE>
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.
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 Banque 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.
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<PAGE>
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
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
30-59 days past due...................... $ -- $ 538 $ 747
60-89 days past due...................... 10 -- --
90 or more days past due................. 488 1,193 --
Gross loans outstanding at period end.... 48,461 45,608 99,654
Average loans outstanding for the period. 24,469 47,716 69,594
Loans charged-off, net................... 201 424 334
Allowance for loan losses................ 727 1,163 2,656
Ratio of loans charged-off, net, to aver-
age loans
outstanding............................. 0.82% 0.89% 0.48%
Ratio of allowance for loan losses to
gross loans
outstanding at period end............... 1.50% 2.55% 2.67%
</TABLE>
Until 1995, the Company made no Gap Loans. During 1997, approximately 61% of
loans made by the Company were Gap Loans. As a result of a change in the type
of loan primarily made by the LHO division of the Company, the above
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 December 31, 1997 and December 31, 1996, the aggregate
outstanding principal amount of the Company's small business loans was
approximately $40 million and $28 million, respectively. The aggregate
principal amount of loans originated for the years ended December 31, 1997 and
1996 was approximately $49.1 million and $38.8 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.
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
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<PAGE>
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 December 31, 1997, all of the Company's SBA loans and
companion loans are secured by a first or second mortgage on the real property
relating to such loan. Similar to SBA loans, there is an active market for
companion loans and the Company generally sells its companion loans for a
premium in those markets. 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 interest rates of these loans are typically
adjustable at some fixed percentage over the prime rate. The weighted average
yield of CAB's loans for the year ended December 31, 1997 was 11.79%. Total
revenue for CAB for the years ended December 31, 1997 and 1996 was $6.1
million and $5.0 million, respectively, representing 11.8% and 6.1%,
respectively, of the Company's total revenue for such periods. Net income for
CAB for the years ended December 31, 1997 and 1996 was $0.8 million and
$1.2 million, respectively, representing 5.0% and 3.2%, respectively, of the
Company's net income for such periods.
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 lowering interest rates 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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<PAGE>
LOAN INFORMATION
The following table sets forth certain information relating to small
business loans originated by the Company during 1996 and during 1996 and 1997:
<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
"504" Loans (1)
Year ended December 31, 1996.................... 1 $ 700 $700
Year ended December 31, 1997.................... 3 1,588 529
Companion Loans
Year ended December 31, 1996.................... 10 $ 7,812 $781
Year ended December 31, 1997.................... 16 10,808 676
</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. During 1996 and 1997, 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 the
maximum allowable adjustable interest rate and, historically, has received a
1% servicing fee, the amount of the premium obtained by CAB varies directly as
a function of a loan's term. The secondary market for the SBA-guaranteed
portion of loans is active and provides an immediate source of funding for
CAB's loan origination activities. Normally, immediately prior to or upon
closing a loan, CAB solicits bids from several or more 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 years
ended December 31, 1996 and 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
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<PAGE>
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 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 initial source of funding for CAB's lending operations will be secured
borrowings made under the Credit Facilities. On a longer-term basis, 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 passbook 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.
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 has
applied to become a member of the FHLB System and expects to be approved for
borrowings from the FHLB pursuant to a secured line of credit, the available
amount of which will be adjusted pursuant to FHLB regulations based on
collateral eligible and available for pledge.
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<PAGE>
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.
Generally, the loan application process begins with an initial telephone
call or meeting between the potential borrower and a CAB officer. CAB
currently has no formal marketing, promotion or advertising program. Its
business is generally developed through the individual marketing efforts of
its personnel and referrals from mortgage brokers and real estate agents. 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 approval
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 substantially all of the SBA loans it originates. Servicing
includes collecting payments from borrowers, conducting site units, tracking
loan 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.
The following table sets forth certain information relating to SBA loans
serviced by CAB:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1995 1996 1997
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Number of loans serviced........................... 198 293 384
Total principal amount of Company's loan portfolio. $22,563 $28,084 $ 39,855
Total principal amount of loans sold............... $36,005 $57,362 $ 81,109
Total principal amount of loans serviced........... $58,568 $85,446 $120,964
</TABLE>
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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 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
ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
30-59 days past due......................... $ 1,731 $ 1,369 $ 413
60-89 days past due......................... 336 350 168
90-119 days past due (2).................... 223 -- 151
120 days or more past due (2)............... -- 914 3,571
Gross loans held for investment at year end. 19,915 22,553 35,955
Average loans held for investment........... 13,649 21,632 31,018
Allowance for loan losses................... 420 716 1,075
Loans charged-off (recoveries), net......... (1) 52 57
Ratio of net charge-offs to average loans
held for investment........................ (0.01)% 0.24% 0.18%
Ratio of allowance for loan losses to gross
loans held for investment at period end ... 2.11 % 3.17% 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 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 are 120 days or more past due increased to $3.6 million at
December 31, 1997 from $0.9 million at December 31, 1996. The increase was
primarily due to two loans made to the same borrower totaling approximately $2
million that became delinquent and were placed on nonaccrual status during the
year ended December 31, 1997. The borrower is in the process of negotiating
the sale of his business to a buyer who has agreed to assume or pay off the
borrower's indebtedness to the Company in full by March 31, 1998.
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<PAGE>
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
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 years ended December 31, 1996 and 1997,
CAB collected approximately $5.9 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.
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.
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<PAGE>
Approximately 97% of SBA loans originated by CAB during the year ended
December 31, 1997 are "7A" loans for purposes of the SBA programs described
above. The remaining SBA loans made by CAB are "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 bear the maximum interest rate allowed within SBA
guidelines, and 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 11 months
ended August 31, 1997 was $8.4 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."
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 its wholly owned subsidiary, Imperial Trust Company
("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 December 31,
1997 and 1996, the Company maintained total assets under administration of
approximately $8.7 billion and $7.5 billion, respectively. ITC was the
fourteenth largest licensed trust company in California at December 31, 1997
based on assets under administration. ITC is headquartered in Los Angeles and
maintains branch offices in Costa Mesa and San Francisco. Total revenue for
ITC for the years ended December 31, 1997 and 1996 was $8.4 million and $8.1
million, respectively, representing 16.3% and 10.0%, respectively, of the
Company's total revenue for such periods. Net income for
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<PAGE>
ITC for the years ended December 31, 1997 and 1996 was $1.0 million and $1.1
million, respectively, representing 6.3% and 2.8%, 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 ten-fold from $790 million at December 31, 1986
to $8.7 billion at December 31, 1997. 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 YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
GROSS REVENUE GROSS REVENUE % GROSS REVENUE GROSS REVENUE %
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Custodial............... $ 2,631 34% $ 3,069 39%
Multi-Employer.......... 1,578 20 1,475 19
Employee Benefit........ 1,496 19 1,506 19
Personal Trusts......... 1,251 16 1,213 16
CD Custodial............ 788 11 704 7
---------- --- ---------- ---
Total................... $ 7,744 100% $ 7,967 100%
========== === ========== ===
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1997
------------------------------ ------------------------------
ASSETS UNDER ASSETS UNDER
ADMINISTRATION ASSET % ADMINISTRATION ASSET %
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Custodial............... $2,953,022 39% $3,521,070 41%
Multi-Employer.......... 3,420,178 45 4,013,080 46
Employee Benefit........ 690,278 9 686,658 8
Personal Trusts......... 418,689 6 473,001 5
CD Custodial............ 50,187 1 21,704 --
---------- --- ---------- ---
Total................... $7,532,354 100% $8,715,513 100%
========== === ========== ===
</TABLE>
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
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<PAGE>
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
December 31, 1997 was approximately $31 million and $1.5 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 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.
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<PAGE>
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.
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 creator 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 its referring
personnel based on the new client's first-year 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 discount 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 December 31, 1997, the Company owned approximately 23.0% of the common
stock of ICII, a diversified specialty finance company whose businesses
complement those of the Company. ICII 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
years ended December 31, 1997 and 1996, ICII generated total revenues of
$308.7 million and $256.9 million, respectively. Total revenue related to the
Company's ownership of ICII stock for the years ended December 31, 1997 and
1996 was $31.2 million and $64.1 million, respectively, representing 60.8% and
79.0%, respectively, of the Company's total revenue for such periods. Net
income related to the Company's ownership of ICII stock for the years ended
December 31, 1997 and 1996 was $12.2 million and $35.1 million, respectively,
representing 80.2% and 90.7%, 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, formerly known as Southern Pacific
Thrift and Loan Association ("SPB"). 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
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<PAGE>
ownership interest in ICII was reduced to approximately 23.0% of the
outstanding ICII common stock as of December 31, 1997.
The Company is currently the largest shareholder of ICII. It is the present
intention of the Company to maintain its ownership interest in ICII at or
about current levels, although the Company cannot prevent additional issuances
of common stock of ICII that could dilute the Company's ownership. If the
Company's ownership were to fall below 20%, the Company would no longer be
able to account for its ownership under the equity method. This could
adversely affect the Company's results of operations. See "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 1997 proxy statement for its annual
meeting of shareholders, no other shareholder beneficially owns in excess of
7.5% 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 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
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<PAGE>
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 Usuary 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.
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,
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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.
CALIFORNIA LAW
The thrift and loan business to be conducted by CAB will be 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 will be
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
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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. From and after the licensing of
CAB as an industrial loan company, CAB is expected to satisfy 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.
As a newly chartered thrift and loan company, CAB will not be 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.
As part of the plan of financing the transfer of the SBA business from the
Bank to CAB, CAB will assume approximately $30 million in debt to a third-
party lender. Such amount will equal approximately 3.0 times CAB's projected
tangible net worth.
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
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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 will be in
compliance with these requirements upon its licensing.
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 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 is commencing operations from two branches:
the main branch located at 2121 Rosecrans Avenue, Suite 1350, El Segundo,
California, and an administrative 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
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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 is commencing operations with LPOs located in Phoenix,
Arizona, Las Vegas, Nevada, Sacramento, California, Newport Beach, California,
Emeryville, California and San Diego, California.
FEDERAL LAW
CAB's deposits will be 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 will be 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.
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. Upon licensing and capitalization, CAB's Leverage Ratio is
projected to be approximately 28.5%.
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.
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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. Upon its licensing, CAB will not have available for sale any
equity securities in its investment portfolio.
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%. Upon licensing, such
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ratio for CAB will be approximately 28.5% and, therefore, CAB's capital will
qualify it for the well capitalized category.
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 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. Although CAB will not be subject to such requirements upon its
licensing, it is expected that CAB will nonetheless comply 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
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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 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.
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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 will be
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 expects to be 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 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 current SBA operations
of the Bank.
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
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<PAGE>
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 is
accordingly not 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 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
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<PAGE>
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 December 31, 1997, the Company employed 113 full-time employees. Of
these employees, approximately 15 were employed by LHO, 56 were employed by
ITC, 10 were employed at the Corporate headquarters and 32 were employed by
CAB. The Company believes that its relations with 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 expires in June 1998 and
will be extended on a month-to-month basis thereafter. CAB's initial deposit
branch will be located at 2121 Rosecrans Avenue, El Segundo, California, and
will consist of 671 square feet. The lease expires August 31, 2007, with two
five-year extensions at the Company's option. CAB also operates eight business
development offices for its SBA lending business in Sacramento, California;
Stockton, California; Costa Mesa, California; Emeryville, California;
Riverside, California; Carlsbad, California; Phoenix, Arizona, and Las Vegas,
Nevada, 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 and San Francisco,
California, both of which are leased. The principal office of ICII is located
in Torrance, California, and is leased.
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<PAGE>
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 47 2001 Co-Chairman of the Board of Directors and
Chief Executive Officer
Lee E. Mikles 41 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
President and Chief Executive Officer of
Lewis P. Horwitz 62 2000 LHO and Director
Clinton W. Bliss 63 N/A Senior Vice President and Chief Credit
Officer
</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, and the
chairman of the board of Vista 2000, Inc., a manufacturer of gloves, balloons
and pet products. Mr. Graziadio is also a director of Franchise Mortgage
Acceptance Corp., 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 Corp., Impac Mortgage
Holdings, a real estate investment trust, Southern Pacific Funding
Corporation, a mortgage lender, and Imperial Commercial Mortgage Investment
Corp., a real estate investment trust.
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<PAGE>
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 Corp.
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.
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.
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
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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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<PAGE>
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 December 31, 1997 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. 2,115,766 (2)(6)(7) 10.78
G. Louis Graziadio, III 257,824 (5)(6)(7) 1.31
Robert M. Franko 2,700 *
Robert L. Harris II 0 --
Perry A. Lerner 0 --
Lee E. Mikles 39,000 (2) *
Paul A. Novelly 123,363 *
H. Wayne Snavely 1,002 *
Clinton W. Bliss 12,387 *
Lewis P. Horwitz 7,358 *
--------- -----
All directors and executive officers
as a group (10 persons) 2,559,400 13.03
5% OWNERS
Imperial Trust Company, as trustee
for Bancorp Profit Sharing Plan,
Employee Stock Ownership Plan and
401(k) Plans 1,291,896 6.57%
Graziadio Family Trust 1,045,770 5.32%
</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 Mr. 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 Mr. 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 minor 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 675,847 shares of
Bancorp Common Stock in the case of George L. Graziadio, Jr., and 31,230
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.
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<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, 1997
III--Chief......... 0 0 0 0 431,250 0 21,465
Executive Officer 1996 0 0 0 0 11,000 0 966,814(2)
Robert M. Franko-- 1997
President.......... 200,000 205,020 97,001 0 393,750 0 13,012
1996 185,000 192,475 92,160 0 0 0 12,218
Clinton W. Bliss--
Senior Vice........ 1997 147,000 75,000 40,453 0 3,750 0 17,762
President and Chief
Credit 1996 140,000 60,000 37,484 0 8,250 0 15,770
Officer
Lewis P. Horwitz-- 1997
President,......... 250,000 504,614 129,764 0 600,000 0 17,762
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 made during fiscal 1997 to the
individuals named in the Summary Compensation Table pursuant to the Company's
plans. 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 ($)
OPTIONS TO EMPLOYEES PRICE ---------------------
NAME GRANTED IN 1997 ($/SHARE) EXPIRATION DATE 5% 10%
- ---- --------- --------------- ----------- ----------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
G. Louis Graziadio,
III(1)................. 575,000 21.0% $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 0.0% $9.63 9/21/07 2,408 4,815
Lewis P. Horwitz(2)..... 600,000 21.9% $5.18/$9.63 4/22/07 / 9/21/07 974,400 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.
(2) Options granted in April 1997 have an exercise price of $5.18 and expire
in April 2007. Options granted in September 1997 have an exercise price of
$9.63 and expire in September 2007.
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OPTION EXERCISES IN FISCAL 1997
The following table sets forth the number of shares of Bancorp Common Stock
covered by both exercisable and unexercisable stock options held by each of
the individuals named in the Summary Compensation Table on December 31, 1997.
Also reported are the values for "in-the-money" options, calculated as the
excess of the value of shares of Bancorp Common Stock as of December 31, 1997
over the respective exercise prices of outstanding stock options. All of the
options described below are currently exercisable in whole or in part. The
options granted to G. Louis Graziadio, III expire five years from date of
grant. All other options described below expire 10 years from date of grant.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
BANCORP OPTIONS AT IN-THE-MONEY BANCORP
SHARES VALUE 12/31/97 (#) OPTIONS AT 12/31/97 ($)
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 in
fiscal 1997 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.
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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.
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
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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 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.
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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.
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 AGREEMENTS
Agreements with G. Louis Graziadio, III. [EMPLOYMENT AGREEMENT SUMMARY TO BE
PROVIDED]
[Pursuant to the Contribution Agreement, the Company has agreed to assume
all of the Bank's obligations under that certain Consulting Agreement dated
November 1, 1991 between the Bank and Second Southern Corp., a company wholly
owned by G. Louis Graziadio, III ("Southern"). As a consultant, 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. Southern 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
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prior to certain specified dates, the agreement provides that 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. As of December 31, 1997, the
liability relating to this consulting agreement approximated $4.6 million, of
which $2.8 million had been accrued for as of December 31, 1997.]
Agreement with Robert Franko. [TO BE PROVIDED]
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 $181,000 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 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.
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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
February 15, 1998 and the Distribution Ratio, it is expected that
approximately 19,648,075 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 or as stock dividends to holders of Company Class B
Common Stock. 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 fifth anniversary of the Distribution Date (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
Prior to the Distribution, the Company intends to enter into two separate
credit facilities (the "Credit Facilities"), one to finance the Company's
operations other than CAB, and a separate facility to initially finance CAB's
activities. These Credit Facilities will be entered into with third party
financial institutions not affiliated with the Bank. In order for the Bank to
replace certain deposit liabilities used to fund the IFG Business, the Bank,
along with the Company and CAB, will be party to the Credit Facilities. The
Company anticipates that these facilities will consist of a $140 million two-
year revolving credit facility for the Company's operations other than CAB and
a $30 million 364-day revolving credit facility for CAB operations. The
$140 million credit facility will be syndicated and will include a $45 million
sublimit for the issuance of standby and commercial letters of credit. The
lenders under the $140 million credit facility will require that the lenders
be 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. It is expected that the $140 million credit facility will
bear interest at an annual rate equal to .95% over LIBOR or .95% over an
alternative base rate which will be the greater of the lead lender's prime
rate and the Federal funds rate plus .50%. The CAB facility will require that
the lenders be granted, among other things, a first priority security interest
in the SBA loans. The borrowing base will be comprised of 80% of eligible SBA
loans. It is expected that the CAB facility will bear interest at an annual
rate equal to .60% over LIBOR, .725% over the Federal funds rate or at an
alternative base rate which will be the greater of the lender's prime rate and
the Federal funds rate plus .50%. It is not expected that the CAB facility
will be syndicated. The Company will also be charged loan and other fees under
the Credit Facilities.
It is also expected that the Credit Facilities will include financial
covenants such as maintenance of a minimum tangible net worth, maintenance of
maximum indebtedness, minimum interest coverage ratio for the Company and
maximum and minimum capital ratio levels for CAB. The Credit Facilities will
also require the Company or CAB to make customary representations and
warranties prior to each borrowing and will include customary affirmative and
negative operating covenants and events of default.
Prior to the Distribution, the Bank will borrow approximately $124 million
(as determined at December 31, 1997) under the Credit Facilities in order to
replace certain deposit liabilities used to fund loans made through LHO and
CAB. 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.
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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."
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
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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 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.
99
<PAGE>
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.
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.
100
<PAGE>
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.
101
<PAGE>
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.
102
<PAGE>
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.
103
<PAGE>
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
</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
DECEMBER 31,
DECEMBER 31, DECEMBER 31, 1997
1996 1997 (UNAUDITED)
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.............. $ 5,245 $ 2,813 $ 2,813
Securities available for sale, at fair
value................................. 1,179 6,027 6,027
Loans held for sale.................... 5,531 3,763 3,763
Loans held for investment, net......... 72,528 134,407 128,614
Investment in stock of Imperial Credit
Industries, Inc. ("ICII")............. 57,736 75,001 75,001
Premises and equipment, net............ 306 551 551
Excess servicing fees receivable....... 3,294 -- --
Loan servicing rights.................. -- 1,914 1,914
Other assets........................... 3,529 3,507 3,268
-------- -------- --------
$149,348 $227,983 $221,951
======== ======== ========
LIABILITIES
Borrowings from Imperial Bank.......... $ 6,184 $ 77,934 $ --
Line of credit......................... -- -- 124,310
Income taxes payable................... 40,340 29,837 29,984
Other liabilities...................... 5,978 7,974 7,962
-------- -------- --------
52,502 115,745 162,256
-------- -------- --------
STOCKHOLDER'S EQUITY
Class A common stock--$.01 par, 1,000
shares authorized; 100 shares issued
or outstanding at December 31, 1997... -- -- 196
Contribution by Imperial Bank.......... 1,597 1,597 1,401
Unrealized (loss) gain on securities
available for sale, net of taxes...... (1) 231 231
Retained earnings...................... 95,250 110,410 57,867
-------- -------- --------
Total stockholder's equity............. 96,846 112,238 59,695
-------- -------- --------
Total liabilities and stockholder's eq-
uity.................................. $149,348 $227,983 $221,951
======== ======== ========
</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
YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------ 1997
1995 1996 1997 (UNAUDITED)
------- ------- ------- ------------
<S> <C> <C> <C> <C>
REVENUE
Interest on loans........................ $ 6,726 $10,629 $14,355 $13,773
Interest on securities available for
sale.................................... 153 158 235 235
------- ------- ------- -------
Total interest income.................... 6,879 10,787 14,590 14,008
Interest expense......................... 1,287 1,973 3,277 5,972
------- ------- ------- -------
Net interest income...................... 5,592 8,814 11,313 8,036
Provision for loan losses................ 1,492 1,781 2,558 2,243
------- ------- ------- -------
Net interest income after provision for
loan losses............................. 4,100 7,033 8,755 5,793
------- ------- ------- -------
Trust fees............................... 8,385 7,744 7,967 7,967
Gain on sale of SBA loans................ 1,813 3,561 3,944 3,944
Equity in net income of ICII............. 5,652 21,444 20,260 20,260
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
Other income............................. 677 1,260 2,627 2,624
------- ------- ------- -------
TOTAL REVENUE............................ 20,627 81,151 51,346 48,381
------- ------- ------- -------
EXPENSES
Personnel................................ 4,827 6,153 9,315 9,315
Occupancy, net........................... 887 1,024 1,198 1,198
Data processing.......................... 518 562 642 642
Real estate owned (income) expenses, net. 129 (11) 138 138
Donation of ICII stock................... -- 4,866 3,632 3,632
Consulting Expense....................... 286 914 6,224 6,224
Other.................................... 3,748 3,325 6,300 6,300
------- ------- ------- -------
TOTAL EXPENSES........................... 10,395 16,833 27,449 27,449
------- ------- ------- -------
Income before income taxes............... 10,232 64,318 23,897 20,932
Income taxes............................. 4,313 25,674 8,737 7,492
------- ------- ------- -------
NET INCOME............................... $ 5,919 $38,644 $15,160 $13,440
======= ======= ======= =======
Pro Forma Earnings Per Share:
Basic.................................. $ 0.32 $ 2.06 $ 0.78 $ 0.69
Diluted................................ $ 0.32 $ 2.03 $ 0.76 $ 0.68
</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
===== ====== ==== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income....................................... $ 5,919 $ 38,644 $ 15,160
Adjustments for non-cash items:
Depreciation and amortization................... 176 164 112
Accretion of discounts, net..................... (26) (9) (77)
Provision for loan losses....................... 1,492 1,781 2,558
Equity in net income of ICII.................... (5,652) (21,444) (20,260)
Gains--ICII stock............................... -- (36,411) (4,977)
Appreciation of donated ICII stock.............. -- (3,698) (2,816)
Donated ICII stock.............................. -- 4,866 3,632
Provision for deferred taxes.................... 1,985 8,310 6,239
Net decrease (increase) in loans held for sale.. (1,000) (2,883) 1,768
Net increase (decrease) in income taxes payable. 867 19,156 (16,742)
Net (increase) decrease in excess servicing fees
receivable..................................... (522) (1,887) 3,294
Net increase in loan servicing rights........... -- -- (1,914)
Net decrease (increase) in other assets......... (1,744) (2,843) (2,305)
Net increase (decrease) in other liabilities.... (1,354) 6,494 1,996
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... 141 10,240 (14,332)
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturity of securities available
for sale, net.................................. 408 800 1,873
Purchase of securities available for sale....... -- (533) (4,051)
Net decrease (increase) in loans held for
investment..................................... (50,641) 1,209 (64,437)
Proceeds from sale of ICII common stock......... -- 35,079 7,156
Purchase of premises and equipment.............. (125) (109) (391)
-------- -------- --------
Net cash provided by (used in) investing
activities...................................... (50,358) 36,446 (59,850)
-------- -------- --------
Cash flow from financing activities:
Net (decrease) increase in borrowings from
Imperial Bank.................................. 52,593 (43,713) 71,750
Dividend to Imperial Bank....................... (2,000) -- --
-------- -------- --------
Net cash (used in) provided by financing
activities...................................... 50,593 (43,713) 71,750
Net change in cash and cash equivalents.......... 376 2,973 (2,432)
Cash and cash equivalents at beginning of period. 1,896 2,272 5,245
-------- -------- --------
Cash and cash equivalents at end of period....... $ 2,272 $ 5,245 $ 2,813
======== ======== ========
Supplementary Information:
Interest paid................................... $ -- $ -- $ --
Taxes paid...................................... 680 -- 2,446
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
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 conduct, 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 totalled approximately 8.9
million shares of stock.
The Company, CAB, the Bank and Imperial Bancorp will enter 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 (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 $15 million plus the after-tax book value of the ICII stock of
approximately $45 million.
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
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
first half of 1998.
Total expenses related to the Distribution for the year ended December 31,
1997 were approximately $1.6 million. Of this amount, the Bank has incurred
$0.7 million and the remaining $0.9 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.
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.
F-7
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
YEAR ENDED
DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Estimated average
borrowings............. $18,571 $30,542 $50,603
Estimated interest rate. 6.93% 6.46% 6.48%
Estimated interest ex-
pense.................. $ 1,287 $ 1,973 $ 3,277
</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
year presented. The unaudited pro forma combined balance sheet reflects the
Contribution and the Distribution as if they occurred at December 31, 1997.
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 $124 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 and December 31, 1997, respectively, the Company owned
approximately 9.4 million and 8.9 million shares of ICII at a book value per
share of $6.16 and $8.39 representing approximately 25% and 23% of all
outstanding ICII shares. 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.
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
F-9
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
servicer would demand to assume the servicing (which is deemed to be 40 basis
points based on the 1993 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 carrrying 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 the straight
line 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 dyas 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 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.
F-10
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(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) No. 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 date of grant. Alternatively, SFAS No.
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 No. 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 No. 123.
F-11
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(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
Accounting Principles Board 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) RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 130--REPORTING COMPREHENSIVE INCOME--The FASB issued SFAS No. 130
"Reporting Comprehensive Income," which establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income represents the
change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. SFAS 130 requires
that all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 does not require a specific format for that financial statement but
requires that an enterprise display an amount representing total comprehensive
income for the period in that financial statement.
SFAS 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. SFAS 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. Management has
determined that the implementation of SFAS 130 will not have a material impact
on the Company's financial condition or results of operations.
SFAS 131--DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION--The FASB issued SFAS No. 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.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second
year of application. 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). 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.
SFAS 132 is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative
purposes is required unless the information is not readily available, in which
case the notes to the financial statements should include all available
information and a description of the information not available. Management has
determined that the implementation of SFAS 132 will not have a material impact
on the Company's financial condition or results of operations.
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
====== ==== ==== ======
</TABLE>
F-13
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 and
$369,000 at December 31, 1996 and December 31, 1997, respectively. There were
no gross realized gains or gross realized losses for the years ended December
31, 1995, 1996, and 1997.
The amortized cost and fair value of securities available for sale at
December 31, 1997, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- ------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less.................................. $2,249 $2,249
Due in one year through five years....................... 1,083 1,089
Due after five years..................................... 2,296 2,689
------ ------
Total.................................................... $5,628 $6,027
====== ======
</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
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Entertainment loans................................... $44,906 $ 98,313
Small business loans.................................. 20,277 34,032
Residential loans secured by real estate.............. 9,974 6,548
------- --------
Total loans........................................... 75,157 138,893
Less allowance for loan losses........................ (2,629) (4,486)
------- --------
Total loans held for investment, net................ $72,528 $134,407
======= ========
</TABLE>
Net deferred loan fees and costs, included in total loans, approximated $0.7
million and $1.3 million at December 31, 1996 and 1997, respectively.
At December 31, 1996, the recorded investment in loans for which impairment
has been recognized 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 for which
impairment has been recognized 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. Impaired loans averaged $3.6 million and $3.0
million, respectively for the years ended December 31, 1996 and 1997. During
the years ended December 31, 1995, 1996 and 1997, approximately $56,000,
$203,000 and $167,000, of interest income, respectively, was recognized on the
impaired loans.
At December 31, 1996 and 1997, there were no restructured loans.
Nonaccrual loans totaled $4.9 million and $4.4 million at December 31, 1996
and 1997, respectively. During the years ended December 31, 1995, 1996 and
1997, approximately $56,000, $203,000 and $167,000 of interest income,
respectively, was recognized on nonaccrual loans. Interest income foregone on
nonaccrual loans approximated $232,000, $375,000 and $296,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
F-14
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1997, approximately 60% and 71%, respectively, of
the Company's loan portfolio were issued to borrowers in the movie production
industry.
At December 31, 1996 and 1997, a majority of the Company's loan portfolio
consisted of customers geographically located in California.
Total SBA loans serviced were $57.4 million and $81.1 million at December
31, 1996 and 1997, respectively.
Loans held for sale at December 31, 1997 and 1996 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>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................ $ 626 $ 1,536 $ 2,629
Loans charged off................................. (613) (833) (850)
Recoveries on loans previously charged off........ 31 145 149
------- ------- -------
Net loans charged off............................. (582) (688) (701)
Provision for loan losses......................... 1,492 1,781 2,558
------- ------- -------
Balance, end of year.............................. $ 1,536 $ 2,629 $ 4,486
======= ======= =======
</TABLE>
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 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, the Company owned approximately 8.9 million shares of
ICII at an equivalent book value of $8.39 per share, representing
approximately 23.0% of all outstanding ICII shares as of such date. The
following table illustrates the changes in the Company's investment in ICII
for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Shares owned, beginning of year................... 5,801,052 9,396,106
Stock splits and stock dividends.................. 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
============ ===========
</TABLE>
F-15
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following tables contain summarized financial information for ICII:
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Total assets....................................... $2,470,639 $2,102,094
Total liabilities.................................. 2,231,131 1,778,161
Shareholders' equity............................... 239,508 323,933
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................. $129,482 $207,471 $227,937
Interest expense................................. 95,728 135,036 126,594
Net interest income after provision for loan
losses.......................................... 28,304 62,662 62,392
Total revenue.................................... 85,309 256,933 308,688
Total expenses................................... 61,180 99,049 149,512
Income before extraordinary item................. 14,193 75,984 89,916
Net income....................................... 14,193 75,984 85,921
</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 ("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 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. Based on the daily average market price for the year ended
December 31, 1997 of $21.34 per share, less 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, 1995, 1996, and 1997 the
Company recorded an expense of $0.3 million, $0.9 million and $1.0 million,
respectively, to its combined statements of income.
At December 31, 1996 and December 31, 1997, respectively, the Company owned
approximately 9.4 million and 8.9 million shares of ICII at an equivalent book
value per share of $6.16 and $8.39, representing approximately 25% and 23% of
all outstanding ICII shares. On February 27, 1997, the fair value of ICII
common stock was $21.13, representing a pre-tax unrealized gain on the
Company's investment of over $113 million.
F-16
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 and $577,000 in fees from this business for the
years ended December 31, 1995, 1996 and 1997, 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, $38,000 and $0 in 1995, 1996 and 1997, respectively, and is included
in "Other expense" in the combined statements of income. 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>
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 December 31, 1997, respectively.
F-17
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 Class A 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."
F-18
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Based on the number of shares of Bancorp Common Stock outstanding as of
February 15, 1998 and the Distribution Ratio, it is expected that
approximately 19,648,075 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
or as stock dividends to holders of Company Class B Common Stock. 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 fifth anniversary of the Distribution Date. No capital
stock of the Company other than the Company Class A Common Stock will be
outstanding on the Distribution Date.
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........................ 122,690 225,896 505,555
---------- ---------- ----------
Diluted EPS
Income available to shareholders:
Net income...................... $5,919 18,346,714 $0.32 $38,644 19,008,571 $2.03 $15,160 19,904,097 $0.76
====== ========== ===== ======= ========== ===== ======= ========== =====
</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
F-19
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
employees included in "Personnel expense" in the accompanying combined
statements of income are $194,000, $252,000 and $396,000 for the years ended
1995, 1996 and 1997, respectively.
(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 and
$151,000 for the years ended December 31, 1995, 1996 and 1997, 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 and $1,368,000 for the years ended December 31, 1995, 1996 and 1997,
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.
F-20
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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:
<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>
F-21
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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:
<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
SHARES PERCENTAGE BY WHICH STOCK PRICE
VESTED EXCEEDS EXERCISE PRICE
---------- -------------------------------
<S> <C>
25% 150%
25% 175%
50% 200%
</TABLE>
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.
F-22
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity for the Company's Share Incentive
Plan for 1997. There were no options issued or outstanding during 1995 and
1996.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at beginning of year......................... -- --
Granted.................................................. 2,744,900 $7.56
Exercised................................................ -- --
Forfeited................................................ -- --
---------
Outstanding at end of year............................... 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.
The following table summarizes information about the Company's stock options
outstanding under the Share Incentive Plan at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
WEIGHTED-
AVE. WEIGHTED-
NUMBER REMAINING AVE.
OUTSTANDING CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE
------------------------ ----------- ----------- ---------
<S> <C> <C> <C>
$5 to $6................................. 744,900 9.3 $5.18
$6 to $7................................. 750,000 9.3 $6.48
$9 to $10................................ 1,250,000 9.7 $9.63
---------
Total.................................... 2,744,900 9.5 $7.56
=========
</TABLE>
There were no options exercisable under the Share Incentive Plan at December
31, 1997.
(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-23
<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>
1995 1996 1997
---------------- ---------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year...................... 6,704 $3.23 125,644 $4.59 224,644 $6.53
Granted.................... 118,940 $4.66 99,000 $8.99 -- --
Exercised.................. -- -- -- -- (67,562) $5.26
Forfeited.................. -- -- -- -- (40,838) $8.99
------- ------- -------
Outstanding at end of year. 125,644 $4.59 224,644 $6.53 116,244 $6.40
======= ======= =======
Options exercisable at year
end....................... 5,028 $3.23 36,439 $4.40 21,504 $5.95
Weighted average fair value
of options granted during
the year.................. -- $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 table summarizes information about Bancorp's stock options
outstanding at December 31, 1997 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.............. 6,704 4.3 $3.23 6,704 $3.23
$4 to $5.............. 56,760 7.1 $4.45 631 $4.45
$8 to $9.............. 52,780 8.3 $8.91 14,169 $8.83
------- ------
Total................. 116,244 7.2 $6.40 21,504 $5.95
======= ======
</TABLE>
F-24
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(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>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income, as reported........................... $ 5,919 $ 38,644 $ 15,160
Net income, pro forma............................. $ 5,886 $ 38,584 $ 14,422
Diluted earnings per share, as reported........... $ 0.32 $ 2.03 $ 0.76
Diluted earnings per share, pro forma............. $ 0.32 $ 2.03 $ 0.72
</TABLE>
Pro forma net income reflects only options granted in 1995, 1996, and 1997,
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, and
$8.7 billion representing 3,971 accounts, at fair value, as of December 31,
1995, 1996 and 1997, respectively. The amounts are not included in the
accompanying combined balance sheets.
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
</TABLE>
F-25
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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
</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
</TABLE>
Management believes that the methods used to allocate cost and determine
billing for the services provided by the Bank are reasonable.
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 was 6.93%, 6.46% and 6.48% 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
F-26
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
At December 31, 1996 and 1997, the Company's contracted balances of
commitments to extend credit were $16.6 million and $11.6 million,
respectively.
At December 31, 1996 and 1997, the balances of standby letters of credit
issued by Imperial Bank on behalf of the Company were $37.5 million and $26.0
million.
(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 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
amounted to $580,000, $769,000 and $869,000, respectively.
Aggregate minimum rental commitments under these leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998...................................................... $ 624
1999...................................................... 468
2000...................................................... 416
2001...................................................... 416
2002...................................................... 390
Thereafter................................................ 1,242
------
Total..................................................... $3,556
======
</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
F-27
<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 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 INSTRU-
MENTS:
Commitments to extend credit....... -- 721 -- 233
Standby letters of credit.......... -- 750 -- 1,190
</TABLE>
F-28
<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
------- ------- ------ ------- --------
</TABLE>
F-29
<PAGE>
EXHIBIT 10.6
1998 STOCK OPTION PLAN
OF
IMPERIAL FINANCIAL GROUP, INC.
Section 1.01. Purpose. The purpose of this 1998 Stock Option Plan of
-------
Imperial Financial Group, Inc. (the "Plan") is to promote the growth and general
prosperity of Imperial Financial Group, Inc., a California corporation (the
"Company"), by permitting the Company to grant options to purchase shares of the
Company's common stock ("Shares"). The Plan is designed to help attract and
retain superior personnel for positions of substantial responsibility with the
Company and to provide directors, officers and key employees with an additional
incentive to contribute to the success of the Company . Options granted pursuant
to the provisions of the Plan may be either "incentive stock options," within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or non-statutory stock options, as determined by the Plan Administrator
and set forth in the stock option agreements. Options granted under this Plan
must be labeled either as an "Incentive Stock Option" or a "Non-Statutory Stock
Option." As used in the Plan, the terms "parent corporation" and "subsidiary
corporation" shall have the meanings set forth in subsections (e) and (f),
respectively, of Section 424 of the Code.
Section 2.01. Administration. The Plan will be administered by the Board
--------------
of Directors of the Company (the "Board of Directors") or, if the Board of
Directors so determines, by a committee appointed by the Board of Directors from
among its members (such committee administering the Plan being hereinafter
referred to as the "Committee"; and the Board of Directors or the Committee
administering the Plan, as the case may be, being hereinafter referred to as the
"Plan Administrator"). If the Board of Directors designates a Committee to
administer the Plan, the Committee (which may include members of the
compensation committee of the Board of Directors, if any) shall be comprised
solely of not less than two members who shall be (i) "disinterested persons"
within the meaning of Rule 16b-3 (or any successor rule) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (ii)
unless otherwise determined by the Board of Directors, "outside directors"
within the meaning of Section 162(m) of the Code.
Section 2.02. Authority of Plan Administrator. The Plan Administrator is
-------------------------------
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make such determinations and interpretations and to take such action in
connection with the Plan and any options granted hereunder as it deems necessary
or advisable. All determinations and interpretations made by the Plan
Administrator shall be binding and conclusive on all participants and their
legal representatives. No member of the Board of the Directors, no member of
the Committee and no employee of the Company shall be liable for any act or
failure to act hereunder, except in circumstances involving his or her bad
faith, gross negligence or willful misconduct, or for any act or failure to act
hereunder by any other member or employee or by any agent to whom duties in
connection with the administration of this Plan have been delegated. The
Company shall indemnify members of the Plan Administrator and any agent of the
Plan Administrator who is an employee of the Company,
<PAGE>
against any and all liabilities or expenses to which they may be subjected by
reason of any act or failure to act with respect to their duties on behalf of
the Plan, except in circumstances involving such person's bad faith, gross
negligence or willful misconduct.
The Plan Administrator may delegate to one or more of its members, or to
one or more agents, such administrative duties as it may deem advisable, and the
Plan Administrator, or any person to whom it has delegated duties as aforesaid,
may employ one or more persons to render advice with respect to any
responsibility the Plan Administrator or such person may have under the Plan.
The Plan Administrator may employ such legal or other counsel, consultants and
agents as it may deem desirable for the administration of the Plan and may rely
upon any opinion or computation received from any such counsel, consultant or
agent. Expenses incurred by the Plan Administrator in the engagement of such
counsel, consultant or agent shall be paid by the Company, or the subsidiary
whose employees have benefited from the Plan as determined by the Plan
Administrator.
Section 2.03. Terms, Conditions and Method of Grant. The terms and
-------------------------------------
conditions of options granted under the Plan may differ from one another as the
Plan Administrator, in its absolute discretion, shall determine as long as all
options granted under the Plan satisfy the requirements of the Plan. Whenever
the Plan Administrator shall designate an employee or other individual to
receive an option (the "optionee"), the Secretary or Assistant Secretary of the
Company shall forthwith send notice thereof to the optionee, stating the number
of Shares covered by the option, the price per Share and the class of common
stock underlying the option. The date of notice shall be the date of granting
the option to the optionee for all purposes of the Plan. The notice shall be
accompanied by an option agreement (with a copy of the Plan attached) to be
signed by the Company and by the optionee, which option agreement shall be in
the form and shall contain such provisions consistent with the Plan as the Plan
Administrator, acting with the benefit of legal counsel, shall consider
advisable.
Section 3.01. Maximum Number of Shares Subject to the Plan. Subject to
--------------------------------------------
the provisions of Section 13.01(a), the maximum aggregate number of authorized
and unissued Shares that may be optioned and sold under the Plan is
_____________ Shares. If any of the options granted under the Plan expire or
terminate for any reason before they have been exercised in full, the
unpurchased Shares subject to those expired or terminated options shall again be
available for the purposes of the Plan. The maximum number of Shares subject to
options that may be granted to any individual under the Plan shall not exceed
__________ Shares in any one year period.
Section 4.01. Eligibility and Participation. Only full-time, key
-----------------------------
employees of the Company or of any subsidiary corporation or any parent
corporation (other than Imperial Bancorp and Imperial Bank) shall be eligible
for selection by the Plan Administrator to receive incentive stock options and
full-time, key employees and directors of the Company or of any subsidiary
corporation or any parent corporation (other than Imperial Bancorp and Imperial
Bank) shall be eligible to receive non-statutory stock options. For purposes of
this Plan, the phrase "key employees" shall include officers, department heads,
division managers, other employees having supervisory responsibilities, and
those other employees as the Plan Administrator may specifically designate from
time to time.
-2-
<PAGE>
Section 5.01. Effective Date and Term of Plan. The Plan shall become
-------------------------------
effective upon its adoption by the Board of Directors of the Company subject to
the receipt of the approval of the Plan required by Section 15.01. The Plan
shall remain in effect for a term of 10 years, unless sooner terminated under
Section 14.01.
Section 5.02. Duration of Options. Each option and all rights thereunder
-------------------
granted pursuant to the terms of the Plan shall expire on the date determined by
the Plan Administrator, but in no event shall any option granted under the Plan
expire later than the (10) years from the date on which the option is granted.
In addition, each option shall be subject to early termination as provided in
the Plan. However, any non-statutory stock option granted to a director of the
Company or any subsidiary corporation or parent corporation (other than Imperial
Bancorp or Imperial Bank) shall expire five (5) years after the date of grant of
such option.
Section 5.03. Purchase Price. The purchase price for Shares acquired
--------------
pursuant to the exercise (in whole or in part) of any incentive stock option or
non-statutory stock option granted under this Plan shall be not less than 100%
of the fair market value of the Shares at the time of the grant. Fair market
value shall be determined by the Plan Administrator on the basis of those
factors they deem in good faith to be appropriate; provided, however, that if at
the time the determination is made the Shares are admitted to trading on a
national securities exchange, the fair market value of the Shares shall be not
less than the higher of (a) the mean between the high bid and asked prices
reported for the Shares on that exchange on the date or most recent trading day
preceding the date on which the option is granted, or (b) the last reported sale
price reported for the Shares on that exchange on the date or most recent
trading day preceding the date on which the option is granted. The phrase
"national securities exchange" shall include the National Association of
Securities Dealers Automated Quotation System and the over-the-counter market.
Section 5.04. Term and Purchase Price of Incentive Stock Option Granted to
------------------------------------------------------------
More Than 10% Shareholder. Notwithstanding anything to the contrary in Sections
- -------------------------
5.02 and 5.03, if an incentive stock option is to be granted to an employee of
the Company or any subsidiary corporation or parent corporation (other than
Imperial Bancorp or Imperial Bank) who at the time the option is granted owns
(or under Section 424(d) of the Code is deemed to own) more than 10% of the
total combined voting power of all classes of stock of the Company or of any
parent corporation or subsidiary corporation, that option by its terms shall not
be exercisable after the expiration of five (5) years after the date that option
is granted, and the purchase price of the Shares acquired pursuant to the
exercise (in whole or in part) of that option shall be at least 110% of the fair
market value (as determined under Section 5.03 by the Plan Administrator) of the
Shares subject to the option at the time the option is granted.
Section 5.05. Maximum Amount of Options. The maximum aggregate fair
-------------------------
market value (determined as of the time the option is granted) of the Shares
with respect to which incentive stock options are exercisable for the first time
by any optionee in any calendar year under all stock option plans of the
Company, or of any parent corporation or subsidiary corporation of the Company,
shall not exceed $100,000. To the extent that the aggregate fair market value
(determined as of the time the option is granted) of the Shares with respect to
which incentive stock options are exercisable for the first time by any optionee
in any calendar year under all stock
-3-
<PAGE>
option plans of the Company or any parent corporation or subsidiary corporation
of the Company exceeds $100,000, such options shall be treated as non-statutory
options.
Section 6.01. Exercise of Options. Subject to Section 6.03, each option
-------------------
shall be exercisable in one or more installments prior to its expiration or
termination at such times as determined by the Plan Administrator at the time of
grant; provided, however, that no option may be exercisable until six (6) months
after the date of the grant. The right to exercise may be cumulative as
determined by the Plan Administrator. No option may be exercised for a fraction
of a Share or other than on a business day of the Company. The full purchase
price of any Shares purchased shall be paid (i) in cash or by certified or
cashier's check payable to the order of the Company, or by a combination of cash
or certified or cashier's check, at the time of exercise of the option, or (ii)
at the discretion of the Plan Administrator and as permitted by law, by
delivering the Company's Shares already owned by the optionee or a combination
of Shares and cash or certified or cashiers checks.
Section 6.02. Written Notice Required. Any option granted pursuant to the
-----------------------
terms of the Plan shall be considered exercised when written notice of that
exercise, together with the investment representation described in Section 7.01,
has been given to the Company at its principal executive office by the person
entitled to exercise the option and full payment for the Shares with respect to
which the option is exercised has been received by the Company.
Section 6.03. Vesting of Non-Statutory Stock Options. Non-statutory stock
--------------------------------------
options granted to directors of the Company or any subsidiary corporation or
parent corporation (other than Imperial Bancorp or Imperial Bank) will become
exercisable as follows: 100% six (6) months after the date of the grant.
Section 7.01. Compliance With State and Federal Laws; Delivery of Shares.
----------------------------------------------------------
No Shares shall be issued with respect to any option granted under the Plan
unless the exercise of that option and the issuance and delivery of the Shares
pursuant to that exercise shall comply with all relevant provisions of state and
federal laws, rules, and regulations, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to that compliance. If any law,
or any regulation of the Securities and Exchange Commission, or of any other
body having jurisdiction, shall require the Company or the optionee to take any
action in connection with the Shares specified in the optionee's notice, then
the date for the delivery of the Shares shall be postponed until the completion
of the necessary action. The Plan Administrator shall require (to the extent
required by or advisable under applicable laws, rules, and regulations) an
optionee to furnish evidence satisfactory to the Company (including a written
and signed representation letter and a consent to be bound by any transfer
restrictions imposed by laws, legend condition, or otherwise) upon exercise of
the option that the Shares to be acquired are being purchased only for
investment and without any present intention to sell or distribute the Shares in
violation of any law, rule, or regulation. Further, each optionee shall consent
to the imposition of a legend on the stock certificate evidencing the Shares
subject to his or her option restricting their transferability as required by or
advisable under applicable laws, rules and regulations.
-4-
<PAGE>
Section 8.01. Employment of Optionee. Each optionee, if requested by the
----------------------
Plan Administrator, must agree in writing as a condition of the granting of his
or her incentive stock option, that he or she will remain in the employ of the
Company or any subsidiary corporation or parent corporation (other than Imperial
Bancorp and Imperial Bank) following the date of the granting of that option for
a period specified by the Plan Administrator, which period shall in no event
exceed three years. Nothing in the Plan or in any option granted hereunder shall
confer upon any optionee (i) any right to continued employment by the Company or
any parent corporation or subsidiary corporation, or limit in any way the right
of the employer at any time to terminate or alter the terms of that employment
or (ii) any right to sue the Company, or any parent corporation or subsidiary
corporation for any adverse tax consequences in connection with the grant or
exercise of any option or the disposition of any Shares acquired pursuant to
this Plan.
Section 9.01. Option Rights Upon Termination of Employment. If an
--------------------------------------------
optionee ceases to be an employee or a director of the Company or any subsidiary
corporation or parent corporation for any reason other than death or permanent
and total disability (within the meaning of Section 22(e)(3) of the Code), the
optionee's option shall immediately terminate; provided, however, that the Plan
Administrator, in its absolute discretion, may provide at the time of the grant
of an option that the option may be exercised (to the extent it remains
unexercised on the date of termination) at any time within a period of up to
three months following the date of termination, unless either the option or the
Plan otherwise provides for earlier termination but only to the extent that the
optionee is entitled to exercise the option at the date of such termination. The
transfer of an employee from the employ of the Company to any subsidiary
corporation or parent corporation (other than Imperial Bancorp or Imperial
Bank), or vice versa, or from any subsidiary corporation or parent corporation
(other than Imperial Bancorp or Imperial Bank), to any other subsidiary
corporation or parent corporation (other than Imperial Bancorp or Imperial Bank)
shall not be deemed to constitute a cessation of employment for purposes of this
Plan.
Section 10.01. Option Rights Upon Death or Disability. Except as
--------------------------------------
otherwise limited by the Plan Administrator at the time of the grant of an
option, if an optionee dies or becomes permanently and totally disabled within
the meaning of Section 22(e)(3) of the Code while an employee or a director of
the Company or any subsidiary corporation or parent corporation (other than
Imperial Bancorp or Imperial Bank), or dies within three months after ceasing to
be an employee or director thereof (provided that the optionee was entitled to
exercise the option at the time of ceasing to be an employee or director), the
optionee's option shall expire one year after the date of death or the date of
permanent and total disability, unless either the option or the Plan otherwise
provides for earlier termination. During this one year (or shorter) period, the
option may be exercised, to the extent that it remains unexercised on the date
of death or on the date of permanent and total disability, by the optionee, if
living, or by the person or persons to whom the optionee's rights under the
option shall pass by will or by the laws of descent and distribution, but only
to the extent that the optionee is entitled to exercise the option at the date
of death or date of permanent and total disability, as the case may be.
Section 11.01. No Privileges of Ownership. Notwithstanding the exercise
--------------------------
of any option granted pursuant to the Plan, no optionee shall have any of the
rights or privileges of a shareholder of the Company in respect of any Shares
issuable upon the exercise of the option until the optionee becomes a
shareholder of record.
-5-
<PAGE>
Section 12.01. Options Not Transferable. Options granted pursuant to the
------------------------
terms of the Plan, other than those to directors which may be assignable at the
director's request, may not be sold, pledged, assigned, or transferred in any
manner, other than by will or the laws of descent and distribution, and may be
exercised during the lifetime of an optionee only by that optionee.
Section 13.01. Adjustment to Number and Purchase Price; Acceleration of
--------------------------------------------------------
Right to Exercise Option; Cancellation of Option. All options granted pursuant
- ------------------------------------------------
to the Plan shall be adjusted, modified, or canceled in the manner prescribed by
this section.
(a) If the outstanding Shares of the Company are increased, decreased,
changed into, or exchanged for a different number or kind or Shares or
securities through merger, consolidation, combination, exchange of Shares, or
other reorganization, recapitalization, reclassification, stock dividend, stock
split, or reverse stock split, an appropriate and proportionate adjustment shall
be made in the maximum number and kind of Shares as to which options may be
granted under the Plan. A corresponding adjustment changing the number or kind
of Shares allocated to unexercised options or portions thereof that were granted
prior to any such change shall likewise be made. Any adjustments made pursuant
to this Section 13.01 in outstanding options shall be made without change in the
aggregate purchase price applicable to the unexercised portion of the option,
but with a corresponding adjustment in the price for each Share or other unit of
any security covered by the option. With respect to incentive stock options,
the adjustments described in this section 13.01(a) shall be made in accordance
with Section 424 of the Code.
(b) Upon the effective date of the dissolution or liquidation of the
Company, or of a reorganization, merger, or consolidation of the Company with
one or more other corporations in which the Company is not the surviving
corporation, or of the transfer of substantially all of the assets or Shares of
the Company to another corporation, the Plan and any option theretofore granted
hereunder shall terminate. In the event of such dissolution, liquidation,
reorganization, merger, consolidation, transfer of assets, or transfer of stock,
each optionee (or that person's estate or a person who acquired the right to
exercise the option from the optionee by bequest or inheritance) shall be
entitled, prior to the effective date of the consummation of any such
transaction, to purchase, in whole or in part, the full number of Shares under
the option or options granted to the optionee that the optionee would otherwise
have been entitled to purchase during the remaining term of the option and
without regard to any otherwise applicable restrictions set forth in the option
delaying the immediate exercise of the option. To the extent that any such
exercise relates to stock that is not otherwise available for purchase through
the exercise of the option by the optionee at that time, the exercise pursuant
to this Section 13.01(b) shall be contingent upon the consummation of that
dissolution, liquidation, reorganization, merger, consolidation, sale, or
transfer of assets or stock.
(c) Notwithstanding the foregoing, in the event of a complete liquidation
of a subsidiary corporation or parent corporation (other than Imperial Bancorp
and Imperial Bank), or in the event that such corporation ceases to be a
subsidiary corporation or parent corporation, any unexercised options
theretofore granted to an employee of such subsidiary corporation or parent
corporation, respectively, shall be deemed canceled unless the employee shall
become employed by the Company or by any other subsidiary corporation or parent
corporation (other than Imperial Bancorp and Imperial Bank). respectively, on
the occurrence of any such event
-6-
<PAGE>
Section 14.01. Termination and Amendment of Plan. The Plan shall
---------------------------------
terminate ten (10) years from the effective date of the Plan (as determined
under Section 5.01), and no options shall be granted under the Plan after that
date; provided, however, that termination of the Plan shall not terminate any
option granted prior thereto, and options granted prior to termination of the
Plan and existing at the time of termination of the Plan shall continue to be
subject to all the terms and conditions of the Plan as if the Plan had not
terminated. Subject to the limitation contained in Section 14.02, the Plan
Administrator may at any time amend or revise the terms of the Plan (including
the form and substance of the option agreements to be used hereunder), provided
that no amendment or revision shall (a) increase the maximum aggregate number of
Shares provided for in Section 3.01 that may be sold pursuant to options granted
under the Plan except as required under the provisions of Section 13.01(a), (b)
permit the granting of an option to anyone other than as provided in Section
4.01, (c) increase the maximum term provided for in Sections 5.02 and 5.04 of
any option, or (d) change the minimum purchase price for the Shares under
Sections 5.03 and 5.04, unless approved by the written consent of the
shareholders, or by the affirmative vote, in person or by proxy, of a majority
of the outstanding voting stock of the Company at a duly held shareholders'
meeting.
Section 14.02. Prior Rights and Obligations. No amendment, suspension, or
----------------------------
termination of the Plan shall, without the consent of the optionee, alter or
impair any of that optionee's right or obligations under any option granted
under the Plan prior to that amendment, suspension, or termination.
Section 15.01. Approval of Shareholders. Within 12 months after its
------------------------
adoption by the Board of Directors of the Company, the Plan must be approved by
the unanimous written consent of the shareholders, or by the affirmative vote,
in person or by proxy, of a majority of the outstanding voting stock of the
Company at a duly held shareholders' meeting. Options may be granted under the
Plan prior to obtaining shareholder approval, but those options shall be
contingent upon shareholder approval being obtained and may not be exercised
prior to the receipt of shareholder approval.
Section 16.01. Reservation of Shares. During the term of the Plan, the
---------------------
Company will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan. In addition, the
Company will from time to time, as is necessary to accomplish the purposes of
the Plan, seek to obtain from any regulatory agency having jurisdiction any
requisite authority in order to grant options under the Plan and to issue and
sell Shares hereunder.
Section 17.01. Tax Withholding. The Company may make such provisions as
---------------
it may deem appropriate for the withholding of any state or federal taxes which
the Company determines is advisable to withhold in connection with any option or
any other right, payment or settlement made under this Plan. The exercise of the
option shall not be effective unless such withholding shall have been effected
or obtained in a manner acceptable to the Company, including, but not limited
to, requiring the optionee to remit to the Company an amount sufficient to
satisfy any federal, state and/or local tax withholding requirements.
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<PAGE>
Section 18.01. Sections-Headings. The headings of the sections of the
-----------------
Plan are for convenience only and shall not be considered or referred to in
resolving questions of interpretation. References to "Section" that are not
followed by a section number and the phrase "of the Code" are references to
sections of the Plan.
Section 19.01. Governing Law. The Plan shall be governed by and construed
-------------
and interpreted in accordance with the internal laws of the State of Delaware,
except to the extent preempted by federal law, which shall govern to such
extent.
Section 20.01. Invalid Provision. In the event that any provision of this
-----------------
Plan is found to be invalid or otherwise unenforceable under any applicable law,
such invalidity or unenforceability shall not be construed as rendering any
other provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid or unenforceable provision was not contained herein.
Section 21.01. Adoption. The Plan was adopted by a resolution duly
--------
adopted by the Board of Directors of the Company on March ___, 1998.
-8-
<PAGE>
EXHIBIT 10.7
IMPERIAL FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
Purpose ................................................................................ 1
ARTICLE 1 Definitions.............................................................. 1
ARTICLE 2 Selection, Enrollment, Eligibility....................................... 7
2.1 Selection by Committee................................................... 7
2.2 Enrollment Requirements.................................................. 7
2.3 Eligibility; Commencement of Participation............................... 8
2.4 Termination of Participation and/or Deferrals............................ 8
ARTICLE 3 Deferral Commitments/Company Matching/Crediting/Taxes.................... 8
3.1 Minimum Deferral......................................................... 8
3.2 Maximum Deferral......................................................... 9
3.3 Election to Defer; Effect of Election Form............................... 10
3.4 Withholding of Annual Deferral Amounts................................... 10
3.5 Annual Company Matching Amount........................................... 10
3.6 Vested Company Matching Account.......................................... 11
3.7 Crediting to Account Balances............................................ 11
3.8 FICA, Withholding and Other Taxes........................................ 12
ARTICLE 4 Short-Term Payout; Withdrawal Election................................... 13
4.1 Short-Term Payout........................................................ 13
4.2 Relationship of Other Benefits to Short-Term Payout...................... 13
4.3 Withdrawal Election...................................................... 13
ARTICLE 5 Retirement Benefit....................................................... 14
5.1 Retirement Benefit....................................................... 14
5.2 Payment of Retirement Benefit............................................ 14
5.3 Death Prior to Completion of Retirement Benefit.......................... 14
ARTICLE 6 Pre-Retirement Survivor Benefit.......................................... 15
6.1 Pre-Retirement Survivor Benefit.......................................... 15
6.2 Payment of Pre-Retirement Survivor Benefit............................... 15
6.3 Restriction in the Event of Suicide or Falsely Provided Information...... 15
</TABLE>
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<TABLE>
<S> <C> <C>
ARTICLE 7 Termination Benefit................................ 15
7.1 Termination Benefit................................ 15
7.2 Payment of Termination Benefit..................... 16
ARTICLE 8 Disability Waiver and Benefit...................... 16
8.1 Disability Waiver.................................. 16
8.2 Continued Eligibility; Disability Benefit.......... 16
ARTICLE 9 Beneficiary Designation............................ 17
9.1 Beneficiary........................................ 17
9.2 Beneficiary Designation; Change; Spousal Consent... 17
9.3 Acknowledgment..................................... 17
9.4 No Beneficiary Designation......................... 17
9.5 Doubt as to Beneficiary............................ 17
9.6 Discharge of Obligations........................... 18
ARTICLE 10 Leave of Absence................................... 18
10.1 Paid Leave of Absence.............................. 18
10.2 Unpaid Leave of Absence............................ 18
ARTICLE 11 Termination, Amendment or Modification............. 18
11.1 Termination........................................ 18
11.2 Amendment.......................................... 19
11.3 Plan Agreement..................................... 19
11.4 Effect of Payment.................................. 19
11.5 Transfer of Plan to Employer....................... 19
ARTICLE 12 Administration..................................... 20
12.1 Committee Duties................................... 20
12.2 Agents............................................. 20
12.3 Binding Effect of Decisions........................ 20
12.4 Indemnity of Committee............................. 20
12.5 Employer Information............................... 20
ARTICLE 13 Other Benefits and Agreements...................... 20
13.1 Coordination with Other Benefits................... 20
</TABLE>
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<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE 14 Claims Procedures.................................................. 21
14.1 Presentation of Claim.............................................. 21
14.2 Notification of Decision........................................... 21
14.3 Review of a Denied Claim........................................... 21
14.4 Decision on Review................................................. 22
14.5 Legal Action....................................................... 22
ARTICLE 15 Trust.............................................................. 22
15.1 Establishment of the Trust......................................... 22
15.2 Interrelationship of the Plan and the Trust........................ 23
15.3 Distributions From the Trust....................................... 23
ARTICLE 16 Guarantee of Company............................................... 23
16.1 Guarantee.......................................................... 23
16.2 Limitations........................................................ 23
ARTICLE 17 Miscellaneous...................................................... 23
17.1 Unsecured General Creditor......................................... 23
17.2 Employer's Liability............................................... 24
17.3 Nonassignability................................................... 24
17.4 Not a Contract of Employment....................................... 24
17.5 Furnishing Information............................................. 24
17.6 Terms.............................................................. 24
17.7 Captions........................................................... 25
17.8 Governing Law...................................................... 25
17.9 Notice............................................................. 25
17.10 Successors......................................................... 25
17.11 Spouse's Interest.................................................. 25
17.12 Validity........................................................... 25
17.13 Incompetent........................................................ 25
17.14 Court Order........................................................ 26
17.15 Distribution in the Event of Taxation.............................. 26
17.16 Legal Fees To Enforce Rights and Liquidated Damages After Change
in Control......................................................... 26
</TABLE>
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<PAGE>
IMPERIAL FINANCIAL GROUP, INC.
DEFERRED COMPENSATION PLAN
PURPOSE
-------
The purpose of this Plan is to provide specified benefits to a select
group of management or highly compensated Employees and Directors who contribute
materially to the continued growth, development and future business success of
IMPERIAL FINANCIAL GROUP, INC. a Delaware corporation, and its subsidiaries
(including lower-tier subsidiaries), if any, that sponsor this Plan. This Plan
shall be unfunded for tax purposes and for purposes of Title I of ERISA. This
Plan shall be effective on the date designated by an authorized IMPERIAL
FINANCIAL GROUP, INC. officer.
ARTICLE 1
DEFINITIONS
-----------
For purposes hereof, unless otherwise clearly apparent from the
context, the following phrases or terms shall have the following indicated
meanings:
1.1 "Account Balance" shall mean, with respect to Participant, the sum of
(i) the Deferral Account plus (ii) the Vested Company Matching Account.
This account shall be a bookkeeping entry only and shall be utilized
solely as a device for the measurement and determination of the amounts
to be paid to a Participant pursuant to this Plan. The Account Balance
of a Participant shall include any liability under the Imperial Bancorp
Deferred Compensation Plan Effective March 31, 1992 (the "1992 Deferral
Plan") or the Imperial Bancorp Deferred Compensation Plan Effective
January 1, 1996 (the "1996 Deferral Plan") which has been assumed by the
Employer. This liability shall be paid in accordance with the election
made by the Participant under the 1992 Deferral Plan or the 1996
Deferral Plan, respectively, unless an election form which meets the
requirements of Section 5.2 of this Plan has been accepted by the
Committee. Liabilities assumed for Participants under the 1992 Deferral
Plan shall be paid not earlier than thirty (30) days nor later than
ninety (90) days after December 31, 1998.
1.2 "Annual Bonus" shall mean any annual cash compensation in addition to
Base Annual Salary relating to services performed during any calendar
year, whether or not paid in such calendar year or included on the
Federal Income Tax Form W-2 for such calendar year, payable to a
Participant as an Employee under any Employer's annual bonus and
incentive plans.
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<PAGE>
1.3 "Annual Company Matching Amount" for any one Plan Year shall be the
amount determined in accordance with Section 3.5.
1.4 "Annual Deferral Amount" shall mean that portion of a Participant's Base
Annual Salary, Annual Bonus and/or Directors Fees that a Participant
elects to have, and is deferred, in accordance with Article 3, for any
one Plan Year. In the event of a Participant's Retirement, Disability
(if deferrals cease in accordance with Section 8.1), death or a
Termination of Employment prior to the end of a Plan Year, such year's
Annual Deferral Amount shall be the actual amount withheld prior to such
event.
1.5 "Annual Installment Method" shall mean equal annual installments, with
the first installment being paid within the time limits set forth in
this Plan for the various benefits available, and the next annual
installment, and all annual installments thereafter, being paid on the
last business day in January. For example, if a Participant Retires on
June 30, 1998, and he or she elects an Annual Installment Method, the
first equal installment shall be payable no later than 60 days after
Retirement, the next equal installment shall be payable on the last
business day in January, 1999 and each remaining equal installment shall
be payable on the last business day in January of each consecutive year.
1.6 "Base Annual Salary" shall mean the annual cash compensation relating to
services performed during any calendar year, whether or not paid in such
calendar year or included on the Federal Income Tax Form W-2 for such
calendar year, including all commissions and automobile allowances, but
excluding bonuses, overtime, relocation expenses, incentive payments,
non-monetary awards, fringe benefits, retainers, directors fees and
other fees, severance allowances, pay in lieu of vacations, insurance
premiums paid by an Employer, insurance benefits paid to the Participant
or his or her beneficiary, Employer contributions to qualified or
nonqualified plans and allowances other than automobile paid to a
Participant for employment services rendered (whether or not such
allowances are included in the Employee's gross income). Base Annual
Salary shall be calculated before reduction for compensation voluntarily
deferred or contributed by the Participant pursuant to all qualified or
non-qualified plans and shall be calculated to include amounts not
otherwise included in the Participant's gross income under Code Sections
125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by any
Employer; provided however that all such amounts will be included in
compensation only to the extent that, had there been no such plan, the
amount would have been payable in cash to the Employee.
1.7 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 9, that are entitled to
receive benefits under this Plan upon the death of a Participant.
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<PAGE>
1.8 "Beneficiary Designation Form" shall mean the form, established from
time to time by the Committee, that a Participant completes, signs and
returns to the Committee to designate one or more Beneficiaries.
1.9 "Board" shall mean the board of directors of the Company.
1.10 "Change in Control" shall mean 90 days prior to the first to occur of
any of the following events:
(a) Any "person" (as that term is used in Section 13 and 14(d)(2)
of the Securities Exchange Act of 1934 ("Exchange Act")) becomes the
beneficial owner (as that term is used in Section 13(d) of the Exchange
Act), directly or indirectly, of 50% or more of the Company's capital
stock entitled to vote in the election of directors;
(b) During any period of not more than two consecutive years, not
including any period prior to the adoption of this Plan, individuals who
at the beginning of such period constitute the board of directors of the
Company, and any new director (other than a director designated by a
person who has entered into an agreement with the Company to effect a
transaction described in clause (a), (c), (d) or (e) of this Section
1.10) whose election by the board of directors or nomination for
election by the Company's stockholders was approved by a vote of at
least three-fourths (3/4ths) of the directors then still in office who
either were directors at the beginning of the period or whose election
or nomination for election was previously so approved, cease for any
reason to constitute at least a majority thereof;
(c) The shareholders of the Company approve any consolidation or
merger of the Company, other than a consolidation or merger of the
Company in which the holders of the common stock of the Company
immediately prior to the consolidation or merger hold more than 50% of
the common stock of the surviving corporation immediately after the
consolidation or merger;
(d) The shareholders of the Company approve any plan or proposal
for the liquidation or dissolution of the Company; or
(e) The shareholders of the Company approve the sale or transfer of
substantially all of the assets of the Company to parties that are not
within a "controlled group of corporations" (as defined in Code Section
1563) in which the Company is a member.
1.11 "Claimant" shall have the meaning set forth in Section 14.1.
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<PAGE>
1.12 "Code" shall mean the Internal Revenue Code of 1986, as may be amended
from time to time.
1.13 "Committee" shall mean the committee described in Article 12.
1.14 "Company" shall mean Imperial Financial Group, Inc., a Delaware
corporation.
1.15 "Company Matching Account" shall mean the sum of all of a Participant's
Annual Company Matching Amounts plus amounts credited in accordance with
all the applicable crediting provisions of this Plan, less all
distributions made to the Participant or his or her Beneficiary pursuant
to this Plan that relate to his or her Company Matching Account. This
account shall be a bookkeeping entry only and shall be utilized solely
as a device for the measurement and determination of the amounts to be
paid to the Participant pursuant to this Plan.
1.16 "Crediting Rate" shall mean, for each Plan Year, an interest rate,
stated as an annual rate, determined and announced by the Committee
before the Plan Year for which it is to be used that is equal to the
"10-Year Treasury Bond Yield" plus 250 basis points. The "10-Year
Treasury Bond Yield" shall be an interest rate, stated as an annual
rate, that is published in the Wall Street Journal on the last business
day of the immediately preceding November for each Plan Year.
1.17 "Deferral Account" shall mean the sum of all of a Participant's Annual
Deferral Amounts, plus amounts credited in accordance with all the
applicable crediting provisions of this Plan, less all distributions
made to the Participant or his or her Beneficiary pursuant to this Plan
that relate to his or her Deferral Account. This account shall be a
bookkeeping entry only and shall be utilized solely as a device for the
measurement and determination of the amounts to be paid to the
Participant pursuant to this Plan.
1.18 "Deduction Limitation" shall mean the following described limitation on
a benefit that may otherwise be distributable pursuant to the provisions
of this Plan. Except as otherwise provided, this limitation shall be
applied to all distributions that are "subject to the Deduction
Limitation" under this Plan. If an Employer determines in good faith
prior to a Change in Control that there is a reasonable likelihood that
any compensation paid to a Participant for a taxable year of the
Employer would not be deductible by the Employer solely by reason of the
limitation under Code Section 162(m), then to the extent deemed
necessary by the Employer to ensure that the entire amount of any
distribution to the Participant pursuant to this Plan prior to the
Change in Control is deductible, the Employer may defer all or any
portion of a distribution under this Plan. Any amounts deferred
pursuant to this limitation shall be credited with additional amounts in
accordance with Section 3.7 below, even if such amount is being paid out
in installments. The amounts so deferred and amounts credited thereon
shall be distributed to the Participant or his or her Beneficiary (in
the event of the Participant's death) at the earliest possible date, as
determined by the
-4-
<PAGE>
Employer in good faith, on which the deductibility of compensation paid
or payable to the Participant for the taxable year of the Employer
during which the distribution is made will not be limited by Section
162(m), or if earlier, the effective date of a Change in Control.
Notwithstanding anything to the contrary in this Plan, the Deduction
Limitation shall not apply to any distributions made after a Change in
Control.
1.19 "Director" shall mean any member of the board of directors of any
Employer.
1.20 "Directors Fees" shall mean the annual fees paid by any Employer,
including retainer fees and meetings fees, as compensation for serving
on the Board.
1.21 "Disability" shall mean a period of disability during which a
Participant qualifies for disability benefits under the Participant's
Employer's long-term disability plan, or, if a Participant does not
participate in such a plan, a period of disability during which the
Participant would have qualified for disability benefits under such a
plan had the Participant been a participant in such a plan, as
determined in the sole discretion of the Committee. If the
Participant's Employer does not sponsor such a plan, or discontinues to
sponsor such a plan, Disability shall be determined by the Committee in
its sole discretion.
1.22 "Disability Benefit" shall mean the benefit set forth in Article 8.
1.23 "Election Form" shall mean the form established from time to time by the
Committee that a Participant completes, signs and returns to the
Committee to make an election under the Plan.
1.24 "Employee" shall mean a person who is an employee of any Employer.
1.25 "Employer(s)" shall mean the Company and/or any of its subsidiaries (now
in existence or hereafter formed or acquired) that have been selected by
the Board to participate in the Plan and have adopted the Plan.
1.26 "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
1.27 "Participant" shall mean any Employee or Director (i) who is selected to
participate in the Plan, (ii) who elects to participate in the Plan,
(iii) who signs a Plan Agreement, an Election Form and a Beneficiary
Designation Form, (iv) whose signed Plan Agreement, Election Form and
Beneficiary Designation Form are accepted by the Committee, (v) who
commences participation in the Plan, and (vi) whose Plan Agreement has
not terminated. A spouse or former spouse of a Participant shall not be
treated as a Participant in the Plan, even if he or she has an interest
in the Participant's benefits under the Plan under applicable law or as
a result of property settlements resulting from legal separation or
divorce.
-5-
<PAGE>
1.28 "Plan" shall mean the Company's Deferred Compensation Plan, which shall
be evidenced by this instrument and by each Plan Agreement, as may be
amended from time to time.
1.29 "Plan Agreement" shall mean a written agreement, as may be amended from
time to time, which is entered into by and between an Employer and a
Participant. The terms of any Plan Agreement may vary any of the terms
set forth in this Plan and such changes shall be binding on the Employer
and Participant if the Plan Agreement is signed by the Participant and
accepted by the Committee. The Plan Agreement executed by a Participant
and accepted by the Committee shall provide for the entire benefit to
which such Participant is entitled under the Plan; should there be more
than one Plan Agreement, the Plan Agreement bearing the latest date of
acceptance by the Committee shall supersede all previous Plan Agreements
in their entirety and shall govern the agreement between the parties.
1.30 "Plan Year" shall begin on January 1 of each year and continue through
December 31.
1.31 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in
Article 6.
1.32 "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an
Employee, severance from employment from all Employers for any reason
other than a leave of absence, death or Disability on or after age sixty
(60) with ten (10) Years of Service. With respect to a Director,
"Retirement", "Retires" or "Retired" shall mean the cessation of service
as a member of the Board for any reason other than a leave of absence,
death or Disability on or after age sixty (60). If a Participant is
both an Employee and a Director, Retirement shall not occur until he or
she Retires as both an Employee and a Director; provided, however, that
such a Participant may elect, prior to Retirement and in accordance with
the policies and procedures established by the Committee, to Retire for
purposes of this Plan at the time he or she Retires as an Employee.
1.33 "Retirement Benefit" shall mean the benefit set forth in Article 5.
1.34 "Return on Equity" for a Plan Year shall mean the percent arrived at by
dividing "net income" by "average stockholders' equity" for such Plan
Year. "Net income" shall mean the consolidated net income for the
Company's fiscal year that ends within the Plan Year, as reflected on
the consolidated income statement of the Company published in the
Company's annual report, less any dividends declared on preferred stock
of the Company during such period. "Average stockholders' equity" shall
mean the average of: (i) total stockholders' equity at the end of the
Company's fiscal year that ends within the Plan Year, as reflected on
the consolidated balance sheet of the Company published in the Company's
annual report, minus stockholders' equity relating to preferred stock
for such fiscal year, and (ii) total stockholders' equity for the
Company's fiscal year that ends one year prior to the fiscal year that
-6-
<PAGE>
ends within the Plan Year, as reflected on the consolidated balance
sheet of the Company published in the Company's annual report, minus
stockholders' equity relating to preferred stock for such fiscal year.
1.35 "Short-Term Payout" shall mean the payout set forth in Section 4.1.
1.36 "Termination Benefit" shall mean the benefit set forth in Article 7.
1.37 "Termination of Employment" shall mean the ceasing of employment with
all Employers, or service as a Director of all Employers, voluntarily or
involuntarily, for any reason other than Retirement, Disability, death
or an authorized leave of absence. If a Participant is both an Employee
and a Director, a Termination of Employment shall occur only upon the
termination of the last position held; provided, however, that such a
Participant may elect, in accordance with the policies and procedures
established by the Committee, to be treated for purposes of this Plan as
having experienced a Termination of Employment at the time he or she
ceases employment with an Employer as an Employee.
1.38 "Trust" shall mean the trust established pursuant to that certain Trust
Agreement, dated as of January 1, 1998 between the Company and the
trustee named therein, as amended from time to time.
1.39 "Vested Company Matching Account" shall have the meaning set forth in
Section 3.6.
1.40 "Years of Service" shall mean the total number of full years in which a
Participant has been employed by one or more Employers. For purposes of
this definition, a year of employment shall be a 365 day period (or 366
day period in the case of a leap year) that, for the first year of
employment, commences on the Employee's date of hiring and that, for any
subsequent year, commences on an anniversary of that hiring date. Any
partial year of employment shall not be counted.
ARTICLE 2
SELECTION, ENROLLMENT, ELIGIBILITY
----------------------------------
2.1 SELECTION BY COMMITTEE. Participation in the Plan shall be limited to a
----------------------
select group of management, highly compensated Employees and/or
Directors of the Employers, as determined by the Committee in its sole
discretion. From that group, the Committee shall select, in its sole
discretion, Employees and Directors to participate in the Plan.
2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected
-----------------------
Employee or Director shall complete, execute and return to the
Committee, within 30 days of selection, a Plan Agreement, an Election
Form and a Beneficiary Designation Form.
-7-
<PAGE>
In addition, the Committee shall establish from time to time such other
enrollment requirements as it determines in its sole discretion are
necessary.
2.3 ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee or
------------------------------------------
Director selected to participate in the Plan has met all enrollment
requirements set forth in this Plan and required by the Committee,
including returning all required documents to the Committee within 30
days of selection, that Employee or Director shall commence
participation in the Plan (i) in the case of Participants meeting all
enrollment requirements by January 31st of the first Plan Year, as of
January 1, 1998; and (ii) in all other cases, on the first day of the
month following the month in which the Employee or Director completes
all enrollment requirements. If an Employee or a Director fails to meet
all such requirements within the required 30 day period, that Employee
or Director shall not be eligible to participate in the Plan until the
first day of the Plan Year following the delivery to and acceptance by
the Committee of the required documents.
2.4 TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee
---------------------------------------------
determines in good faith that a Participant no longer qualifies as a
member of a select group of management or highly compensated employees,
as membership in such group is determined in accordance with Sections
201(2), 301(a)(3) and 401(a)(1) of ERISA, the Committee shall have the
right, in its sole discretion, to (i) terminate any deferral election
the Participant has made for the Plan Year in which the Participant's
membership status changes, (ii) prevent the Participant from making
future deferral elections and/or (iii) immediately distribute the
Participant's then Account Balance, determined as if there has occurred
a Termination of Employment and terminate the Participant's
participation in the Plan. If the Committee chooses not to terminate the
Participant's participation in the Plan, the Committee may, in its sole
discretion, reinstate the Participant to full Plan participation at such
time in the future as the Participant again becomes a member of the
select group described above.
ARTICLE 3
DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING/TAXES
-----------------------------------------------------
3.1 MINIMUM DEFERRAL.
----------------
(a) MINIMUM. For each Plan Year, a Participant may elect to defer,
-------
as his or her Annual Deferral Amount, an aggregate minimum
amount of at least $2000. Such amount can be deferred from Base
Annual Salary, Annual Bonus and/or Director Fees. If an election
is made for less than $2000 in the aggregate, or if no election
is made, the amount deferred shall be zero.
(b) SHORT PLAN YEAR. If a Participant first becomes a Participant
---------------
after the first day of a Plan Year, the minimum deferral shall
be an amount equal to the minimum set forth above, multiplied by
a fraction, the numerator of which
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<PAGE>
is the number of complete months remaining in the Plan Year and
the denominator of which is 12.
(c) DEEMED DEFERRAL OF COMPENSATION. In addition to a Participant's
-------------------------------
annual deferral election, a Participant shall be deemed to have
elected beginning with the first Plan Year in which the
Participant commences participation in the Plan and for each
succeeding Plan Year, that if an Employer determines in good
faith prior to a Change in Control that there is a reasonable
likelihood that any compensation paid to a Participant for a
taxable year of the Employer would not be deductible by the
Employer solely by reason of the limitation under Code Section
162(m), then to the extent deemed necessary by the Employer to
ensure that the entire amount of any compensation paid to the
Participant prior to the Change in Control is deductible, that
the payment of such amount shall be deferred by the Employer
under this Plan. Any amounts deferred pursuant to this
limitation shall be credited with additional amounts in
accordance with Section 3.7 below. The amounts so deferred and
amounts credited thereon shall be distributed to the Participant
or his or her Beneficiary (in the event of the Participant's
death) at the earliest possible date, as determined by the
Employer in good faith, on which the deductibility of
compensation paid or payable to the Participant for the taxable
year of the Employer during which the distribution is made will
not be limited by Section 162(m), or if earlier, the effective
date of a Change in Control. Notwithstanding anything to the
contrary in this Plan, this limitation shall not apply to any
compensation paid to a Participant, or any distributions made to
a Participant, after a Change in Control.
3.2 MAXIMUM DEFERRAL.
----------------
(a) MAXIMUM. For each Plan Year, a Participant may elect to defer,
-------
as his or her Annual Deferral Amount up to 100% of Base Annual
Salary, Annual Bonus, and/or Directors Fees, except that amount
of Base Annual Salary, Annual Bonus or Directors Fees previously
deferred into any other Deferred Compensation Plan of this
Employer then currently in effect, and have such deferrals
governed by this Plan not withstanding any other provisions
contained herein. Any deferral amount in excess of 40% in any
year of Base Annual Salary and Annual Bonus, shall not be
eligible for annual company matching amount, but shall continue
to earn interest as otherwise provided for in this Plan
document.
(b) SHORT PLAN YEAR. If a Participant first becomes a Participant
---------------
after the first day of a Plan Year, for such Plan Year only, a
Participant may elect to defer, as his or her Annual Deferral
Amount, Base Annual Salary, Annual Bonus and/or Directors Fees
that accrue after the date of entry into the Plan, a dollar
amount up to an amount equal to the limits set forth above
multiplied by such
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<PAGE>
Participant's total amount of Base Annual Salary, Annual Bonus
and/or Directors Fees for the entire Plan Year.
3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM.
------------------------------------------
(a) FIRST PLAN YEAR. In connection with a Participant's
---------------
commencement of participation in the Plan, the Participant shall
make an irrevocable deferral election for the Plan Year in which
the Participant commences participation in the Plan, along with
such other elections as the Committee deems necessary or
desirable under the Plan. For these elections to be valid, the
Election Form must be completed and signed by the Participant,
timely delivered to the Committee (in accordance with Section
2.3 above), and accepted by the Committee.
(b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an
---------------------
irrevocable deferral election for that Plan Year, and such other
elections as the Committee deems necessary or desirable under
the Plan, shall be made by timely delivering to the Committee,
in accordance with its rules and procedures, before the end of
the Plan Year preceding the Plan Year for which the election is
made, a new Election Form. If no Election Form is timely
delivered for a Plan Year, no Annual Deferral Amount shall be
withheld for that Plan Year.
3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Base
--------------------------------------
Annual Salary portion of the Annual Deferral Amount shall be withheld in
equal amounts from each regularly scheduled Base Annual Salary payroll.
The Annual Bonus and/or Directors Fees portion of the Annual Deferral
Amount shall be withheld at the time the Annual Bonus or Directors Fees
are or otherwise would be paid to the Participant, whether or not this
occurs during the Plan Year itself.
3.5 ANNUAL COMPANY MATCHING AMOUNT. Except as provided below, a
------------------------------
Participant's Annual Company Matching Amount for any Plan Year shall be
an amount equal to the sum of (i) fifty percent (50%) of the lesser of:
(x) the Participant's Annual Deferral Amount for such Plan Year which
does not exceed 40% of Base Annual Salary and Annual Bonus, (y) eight
percent (8%) of the sum of the Participant's Base Annual Salary and
Annual Bonus for such Plan Year, or (z) the annual contribution limit
described in Code Section 402(g), relating to the elective deferral
limitation for "401(k) plans," for the such Plan Year ((i) shall, by
definition, equal zero in the case of a Director who is not an
Employee), plus (ii) for the 1998 Plan Year, (A) the excess of the
Participant's Annual Deferral Amount for such Plan Year over the amount
described in (i) above, (B) multiplied by the percentages set forth
below,
-10-
<PAGE>
depending on the Return on Equity range for the Company's fiscal
year ending within the calendar year ending December 31, 1998:
RETURN ON EQUITY FOR ANNUAL COMPANY MATCHING AMOUNT
THE PLAN YEAR
Less than 16% 10%
16% or more, but less than 17% 20%
17% or more, but less than 18% 30%
18% or more, but less than 19% 40%
19% or more 50%
Prior to the commencement of each Plan Year after the first Plan Year,
the Committee shall announce the Return on Equity ranges, if any, for
such Plan Year.
Notwithstanding the above, if a Participant is not employed by an
Employer, or is no longer providing services as a Director, as of the
last day of a Plan Year other than by reason of his or her Retirement or
death, the Annual Company Matching Amount for such Plan Year shall be
zero. In the event of Retirement or death, a Participant shall be
credited with the Annual Company Matching Amount for the Plan Year in
which he or she Retires or dies.
3.6 VESTED COMPANY MATCHING ACCOUNT. With respect to all benefits under
-------------------------------
this Plan other than the Termination Benefit, and except as provided in
Section 6.3 below, a Participant's Vested Company Matching Account shall
equal 100% of such Participant's Company Matching Account. With respect
to the Termination Benefit, a Participant's Company Matching Account
shall vest on a year-by-year basis as follows: Each Annual Company
Matching Amount, plus amounts credited thereon, shall vest as of the
last day of the Plan Year that is one calendar year after the last day
of the Plan Year to which the Annual Deferral Amount relates. By way of
example, an Annual Company Matching Amount for the 1998 Plan Year, plus
amounts credited thereon, shall vest on December 31, 1999, regardless of
when the Base Annual Salary or the Annual Bonus deferrals relating to
the 1998 Plan Year are actually made.
Notwithstanding the above, after a Change in Control, a Participant's
Vested Company Matching Account shall equal 100% of such Participant's
Company Matching Account.
3.7 CREDITING TO ACCOUNT BALANCES. In accordance with, and subject to, the
-----------------------------
rules and procedures that are established from time to time by the
Committee, in its sole discretion, amounts shall be credited or debited
to a Participant's Account Balance in accordance with the following
rules:
-11-
<PAGE>
(a) PRIOR TO DISTRIBUTION. Prior to any distribution of benefits under
---------------------
Articles 4, 5, 6, 7 or 8, interest shall be credited and compounded
annually as though the Annual Deferral Amount for a Plan Year was
withheld at the beginning of the Plan Year or, in the case of the
first year of Plan participation, was withheld on the date that the
Participant commenced participation in the Plan, regardless of when
the Base Annual Salary, Annual Bonus and/or Directors Fees would
have otherwise been payable. Interest on the Participant's Company
Matching Account shall be credited and compounded annually; the
Participant's Annual Company Matching Amount for a Plan Year shall
be added to the Company Matching Account for purposes of interest
crediting at the beginning of the Plan Year after the Plan Year to
which it relates. The rate of interest for crediting shall be the
Crediting Rate, except as otherwise provided in this Plan, which
rate shall be treated as the nominal rate for crediting interest. In
the event of Retirement, Disability, death or Termination of
Employment prior to the end of a Plan Year, the basis for that
year's interest crediting will be a fraction of the full year's
interest, based on the number of full months that the Participant
was employed with the Employer during the Plan Year prior to the
occurrence of such event. If a distribution is made under this Plan,
for purposes of crediting interest up to the time of the
distribution, the Participant's Account Balance shall be reduced as
of the first day of the month in which the distribution is made.
(b) CREDITING FOR INSTALLMENT DISTRIBUTIONS. If a Participant's
---------------------------------------
benefits under this Plan are to be paid in under an Annual
Installment Method, such payments shall be determined by amortizing
the Participant's specified benefit over the number of years
elected, using the interest rate specified below and treating the
first installment payment as all principal and each subsequent
installment payment, first as interest accrued for the applicable
installment period on the unpaid Account Balance and second as a
reduction in that portion of the Account Balance. The interest rate
to be used to calculate installment payment amounts shall be a fixed
interest rate that is determined by averaging the Crediting Rate for
the Plan Year in which installment payments commence and the
Crediting Rate for the four (4) preceding Plan Years. This rate
shall be treated as the nominal rate for making such calculations.
If a Participant has completed fewer than five (5) Plan Years, this
average shall be determined using the Crediting Rate for the Plan
Years during which the Participant participated in the Plan.
3.8 FICA, WITHHOLDING AND OTHER TAXES. For each Plan Year in which an
---------------------------------
Annual Deferral Amount is being withheld or an Annual Company Matching
Amount is credited to a Participant, the Participant's Employer(s) shall
withhold from that portion of the Participant's Base Annual Salary,
Annual Bonus and/or Director Fees that is not being deferred, in a
manner determined by the Employer(s), the Participant's share of FICA
and other employment taxes. If necessary, the Committee shall reduce the
Annual Deferral Amount in order to comply with this
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<PAGE>
Section 3.8. In addition, the Participant's Employer(s) or the Trust,
shall withhold from any payments made to a Participant under this Plan
all federal, state and local income, employment and other taxes required
to be withheld in connection with such payments, in amounts and in a
manner to be determined in the sole discretion of the Employer(s) or the
Trust.
ARTICLE 4
SHORT-TERM PAYOUT; WITHDRAWAL ELECTION
--------------------------------------
4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual
-----------------
Deferral Amount, a Participant may elect to receive a future "Short-Term
Payout" from the Plan with respect to all or a portion of that Annual
Deferral Amount. Subject to the Deduction Limitation, the Short-Term
Payout shall be equal to the portion of the Annual Deferral Amount
elected to be paid as a Short-Term Payout, plus amounts credited in the
manner provided in Section 3.7 above on that amount. The Short-Term
Payout amount shall be payable in a lump sum or pursuant to an Annual
Installment Method of 5, 10 or 15 years. Subject to the other terms and
conditions of this Plan, the lump sum payment shall be made, or
installment payments shall commence, subject to the Deduction
Limitation, within 60 days after the first day of the Plan Year elected
by the Participant; provided that no election shall be effective unless
the Plan Year elected is at least two calendar years after the last day
of the Plan Year to which the Annual Deferral Amount relates. By way of
example, if a Short-Term Payout is elected for amounts that are deferred
in the Plan Year commencing January 1, 1998, the Short-Term Payout can
become payable no earlier than the 60 day period commencing on January
1, 2001, regardless of when the Base Annual Salary, the Annual Bonus
and/or Directors Fees deferrals relating to the 1998 Plan Year are
actually made. If a Participant in this Plan elected a Short-Term Payout
under the 1996 Deferral Plan and the liability for such payment has been
assumed by the Employer, such Payout shall be made under this Plan at
the same time and in the same manner as elected under the 1996 Deferral
Plan.
4.2 RELATIONSHIP OF OTHER BENEFITS TO SHORT-TERM PAYOUT. Should an event
---------------------------------------------------
occur that triggers a benefit under Articles 6 or 8, any Annual Deferral
Amount, plus amounts credited thereon, that is subject to a Short-Term
Payout election under Section 4.1 shall not be paid in accordance with
Section 4.1 but shall be paid in accordance with the other applicable
Article. Should an event occur that triggers a benefit under Articles 5
or 7, any Annual Deferral Amount, plus amounts credited thereon, that is
subject to a Short-Term Payout election under Section 4.1 shall be paid
in accordance with Section 4.1 and the Benefit described in such Article
less the amounts subject to a Short-Term Payout election, plus amounts
credited thereon, shall be paid in accordance with the other applicable
Article.
4.3 WITHDRAWAL ELECTION. A Participant may elect, at any time, to withdraw
-------------------
all of his or her Account Balance, less a withdrawal penalty equal to
10% of such amount (the
-13-
<PAGE>
net amount shall be referred to as the "Withdrawal Amount"). This
election can be made at any time, before or after Retirement,
Disability, death or Termination of Employment, and whether or not the
Participant (or Beneficiary) is in the process of being paid pursuant to
an installment payment schedule. If made before Retirement, Disability
or death, a Participant's Withdrawal Amount shall be his or her Account
Balance calculated as if there had occurred a Termination of Employment
as of the day of the election. No partial withdrawals of the Withdrawal
Amount shall be allowed. The Participant (or Beneficiary) shall make
this election by giving the Committee advance written notice of the
election in a form determined from time to time by the Committee. The
Participant shall be paid the Withdrawal Amount within 60 days of his or
her election. Once the Withdrawal Amount is paid, the Participant's
participation in the Plan shall terminate and the Participant shall not
be eligible to participate in the Plan in the future. The payment of
this Withdrawal Amount shall not be subject to the Deduction Limitation.
ARTICLE 5
RETIREMENT BENEFIT
------------------
5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant
------------------
who Retires shall receive, as a Retirement Benefit, his or her Account
Balance.
5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or
-----------------------------
her commencement of participation in the Plan, shall elect on an
Election Form to receive the Retirement Benefit in a lump sum or
pursuant to an Annual Installment Method of 5, 10, or 15 years. The
Participant may annually change his or her election to an allowable
alternative payout period by submitting a new Election Form to the
Committee, provided that any such Election Form is submitted at least 3
years prior to the Participant's Retirement and is accepted by the
Committee in its sole discretion. The Election Form most recently
accepted by the Committee shall govern the payout of the Retirement
Benefit. If a Participant does not make any election with respect to the
payment of the Retirement Benefit, such benefit shall be payable in a
lump sum. The lump sum payment shall be made, or installment payments
shall commence, no later than 60 days after the date the Participant
Retires. Any payment made shall be subject to the Deduction Limitation.
5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies
-----------------------------------------------
after Retirement but before the Retirement Benefit is paid in full, the
Participant's unpaid Retirement Benefit payments shall continue and
shall be paid to the Participant's Beneficiary (a) over the remaining
number of years and in the same amounts as that benefit would have been
paid to the Participant had the Participant survived, or (b) in a lump
sum, if requested by the Beneficiary and allowed in the sole discretion
of the Committee, that is equal to the Participant's unpaid remaining
Account Balance.
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<PAGE>
ARTICLE 6
PRE-RETIREMENT SURVIVOR BENEFIT
-------------------------------
6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation,
-------------------------------
and except as provided in Section 6.3 below, the Participant's
Beneficiary shall receive a Pre-Retirement Survivor Benefit equal to the
Participant's Account Balance if the Participant dies before he or she
Retires, experiences a Termination of Employment or suffers a
Disability.
6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant, in
------------------------------------------
connection with his or her commencement of participation in the Plan,
shall elect on an Election Form whether the Pre-Retirement Survivor
Benefit shall be received by his or her Beneficiary in a lump sum or
pursuant to an Annual Installment Method of 5, 10 or 15 years. The
Participant may annually change this election to an allowable
alternative payout period by submitting a new Election Form to the
Committee, which form must be accepted by the Committee in its sole
discretion. The Election Form most recently accepted by the Committee
prior to the Participant's death shall govern the payout of the
Participant's Pre-Retirement Survivor Benefit. If a Participant does not
make any election with respect to the payment of the Pre-Retirement
Survivor Benefit, such benefit shall be paid in a lump sum. Despite the
foregoing, if the Participant's Account Balance at the time of his or
her death is less than $25,000, payment of the Pre-Retirement Survivor
Benefit may be made, in the sole discretion of the Committee, in a lump
sum or pursuant to an Annual Installment Method of 5 years. The lump sum
payment shall be made, or installment payments shall commence, no later
than 60 days after the date the Committee is provided with proof that is
satisfactory to the Committee of the Participant's death. Any payment
made shall be subject to the Deduction Limitation.
6.3 RESTRICTION IN THE EVENT OF SUICIDE OR FALSELY PROVIDED INFORMATION. In
-------------------------------------------------------------------
the event of a Participant's suicide within 2 years after the
Participant first becomes a Participant, or in the event the
Participant's death is determined to be from a bodily or mental cause or
causes, the information about which was withheld, knowingly concealed,
or falsely provided by the Participant if requested to furnish evidence
of good health, the Pre-Retirement Survivor Benefit shall be equal to
the sum of the Participant's Annual Deferral Amounts, without any
amounts credited thereon and with no Company Matching Account, all
determined as of his or her date of death and payable in accordance with
the provisions of Section 6.2 above.
ARTICLE 7
TERMINATION BENEFIT
-------------------
7.1 TERMINATION BENEFIT. Subject to the Deduction Limitation, the
-------------------
Participant shall receive a Termination Benefit, which shall be equal to
the Participant's Account
-15-
<PAGE>
Balance if a Participant experiences a Termination of Employment prior
to his or her Retirement, death or Disability.
7.2 PAYMENT OF TERMINATION BENEFIT. The Termination Benefit shall be paid
------------------------------
in a lump sum within 60 days of the Termination of Employment. Any
payment made shall be subject to the Deduction Limitation.
ARTICLE 8
DISABILITY WAIVER AND BENEFIT
-----------------------------
8.1 DISABILITY WAIVER.
-----------------
(a) WAIVER OF DEFERRAL. A Participant who is determined by the
------------------
Committee to be suffering from a Disability shall be excused
from fulfilling that portion of the Annual Deferral Amount
commitment that would otherwise have been withheld from a
Participant's Base Annual Salary, Annual Bonus and/or Directors
Fees for the Plan Year during which the Participant first
suffers a Disability. During the period of Disability, the
Participant shall not be allowed to make any additional deferral
elections, but will continue to be considered a Participant for
all other purposes of this Plan.
(b) RETURN TO WORK. If a Participant returns to employment, or
--------------
service as a Director, with an Employer, after a Disability
ceases, the Participant may elect to defer an Annual Deferral
Amount for the Plan Year following his or her return to
employment or service and for every Plan Year thereafter while a
Participant in the Plan; provided such deferral elections are
otherwise allowed and an Election Form is delivered to and
accepted by the Committee for each such election in accordance
with Section 3.3 above.
8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a
-----------------------------------------
Disability shall, for benefit purposes under this Plan, continue to be
considered to be employed, or in the service of an Employer as a
Director, and shall be eligible for the benefits provided for in
Articles 4, 5, 6 or 7 in accordance with the provisions of those
Articles. Notwithstanding the above, the Committee shall have the right
to, in its sole and absolute discretion and for purposes of this Plan
only, and must in the case of a Participant who is otherwise eligible to
Retire, deem the Participant to have experienced a Termination of
Employment, or in the case of a Participant who is eligible to Retire,
to have Retired, at any time (or in the case of a Participant who is
eligible to Retire, as soon as practicable) after such Participant is
determined to be permanently disabled (i) under the Participant
Employer's long-term disability plan (or would have been determined to
be permanently disabled had he or she participated in that plan), or
(ii) if such a plan does not exist, by the Committee in its sole
discretion, in which case the Participant shall receive a Disability
Benefit equal to his or her Account Balance at the time the Committee's
determination. The
-16-
<PAGE>
Disability Benefit shall be paid in a lump sum within 60 days of the
Committee's exercise of such right; provided however, that should the
Participant otherwise have been eligible to Retire, he or she shall be
paid in accordance with Article 5. Any payment made shall be subject to
the Deduction Limitation.
ARTICLE 9
BENEFICIARY DESIGNATION
-----------------------
9.1 BENEFICIARY. Each Participant shall have the right, at any time, to
-----------
designate his or her Beneficiary(ies) (both primary as well as
contingent) to receive any benefits payable under the Plan to a
beneficiary upon the death of a Participant. The Beneficiary designated
under this Plan may be the same as or different from the Beneficiary
designation under any other plan of an Employer in which the Participant
participates.
9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall
------------------------------------------------
designate his or her Beneficiary by completing and signing the
Beneficiary Designation Form, and returning it to the Committee or its
designated agent. A Participant shall have the right to change a
Beneficiary by completing, signing and otherwise complying with the
terms of the Beneficiary Designation Form and the Committee's rules and
procedures, as in effect from time to time. If the Participant names
someone other than his or her spouse as a Beneficiary, a spousal
consent, in the form designated by the Committee, must be signed by that
Participant's spouse and returned to the Committee. Upon the acceptance
by the Committee of a new Beneficiary Designation Form, all Beneficiary
designations previously filed shall be cancelled. The Committee shall be
entitled to rely on the last Beneficiary Designation Form filed by the
Participant and accepted by the Committee prior to his or her death.
9.3 ACKNOWLEDGMENT. No designation or change in designation of a
--------------
Beneficiary shall be effective until received, accepted and acknowledged
in writing by the Committee or its designated agent.
9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a
--------------------------
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all
designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the
Participant's designated Beneficiary shall be deemed to be his or her
surviving spouse. If the Participant has no surviving spouse, the
benefits remaining under the Plan to be paid to a Beneficiary shall be
payable to the executor or personal representative of the Participant's
estate.
9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the
-----------------------
proper Beneficiary to receive payments pursuant to this Plan, the
Committee shall have the right, exercisable in its discretion, to cause
the Participant's Employer to withhold such payments until this matter
is resolved to the Committee's satisfaction.
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<PAGE>
9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a
------------------------
Beneficiary shall fully and completely discharge the Company, all
Employers and the Committee from all further obligations under this Plan
with respect to the Participant, and that Participant's Plan Agreement
shall terminate upon such full payment of benefits.
ARTICLE 10
LEAVE OF ABSENCE
----------------
10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the
---------------------
Participant's Employer for any reason to take a paid leave of absence
from the employment of the Employer, the Participant shall continue to
be considered employed by the Employer and the Annual Deferral Amount
shall continue to be withheld during such paid leave of absence in
accordance with Section 3.3.
10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the
-----------------------
Participant's Employer for any reason to take an unpaid leave of absence
from the employment of the Employer, the Participant shall continue to
be considered employed by the Employer and the Participant shall be
excused from making deferrals until the earlier of the date the leave of
absence expires or the Participant returns to a paid employment status.
Upon such expiration or return, deferrals shall resume for the remaining
portion of the Plan Year in which the expiration or return occurs, based
on the deferral election, if any, made for that Plan Year. If no
election was made for that Plan Year, no deferral shall be withheld.
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
--------------------------------------
11.1 TERMINATION. Each Employer reserves the right to terminate the Plan at
-----------
any time with respect to any or all of its participating Employees
and/or Directors by the actions of its board of directors. Upon the
termination of the Plan with respect to any Employer, the Plan
Agreements of the affected Participants who are employed by that
Employer, or in the service of that Employer as a Director, shall
terminate and their Account Balances, determined as if they had
experienced a Termination of Employment on the date of Plan termination
or, if Plan termination occurs after the date upon which a Participant
was eligible to Retire, then with respect to that Participant as if he
or she had Retired on the date of Plan termination, shall be paid to the
Participants as follows: Prior to a Change in Control, if the Plan is
terminated with respect to all of its Participants, an Employer shall
have the right, in its sole discretion, and notwithstanding any
elections made by the Participant, to pay such benefits in a lump sum or
pursuant to an Annual Installment Method of up to 15 years, with amounts
credited during the installment period as provided in Section 3.7. If
the Plan is terminated with respect to less than all of its
Participants, an Employer shall be required to pay such benefits in a
lump sum. After a Change
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<PAGE>
in Control, the Employer shall be required to pay such benefits in a
lump sum. The termination of the Plan shall not adversely affect any
Participant or Beneficiary who has become entitled to the payment of any
benefits under the Plan as of the date of termination; provided however,
that the Employer shall have the right to accelerate installment
payments by paying the present value equivalent of such payments, using
the Crediting Rate for the Plan Year in which the termination occurs as
the discount rate, in a lump sum or pursuant to a different payment
schedule (provided that, the present value of all payments that will
have been received by a Participant at any given point in time under the
different payment schedule shall equal or exceed the present value of
all payments that would have been received at that point in time under
the original payment schedule).
11.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan in
---------
whole or in part with respect to that Employer by the actions of its
board of directors; provided, however, that no amendment or modification
shall be effective to decrease or restrict the value of a Participant's
Account Balance in existence at the time the amendment or modification
is made, calculated as if the Participant had experienced a Termination
of Employment as of the effective date of the amendment or modification,
or, if the amendment or modification occurs after the date upon which
the Participant was eligible to Retire, the Participant had Retired as
of the effective date of the amendment or modification. The amendment or
modification of the Plan shall not affect any Participant or Beneficiary
who has become entitled to the payment of benefits under the Plan as of
the date of the amendment or modification; provided, however, that the
Employer shall have the right to accelerate installment payments by
paying the present value equivalent of such payments, using the
Crediting Rate for the Plan Year of the amendment or modification as the
discount rate, in a lump sum or pursuant to a different payment schedule
(provided that, the present value of all payments that will have been
received by a Participant at any given point in time under the different
payment schedule shall equal or exceed the present value of all payments
that would have been received at that point in time under the original
payment schedule).
11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above,
--------------
if a Participant's Plan Agreement contains benefits or limitations that
are not in this Plan document, the Employer may only amend or terminate
such provisions with the consent of the Participant.
11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under
-----------------
Section 4.3 or Articles 5, 6, 7 or 8 of the Plan shall completely
discharge all obligations to a Participant and his or her designated
Beneficiaries under this Plan and the Participant's Plan Agreement shall
terminate.
11.5 TRANSFER OF PLAN TO EMPLOYER. Each Employer may agree at any time to
----------------------------
transfer this Plan to another employer with respect to all Participants
employed by that Employer, in which case the new employer shall adopt an
identical plan and assume
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<PAGE>
liability on all payments to be made under this Plan with respect to
those Participants.
ARTICLE 12
ADMINISTRATION
--------------
12.1 COMMITTEE DUTIES. This Plan shall be administered by a Committee which
----------------
shall consist of the Board, or such committee as the Board shall
appoint. Members of the Committee may be Participants under this Plan.
The Committee shall also have the discretion and authority to (i) make,
amend, interpret, and enforce all appropriate rules and regulations for
the administration of this Plan and (ii) decide or resolve any and all
questions including interpretations of this Plan, as may arise in
connection with the Plan.
12.2 AGENTS. In the administration of this Plan, the Committee may, from
------
time to time, employ agents and delegate to them such administrative
duties as it sees fit (including acting through a duly appointed
representative) and may from time to time consult with counsel who may
be counsel to any Employer.
12.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee
---------------------------
with respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the rules
and regulations promulgated hereunder shall be final and conclusive and
binding upon all persons having any interest in the Plan.
12.4 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless
----------------------
the members of the Committee against any and all claims, losses,
damages, expenses or liabilities arising from any action or failure to
act with respect to this Plan, except in the case of willful misconduct
by the Committee or any of its members.
12.5 EMPLOYER INFORMATION. To enable the Committee to perform its functions,
--------------------
each Employer shall supply full and timely information to the Committee
on all matters relating to the compensation of its Participants, the
date and circumstances of the Retirement, Disability, death or
Termination of Employment of its Participants, and such other pertinent
information as the Committee may reasonably require.
ARTICLE 13
OTHER BENEFITS AND AGREEMENTS
-----------------------------
13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a
--------------------------------
Participant and Participant's Beneficiary under the Plan are in addition
to any other benefits available to such Participant under any other plan
or program for employees of the Participant's Employer. The Plan shall
supplement and shall not supersede, modify
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<PAGE>
or amend any other such plan or program except as may otherwise be
expressly provided.
ARTICLE 14
CLAIMS PROCEDURES
-----------------
14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased
---------------------
Participant (such Participant or Beneficiary being referred to below as
a "Claimant") may deliver to the Committee a written claim for a
determination with respect to the amounts distributable to such Claimant
from the Plan. If such a claim relates to the contents of a notice
received by the Claimant, the claim must be made within 60 days after
such notice was received by the Claimant. All other claims must be made
within 180 days of the date on which the event that caused the claim to
arise occurred. The claim must state with particularity the
determination desired by the Claimant.
14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's
------------------------
claim within a reasonable time, and shall notify the Claimant in
writing:
(a) that the Claimant's requested determination has been made, and that
the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in whole or in
part, to the Claimant's requested determination, and such notice
must set forth in a manner calculated to be understood by the
Claimant:
(i) the specific reason(s) for the denial of the claim, or
any part of it;
(ii) specific reference(s) to pertinent provisions of the
Plan upon which such denial was based;
(iii) a description of any additional material or
information necessary for the Claimant to perfect the
claim, and an explanation of why such material or
information is necessary; and
(iv) an explanation of the claim review procedure set
forth in Section 14.3 below.
14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from
------------------------
the Committee that a claim has been denied, in whole or in part, a
Claimant (or the Claimant's duly authorized representative) may file
with the Committee a written request for a review of the denial of the
claim. Thereafter, but not later than 30 days
-21-
<PAGE>
after the review procedure began, the Claimant (or the Claimant's duly
authorized representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole
discretion, may grant.
14.4 DECISION ON REVIEW. The Committee shall render its decision on review
------------------
promptly, and not later than 60 days after the filing of a written
request for review of the denial, unless a hearing is held or other
special circumstances require additional time, in which case the
Committee's decision must be rendered within 120 days after such date.
Such decision must be written in a manner calculated to be understood by
the Claimant, and it must contain:
(a) specific reasons for the decision;
(b) specific reference(s) to the pertinent Plan provisions upon which
the decision was based; and
(c) such other matters as the Committee deems relevant.
14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of
------------
this Article 14 is a mandatory prerequisite to a Claimant's right to
commence any legal action with respect to any claim for benefits under
this Plan.
ARTICLE 15
TRUST
-----
15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and
--------------------------
the Company shall at least annually transfer over to the Trust such
assets as the Company, through the Committee, determines are necessary
to provide, on a present value basis, for the liabilities created with
respect to all Annual Deferral Amounts and Company Matching Amounts for
all Employers for all periods prior to the transfer, as well as the
debits and credits to the Participants' Account Balances for all periods
prior to the transfer, taking into consideration the value of the assets
in the trust at the time of the transfer. Notwithstanding the above, the
Company shall not be obligated to transfer assets to the Trust to the
extent that it is prohibited by law or regulatory authorities from
receiving distributions from its subsidiaries of sufficient assets to
make the transfer.
-22-
<PAGE>
15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan
-------------------------------------------
and the Plan Agreement shall govern the rights of a Participant to
receive distributions pursuant to the Plan. The provisions of the Trust
shall govern the rights of the Employers, Participants and the creditors
of the Company to the assets transferred to the Trust. Each Employer
shall at all times remain liable to carry out its obligations under the
Plan.
15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the
----------------------------
Plan may be satisfied with Trust assets distributed pursuant to the
terms of the Trust, and any such distribution shall reduce the
Employer's obligations under this Plan; provided however that the
reduction of an Employer's obligations under the Plan shall not affect
the ability of the Company or the Trust to seek reimbursement from the
Employer with respect to the obligations so reduced.
ARTICLE 16
GUARANTEE OF COMPANY
--------------------
16.1 GUARANTEE. Subject to the limitations set forth in this Article 16,
---------
with respect to any Participant of an Employer other than the Company,
by signing this Plan, the Company hereby unconditionally and irrevocably
guarantees that such Employer will perform and observe each and every
agreement, covenant, term and condition under the Plan and the
Participant's Plan Agreement, and upon the Employer's failure to do so,
the Company will promptly perform and observe each such agreement,
covenant, term and condition or cause the same promptly to be performed
and observed. Without limiting the foregoing, the Company
unconditionally and irrevocably guarantees that all sums of whatever
character which may become payable to the Participant by the Employer
pursuant to the Plan or Plan Agreement will be promptly paid in full
when due.
16.2 LIMITATIONS. The guarantee described in Section 16.1 above shall not
-----------
apply to nonpayment or nonperformance of an Employer caused by or
resulting from the Employer being "Insolvent." For purposes of this
Section 16.2, "Insolvent" shall have the same meaning as in Section
3.7(a) of that certain Trust Agreement, dated as of January 1, 1998
between the Company and the trustee named therein.
ARTICLE 17
MISCELLANEOUS
-------------
17.1 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries,
--------------------------
heirs, successors and assigns shall have no legal or equitable rights,
interests or claims in any property or assets of an Employer. For
purposes of the payment of benefits under this Plan, any and all of the
Employer's assets shall be, and remain, the general, unpledged
-23-
<PAGE>
unrestricted assets of the Employer. An Employer's obligation under the
Plan shall be merely that of an unfunded and unsecured promise to pay
money in the future.
17.2 EMPLOYER'S LIABILITY. An Employer's liability for the payment of
--------------------
benefits shall be defined only by the Plan and the Plan Agreement, as
entered into between the Employer and a Participant. An Employer shall
have no obligation to a Participant under the Plan except as expressly
provided in the Plan and his or her Plan Agreement.
17.3 NONASSIGNABILITY. Neither a Participant nor any other person shall have
----------------
any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate, alienate or
convey in advance of actual receipt, the amounts, if any, payable
hereunder, or any part thereof, which are, and all rights to which are
expressly declared to be, unassignable and non-transferable, except that
the foregoing shall not apply to any family support obligations set
forth in a court order. No part of the amounts payable shall, prior to
actual payment, be subject to seizure, attachment, garnishment or
sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other person, nor be
transferable by operation of law in the event of a Participant's or any
other person's bankruptcy or insolvency.
17.4 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan
----------------------------
shall not be deemed to constitute a contract of employment between the
Company or any Employer and the Participant. Such employment is hereby
acknowledged to be an "at will" employment relationship that can be
terminated at any time for any reason, or no reason, with or without
cause, and with or without notice, unless expressly provided in a
written employment agreement. Nothing in this Plan shall be deemed to
give a Participant the right to be retained in the service of the
Company or any Employer or to interfere with the right of the Company or
any Employer to discipline or discharge the Participant at any time.
17.5 FURNISHING INFORMATION. A Participant or his or her Beneficiary will
----------------------
cooperate with the Committee by furnishing any and all information
requested by the Committee and take such other actions as may be
requested in order to facilitate the administration of the Plan and the
payments of benefits hereunder, including but not limited to taking such
physical examinations as the Committee may deem necessary.
17.6 TERMS. Whenever any words are used herein in the masculine, they shall
-----
be construed as though they were in the feminine in all cases where they
would so apply; and whenever any words are used herein in the singular
or in the plural, they shall be construed as though they were used in
the plural or the singular, as the case may be, in all cases where they
would so apply.
-24-
<PAGE>
17.7 CAPTIONS. The captions of the articles, sections and paragraphs of this
--------
Plan are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
17.8 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be
-------------
construed and interpreted according to the internal laws of the State of
California without regard to its conflicts of laws principles.
17.9 NOTICE. Any notice or filing required or permitted to be given to the
------
Committee under this Plan shall be sufficient if in writing and hand-
delivered, or sent by registered or certified mail, to the address
below:
Imperial Financial Group, Inc.
Deferred Compensation Plan
Administrative Committee
[Address]
Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the
receipt for registration or certification.
Any notice or filing required or permitted to be given to a Participant
under this Plan shall be sufficient if in writing and hand-delivered, or
sent by mail, to the last known address of the Participant.
17.10 SUCCESSORS. The provisions of this Plan shall bind and inure to the
----------
benefit of the Participant's Employer and its successors and assigns and
the Participant and the Participant's designated Beneficiaries.
17.11 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse
-----------------
of a Participant who has predeceased the Participant shall automatically
pass to the Participant and shall not be transferable by such spouse in
any manner, including but not limited to such spouse's will, nor shall
such interest pass under the laws of intestate succession.
17.12 VALIDITY. In case any provision of this Plan shall be illegal or
--------
invalid for any reason, said illegality or invalidly shall not affect
the remaining parts hereof, but this Plan shall be construed and
enforced as if such illegal or invalid provision had never been inserted
herein.
17.13 INCOMPETENT. If the Committee determines in its discretion that a
-----------
benefit under this Plan is to be paid to a minor, a person declared
incompetent or to a person incapable of handling the disposition of that
person's property, the Committee may direct payment of such benefit to
the guardian, legal representative or person having the care and custody
of such minor, incompetent or incapable person. The Committee may
require proof of minority, incompetency, incapacity or guardianship, as
it may
-25-
<PAGE>
deem appropriate prior to distribution of the benefit. Any payment of a
benefit shall be a payment for the account of the Participant and the
Participant's Beneficiary, as the case may be, and shall be a complete
discharge of any liability under the Plan for such payment amount.
17.14 COURT ORDER. The Committee is authorized to make any payments directed
-----------
by court order in any action in which the Plan or the Committee has been
named as a party. In addition, if a court determines that a spouse or
former spouse of a Participant has an interest in the Plan as the result
of a property settlement or otherwise, the Committee, in its sole
discretion, shall have the right, notwithstanding any election made by a
Participant, to immediately distribute the spouse's or former spouse's
interest in the Plan to that spouse or former spouse.
17.15 DISTRIBUTION IN THE EVENT OF TAXATION.
-------------------------------------
(a) IN GENERAL. If, for any reason, all or any portion of a
----------
Participant's benefit under this Plan becomes taxable to the
Participant prior to receipt, a Participant may petition the
Committee before a Change in Control, or the trustee of the
Trust after a Change in Control, for a distribution of that
portion of his or her benefit that has become taxable. Upon the
grant of such a petition, which grant shall not be unreasonably
withheld (and, after a Change in Control, shall be granted), a
Participant's Employer shall distribute to the Participant
immediately available funds in an amount equal to the taxable
portion of his or her benefit (which amount shall not exceed a
Participant's unpaid Account Balance under the Plan). If the
petition is granted, the tax liability distribution shall be
made within 90 days of the date when the Participant's petition
is granted. Such a distribution shall affect and reduce the
benefits to be paid under this Plan.
(b) TRUST. If the Trust terminates in accordance with [SECTION
-----
3.6(e)] of the Trust and benefits are distributed from the Trust
to a Participant in accordance with that Section, the
Participant's benefits under this Plan shall be reduced to the
extent of such distributions.
17.16 LEGAL FEES TO ENFORCE RIGHTS AND LIQUIDATED DAMAGES AFTER CHANGE IN
-------------------------------------------------------------------
CONTROL. The Company and each Employer is aware that upon the occurrence
-------
of a Change in Control, the Board or the board of directors of the
Employer (which might then be composed of new members) or a shareholder
of the Company or the Employer, or of any successor corporation might
then cause or attempt to cause the Company, the Employer or such
successor to refuse to comply with its obligations under the Plan and
might cause or attempt to cause the Company or the Employer to
institute, or may institute, litigation seeking to deny Participants the
benefits intended under the Plan. In these circumstances, the purpose of
the Plan could be frustrated. Accordingly, if, following a Change in
Control, it should appear to any Participant that the Company, its
Employer or any successor corporation has failed to comply
-26-
<PAGE>
with any of its obligations under the Plan or any agreement thereunder
or, if the Company, such Employer or any other person takes any action
to declare the Plan void or unenforceable or institutes any litigation
or other legal action designed to deny, diminish or to recover from any
Participant the benefits intended to be provided, then the Company and
the Employer irrevocably authorize such Participant to retain counsel of
his or her choice at the expense of the Company and the Employer (who
shall be jointly and severally liable) to represent such Participant in
connection with the initiation or defense of any litigation or other
legal action, whether by or against the Company, the Employer or any
director, officer, shareholder or other person affiliated with the
Company, the Employer or any successor thereto in any jurisdiction.
Furthermore, if after a Change in Control a Participant shall institute
litigation or other legal action to obtain the benefits intended under
the Plan and the Participant is awarded such benefits or obtains a
declaration, by a court of competent jurisdiction or by a duly appointed
arbitrator, that the Participant is entitled to such benefits, then the
Participant shall be entitled to receive an amount equal to three (3)
times the amount of such benefits. The Company and the Employer shall be
jointly and severally liable for the amount of any benefits awarded,
including the trebling thereof, and the expenses of the Participant in
obtaining legal counsel as authorized herein.
IN WITNESS WHEREOF, the Company has signed this Plan document as of
the date designated by an authorized IMPERIAL FINANCIAL GROUP, INC. officer.
"Company"
IMPERIAL FINANCIAL GROUP, INC., a Delaware
corporation
By: ______________________________________
Title: ___________________________________
-27-
<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>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 5,245 2,813
<SECURITIES> 1,179 6,027
<RECEIVABLES> 80,688 142,656
<ALLOWANCES> 2,629 4,486
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 306 551
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 153,920 227,983
<CURRENT-LIABILITIES> 52,502 115,745
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 96,846 112,238
<TOTAL-LIABILITY-AND-EQUITY> 149,348 227,983
<SALES> 84,905 57,181
<TOTAL-REVENUES> 84,905 57,181
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 16,833 27,449
<LOSS-PROVISION> 1,781 2,558
<INTEREST-EXPENSE> 1,973 3,277
<INCOME-PRETAX> 64,318 23,897
<INCOME-TAX> 25,674 8,737
<INCOME-CONTINUING> 38,644 15,160
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 38,644 15,160
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Index Numbers: 355.01-00 402.00-00
355.04-00
Mr. Richard W. Bailine Contact Person:
KPMG Peat Marwick, LLP Phoebe Bennett
2001 M Street, NW
Washington, DC 20036 Telephone Number:
202-622-7750
In Reference to:
CC:DOM:CORP:1 PLR-121341-97
Date: FEB 24 1998
Re: Imperial Bancorp & Subsidiaries
<TABLE>
<CAPTION>
<S> <C> <C>
Parent = Imperial Bancorp
EIN 95-2575576
State A = California
Exchange A = New York Stock Exchange
Distributing = Imperial Bank
EIN 95-2247354
Business A = commercial banking
Business B = financing for the entertainment
industry, including project financing
and discounting contracts for motion
picture or television production
Business C = providing mid- to long-term loans for
small businesses
Sub A = Imperial Trust Company
EIN 95-4673021
B% = approximately 24.5 percent
Sub B = Imperial Credit Industries, Inc.
EIN 95-4054791
Sub C = Crown American Bank
EIN 95-4673021
Controlled = Imperial Financial Group, Inc.
EIN 91-1817448
$a = approximately $120,000,000
$b = approximately $90,000,000
$c = approximately $30,000,000
Bank = NationsBank of Texas
</TABLE>
<PAGE>
Page 2
PLR-107628-97
<TABLE>
<S> <C> <C>
$d = approximately $50,000,000
$e = approximately $40,000,000
$f = approximately $5,000,000
$g = approximately $10,000,000
$h = approximately $25,000,000
Business D = purchasing and reselling of financial instruments to
investors as a broker/dealer registered with the
Securities and Exchange Commission
Sub D = Broker/Dealer (to be formed)
Parent Qualified = profit sharing and employee stock ownership plan of
Plans Imperial Bancorp (which contains the employee stock
ownership plan of Imperial Bancorp maintained as a
separate plan prior to January 1, 1997) and salary
investment plan of Imperial Bancorp
Shareholder L = George L. Graziado
Shareholder M = The Graziado Family Trust
Shareholder N = Trustee for Imperial Bank's ESOP and benefit plans
r percent = 11.59
- -
s percent = 5.97
- -
t percent = 7.57
- -
u percent = 5.33
- -
</TABLE>
Dear Mr. Bailine:
This is in response to a letter dated April 11, 1997, requesting a ruling
as to the federal income tax consequences of a proposed transaction. Additional
information was submitted in letters dated June 2, September 16, and
November 10, 1997 and January 20 and February 18, 1998.
The rulings contained in this letter are predicated upon the facts and
representations submitted by the taxpayer and accompanied by a penalties of
perjury statement executed by an
<PAGE>
Page 3
PLR-107628-97
appropriate party. This office has not verified any of the material submitted
in support of the request for rulings. Verification of the factual information,
representations, and other data may be required as part of the audit process.
Parent, incorporated in State A, is the parent of a consolidated group of
corporations. Parent uses the accrual method of accounting and files its
federal income tax on a calendar year. It has a single class of voting common
stock issued and outstanding, which is publicly traded on Exchange A. Parent is
subject to both the requirements of the Bank Holding Company Act of 1956
("BHCA") and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA").
Parent has four shareholders who each own more than five percent of the
outstanding stock: Shareholder L, r percent; Shareholder M, s percent;
- -
Shareholder N, t percent; and, Shareholder O, u percent.
- -
Parent holds all of the single class of Distributing voting common stock
issued and outstanding. Distributing has engaged in Business A, Business B, and
Business C for many years. Distributing owns all of the issued and outstanding
stock of Sub A, an investment of B% (more than 20% and less than 25%) of the
stock of Sub B.
Parent proposes the following steps effect corporate separation:
(1) Distributing will transfer all of the assets of Business C to Sub C in
exchange for all of the Sub C stock.
(2) Distributing will transfer all of the assets of Business B and all of
the Stock of Sub A, Sub B, and Sub C to Controlled in exchange for Class A
shares of Controlled. Controlled will authorize two classes of voting common
stock, Class A, which will have one vote per share with no liquidation
preferences, and Class B, which will have one-tenth vote per share with no
liquidation preferences.
(3) Distributing will distribute all of the Class A shares it owns in
Controlled to Parent.
(4) Parent will distribute all of the Class A shares it will receive from
Distributing to the Parent shareholders pro rata.
(5) Controlled thereafter will undertake a stock offering of between 10 and
15 percent of its Class A shares.
<PAGE>
Page 4
PLR-107628-97
Distributing has provided financial information indicating that Business A
and Business B have each had gross receipts and operating expenses
representative of the active conduct of a trade or business for each of the past
five years. Parent is indirectly engaged in an active trade or business through
its ownership of all of the stock of Distributing, which accounts for at least
90 percent of the fair market value of the gross assets of Parent.
Distributing's management believes that the transaction accomplishes three
business purposes: (i) to facilitate a stock offering of Controlled, (ii) to
allow Parent to comply with BHCA requirements by divesting its indirect interest
in Sub B, and (iii) to expand Controlled's other businesses in a publicly traded
company not subject to federal and state banking laws and regulations.
Parent is concerned that its indirect ownership of Sub B may violate the
BHCA. Because Parent cannot assure regulators that wishes Distributing to divest
its interest in Sub B. In addition, Distributing's financial advisors recommend
that Controlled use the Sub B stock as collateral for cost effective borrowings
to raise additional capital. Distributing will meet these goals by transferring
the stock of Sub B to Controlled as part of the spin off.
The separation of the stock of Controlled from the Distributing group will
require replacement of $a of nontransferable FDIC liabilities of Distributing
which relate to assets to be transferred to Controlled. $b of the $a of FDIC
liabilities relate to Business B, while the remaining $c relate to Sub C.
Because Controlled will be prohibited from assuming these liabilities,
Distributing has arranged a credit facility with Bank, an unrelated lender, to
be secured by the Controlled assets. Distributing will borrow $a under the
credit facility, which it will use to pay the FDIC liabilities. In connection
with the distribution, Controlled will assume all liabilities created under the
credit facility. In addition, Controlled will require $d to satisfy current
obligations to be transferred to Controlled which relate to Business B.
Controlled will borrow $d under the credit facility to satisfy these current
obligations.
Controlled will need to raise an additional $e in the stock offering. The
stock offering is needed because Controlled could not obtain these additional
funds by borrowing in a cost effective manner. $f will be used by Controlled
for general corporate purposes. $g will purchase or capitalize Business D. The
remaining $h will fund Business B.
<PAGE>
Page 5
PLR-107628-97
Although Controlled, Business B, and Business D require funds from the
stock offering and/or credit facility, the other subsidiaries need no funds.
Distributing's investment bankers have advised that a successful stock offering
by Controlled depends upon the inclusion of Sub A, Sub B, and Sub C. They base
this determination on several factors. Diversified non-BHCA companies like
Controlled have performed successfully in the marketplace. Investors in similar
diversified companies appear to be able to understand and value the various
components, including the value added by diversification and the reduction of
risk. The investment bankers also believe that for a successful stock offering,
Controlled will require the income from Sub A, Sub B, and Sub C to reach an
adequate market capitalization. Finally, management believes its proposals for
non-BHCA interaction among the subsidiaries of Controlled will create strategic
synergies which will attract investors.
As to the Sub B stock, the investment bankers indicate that many investors
likely to participate in the stock offering already own stock of Sub B, and
should favorably value the impact upon Controlled of Sub B's growth prospects.
Distributing will form Sub D to conduct Business D either immediately prior
to or following the distribution. If formed immediately prior to the
distribution, Distributing will transfer the stock of Sub D to Controlled as
part of step (2). Business D will be purchased from a third party or capitalized
subsequent to the distribution. No rulings were requested and no opinion is
expressed regarding the federal income tax consequences of either the formation
of Sub D or the purchase or capitalization of Business D.
Parent has a stock option plan, under which either "incentive stock
options" or nonstatutory options were granted to its directors and employees and
those of its affiliates. The options' exercise prices equal the fair market
value of Parent's common stock on the date of grant. Directors' options are
immediately exercisable.
Controlled will form a stock option plan for compensating employees. Upon
exercise of the options, Controlled employees will receive Controlled Class B
shares. Stock options for Class A shares will be used to convert nonstatutory
options or incentive stock options for Parent stock held by those employees of
Distributing and Parent that will become employees of Controlled.
Parent maintains for employees two qualified defined contribution
retirement plans ("Parent Qualified Plans"); (i) a profit sharing plan and (ii)
a (S) 401(k) plan. These qualified plans in the aggregate own approximately
seven percent of
<PAGE>
Page 6
PLR-107628-97
Parent's stock. Controlled will establish a profit sharing plan and a (S) 401
(k) plan which mirror the Parent Qualified Plans for those employees of
Distributing and Parent that will become employees of Controlled. Upon
consummation of the transaction, each of the Parent Qualified Plans and the
Controlled qualified plans holding stock of Parent will receive stock of
Controlled. On or after the fifth day after the transaction, the Controlled
qualified plans will exchange Parent shares for Controlled shares held by the
Parent Qualified Plans. To the extent the Parent Qualified Plans continue to own
Controlled stock, within 90 days of the transaction, the Controlled qualified
plans will purchase Controlled stock from the Parent Qualified Plans. To the
extent the Parent Qualified Plans continue to own Controlled stock, within 90
days of the transaction, the Parent Qualified Plans will sell in open market
transactions any Controlled stock not sold to the Controlled qualified plans and
reinvest the proceeds in Parent stock.
The following additional representations have been made in connection with
step (1) of the proposed transaction:
(a) No stock or securities will be issued for services rendered to or for
the benefit of Sub C and no stock will be issued for Sub C indebtedness.
(b) The transfer is not the result of the solicitation by a promoter,
broker, or investment house.
(c) Distributing will not retain any rights in the property transferred to
Sub C.
(d) The value of the stock received in exchange for accounts receivable
will be equal to the net value of the accounts transferred, i.e., the face
amount of the accounts receivable previously included in income less the amount
of the reserve for bad debts.
(e) The adjusted basis and the fair market value of the assets to be
transferred by Distributing to Sub C will, in each instance, be equal to or
exceed the sum of the liabilities to be assumed by Sub C, plus any liabilities
to which the transferred assets are subject.
(f) The liabilities of Distributing to be assumed by Sub C, if any, were
incurred ***for business purposes*** in the ordinary course of business and are
associated with the assets to be transferred.
(g) There is no indebtedness between Sub C and Distributing and there will
be no indebtedness created in favor of Distributing as a result of the
transaction.
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(h) The transfers and exchanges will occur under a plan agreed upon
before the transaction in which the rights of the parties are defined.
(i) All exchanges will occur on approximately the same date.
(j) There is no plan or intention on the part of Sub C to redeem or
otherwise reacquire any stock to be issued in the proposed transaction.
(k) Following steps (1) - (5), taking into account any issuance of
additional shares of Sub C stock; any issuance of stock for services; the
exercise of any Sub C stock rights, warrants, or subscriptions; a public
offering of Sub C stock; and the sale, exchange, transfer by gift, or other
disposition of any of the stock of Sub C, Controlled will be in "control" of Sub
C within the meaning of (S) 368(c) of the Internal Revenue Code.
(1) Distributing will receive stock of Sub C approximately equal to the
fair market value of the property transferred to Sub C.
(m) Sub C will remain in existence and retain and use the property
transferred to it in a trade or business.
(n) There is no plan or intention by Sub C to dispose of the
transferred property.
(o) Each of the parties to the transaction will pay its own expenses,
if any, incurred in connection with the proposed transaction.
(p) Sub C will not be an investment company within the meaning of (S)
351(e)(1) and Income Tax Regulations (S) 1.351-1(c)(1)(ii).
(g) Distributing is not under the jurisdiction of a court in a title 11
or similar case (within the meaning of (S) 368(a)(3)(A) and the stock or
securities received in the exchange will not be used to satisfy the indebtedness
of such debtor.
(r) Sub C will not be a "personal service corporation" within the
meaning of (S) 269A.
The following additional representations have been made in connection
with step (2) of the proposed transaction:
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(s) No stock or securities will be issued for services rendered to or for
the benefit of Controlled, and no stock will be issued for Controlled
indebtedness.
(t) The transfer is not the result of the solicitation by a promoter,
broker, or investment house.
(u) Distributing will not retain any rights in the property transferred to
Controlled.
(v) The value of the stock received in exchange for accounts receivable
will be equal to the net value of the accounts transferred, i.e., the face
amount of the accounts receivable previously included in income less the amount
of the reserve for bad debts.
(w) The adjusted basis and the fair market value of the assets to be
transferred by Distributing to Controlled will, in each instance, be equal to or
exceed the sum of the liabilities to be assumed by Controlled, plus any
liabilities to which the transferred assets are subject.
(x) The liabilities of Distributing to be assumed by Controlled, if any,
(other than the Credit Facility) were incurred in the ordinary course of
business and are associated with the assets to be transferred.
(y) There is no indebtedness between Controlled and Distributing and there
will be no indebtedness created in favor of Distributing as a result of the
transaction.
(z) The transfers and exchanges will occur under a plan agreed upon before
the transaction in which the rights of the parties are defined.
(aa) All exchanges will occur on approximately the same date.
(bb) There is no plan or intention on the part of Controlled to redeem or
otherwise reacquire any stock to be issued in the proposed transaction.
(cc) Taking into account any issuance of additional shares of Controlled
stock; any issuance of stock for services; the exercise of any Controlled stock
rights, warrants or subscriptions; a public offering of Controlled stock; and
the sale, exchange, gift, or other disposition of any of the stock of Controlled
to be received in step (4) above, the shareholders of Parent that receive
Controlled stock will own stock possessing more than 50 percent of the total
combined voting power of all classes of Controlled stock entitled to vote and
more than 50
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percent of the total value of shares of all classes of Controlled stock ((S)
351(c)).
(dd) Distributing will receive stock of Controlled approximately equal to
the fair market value of the property transferred to Controlled.
(ee) Controlled will remain in existence and retain and use the property
transferred to it in a trade or business.
(ff) There is no plan or intention by Controlled to dispose of the
transferred property.
(gg) Each of the parties to the transaction will pay its own expenses, if
any, incurred in connection with the proposed transaction.
(hh) Controlled will not be an investment company within the meaning of (S)
351(e)(1) and (S) 1.351-1(c)(1)(ii).
(ii) Distributing is not under the jurisdiction of a court in a title 11 or
similar case (within the meaning of (S) 368(a)(3)(A)) and the stock or
securities received in the exchange will not be used to satisfy the indebtedness
of such debtor.
(jj) Controlled will not be a "personal service corporation" within the
meaning of (S) 269A.
The following additional representations have been made in connection with
steps (3) - (5) of the proposed transaction:
(kk) No part of the consideration distributed by either Parent or
Distributing will be received by a shareholder as a creditor, employee, or in
any capacity other than that of a shareholder of the corporations.
(ll) The five years of financial information submitted on behalf of
Distributing and Controlled is representative of each corporation's present
operations, and, with regard to each of such corporations, there have been no
substantial operational changes since the date of the last financial statements
submitted.
(mm) Immediately after the distribution by Parent at least 90 percent of
the fair market value of the gross assets of Parent will consist of the stock of
Distributing that is engaged in the active conduct of a trade or business.
(nn) Following the transaction, Distributing and Controlled will each
continue the active conduct of their respective businesses, independently and
with their separate employees.
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(oo) Following the transaction, the fair market value of the assets of the
active trade or business conducted by Controlled, respectively, will exceed five
percent of the fair market value of the gross assets of such corporation.
(pp) The distribution of the stock controlled is carried out for the
following corporate business purposes: to facilitate a stock offering of
Controlled, to allow Parent to comply with BHCA requirements by divesting its
indirect interest in Sub B, and to expand Controlled's other businesses in a
publicly traded company not subject to federal and state banking laws and
regulations. The distribution of the stock of Controlled is motivated, in whole
or substantial part, by one or more of these corporate business purposes.
(qq) There is no plan or intention by any shareholder who owns five percent
or more of the stock of Parent or Distributing, and the managements of Parent
and Distributing, to the best of their knowledge, are not aware of any plan or
intention on the part of any particular remaining shareholder or security holder
of either Parent or Distributing, to sell, exchange, transfer by gift, or
otherwise dispose of any stock in, or securities of, Parent, Distributing, or
Controlled after the transaction.
(rr) There is no plan or intention by Parent, Distributing or Controlled,
directly or through any subsidiary corporation, to purchase any of its
outstanding stock after the transaction, other than through stock purchases
meeting the requirements of (S) 4.05(1)(b) of Rev. Proc. 96-30.
(ss) There is no plan or intention to liquidate Parent, Distributing or
Controlled, to merge any of the corporations with any other corporation, or to
sell or otherwise dispose of the assets of any of the corporations after the
transaction, except in the ordinary course of business.
(tt) The total adjusted bases and the fair market value of the assets
transferred to Controlled by Distributing each equals or exceeds the sum of the
liabilities assumed by Controlled plus any liabilities to which the transferred
assets are subject; and the liabilities assumed in the transaction and the
liabilities to which the transferred assets are subject were incurred **in the
ordinary course of business** ??for business purposes?? and are associated with
the assets being transferred.
(uu) No intercorporate debt will exist between Parent or Distributing and
Controlled at the time of, or subsequent to, the distribution of Controlled
stock.
(vv) Immediately before the distribution, items of income, gain, loss,
deduction, and credit will be taken into account as
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required by the applicable intercompany transaction regulations (see (S) 1.1502-
---
13 and (S) 1.1502-14 as in effect before the publication of T.D. 8597, 1995-2
C.B. 147, and as currently in effect; (S) 1.1502-13 as published by T.D. 8597).
Distributing will not have an excess loss account (determined taking into
account the assumption by Controlled of the Credit Facility) with respect to the
stock of Controlled (See (S) 1.1502-19).
(ww) Payments made in connection with all continuing transactions, if any,
between Parent or Distributing and Controlled will be for fair market value
based on terms and conditions arrived at by the parties bargaining at arm's
length.
(xx) No two parties to the transaction are investment companies as defined
in (S) 368(a)(2)(F)(iii) and (iv).
Based solely on the information submitted and on the representations set
forth above, it is held as follows with respect to step (1):
(1) The transfer by Distributing of Business C to Sub C in exchange for
Sub C stock and the assumption by Sub C of the liabilities will be a
transfer to a controlled corporation within the meaning of (S) 351(a).
The subsequent transfer by Distributing of the Sub C stock to
Controlled will not cause the transfer of the assets to Sub C to fail
to qualify under (S) 351(a).
(2) No gain or loss will be recognized by Distributing on the transfer of
Business C to Sub C in exchange for the stock of Sub C and the
assumption by Sub C by Sub C of the liabilities ((SS) 351(a) and 357
(a)).
(3) No gain or loss will be recognized by Sub C on the receipt of Business
C in exchange for the stock of Sub C ((S) 1032(a)).
(4) The basis of the Business C assets in the hands of Sub C will be the
same as the basis of the assets in the hands of Distributing
immediately prior to the transfer ((S) 362(a)).
(5) The holding period of the Business C assets in the hands of Sub C will
include, in each instance, the period during which the assets were
held by Distributing ((S) 1223(2)).
(6) The basis of the Sub C stock received by Distributing in exchange for
the Business C assets will be the same as the basis of the Business C
assets immediately prior to the exchange, decreased by the amount of
the
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liabilities assumed by Sub C ((S) 358(a)(1) and 358(d)(1)).
(7) The holding period of the stock of Sub C received by Distributing will
include the holding period of the Business C assets transferred to Sub
C, provided that the Business C assets were held by Distributing as
capital assets on the date of the exchange ((S) 1223(1)).
Based solely on the information submitted and on the representations set
forth above, it is held as follows with respect to step (2):
(1) The transfer by Distributing of Business B and the stock of Sub A, Sub
B, Sub C, and Sub D, if applicable, in exchange for Controlled stock
and the assumption by Controlled of the liabilities will be a transfer
to a controlled corporation within the meaning of (S) 351(a).
(2) No gain or loss will be recognized by Distributing on the transfer of
Business B and the stock of Sub A, Sub B, Sub C, and Sub D, if
applicable, to Controlled in exchange for the stock of Controlled
and the assumption by Controlled of the liabilities ((S)(S) 351(a) and
357(a)).
(3) No gain or loss will be recognized by Controlled on the receipt of
Business B and the stock of Sub A, Sub B, Sub C, and Sub D, if
applicable, in exchange for the stock of Controlled ((S) 1032(a)).
(4) The basis of the Business B assets and the stock of Sub A, Sub B, Sub
C, and Sub D, if applicable, in the hands of Controlled will be the
same as the basis of the assets and stock in the hands of Distributing
immediately prior to the transfer ((S) 362(a)).
(5) The holding period of the Business B assets and the stock of Sub A, Sub
B, Sub C, and Sub D, if applicable, in the hands of Controlled will
include, in each instance, the period during which the assets and stock
were held by Distributing ((S) 1223(2)).
(6) The basis of the Controlled stock received by Distributing in exchange
for the Business B assets and the stock of Sub A, Sub B, Sub C, and Sub
D, if applicable, will be the same as the basis of the assets and stock
immediately prior to the exchange, decreased by the amount of the
liabilities assumed by Controlled ((S) 358(a)(1) and 358(d)(1).
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(7) The holding period of the stock of Controlled received by
Distributing will include the holding period of the Business B
assets and the stock of Sub A, Sub B, Sub C, and Sub D, if
applicable, transferred to Controlled, provided that the Business
B assets and the stock of Sub A, Sub B, Sub C, and Sub D, if
applicable, were held by Distributing as capital assets on the
date of the exchange ((S) 1223(1).
Based solely on the information submitted and on the representations set
forth above, it is held as follows with respect to steps (3) - (5):
(8) No gain or loss will be recognized by Distributing or Parent,
respectively upon the respective distributions of all the
Controlled stock ((S) 357(c)(1)).
(9) No gain or loss will be recognized by (and no amount will be
included in the income of) Parent or the Parent shareholders,
respectively, upon the receipt by each of the Controlled stock
((S) 355(a)(1)).
(10) The basis of the stock of Controlled in the hands of Parent or the
Parent shareholders, respectively, will be the same as the basis
of the Distributing or Parent stock, as applicable, held by Parent
or the Parent shareholders, respectively, immediately prior to the
distribution, allocated in proportion to the fair market value of
each in accordance with (S) 358(b)(2) and (S) 1.358-2(a)(2).
(11) The holding period of the Controlled stock to be received by
Parent or the Parent shareholders, respectively, after the
distribution will include the holding period of the Distributing
or Parent stock previously owned by such shareholders, provided
that the shares of Distributing or Parent stock, as applicable,
are held as a capital asset on the date of the distribution ((S)
1223(1)).
(12) Proper allocation of earnings and profits between Parent,
Distributing and Controlled will be made under (S) 1.312-10(b).
(13) Provided that the options for Controlled shares will not have a
readily ascertainable fair market value when granted, no income,
gain or loss will be recognized by holders of outstanding stock
options for Parent stock upon surrender of such options and the
issuance of new options to acquire stock of Controlled in exchange
therefor.
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(14) No income, gain or loss will be recognized by holders of outstanding
stock options for Parent stock as a result of the adjustment to the
exercise price of, and number of shares subject to such options to
reflect the decline in value of Parent stock resulting from the spin
off of Controlled.
(15) Provided that the requirements of (S) 162 are satisfied, Controlled
will be entitled to a tax deduction upon the exercise of a
nonstatutory option to acquire Controlled Stock, or a "disqualifying
disposition" of Controlled stock issued under an "incentive stock
option," in an amount equal to the compensation income recognized by
the optionee upon the exercise or disqualifying disposition, as
applicable.
(16) The proposed transaction does not constitute a change of ownership of
Controlled, within the meaning of (S) 280G(b)(2) and Q&A-27 of (S)
1.280G-1 of the proposed regulations, as no person, or more than one
person acting as a group, will acquire ownership of more than 50
percent of the total fair market value or total voting power of
Controlled.
(17) Prior to the proposed transaction described above, Controlled stock
acquired by the Parent Qualified Plans pursuant to the spin off will
be treated as "securities of the employer corporation" with respect to
which net unrealized appreciation may be excluded from gross income
upon distribution to a participant or beneficiary to the extent such
distribution is part of a lump sum distribution under section
402(e)(4)(D), or represents a distribution of employee after tax
contributions pursuant to section 402(e)(4)(A).
(18) Any exchange by the Parent Qualified Plans of Controlled stock
received pursuant to the spin off for additional Distributing stock
shall constitute an exchange of "securities of the employer
corporation" for purposes of section 402(j)(2) so that any net
unrealized appreciation attributable to such Controlled stock before
the exchange shall be attributed, immediately after the exchange, to
the Distributing stock received by the Parent Qualified Plans.
(19) Pursuant to the authority granted by section 402(j)(2)(B) to extend
the 90-day period for reinvesting in employer securities, the
disposition of Controlled stock received by the Parent Qualified Plans
pursuant to the spin off and the purchase of Parent stock with the
proceeds from any disposition may take
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place over a period of 90 days from the date of the disposition (not
the date of the spinoff), so that the determination of net unrealized
appreciation of such Parent stock will be made without regard to such
receipt, disposition and purchase. This ruling does not apply to any
employee with respect to whom a distribution of money was made during
the period after such disposition and before such purchase.
(20) For purpose of determining net unrealized appreciation under section
402(e), the basis of the Controlled and Parent stock will be
determined by allocating the basis in the Parent stock immediately
prior to the spin off between Controlled and Parent stock immediately
after the spin off in accordance with the rules of section 358.
Except as ruled above, no opinion is expressed about the tax treatment of
the proposed transaction under any other provisions of the Code or regulations
or about the tax treatment of any conditions existing at the time of, or effects
resulting from, the proposed transaction not specifically covered by the above
rulings. In particular, we express no opinion as to whether any of the options
in question qualify or will qualify as "incentive stock options," as defined in
(S) 422(b). Furthermore, we express no opinion regarding the effects of
application of the provisions of (S) 482 or the alternative minimum tax
provisions.
This ruling is directed only to the taxpayers who requested it. Section
6110(j)(3) of the Code provides that it may not be used or cited as precedent.
It is important that a copy of this letter be attached to the federal income
tax returns of the taxpayers involved for the taxable year in which the
transaction covered by this letter is consummated.
Sincerely yours,
Assistant Chief Counsel (Corporate)
By /s/ Howard W. Staiman
------------------------------
Howard W. Staiman
Assistant to the Chief, Branch 1
