<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 20, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
IMPERIAL CREDIT INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C> <C>
CALIFORNIA 6122 95-40544791
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110
TORRANCE, CALIFORNIA 90505
(310) 373-1704
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
H. WAYNE SNAVELY
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
IMPERIAL CREDIT INDUSTRIES, INC.
23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110
TORRANCE, CALIFORNIA 90505
(310) 373-1704
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------
Copies to:
THOMAS J. POLETTI, ESQ.
SUSAN B. KALMAN, ESQ.
FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN
9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST
BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE (310) 273-1870
FACSIMILE (310) 274-8357
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Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
OF SECURITIES REGISTERED REGISTERED PER UNIT PRICE(1) FEE
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9 7/8% Series B Senior Notes due
2007............................ $200,000,000 100.000% $200,000,000 $60,606.06
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Total.......................................................................... $60,606.06
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES +
+AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY AN OFFER TO +
+BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES +
+EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 20, 1997
PROSPECTUS
$200,000,000
OFFER FOR ALL OUTSTANDING 9 7/8% SENIOR NOTES DUE 2007
IN EXCHANGE FOR 9 5/8% SERIES B SENIOR NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") OF
[LOGO OF IMPERIAL CREDIT INDUSTRIES, INC.]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME
ON , 1997, UNLESS EXTENDED
Imperial Credit Industries, Inc. (the "Company"), a California corporation,
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount of
up to $200,000,000 of 9 7/8% Series B Senior Notes due 2007 (the "New Notes")
of the Company, which have been registered under the Securities Act, for a like
principal amount of the issued and outstanding 9 7/8% Senior Notes due 2007
(the "Series A Notes" and "Old Notes") of the Company from the registered
holders thereof (the "Holders"). The terms of the New Notes are identical in
all material respects to the Old Notes, except for certain transfer
restrictions relating to the Old Notes. The New Notes will evidence the same
class of debt as the Old Notes and will be issued pursuant to, and entitled to
the benefits of, the indenture governing the Old Notes (the "Indenture"). As
used herein, the term "Notes" means the Old Notes and the New Notes, treated as
a single class.
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m. New York City time, on , 1997, unless
extended (as so extended, the "Expiration Date"). Tenders of Old Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange pursuant to the Exchange Offer. The Exchange Offer is subject to
certain other customary conditions. See "The Exchange Offer."
On January 23, 1997, the Company issued $200,000,000 principal amount of Old
Notes (the "Offering") pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act and applicable
state securities laws.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest and Liquidated Damages (as
defined), if any, to the redemption date. In addition, prior to January 15,
2000, the Company may redeem up to 35% of the originally issued principal
amount of Notes at a redemption price equal to 109 7/8% of the principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the redemption date, with the net proceeds of an Equity Offering (as defined);
provided, that at least 65% of the originally issued principal amount of Notes
remain outstanding immediately after the occurrence of such redemption. In the
event of a Change of Control (as defined), holders of the Notes will have the
right to require the Company to repurchase their Notes, in whole or in part, at
a purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of purchase.
(Cover continued on following page)
SEE "RISK FACTORS" ON PAGE 15 OF THIS PROSPECTUS FOR A DESCRIPTION OF CERTAIN
RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE
OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1997.
<PAGE>
The New Notes will constitute, and the Old Notes currently constitute,
general unsecured obligations of the Company, ranking senior in right of
payment to all subordinated Indebtedness (as defined) of the Company and
ranking pari passu in right of payment with all senior Indebtedness. The Notes
will be unconditionally guaranteed (the "Subsidiary Guarantees") on a senior
unsecured basis by all of the Company's Restricted Subsidiaries (as defined)
other than Southern Pacific Thrift and Loan Association ("SPTL") and Special
Purpose Subsidiaries (as defined) (collectively, "Subsidiary Guarantors") and
the Subsidiary Guarantees will rank senior in right of payment to all
subordinated Indebtedness of the Subsidiary Guarantors and will rank pari passu
in right of payment with all senior Indebtedness of the Subsidiary Guarantors.
The Notes will be effectively subordinated to all indebtedness and other
liabilities of SPTL and the Notes and Subsidiary Guarantees will be effectively
subordinated to secured Indebtedness of the Company and Subsidiary Guarantors,
respectively. At September 30, 1996, on a pro forma basis after giving effect
to, among other things, the Offering and the Exchange Offer and application of
the proceeds thereof, the Notes would have been effectively subordinated to
approximately $169.0 million of secured Indebtedness of the Company and the
Subsidiary Guarantors. See "Risk Factors--Ranking; Holding Company Structure."
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on the
Old Notes, from January 23, 1997. Old Notes accepted for exchange will cease to
accrue interest from and after the date of consummation of the Exchange Offer.
Holders of Old Notes whose Old Notes are accepted for exchange will not receive
any payment in respect of accrued interest on such Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined). Based on interpretations by the staff of the Securities and Exchange
Commission (the "SEC") as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by Holders thereof (other than any Holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act),
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such Holders' business and such Holders have no arrangement with any
person to engage in a distribution of such New Notes. However, the SEC has not
considered the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of such
New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of new Notes received in exchange for Old
Notes where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. In the event
the Company terminates the Exchange Offer and does not accept for exchange any
Old Notes, the Company will promptly return the Old Notes to the Holders
thereof. See "The Exchange Offer."
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes. The
Initial Purchasers (as defined) have advised the Company that they currently
intend to make a market in the New Notes. The Initial Purchasers are not
obligated to do so, however, and any market-making with respect to the New
Notes may be discontinued at any time without notice. The Company does not
intend to apply for listing or quotation of the New Notes on any securities
exchange or stock market.
2
<PAGE>
AVAILABLE INFORMATION
The Company and the Guarantors have filed with the SEC a registration
statement on Form S-4 (herein, together with all amendments and exhibits,
referred to as the "Registration Statement") under the Securities Act with
respect to the New Notes offered hereby. This Prospectus, which forms a part
of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to the Company,
the Guarantors and the New Notes offered hereby, reference is made to the
Registration Statement. Any statements made in this Prospectus concerning the
provisions of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit
to the Registration Statement otherwise filed with the SEC.
The Company is, and as of the date of this Prospectus, certain Subsidiary
Guarantors will become, subject to the informational requirements of the
Exchange Act and, in accordance therewith, file, or will file, as the case may
be, reports, proxy statements and other information with the SEC. Reports,
proxy statements and other information filed by the Company with the SEC can
be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's regional offices located at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the SEC, at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates. In addition such material
concerning the Company can be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The SEC
also maintains a World Wide Web site (http://www.sec.gov) that contains
reports, proxy and other information regarding registrants that file
electronically with the SEC.
The Company will furnish holders of the New Notes offered hereby with annual
reports containing, among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited financial information for the first three quarters of
each fiscal year. The Company will also furnish such other reports as it may
determine or as may be required by law. In addition, in the event that the
Company is not required to be subject to the reporting requirements of the
Exchange Act in the future, the Company will be required under the Indenture,
pursuant to which the Old Notes were, and the New Notes will be, issued, to
continue to file with the SEC, and to furnish Holders of the New Notes with,
the information, documents and other reports specified in Sections 13 and
15(d) of the Exchange Act. Under the Indenture, the Company and the Subsidiary
Guarantors will furnish holders of the Notes, upon written request,
information required to be delivered pursuant to Rule 144A(d)(4) of the
Securities Act.
INCORPORATION BY REFERENCE
The Company's annual report on Form 10-K for the fiscal year ended December
31, 1995 filed by the Company with the SEC pursuant to the Exchange Act is
incorporated herein by reference.
The reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the Exchange Offer hereunder shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date of filing of such reports and documents. Any statement contained in
this Prospectus or in a document incorporated by reference herein will be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus or in any subsequently
filed document which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded will not be deemed, except as so modified or superseded, to
constitute a part of the Registration Statement or this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, copies of any and all of the documents incorporated herein by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference into the information incorporated
herein). Requests for such documents should be directed to Imperial Credit
Industries, Inc. 23550 Hawthorne Boulevard, Building One, Suite 210, Torrance
California 90505, telephone number (310) 373-1704, Attention: General Counsel.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors,"
appearing elsewhere in this Prospectus, and the consolidated financial
statements and the notes thereto. References in this Prospectus to "ICII" refer
to the Company as a separate entity from its subsidiaries. All references to
the "Company" in this Prospectus refer, unless otherwise stated or unless the
context otherwise requires, to ICII and its subsidiaries on a consolidated
basis. As of November 30, 1996, ICII owned (i) 100% of the Common Stock of ICI
Funding Corporation ("ICIFC") which is equal to a 1% economic interest and (ii)
51.2% of Southern Pacific Funding Corporation ("SPFC"). ICII intends to dispose
of its common stock interest in ICIFC and expects that its percentage ownership
in SPFC will be reduced below 50% at which point the financial statements of
ICIFC and SPFC would not be consolidated with those of ICII (collectively, the
"Deconsolidation"). For a further description of the effects of such
Deconsolidation, see "Unaudited Consolidated Pro Forma Financial Statements."
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
Imperial Credit Industries, Inc. (the "Company") is a diversified commercial
and consumer finance company. In 1995, the Company began to reposition its
business from originating and selling conforming residential mortgage loans to
offering higher margin loan and lease products. The Company accomplished this
repositioning through a business strategy that emphasizes: (i) opportunistic
expansion and acquisitions of businesses in niche segments of the financial
services industry, (ii) conservative and disciplined underwriting and credit
risk management, (iii) loan and lease originations, where possible, on a
wholesale basis, (iv) securitization or sale in the secondary market of
substantially all of the Company's loans and leases, other than those held by
Southern Pacific Thrift and Loan Association ("SPTL") for investment and (v)
maintaining business and financial flexibility to take advantage of changing
market conditions with respect to specific financial services businesses.
Beginning in 1995, a substantial portion of the Company's operations were
conducted through its non-conforming residential mortgage lending subsidiary,
SPFC. In June 1996, as part of the Company's repositioning, SPFC completed an
initial public offering of its common stock pursuant to which ICII was a
selling shareholder. In November 1996, ICII sold additional shares of its SPFC
common stock reducing its ownership percentage to 51.2%. ICII expects that its
percentage ownership of SPFC will be reduced below 50% at which point the
financial statements of SPFC would not be consolidated with those of ICII. For
a further description of the effect of such deconsolidation, see "Unaudited
Consolidated Pro Forma Financial Statements."
The Company has also diversified its loan and lease products by focusing on
the creation and acquisition of additional finance businesses in order to
reduce its dependency on residential mortgage lending. When acquiring new
businesses or targeting expansion opportunities, the Company seeks to retain
existing management and recruit additional experienced management to increase
growth and profitability and to reduce the risks associated with operating the
newly acquired entity. For the nine months ended September 30, 1996 and the
year ended December 31, 1995, the Company originated or acquired $1.6 billion
and $3.1 billion of loans and leases, respectively. During these periods,
conforming residential mortgage loans decreased as a percentage of total loans
and leases from 58% to 20%, while non-conforming residential mortgage loans
increased as a percentage of total loans and leases from 28% to 31%, commercial
mortgage loans increased as a percentage of total loans and leases from 9% to
32%, business loans and leases increased as a percentage of total loans and
leases from 3% to 14% and consumer loans increased slightly from 2% to 3% of
total loans and leases. In addition, during
4
<PAGE>
the nine months ended September 30, 1996 and the year ended December 30, 1995,
the Company completed securitization transactions totaling $934.5 million and
$1.0 billion, respectively.
The Company offers loan and lease products in the following sectors:
FRANCHISE LENDING. Franchise lending is conducted through ICII's 66.7% owned
subsidiary, Franchise Mortgage Acceptance Company LLC ("FMAC"), the assets of
which were acquired from a division of Greenwich Financial Capital Products,
Inc. in June 1995. FMAC is a full service franchise finance company which
originates loans and equipment leases to top-tier national and regional
franchisee concept operators. While FMAC historically focused on franchise
concepts such as Taco Bell, Burger King, Hardee's, Wendy's, Pizza Hut and KFC,
it is currently expanding its marketing focus to include other food and non-
food related franchise concepts. In addition, FMAC recently established a
division to provide financing to experienced golf course operators for the
expansion and development of golf courses. For the nine months ended September
30, 1996, FMAC originated or acquired $304.4 million of franchise loans and
securitized $167.4 million of loans.
BUSINESS FINANCE LENDING. Business finance lending is conducted through the
Imperial Business Credit, Inc. ("IBC") subsidiary of the Company and three
divisions of the Company's SPTL subsidiary: Coast Business Credit ("CBC"), the
Loan Participation and Investment Group ("LPIG") and the Auto Lend Group ("Auto
Lend").
Coast Business Credit. CBC is an asset-based lender specializing in
lending to middle market manufacturing and high-technology businesses.
CBC's predecessor operated as a division of Coast Federal Bank until its
acquisition by the Company in September 1995. CBC originates loans and
commitments subject to stringent underwriting and collateral requirements.
As of September 30, 1996, CBC had total loan commitments of $515.3 million
of which $278.9 million of loans were outstanding.
Imperial Business Credit. IBC leases business equipment including
copying, data processing, communication, printing and manufacturing
equipment exclusively to business users. IBC was formed in May 1995 to
combine the Company's existing leasing business with the assets acquired
from First Concord Acceptance Corporation ("FCAC"). For the nine months
ended September 30, 1996, IBC originated $54.6 million of leases and
securitized $67.7 million of leases.
Loan Participation and Investment Group. LPIG was formed in September
1995 to invest in and purchase syndicated commercial loan participations in
the secondary market originated by commercial banks. As of September 30,
1996, LPIG had total loan commitments of $236.1 million of which
$127.1 million of loans were outstanding.
Auto Lend Group. Auto Lend was formed in September 1996 to finance
automobile dealership inventories. As of September 30, 1996, Auto Lend had
total loan commitments of $28.8 million of which $2.5 million of loans were
outstanding.
COMMERCIAL MORTGAGE LENDING. The Company conducts its commercial mortgage
lending operations through the Income Property Lending Division ("IPLD") of
SPTL. IPLD was formed in February 1994 to expand the Company's apartment and
commercial property lending business. The focus of IPLD's lending activities is
the small loan market (consisting of loans less than $2.5 million) for multi-
family apartments and commercial buildings. For the nine months ended September
30, 1996, IPLD loan originations totaled $182.2 million. During the nine months
ended September 30, 1996, SPTL completed a securitization of $277.0 million of
multi-family and commercial mortgage loans originated or acquired by IPLD.
CONSUMER LENDING. The Company conducts consumer lending operations through
the Auto Lending Division ("ALD") and Consumer Credit Division ("CCD") of SPTL.
5
<PAGE>
Auto Lending Division. ALD was formed in October 1994 and lends primarily
to credit-impaired buyers of new and used automobiles who are unable to
access traditional sources of financing from banks and automobile finance
companies. ALD currently operates from three retail offices in Northern
California and expects to further expand its operations within California.
For the nine months ended September 30, 1996, ALD originated $24.8 million
of sub-prime auto loans.
Consumer Credit Division. CCD was formed in early 1994 and offers loans
to finance home improvements and consumer goods. For the nine months ended
September 30, 1996, CCD originated $16.5 million in loans and had $39.2
million of loans outstanding as of September 30, 1996.
NON-CONFORMING RESIDENTIAL LENDING. Non-conforming residential lending is
conducted through ICII's 51.2% owned subsidiary, SPFC. SPFC originates,
purchases and sells high yielding, single family non-conforming mortgage loans.
Substantially all of SPFC's loans are secured by first or second mortgages on
owner occupied single family residences. The majority of the originated and
purchased loans are made to borrowers who do not qualify for or are unwilling
to obtain financing from conventional mortgage sources. SPFC's mortgage loan
originations and purchases for the nine months ended September 30, 1996 were
$490.2 million. SPFC securitized $422.4 million of non-conforming residential
mortgage loans for the nine months ended September 30, 1996.
ICII was incorporated in California in 1986. The Company's principal
executive offices are located at 23550 Hawthorne Boulevard, Building One, Suite
110, Torrance, California 90505 and its telephone number is (310) 373-1704.
FUNDING STRATEGY
Pending loan securitization transactions or whole loan sales, the Company has
historically funded its loan originations from warehouse lines of credit and
repurchase facilities, equity and debt offerings in the capital markets and
deposits or borrowings at SPTL.
As of September 30, 1996, the Company had warehouse lines of credit and
commitments of $103.1 million, excluding financing at SPFC and ICIFC and
amounts available to ICII under a warehouse facility with PaineWebber
Incorporated which the Company does not anticipate using in the future. Amounts
outstanding under these facilities at September 30, 1996 totaled $73.7 million.
The Company plans to use existing warehouse lines and a portion of the proceeds
from the Offering to fund the business operations and securitization programs
of its FMAC and IBC subsidiaries. Business operations conducted through
divisions of SPTL will be primarily financed through deposits, capital
contributions from the ICII to SPTL and Federal Home Loan Bank of San Francisco
("FHLB") borrowings. At September 30, 1996, SPTL had total deposits of
approximately $1.1 billion (excluding deposits of the Company maintained with
SPTL).
RECENT DEVELOPMENTS
In October 1996, IBC expanded its commercial equipment leasing origination
and servicing business through the acquisition of substantially all of the
assets of Avco Leasing Services, Inc. and all of the assets of Avco Financial
Services of Southern California, Inc. related to its business of originating
and servicing business equipment leases and agreed to assume certain related
liabilities in connection therewith from Avco Financial Services, Inc. (the
"Avco Acquisition"). The Company paid approximately $95 million for the
operations and the assets, which consisted primarily of a portfolio of
equipment leases totaling approximately $85.0 million. The portfolio had a
weighted average interest rate of 15.5%. The purchase was financed through
additional drawdowns on warehouse facilities of $81.4 million and cash on hand
of approximately $13.3 million.
6
<PAGE>
In September 1996, the Company entered into various transactions with
Dabney/Resnick, Inc. (collectively, the "DRI Transaction"), subsequently
renamed Dabney/Resnick/Imperial, LLC ("DRI"), and its affiliated entities. DRI
engages in investment banking activities. ICII has acquired a 1% equity
interest in DRI and has purchased a warrant to acquire an additional 48%
interest therein.
On January 23, 1997, the Company concurrently completed a tender offer (the
"Tender Offer") for its 9 3/4% Senior Notes due 2004 and issued $200,000,000 of
Old Notes for net proceeds of approximately $193.8 million in reliance upon the
exemptions from registration granted under Section 4(2) of the Securities Act.
The Company used approximately $70.0 million of the net proceeds to consummate
the Tender Offer; approximately $20.0 million of the Company's 9 3/4% Senior
Notes due 2004 remain outstanding.
THE EXCHANGE OFFER
On January 23, 1997, the Company issued $200,000,000 principal amount of Old
Notes. The Old Notes were sold pursuant to exemptions from, or in transactions
not subject to, the registration requirements of the Securities Act and
applicable state securities laws. Lehman Brothers Inc., Montgomery Securities
and Dabney/Resnick/Imperial, LLC (the "Initial Purchasers"), as a condition to
their purchase of the Old Notes, required that the Company agree to commence
the Exchange Offer following the Offering. The New Notes will evidence the same
class of debt as the Old Notes and will be issued pursuant to, and be entitled
to the benefits of, the Indenture. As used herein, the term "Notes" means the
Old Notes and the New Notes, treated as a single class.
SECURITIES OFFERED.... Up to $200,000,000 aggregate principal amount of the
Company's 9 7/8% Series B Senior Notes Due 2007, which
have been registered under the Securities Act. The
terms of the New Notes and the Old Notes are identical
in all material respects, except for certain transfer
restrictions relating to the Old Notes.
THE EXCHANGE OFFER.... The New Notes are being offered in exchange for a like
principal amount of Old Notes. The issuance of the New
Notes is intended to satisfy obligations of the Company
contained in the Registration Rights Agreement, dated
January 23, 1997, among the Company, the Subsidiary
Guarantors and the Initial Purchasers (the
"Registration Rights Agreement"). For procedures for
tendering the Old Notes pursuant to the Exchange Offer,
see "The Exchange Offer."
TENDERS, EXPIRATION
DATE; WITHDRAWAL...... The Exchange Offer will expire at 5:00 P.M., New York
City time, on , 1997, or such later date and time
to which it is extended (as so extended, the
"Expiration Date"). A tender of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time prior
to the Expiration Date. Any Old Note not accepted for
exchange for any reason will be returned without
expense to the tendering Holder thereof as promptly as
practicable after the expiration or termination of the
Exchange Offer.
FEDERAL INCOME TAX
CONSEQUENCES.......... The exchange pursuant to the Exchange Offer should not
result in any income, gain or loss to the Holders or
the Company for federal income tax purposes. See
"Certain U.S. Income Tax Consequences."
USE OF PROCEEDS....... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
7
<PAGE>
EXCHANGE AGENT........ Chemical Trust Company of California is serving as the
Exchange Agent in connection with the Exchange Offer.
SHELF REGISTRATION
STATEMENT............. Under certain circumstances described in the
Registration Rights Agreement, certain Holders of Notes
(including Holders who are not permitted to participate
in the Exchange Offer or who may not freely resell New
Notes received in the Exchange Offer) may require the
Company to file, and use best efforts to cause to
become effective, a shelf registration statement under
the Securities Act, which would cover resales of Notes
by such Holders. See "Description of Notes--Exchange
Offer; Registration Rights."
CONDITIONS TO THE
EXCHANGE OFFER........ The Exchange Offer is not conditioned on any minimum
principal amount of Old Notes being tendered for
exchange. The Exchange Offer is subject to certain
other customary conditions, each of which may be waived
by the Company. See "The Exchange Offer--Conditions."
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. See "Description
of the Notes--Exchange Offer; Registration Rights." Based on interpretations by
the staff of the SEC, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any Holder which is an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such Holders' business and such Holders, other than broker-dealers,
have no arrangement with any person to participate in the distribution of such
New Notes. However, the SEC has not considered the Exchange Offer in the
context of a no-action letter and there can be no assurance that the staff of
the SEC would make a similar determination with respect to the Exchange Offer
as in such other circumstances. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. Each broker-dealer that receives
New Notes for its own account in exchange for Old Notes must acknowledge that
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities and that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution." In
addition, to comply with the securities laws of certain jurisdictions, it may
be necessary to qualify for sale or register thereunder the New Notes prior to
offering or selling such New Notes. The Company has agreed, pursuant to the
Registration Rights Agreement, subject to certain limitations specified
therein, to register or qualify the New Notes for offer or sale under the
securities laws of such jurisdictions as any Holder reasonably requests in
writing. Unless a Holder so requests, the Company does not intend to register
or qualify the sale of the New Notes in any such jurisdictions. See "Risk
Factors--Consequences of Failure to Exchange" and "The Exchange Offer--
Consequences of Exchanging Old Notes."
8
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions relating to the Old Notes.
The New Notes will bear interest from the most recent date to which interest
has been paid on the Old Notes or, if no interest has been paid on the Old
Notes, from January 23, 1997. Accordingly, registered holders of New Notes on
the relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the most
recent date to which interest has been paid on the Old Notes or, if no interest
has been paid, from January 23, 1997. Old Notes accepted for exchange will
cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders whose Old Notes are accepted for exchange will not
receive any payment in respect of interest on such Old Notes otherwise payable
on any interest payment date the record date for which occurs on or after
consummation of the Exchange Offer.
SECURITIES OFFERED.... $200,000,000 aggregate principal amount of 9 7/8%
Series B Senior Notes due 2007.
ISSUER................ Imperial Credit Industries, Inc.
MATURITY DATE......... January 15, 2007.
INTEREST PAYMENT
DATES................. January 15 and July 15, commencing July 15, 1997.
MANDATORY REDEMPTION.. None.
OPTIONAL REDEMPTION... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
January 15, 2002 at the redemption prices set forth
herein, plus accrued and unpaid interest and Liquidated
Damages, if any, through the redemption date. In
addition, prior to January 15, 2000, the Company may
redeem up to 35% of the originally issued principal
amount of Notes at a redemption price equal to 109 7/8%
of the principal amount thereof, in each case plus
accrued and unpaid interest and Liquidated Damages, if
any, thereon to the redemption date, with the net
proceeds of an Equity Offering; provided, that at least
65% of the originally issued principal amount of Notes
remains outstanding immediately after the occurrence of
such redemption. See "Description of Notes--Optional
Redemption."
CHANGE OF CONTROL..... In the event of a Change of Control (as defined), each
Holder of Notes will have the right to require the
Company to repurchase their Notes at a price equal to
101% of the aggregate principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase. See "Description of
Notes--Certain Covenants--Change of Control."
RANKING............... The Notes currently are general unsecured obligations
of the Company, ranking pari passu with all future
Indebtedness of the Company, if any, that is not
subordinated to the Notes and senior to any
Indebtedness of the Company that is subordinated to the
Notes. The Subsidiary Guarantees will rank pari passu
with all future Indebtedness of the Subsidiary
Guarantors, if any, that is not subordinated to the
Subsidiary Guarantees and senior to any Indebtedness of
the Subsidiary Guarantors that is subordinated to the
Subsidiary Guarantees. The Notes will be effectively
subordinated to all indebtedness and other liabilities
of SPTL and the Notes and Subsidiary Guarantees will be
effectively subordinated to secured Indebtedness of the
Company and the Subsidiary Guarantors, respectively. At
September 30,
9
<PAGE>
1996, on a pro forma basis after giving effect to the
Offering, the application of the proceeds thereof, and
the Exchange Offer, the Notes would have been
effectively subordinated to approximately $1.4 billion
of deposits and borrowings at SPTL and the Notes and
Subsidiary Guarantees would have been effectively
subordinated to approximately $169.0 million of secured
Indebtedness of the Company and the Subsidiary
Guarantors. See "Risk Factors--Ranking; Holding Company
Structure."
SUBSIDIARY
GUARANTEES............ The Company's payment obligations under the Notes are
jointly and severally guaranteed (the "Subsidiary
Guarantees") by each of the Subsidiary Guarantors,
which consist of all of the Company's Restricted
Subsidiaries other than SPTL and the Special Purpose
Subsidiaries. In addition, as a result of the expected
Deconsolidation, ICIFC and SPFC will not be Subsidiary
Guarantors under the Indenture. The Subsidiary
Guarantees may be released under certain circumstances.
See "Description of Notes--Subsidiary Guarantees."
CERTAIN COVENANTS..... The Indenture contains certain covenants that, among
other things, limit the ability of the Company and its
subsidiaries to (i) incur additional Indebtedness and
issue preferred stock, (ii) pay dividends or make other
distributions, (iii) repurchase Equity Interests (as
defined) or subordinated Indebtedness, (iv) create
certain liens, (v) enter into certain transactions with
affiliates, (vi) sell assets of the Company or its
subsidiaries, (vii) issue or sell Equity Interests of
the Company's subsidiaries or (viii) enter into certain
mergers and consolidations. The Company will be
required to offer to purchase the Notes at a purchase
price equal to 100% of the principal amount thereof,
plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase with the
proceeds of certain Asset Sales (as defined). See
"Description of Notes--Certain Covenants."
EXCHANGE OFFER;
REGISTRATION RIGHTS... Pursuant to the Registration Rights Agreement, the
Company agreed to file an exchange offer registration
statement with respect to the Exchange Offer. The
Registration Statement of which this Prospectus is a
part constitutes the exchange offer registration
statement referred to therein. If, among other things,
any Holder of the Transfer Restricted Securities (as
defined) notifies the Company that (A) it is prohibited
by law or SEC policy from participating in the Exchange
Offer, (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus
contained in the Exchange Offer Registration Statement
is not appropriate or available for such resales or
(C) that it is a broker-dealer and holds Notes acquired
directly from the Company or an affiliate of the
Company, the Company will be required to provide a
shelf registration statement (the "Shelf Registration
Statement") to cover resales of the Notes by the
Holders thereof. If the Company fails to satisfy these
registration obligations, it will be required to pay
certain Liquidated Damages to the Holders of the Old
Notes as provided in the Registration Rights Agreement.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
10
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
PRINCIPAL OPERATING SUBSIDIARIES AND DIVISIONS
IMPERIAL CREDIT
INDUSTRIES, INC.
"ICII"
------------------------------------------------------------
100% 100% 100% 66.7% 51.2%
owned owned owned owned owned
Imperial Imperial Franchise Southern
Business Credit Mortgage Pacific
Credit, Advisors, Acceptance Funding
Inc. Inc. Co. LLC Corporation
"IBC" "ICAI" "FMAC" "SPFC"(1)
Southern Pacific
Thrift & Loan
Association
"SPTL"
-----------------------------------------------------
Auto Consumer Income Coast
Lend Group Credit Property Business
"Auto Lend" Division Lending Credit
"CCD" Division "CBC"
"IPLD"
Auto Loan
Lending Participation
Division and
"ALD" Investment
Group
"LPIG"
- -------
(1) As of November 30, 1996, ICII owned 51.2% of the Common Stock of SPFC. ICII
expects that its percentage ownership of SPFC will be reduced below 50% at
which point the financial statements of SPFC would not be consolidated with
those of ICII. For a further description of the effect of such
deconsolidation, see "Unaudited Consolidated Pro Forma Financial
Statements."
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth summary historical and unaudited pro forma
consolidated financial and other data for the periods indicated. The following
summary historical balance sheet data and income statement data are derived
from the consolidated financial statements of the Company as of December 31,
1995 and 1994 and for the years in the three-year period ending December 31,
1995, which have been audited by KPMG Peat Marwick LLP, independent auditors.
The report of KPMG Peat Marwick LLP covering the December 31, 1995 consolidated
financial statements contains an explanatory paragraph regarding the adoption
of Statement of Financial Accounting Standards No. 122 "Accounting for Mortgage
Servicing Rights" ("SFAS 122"). This data should be read in conjunction with
the consolidated financial statements and related notes for these periods and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus. The selected consolidated
balance sheet data as of December 31, 1993, 1992 and 1991 and the income
statement data for the years ended December 31, 1992 and 1991 are derived from
audited consolidated financial statements of the Company, which have been
audited by KPMG Peat Marwick LLP but are not included in this Prospectus. The
balance sheet data as of September 30, 1996, and income statement data for the
nine month periods ended September 30, 1996 and 1995 have been derived from the
unaudited consolidated financial statements of the Company and, in the opinion
of management, include all adjustments (consisting of normal, recurring and
other adjustments) necessary for a fair presentation of such information. The
unaudited consolidated pro forma income statement data and other operating data
for the nine month period ended September 30, 1996 gives effect to the
Deconsolidation, the Avco Acquisition, the DRI Transaction and the application
of the net proceeds of $193.8 million from the Offering (the "Pro Forma
Transactions") as if they had occurred at the beginning of said period. The
unaudited consolidated pro forma income statement data and other operating data
for the year ended December 31, 1995 gives effect to the Pro Forma Transactions
and the acquisition by the Company of CBCC in September 1995 (the "CBCC
Acquisition"), as if these had occurred at the beginning of said period. The
unaudited consolidated pro forma balance sheet data give effect to the
Company's assumed sale of a portion of its investment in SPFC and the Company's
assumed sale of its investment in ICIFC (collectively, the "Stock Sales") and
the Pro Forma Transactions as if they had occurred on September 30, 1996. The
pro forma consolidated financial data are unaudited and do not purport to
represent what the Company's financial position or results of operations would
actually have been if the Pro Forma Transactions, the CBCC Acquisition and the
Stock Sales, as applicable, had occurred on the dates specified and do not
project the Company's financial position or results of operations for any
future periods. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------------------
PRO FORMA PRO FORMA
1996(1) 1996 1995 1995(1) 1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------- --------- ---------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gain on sale of
loans............... $ 25,512 $ 69,517 $ 29,953 $30,724 $ 39,557 $ 8,628 $ 18,149 $ 20,606 $ 5,239
Net interest income
after provision
for loan losses..... 32,386 42,163 14,832 27,662 28,304 15,959 21,423 13,264 8,249
Gain on sale of SPFC
stock............... 62,007 62,007 -- -- -- -- -- -- --
Other income......... 26,303 17,842 13,271 19,925 17,448 48,217 31,854 13,222 7,277
-------- --------- --------- ------- ---------- --------- ---------- -------- ---------
Total revenue........ 146,208 191,529 58,056 78,311 85,309 72,804 71,426 47,092 20,765
Personnel expense.... 26,898 36,477 24,041 35,650 34,053 33,477 24,520 15,678 6,184
Other expenses....... 31,994 36,267 20,070 28,522 27,127 28,037 15,433 8,190 5,236
-------- --------- --------- ------- ---------- --------- ---------- -------- ---------
Total expenses....... 58,892 72,744 44,111 64,172 61,180 61,514 39,953 23,868 11,420
-------- --------- --------- ------- ---------- --------- ---------- -------- ---------
Income before income
taxes............... 87,316 118,785 13,945 14,139 24,129 11,290 31,473 23,224 9,345
Income taxes......... 35,876 51,322 5,844 5,840 10,144 4,685 13,055 9,583 3,754
Minority interest in
income (loss) of
consolidated
subsidiaries........ 2,138 6,373 -- (60) (208) -- -- -- --
-------- --------- --------- ------- ---------- --------- ---------- -------- ---------
Income before
extraordinary item.. $ 49,302 61,090 8,101 $ 8,359 14,193 6,605 18,418 13,641 5,591
======== =======
Extraordinary item-
repurchase of 9 3/4%
Senior Notes due
2004, net of income
taxes............... -- -- -- 919 -- -- --
--------- --------- ---------- --------- ---------- -------- ---------
Net income........... $ 61,090 $ 8,101 $ 14,193 $ 7,524 $ 18,418 $ 13,641 $ 5,591
========= ========= ========== ========= ========== ======== =========
CASH FLOW DATA:
Net cash provided by
(used in) operating
activities.......... $ 555,691 $ (99,850) $ (668,666) $ 961,579 $ (903,050) $(78,865) $(156,481)
Net cash (used in)
provided by
investing
activities.......... (160,536) (271,190) (364,076) (796,638) (145,701) 21,302 (38,359)
Net cash (used in)
provided by
financing
activities.......... (376,383) 351,966 1,047,004 (177,314) 1,066,584 70,216 199,658
--------- --------- ---------- --------- ---------- -------- ---------
Net change in cash. $ 18,772 $ (19,074) $ 14,262 $ (12,373) $ 17,833 $ 12,653 $ 4,818
========= ========= ========== ========= ========== ======== =========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------
PRO FORMA PRO FORMA
1996(1) 1996 1995 1995(1) 1995 1994 1993 1992 1991
--------- ------ ------ --------- ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA(2):
Loans originated:
ICII...................... $ 318 $ 318 $1,262 $1,816 $1,816 $4,260 $6,019 $3,383 $1,416
SPTL...................... 428 428 431 724 724 NA(3) NA(3) NA(3) NA(3)
SPFC...................... -- 490 214 -- 289 190 -- -- --
FMAC...................... 304 304 8 164 164 -- -- -- --
IBC....................... 55 55 29 36 36 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $1,105 $1,595 $1,944 $2,740 $3,029 $4,450 $6,019 $3,383 $1,416
====== ====== ====== ====== ====== ====== ====== ====== ======
Loans securitized:
ICII...................... $ -- $ -- $ 78 $ 177 $ 177 $ -- $ -- $ -- $ --
SPTL...................... 277 277 511 511 511 46 -- -- --
SPFC...................... -- 422 135 -- 165 -- -- -- --
FMAC...................... 167 167 -- 105 105 -- -- -- --
IBC....................... 68 68 -- 85 85 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total................... $ 512 $ 934 $ 724 $ 878 $1,043 $ 46 $ -- $ -- $ --
====== ====== ====== ====== ====== ====== ====== ====== ======
Outstanding balance of
loans and leases
securitized (at the end
of period)(4)............ $1,087 $1,849 $794 $680 $1,047 $45 $ -- $ -- $ --
SELECTED RATIOS:
Ratio of earnings to
fixed charges(5)......... 2.0x 2.1x 1.2x 1.1x 1.3x 1.2x 2.1x 2.2x 1.7x
Pre-tax interest coverage
ratio(6)................. 6.1 17.9 3.2 1.6 3.9 2.4 -- -- --
Ratio of indebtedness to
total capitalization (at
end of period)(7)........ 48.6% 28.5% 48.8% 60.7% 46.1% 51.4% -- % -- % -- %
Average equity to average
assets................... 8.68 7.13 5.15 5.95 4.72 4.86 6.71 7.71 5.48
Return on average common
equity................... 35.59 51.79 13.59 7.85 17.59 10.57 31.76 37.75 35.07
Return on average assets.. 3.09 3.69 0.70 0.47 0.82 0.51 2.13 2.91 1.92
SPTL REGULATORY CAPITAL RA-
TIOS (AT END OF PERIOD):
California leverage
limitation (8)........... 12.97% 12.97% 13.37% 11.58% 11.58% 11.50% 7.29% 8.73% 7.49%
Risk-based--Tier 1........ 9.47 9.47 12.05 11.72 11.72 14.21 10.27 14.94 11.04
Risk-based--Total......... 10.56 10.56 13.42 13.18 13.18 15.13 10.73 15.74 11.69
FDIC Leverage Ratio....... 8.46 8.46 7.83 8.04 8.04 8.08 9.47 8.78 7.54
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets as
a percentage of total
assets................... 2.82% 2.64% 1.18% 1.81% 1.55% 1.16% 0.64% 0.79% 1.66%
Allowance for loan losses
as a percentage of non-
performing loans......... 31.04 31.04 58.04 44.30 44.30 53.83 65.91 79.10 23.84
Net charge-offs as a
percentage of average
total loans held for
investment............... 0.91 0.96 0.26 0.36 0.36 0.23 0.89 0.18 0.02
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
--------------------- --------------------------------------------------
PRO FORMA
1996(1) 1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 171,503 $ 57,938 $ 39,166 $ 24,904 $ 37,277 $ 19,444 $ 6,791
Interest bearing
deposits.............. 314,192 314,192 267,776 10,600 90,000 30,000 45,000
Loans held for sale ... 482,599 812,257 1,341,810 263,807 1,238,006 328,575 238,963
Loans held for
investment, net....... 892,906 803,205 668,771 1,029,556 154,595 84,843 94,966
Securitization related
assets................ 63,478 122,332 58,272 4,558 529 982 942
Total assets........... 2,102,043 2,246,137 2,510,635 1,420,408 1,572,663 479,430 394,056
Deposits............... $1,052,352 $1,052,352 $1,092,989 $ 934,621 $1,001,468 $422,551 $ 96,297
Borrowings from FHLB... 338,000 338,000 190,000 295,000 320,000 -- --
Other borrowings....... 168,963 400,045 875,815 -- 147,611 -- --
Senior notes(9)........ 219,593 88,169 80,472 80,343 -- -- --
Total liabilities...... 1,869,687 2,024,788 2,416,533 1,344,536 1,504,411 429,652 373,772
Shareholders' equity... 232,356 221,349 94,102 75,872 68,252 49,778 20,284
</TABLE>
- -------
(1) Income statement and related data and ratios for the nine months ended
September 30, 1996 reflect the Pro Forma Transactions. Income statement and
related data and ratios for the year ended December 31, 1995 reflect the
Pro Forma Transactions and the CBCC Acquisition. Balance sheet and related
data and ratios reflect the Pro Forma Transactions and the Stock Sales. See
"Unaudited Consolidated Pro Forma Financial Statements."
(2) Does not include loans originated or securitized by ICIFC.
(3) Information not available.
(4) Represents outstanding balance of loans and leases securitized, excluding
loans held for sale and investment.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes, plus fixed charges. Fixed
charges represent interest expense on all indebtedness and the interest
factor of rent expense estimated to be one-third of occupancy expense.
(6) Ratio of (i) the sum of income before income taxes plus interest expense on
non-funding indebtedness to (ii) interest expense on non-funding
indebtedness.
(7) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus
total shareholders' equity.
(8) Ratio of (i) SPTL's total shareholders' equity to (ii) total deposits.
(9) Represents $200.0 million of Notes and approximately $20.0 million of 9
3/4% Senior Notes due 2004 not tendered pursuant to the Tender Offer.
14
<PAGE>
RISK FACTORS
An investment in the Notes offered hereby involves a high degree of risk.
Prospective investors should carefully consider the following factors, in
addition to the other information presented in this Prospectus in connection
with an investment in the Notes offered hereby. This Prospectus contains
forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this
Prospectus.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE OUTSTANDING INDEBTEDNESS
The Company is highly leveraged. At September 30, 1996, on a pro forma basis
after giving effect to the Pro Forma Transactions and the Stock Sales, the
Company's total Indebtedness (excluding deposits and borrowings at SPTL) would
have been $388.6 million and its total shareholders' equity would have been
$232.4 million. In addition, ICII has guaranteed SPFC's warehouse facility
with Lehman Commercial Paper Inc. As of November 30, 1996, SPFC had an
outstanding balance of $52.4 million with respect to this facility, which
expires April 1, 1997. Under the terms of the Indenture, this guarantee may
not be renewed.
The Company's ability to make scheduled payments of the principal of, or to
pay the interest or Liquidated Damages, if any, on, or to refinance its
Indebtedness (including the Notes) will depend upon its future performance
which, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors beyond its control.
Management believes that, based on current levels of operations, cash flows
from operations and available borrowings will enable the Company to fund its
liquidity and capital expenditure requirements for the foreseeable future,
including scheduled payments of interest on the Notes and payments of interest
and principal on the Company's other Indebtedness. There can be no assurance,
however, that the Company's business will generate sufficient cash flow from
operations or that future borrowings will be available in an amount sufficient
to enable the Company to service its Indebtedness, including the Notes, or to
make anticipated capital expenditures. It may be necessary for the Company to
refinance all or a portion of the principal of the Notes on or prior to
maturity, under certain circumstances, but there can be no assurance that the
Company will be able to effect such refinancing on commercially reasonable
terms or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
The degree to which the Company is leveraged could have material adverse
effects on the Company and the Holders of Notes, including, but not limited
to, the following: (i) the Company's ability to obtain additional financing in
the future for acquisitions, working capital, capital expenditures, and
general corporate or other purposes may be impaired, (ii) a substantial
portion of the Company's cash flow from operations will be dedicated to debt
service and will be unavailable for other purposes, (iii) certain of the
Company's borrowings may be at variable rates of interest, which could result
in higher interest expense in the event of increases in interest rates and
(iv) the Company will be subject to a variety of restrictive covenants, the
failure to comply with which could result in events of default that, if not
cured or waived, could restrict the Company's ability to make payments of
principal of, and interest and Liquidated Damages, if any, on the Notes. See
"Business--Funding and Securitizations" and "Description of Notes."
RANKING; HOLDING COMPANY STRUCTURE
The Notes are general unsecured obligations of the Company ranking
pari passu with all future Indebtedness of the Company, if any, that is not
subordinated to the Notes and senior to any Indebtedness of the Company that
is subordinated to the Notes. The Subsidiary Guarantees will rank pari passu
with all future Indebtedness of the Subsidiary Guarantors, if any, that is not
subordinated to the Subsidiary Guarantees and senior to any Indebtedness of
the Subsidiary Guarantors that is subordinated to the Subsidiary Guarantees.
The Indenture limits the ability of the Company and its Restricted
Subsidiaries to incur additional Indebtedness. However, under certain
circumstances, the Company and its Restricted Subsidiaries will be permitted
to incur secured Indebtedness. Although the Notes constitute senior
obligations of the Company, and the Subsidiary
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Guarantees constitute senior Indebtedness of the Subsidiary Guarantors, the
holders of secured Indebtedness, including indebtedness under warehouse
facilities, would have a prior claim on the assets securing such indebtedness.
At September 30, 1996, on a pro forma basis giving effect to the Offering and
the application of the net proceeds thereof, the Company would have had
$1.6 billion of secured indebtedness, including deposits and FHLB borrowings
at SPTL, and warehouse line borrowings, that would be effectively senior to
the Notes with respect to the assets securing such indebtedness.
ICII is a holding company that conducts a substantial portion of its
business operations through its subsidiaries. For the nine months ended
September 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
approximately 34.6%, 30.2%, 53.5% and 68.2% respectively, of the Company's
total revenue was generated by the operations of ICII, with 65.4%, 69.8%,
46.5%, and 31.8%, respectively, being generated by the Company's subsidiaries.
Consequently, the Company's operating cash flow and its ability to service its
Indebtedness, including the Notes, is dependent upon the cash flow of the
Company's subsidiaries and the payment of funds by such subsidiaries to ICII
in the form of loans, dividends or otherwise. The Restricted Subsidiaries are
separate and distinct legal entities apart from ICII and each Subsidiary
Guarantor has agreed to guarantee payment of the Notes on a senior basis.
In addition, although a substantial portion of the Company's business is
conducted through SPTL, SPTL is not a Subsidiary Guarantor and SPTL's ability
to pay dividends to ICII is dependent upon its ability to generate earnings
and is subject to a number of regulatory and other restrictions described
below. Because SPTL will not execute a Subsidiary Guarantee, the Notes will be
effectively subordinated to all indebtedness of SPTL. As of September 30,
1996, SPTL had approximately $1.4 billion of deposits and other borrowings,
all of which would have been effectively senior to the Notes. In addition, due
to these restrictions and SPTL's rapid growth, SPTL has retained all of its
internally generated earnings and has required the infusion of significant
amounts of additional capital by ICII. The Company expects such trends to
continue for the foreseeable future and intends to contribute approximately
$35.0 million of the proceeds of the Offering to the capital of SPTL in the
form of preferred stock. Depending upon the Company's growth, ICII may be
required to make additional capital contributions to SPTL. There can be no
assurance that ICII's operations will generate sufficient cash flow to support
payment of interest or principal on the Notes, or that dividend distributions
will be available from SPTL or any ICII subsidiary to fund such payments.
Certain provisions of the Federal Deposit Insurance Corporation Improvements
Act of 1991 ("FDICIA") generally prohibit any state nonmember bank (including,
for this purpose, SPTL) from making a capital distribution (including payment
of dividends) if it would cause the institution to become "undercapitalized"
(as defined for purposes of those provisions). See "Business--Regulation--
Thrift and Loan Operations." In addition, the Federal Deposit Insurance
Corporation (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, SPTL 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. Federal regulators also have 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 SPTL and other factors, that such regulators could
assert that the payment of dividends to ICII in some circumstances might
constitute unsafe or unsound practices and prohibit payment of dividends.
Under California law, a thrift and loan is subject to certain leverage
limitations that are not generally applicable to commercial banks or savings
and loan associations. In particular, a financial institution that has been in
operation in excess of 60 months may have outstanding at any time deposits not
to exceed 20 times paid-up and unimpaired capital and surplus as restricted by
the institution's by-laws not to be available for dividends, with the exact
limitation subject to order by the California Commissioner of Corporations
(the "Commissioner"). The Commissioner has issued an order to SPTL authorizing
the maximum 20 times leverage standard.
Under California law, SPTL is not permitted to declare dividends on its
capital stock unless it has at least $750,000 of unimpaired capital plus
additional capital stock of $50,000 for each branch office. In addition, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed a thrift and loan's retained
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earnings, (ii) any payment would not result in a violation of the approved
minimum capital to thrift and loan deposit leverage ratio and (iii) in the
alternative, after giving effect to the distribution, either (y) the sum of a
thrift and loan'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), and (z) current
assets would not be less than current liabilities (except that if a thrift and
loan's average earnings before taxes for the last two years had been less than
average interest expense, current assets must be not less than 125% of current
liabilities). A portion of SPTL's capital and surplus is currently restricted
from the payment of dividends. As of September 30, 1996, after giving pro
forma effect to the Offering and the application of a portion of the net
proceeds thereof, the amount SPTL could dividend to ICII would be limited to
$59.8 million.
DIVERSIFICATION STRATEGY
Beginning in 1995, the Company diversified away from the conforming
residential mortgage lending business, the Company's traditional focus, and
expanded into other commercial and consumer finance lending businesses. In
connection with the Company's diversification strategy, the Company sold
substantially all of its conforming residential mortgage loan origination
business. In addition, the Company sold or subcontracted out substantially all
of the servicing with respect to such loans. The Company significantly
expanded several existing businesses and commenced several new businesses,
including equipment leasing, non-conforming residential mortgage lending,
franchise lending, asset-based commercial lending and loan participations.
Prior to the expansion and commencement of these new businesses, the Company
had little or no experience in operating certain of such businesses. Although
the Company believes that these new and expanded businesses are currently
managed by individuals who have significant experience in the applicable
areas, there can be no assurance that the Company's efforts to develop as a
diversified commercial and consumer finance company will prove successful or
that it can manage these new and expanded businesses successfully.
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 a
number of subsidiary companies operated by individual management teams. In
each subsidiary, there are key personnel, the loss of whom may have a
temporary adverse effect on that subsidiary. The Company believes that its
ability to successfully manage the growth of its subsidiaries as well as the
Company itself is due in part to its proven ability to retain and attract
highly skilled and qualified personnel. Although the Company has established
incentive compensation plans and entered into employment agreements to retain
key executives, 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.
VOLATILITY OF SECURITIZATION RELATED ASSETS
As a fundamental part of its business and financing strategy, the Company
sells substantially all of its loans and leases, except loans held for
investment by SPTL, through securitization. In a securitization, the Company
sells loans or leases that it has originated or purchased to a trust or
special purpose entity for a cash purchase price and an interest in the loans
or leases securitized. The cash price is raised through an offering of pass-
through certificates by the trust or special purpose entity. Following the
securitization, the purchasers of the pass-through certificates receive the
principal collected and the investor pass-through interest rate on the
principal balance of the loans or leases, while the Company receives the
balance of the cash flows generated by the securitized assets in the form of
excess servicing fees. The excess servicing fees represent the excess interest
collected after credit losses on loans or leases sold over the sum of the
pass-through interest rate plus a normal servicing fee, a trustee fee and,
where applicable, an insurance fee related to such loans or leases over the
life of the loans or leases.
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Each loan or lease securitization has specific overcollateralization
requirements which must be met before the Company receives cash flows due. As
the securitized assets produce excess servicing fees, they are initially used
to pay down the balance of the pass-through certificates until such time as
the ratio of securitized assets to pass-through certificates reaches the
overcollateralization requirement specified in each securitization. This
overcollateralization amount is carried on the balance sheet as retained
interest in loan and lease securitizations. After the overcollateralization
requirement and the other requirements specified in the pooling and servicing
agreement have been met, the Company receives the remaining excess servicing
fees and a portion of the retained interest on a monthly basis.
A substantial portion of the Company's gross income is recognized as gain on
each sale of loans or leases, which gain represents the present value of the
estimated excess servicing fees, less origination and underwriting costs
("Capitalized Excess Servicing Fees Receivable"). Capitalized Excess Servicing
Fees Receivable represents residual interests in the trust or special purpose
entity to which such loans or leases have been sold. The Company recognizes
such gain on sale of loans or leases in the year in which such loans or leases
are sold, although cash (representing the excess servicing fees and retained
interest in loan and lease securitizations) is received by the Company over
the life of the loans or leases. Concurrent with recognizing such a gain on
sale, the Company records Capitalized Excess Servicing Fees Receivable as an
asset on its consolidated balance sheet.
Capitalized Excess Servicing Fees Receivable is determined by computing the
present value of the excess of the weighted average coupon on the loans or
leases sold over the sum of: (i) the coupon in the pass-through certificates,
(ii) a base servicing fee paid to the loan or lease servicer and (iii)
expected losses to be incurred on the portfolio of loans or leases sold, and
considering prepayment assumptions. Prepayment assumptions are based on recent
evaluations of the actual prepayments of the Company's servicing portfolio or
on market prepayment rates on new portfolios and consideration of the current
interest rate environment and its potential impact on prepayment rates. The
cash flows expected to be received by the Company, net of expected losses, are
then discounted at an interest rate that the Company believes an unaffiliated
third-party purchaser would require as a rate of return on a financial
instrument with such characteristics. Expected losses are discounted using a
rate equivalent to the risk-free rate for securities with a duration similar
to that estimated for the underlying loans or leases sold. The excess
servicing cash flows are only available to the Company to the extent that
there is no impairment of the credit enhancements established at the time the
loans or leases are sold. Interest-only and residual certificates in loan
securitizations retained by SPFC are held as trading securities and are
adjusted to their respective market value quarterly with corresponding charges
and credits made to income in the adjustment period.
Capitalized Excess Servicing Fees Receivable is amortized using the interest
method. To the extent that actual results are different from the excess cash
flows the Company estimated, the Company's Capitalized Excess Servicing Fees
Receivable will be adjusted quarterly with corresponding charges made against
income in that period. Upon completion and analysis of the carrying values of
the Company's excess servicing assets during the third quarter of 1996, the
Company wrote down the balance of excess servicing assets by $2.5 million. Any
similar future charge against income may have a material adverse effect on the
Company's results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
At September 30, 1996 and December 31, 1995, the Company's consolidated
balance sheet, as reclassified, reflected retained interest in loan and lease
securitizations of $33.2 million and $13.0 million, respectively. At
September 30, 1996 and December 31, 1995, the Company's consolidated balance
sheet reflected Capitalized Excess Servicing Fees Receivable of $30.3 and
$34.4 million, respectively. Capitalized Excess Servicing Fees Receivable is
computed using prepayment, default, discount rate and interest rate
assumptions that the Company believes market participants would use for
similar instruments at the time of sale. There is no liquid market for
Capitalized Excess Servicing Fees Receivable; therefore, no assurance can be
given that all or any portion of Capitalized Excess Servicing Fees Receivable
could be sold at its stated value on the consolidated balance sheet.
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On the Company's consolidated balance sheet, the amount of Capitalized
Excess Servicing Fees Receivable is reduced as cash is received by the trust
or special purpose entity holding the loans or leases pooled and sold.
Although the Company believes that it has made reasonable assumptions, on a
pool-by-pool basis of Capitalized Excess Servicing Fees Receivable likely to
be realized, it should be recognized that the rates of prepayment and default
or other assumptions utilized by the Company represent estimates. Actual
experience may vary from these estimates.
LIQUIDITY NEEDS AND DEPENDENCE ON SECURITIZATION AND WAREHOUSE FACILITIES TO
FINANCE LENDING ACTIVITIES
The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
loan and lease originations and acquisitions increases. The Company's primary
cash requirements include the funding of (i) loan and lease originations and
acquisitions pending their pooling and sale, (ii) points and expenses paid in
connection with the acquisition of wholesale loans, (iii) fees and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and securitized, (v) ongoing administrative and other
operating expenses and (vi) the costs of the Company's warehouse credit and
repurchase facilities with certain financial institutions. The Company has
financed its activities through warehouse lines of credit and repurchase
facilities from financial institutions, equity and debt offerings in the
capital markets, deposits or borrowings at SPTL and securitizations. The
Company believes that such sources, together with the net proceeds of the
Offering, will be sufficient to fund the Company's liquidity requirements for
the foreseeable future.
The Company currently pools and sells through securitization substantially
all of the loans or leases which it originates or purchases, other than loans
held by SPTL for investment. Accordingly, adverse changes in the
securitization market could impair the Company's ability to originate,
purchase and sell loans or leases on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's business
and results of operations. In addition, the securitization market for many
types of assets is relatively undeveloped and may be more susceptible to
market fluctuations or other adverse changes than more developed capital
markets. Finally, any delay in the securitization of a loan or lease pool
could cause the Company's earnings to fluctuate from quarter to quarter.
In a securitization, the Company recognizes a gain on sale of the loans or
leases securitized upon the closing of the securitization but does not receive
the cash representing such gain until it receives the excess servicing fees
which are payable over the actual life of the loans or leases securitized. As
a result, such transactions may not generate cash flows to the Company for an
extended period.
In addition, in order to gain access to the secondary market for loans and
leases, the Company has historically relied on monoline insurance companies to
provide guarantees on outstanding senior interests in the special purpose
entities to which such loans and leases are sold to enable it to obtain
investment grade ratings for such interests. To a limited extent, the Company
also relies on overcollateralization to support outstanding senior interests.
However, any unwillingness of the monoline insurance companies to guarantee
the senior interests in the Company's loan or lease pools could have a
material adverse effect on the Company's financial position and results of
operations.
The Company is dependent upon its ability to access warehouse credit and
repurchase facilities in addition to its ability to continue to pool and sell
loans and leases in the secondary market, in order to fund new originations
and purchases. The Company has warehouse lines of credit and repurchase
facilities under which it had available an aggregate of approximately $141.0
million in financing at November 30, 1996 (excluding financing available to
SPFC and ICIFC, and amounts available to ICII under a $200 million warehouse
facility with PaineWebber Incorporated which the Company does not anticipate
using in the future). See "Business--Other Activities." These credit and
repurchase facilities expire between December 1996 and December 1997. The
Company expects to be able to maintain existing warehouse lines of credit and
repurchase facilities (or to obtain replacement or additional financing) as
current arrangements expire or become fully utilized; however, there can be no
assurance that such financing will be obtainable on favorable terms. To the
extent that the
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Company is unable to arrange new warehouse lines of credit and repurchase
facilities, the Company may have to curtail its loan origination and
purchasing activities, which could have a material adverse effect on the
Company's operations and financial position. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
ECONOMIC CONDITIONS
General
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 and 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 and leases previously entered into by the Company,
thereby weakening collateral coverage and increasing the possibility of a loss
in the event of a default. Delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. In addition, in an economic
slowdown or recession, the Company's servicing costs will increase. Any
sustained period of increased delinquencies, foreclosures, losses or increased
costs could adversely affect the Company's ability to sell loans or leases
through securitization and could increase the cost of selling loans or leases
through securitization, which in either case could adversely affect the
Company's financial condition and results of operations.
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 leases and the costs
of its liabilities. While the Company monitors the interest rate environment
and employs a hedging 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. In addition, an increase in interest rates may decrease the
demand for consumer or commercial credit. A substantial and sustained increase
in interest rates could adversely affect the Company's ability to purchase or
originate loans or leases, reduce the average size of loans and leases
underwritten by the Company and reduce the gains recognized by the Company
upon their securitization and sale. A significant decline in interest rates
could decrease the size of the Company's securitized loan and lease portfolio
by increasing the level of loan and lease prepayments which shortens the
average life and impairs the value of the Capitalized Excess Servicing Fees
Receivable. 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 and leases held pending sale and funds borrowed by the Company to
finance the origination or purchase of such loans and leases. In addition,
inverse or flattened interest yield curves could have an adverse impact on the
profitability of the Company because the loans or leases pooled and sold by
the Company are priced based on longer-term interest rates as compared to the
senior interests in the related trusts.
SPFC originates adjustable rate residential mortgage loans ("ARMs").
Substantially all such ARMs include a "teaser" rate, i.e., an initial interest
rate significantly below the fully-indexed interest rate at origination.
Although these loans are underwritten at the fully-indexed rate at
origination, credit-impaired borrowers may encounter financial difficulties as
a result of increases in the interest rate over the life of the loan. Further,
some adjustable rate non-conforming residential mortgage loans may be subject
to periodic and lifetime payment caps that result in some portion of the
interest accruing on such ARMs being deferred and added to the principal
outstanding. This could result in receipt by SPFC of less cash income on its
adjustable rate non-conforming residential mortgage loans than it is required
to pay in interest on the related borrowings, which do not have such payment
caps.
To reduce risks associated with its originations and purchases of loans and
leases, the Company enters into transactions designed to hedge interest rate
risks, including mandatory and optional forward selling of mortgage loans or
mortgage-backed securities and buying and selling of futures and options on
futures. The nature and quantity of the hedging transactions is determined by
management based on various factors, including market
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conditions and the expected volume of mortgage loan and equipment lease
originations and purchases. No assurance can be given that such hedging
transactions will offset the risks of changes in interest rates, and it is
possible that there will be periods during which the Company could incur
losses after accounting for or resulting from its hedging activities.
CONTINGENT RISKS
Although the Company sells a majority of the loans and leases which it
originates or purchases (other than those held for investment by SPTL), the
Company retains some degree of risk on substantially all loans and leases
sold. During the period of time that loans or leases are held pending sale or
securitization, the Company is subject to various risks associated with the
lending business, including the risk of borrower default, the risk of
foreclosure and the risk that an increase in interest rates would result in a
decline in the value of such loans or leases. The documents governing the
Company's securitization programs generally require (i) the Company to
establish deposit accounts or (ii) the related trust or special purpose entity
to build overcollateralization levels by retaining excess servicing fees or
applying excess servicing fees to reduce the principal balances of the senior
interests issued by the trust or special purpose entity. These actions serve
as credit enhancement for the related trust or special purpose entity and are
therefore available to fund losses realized on loans or leases held by such
trust or special purpose entity. At September 30, 1996 and December 31, 1995,
credit enhancement amounts provided by the Company (in the form of deposit
accounts and overcollateralization levels) aggregated approximately $33.2
million and $13.0 million, respectively. The Company is subject to the risks
of default and foreclosure following the sale of the loans or leases sold
through securitization to the extent of the excess servicing fees. In
addition, documents governing the Company's securitization programs require
the Company to commit to repurchase or replace loans or leases which do not
conform to the representations and warranties made by the Company at the time
of the sale. When borrowers are delinquent in making monthly payments on loans
or leases included in a trust or special purpose entity and serviced by the
Company, the servicer is required to advance interest and principal payments
with respect to such delinquent loans or leases. The Company may be required
to fund such advances from the Company's available capital resources, but such
advances will have priority of repayment from the succeeding month's payments.
CREDIT-IMPAIRED BORROWERS
In the Company's sub-prime lending businesses, such as SPFC's non-conforming
residential mortgage lending business and certain of the Company's other
businesses, the Company markets some of its loan products specifically to
credit-impaired borrowers. Loans made to such borrowers may entail a higher
risk of delinquency and higher losses than loans made to more creditworthy
borrowers. While the Company believes that its underwriting policies and
collection methods enable it to control the higher risks inherent in loans
made to credit-impaired borrowers, no assurance can be given that such
criteria or methods will afford adequate protection against such risks. In the
event that loans originated or acquired by the Company or SPFC, as the case
may be, (whether held for investment or serviced for others) experience higher
delinquencies, foreclosures or losses than anticipated, the Company's
financial condition or results of operations could be adversely affected.
GOVERNMENT REGULATION
The Company's operations are subject to regulation by federal, state and
local government authorities, as well as to various laws and judicial and
administrative decisions, that impose requirements and restrictions affecting,
among other things, the Company's loan originations, credit activities,
maximum interest rates, finance and other charges, disclosures to customers,
the terms of secured transactions, collection, repossession and claims-
handling procedures, multiple qualification and licensing requirements for
doing business in various jurisdictions, and other trade practices. Except as
set forth below, the Company believes that it is in compliance in all material
respects with applicable local, state and federal laws, rules and regulations.
There can be no assurance that more restrictive laws, rules or regulations
will not be adopted in the future that could make compliance much more
difficult or expensive, restrict the Company's ability to originate, purchase
or sell loans
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or leases, further limit or restrict the amount of interest and other charges
earned on loans originated or purchased by the Company, further limit or
restrict the terms of loan or lease agreements, or otherwise adversely affect
the business of the Company. In addition, changes in government sponsored loan
programs could adversely affect the Company's business.
SPTL, as a California chartered industrial loan company with deposits
insured by the FDIC, is subject to extensive federal and state governmental
supervision, regulation and control, including regulation by the FDIC and the
Commissioner. Future legislation and government policy could adversely affect
the thrift and loan industry, including SPTL. The full impact of such
legislation and regulation cannot be predicted and future changes may alter
the structure and competitive relationship among financial institutions. In
addition, federal and state laws impose standards with respect to, and
regulatory authorities have the power in certain circumstances to limit or
prohibit, transactions between ICII and SPTL and between SPTL and any of
ICII's other subsidiaries, the growth of SPTL's assets and liabilities and the
payment of dividends from SPTL to ICII, among other things. SPTL is also
required to maintain capital ratios in accordance with regulatory
requirements. See "Business--Thrift and Loan Operations--Recent Legislation."
The California Department of Corporations and the FDIC recently completed a
joint examination of SPTL. As a result of such examination, SPTL entered into
a joint memorandum of understanding with the FDIC and the California
Department of Corporations. The memorandum of understanding requires certain
measures to be taken in the areas of: (i) hiring and retention of management,
(ii) adoption of systems to monitor and control risk, (iii) correction of
certain violations of law, (iv) credit review and (v) enhancement of other
operational policies. SPTL does not believe that this informal agreement will
have an adverse effect on the Company. In the event that SPTL fails to comply
with the memorandum of understanding, SPTL could be subject to various
enforcement actions, including cease and desist orders, criminal or civil
penalties, removal of management and directors from office, termination of
deposit insurance or the revocation of SPTL's charter. Any such enforcement
action could have a material adverse effect on the Company. See "Business--
Regulation."
COMPETITION
The businesses in which the Company operates are highly competitive. The
Company faces significant competition from other commercial and consumer
finance lenders, commercial banks, credit unions, thrift institutions and
securities firms, among others. Many of these competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms, including convenience in obtaining a loan or lease,
customer service, marketing and distribution channels and interest rates
charged to borrowers. In addition, the current level of gains realized by the
Company and its competitors on the sale of their loans and leases could
attract additional competitors into these markets, with the possible effect of
lowering gains that may be realized on the Company's future loan and lease
sales.
Wholesale originations are expected to remain a significant part of the
Company's loan and lease production programs. As a wholesale purchaser of
loans and leases, the Company is exposed to fluctuations in the volume and
cost of wholesale loans and leases resulting from competition with other
purchasers of such loans and leases, market conditions and other factors.
ENVIRONMENTAL LIABILITIES
In the course of its business, the Company has acquired, and may in the
future acquire, real property securing loans that are in default. There is a
risk that hazardous substances or waste, contaminants, pollutants or sources
thereof could be discovered on such properties after acquisition by the
Company. In such event, the Company might be required to remove such
substances from the affected properties at its sole cost and expense. There
can be no assurances 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.
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FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Subsidiary Guarantees.
To the extent that a court were to find that (x) a Subsidiary Guarantee was
incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any
present of future creditor or the Subsidiary Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (y) a Subsidiary Guarantor did not receive fair
consideration or reasonably equivalent value for issuing its Subsidiary
Guarantee and such Subsidiary Guarantor (i) was insolvent, (ii) was rendered
insolvent by reason of the issuance of such Subsidiary Guarantee, (iii) was
engaged or about to engage in a business or transaction for which the
remaining assets of such Subsidiary Guarantor constituted unreasonably small
capital to carry on its business or (iv) intended to incur, or believed that
it would incur, debts beyond its ability to pay such debts as they matured,
the court could avoid or subordinate such Subsidiary Guarantee in favor of the
Subsidiary Guarantor's creditors. Among other things, a legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds may focus on the
benefits, if any, realized by the Subsidiary Guarantor as a result of the
Company's issuance of the Notes. The Indenture contains a savings clause,
which generally limits the obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee to the maximum amount as will, after giving effect to all
of the liabilities of such Subsidiary Guarantor, result in such obligations
not constituting a fraudulent conveyance. To the extent a Subsidiary Guaranty
of any Subsidiary Guarantor was avoided or limited as a fraudulent conveyance
or held unenforceable for any other reason, Holders of the Notes would cease
to have any claim against such Subsidiary Guarantor and would be creditors
solely of the Company and any Subsidiary Guarantor whose Subsidiary Guarantee
was not avoided or held unenforceable. In such event, the claims of the
Holders of the Notes against the issuer of an invalid Subsidiary Guarantee
would be subject to the prior payment of all liabilities (including trade
payables) of such Subsidiary Guarantor. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets to satisfy
the claims of the Holders of the Notes relating to any avoided portions of any
of the Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally,
however, a Subsidiary Guarantor may be considered insolvent if the sum of its
debts, including contingent liabilities, is greater than the fair marketable
value of all of its assets at a fair valuation or if the present fair
marketable value of its assets is less than the amount that would be required
to pay its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature. Based upon financial and
other information, the Company and the Subsidiary Guarantors believe that the
Subsidiary Guarantees are being incurred for proper purposes and in good faith
and that the Company and each Subsidiary Guarantor is solvent and will
continue to be solvent after issuing its Subsidiary Guarantee, will have
sufficient capital for carrying on its business after such issuance and will
be able to pay its debts as they mature. There can be no assurance, however,
that a court passing on such standards would agree with the Company. See
"Description of Notes--Subsidiary Guarantees."
CHANGE OF CONTROL
The Indenture provides that, upon the occurrence of any Change of Control,
the Company will be required to make an offer to purchase all of the Notes
issued and then outstanding under the Indenture at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase. Certain future
credit or other borrowing agreements may contain similar restrictions. The
Company's ability to pay cash to the Holders of Notes upon a repurchase may
prohibit the Company from purchasing any Notes prior to their stated maturity
and may provide that certain Change of Control events would constitute a
default thereunder. See "Description of Notes--Certain Covenants."
If a Change of Control were to occur, it is unlikely that the Company would
be able to both repurchase all of the Notes and repay all of its obligations
under other indebtedness that would become payable upon the occurrence of such
Change of Control, unless it could obtain alternate financing. There can be no
assurance that
23
<PAGE>
the Company would be able to obtain any such financing on commercially
reasonable terms or at all, and consequently no assurance can be given that
the Company would be able to purchase any of the Notes tendered pursuant to a
Change of Control Offer.
LACK OF PUBLIC MARKET
The New Notes are being offered to the Holders of the Old Notes. The Old
Notes constitute a new class of securities with no established trading market.
The Old Notes are eligible for trading in the PORTAL market. To the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for the remaining untendered Old Notes could be adversely affected.
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes, or
the ability of Holders of the New Notes to sell their New Notes or the price
at which such Holders may be able to sell their New Notes. If such a market
were to develop, the New Notes could trade at prices that may be higher or
lower than their principal amount or purchase price, depending on many
factors, including prevailing interest rates, the Company's operating results
and the market for similar securities. Each Initial Purchaser has advised the
Company that it currently intends to make a market in the New Notes. The
Initial Purchasers are not obligated to do so, however, and any market-making
with respect to the New Notes may be discontinued at any time without notice.
Therefore, there can be no assurance as to the liquidity of any trading market
for the New Notes or that an active public market for the New Notes will
develop. The Company does not intend to apply for listing or quotation of the
New Notes on any securities exchange or stock market.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will
not be subject to similar disruptions. Any such disruptions may have an
adverse effect on Holders of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register the Old Notes under the Securities Act. See "Description
of the Notes--Exchange Offer; Registration Rights." Based on interpretations
by the staff of the SEC, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course or such Holders' business and such Holders, other than
broker-dealers, have no arrangement or understanding with any person to
participate in the distribution of such New Notes. However, the SEC has not
considered the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of such
New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. If any Holder is an affiliate of the Company or is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such Holder (i) may not rely on the applicable
interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes pursuant to the Exchange
Offer must acknowledge
24
<PAGE>
that such Old Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities and that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdictions
or an exemption from registration or qualification is available and is
complied with. The Company has agreed, pursuant to the Registration Rights
Agreement, subject to certain limitations specified therein, to register or
qualify the New Notes for offer or sale under the securities laws of such
jurisdiction as any holder reasonably requests in writing. Unless a Holder so
requests, the Company does not currently intend to register or qualify the
sale of the New Notes in any such jurisdictions. See "The Exchange Offer."
25
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996, (ii) pro forma to reflect the effects of the
Deconsolidation, the Avco Acquisition, the DRI Transaction and the Stock Sales
and (iii) as adjusted to give effect to the Offering and the application of
the net proceeds therefrom. In addition, at September 30, 1996, the Company
had other debt consisting of deposits ($1.1 billion) and FHLB borrowings
($338.0 million) incurred in the ordinary course of business. This table
should be read in conjunction with the consolidated financial statements of
the Company, including the related notes thereto and "Unaudited Consolidated
Pro Forma Financial Statements."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash.......................................... $ 57,938 $ 50,778(1) $171,503
Loans held for sale........................... 812,257 482,599 482,599
Other borrowings.............................. 400,045 168,963 168,963
Long-term debt:
9 3/4% Senior Notes due 2004................ $ 88,169 $ 88,169 $ 19,593(2)
9 7/8% Senior Notes due 2007................ -- -- 200,000
Shareholders' equity:
Preferred Stock; 8,000,000 shares
authorized; none issued and outstanding.... -- -- --
Common Stock, no par value; 80,000,000
shares authorized; 37,903,190 shares issued
and outstanding(3)......................... 142,943 142,943 142,943
Retained earnings............................. 74,082 89,000(4) 85,089(5)
Unrealized gain on equity securities available
for sale, net................................ 4,324 4,324 4,324
-------- -------- --------
Total shareholders' equity.................. 221,349 236,267 232,356
-------- -------- --------
Total capitalization...................... $309,518 $324,436 $451,949
======== ======== ========
</TABLE>
- --------
(1) Reflects proceeds of $32.8 million on the assumed sale of 1,300,750 shares
of SPFC stock, $13.3 million paid for the Avco Acquisition, $9.0 million
in loans related to the DRI Transaction, and the elimination of
$17.7 million of cash due to the Deconsolidation.
(2) Represents 9 3/4% Senior Notes due 2004 not tendered pursuant to the
Tender Offer.
(3) Reflects a 2-for-1 stock split effected in October 1996.
(4) Reflects a net gain of $14.9 million on the assumed sale of SPFC stock.
(5) Reflects the recognition of $3.0 million in prepayment fees and the write-
off of $3.7 million in unamortized discount and debt issuance costs
related to the 9 3/4% Senior Notes due 2004, net of related taxes of $2.9
million, as a loss on early extinguishment of debt and resultant charge to
retained earnings.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated income statement data for each of the years in the
three-year period ended December 31, 1995 and the selected consolidated
balance sheet data as of December 31, 1995 and 1994 have been derived from
audited financial statements of the Company which, together with the notes
thereto and the related report of KPMG Peat Marwick LLP, independent certified
public accountants, are included in this Prospectus The report of KPMG Peat
Marwick LLP covering the December 31, 1995 consolidated financial statements
contains an explanatory paragraph regarding the adoption of SFAS 122. The
selected consolidated balance sheet data as of December 31, 1993, 1992 and
1991 and the income statement data for the years ended December 31, 1992 and
1991 are derived from audited consolidated financial statements of the
Company, which have been audited by KPMG Peat Marwick LLP but are not included
in this Prospectus. The following selected income statement data and balance
sheet data as of September 30, 1996 and for each of the nine month periods
ended September 30, 1996 and 1995 have been derived from the unaudited
financial statements of the Company and include all adjustments, consisting
only of normal recurring accruals, which management considers necessary for a
fair presentation of such financial information for those periods. Results for
the nine months ended September 30, 1996 are not necessarily indicative of
results to be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- -------- -------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of loans.. $ 69,517 $ 29,953 $ 39,557 $ 8,628 $18,149 $20,606 $ 5,239
--------- -------- -------- ------- ------- ------- -------
Interest on loans...... 139,284 81,262 120,244 79,173 51,612 32,741 22,674
Interest on
investments........... 2,831 2,635 6,630 3,610 1,972 1,162 363
Interest on other
finance activities.... 6,957 -- 2,608 -- -- -- --
--------- -------- -------- ------- ------- ------- -------
Total interest
income.............. 149,072 83,897 129,482 82,783 53,584 33,903 23,037
Interest expense....... 100,767 65,115 95,728 61,674 29,811 19,959 14,443
--------- -------- -------- ------- ------- ------- -------
Net interest income.. 48,305 18,782 33,754 21,109 23,773 13,944 8,594
Provision for loan and
lease losses.......... 6,142 3,950 5,450 5,150 2,350 680 345
--------- -------- -------- ------- ------- ------- -------
Net interest income
after provision for
loan losses......... 42,163 14,832 28,304 15,959 21,423 13,264 8,249
Loan servicing income.. 2,264 9,813 12,718 16,332 6,785 5,910 2,307
Gain on sale of
servicing rights...... 7,808 2,921 3,578 30,837 23,655 6,658 4,503
Sale of SPFC stock..... 62,007 -- -- -- -- -- --
Other income........... 7,770 537 1,152 1,048 1,414 654 467
--------- -------- -------- ------- ------- ------- -------
Total other income... 79,849 13,271 17,448 48,217 31,854 13,222 7,277
--------- -------- -------- ------- ------- ------- -------
Total revenues....... 191,529 58,056 85,309 72,804 71,426 47,092 20,765
Expenses:
Personnel expense...... 36,477 24,041 34,053 33,477 24,520 15,678 6,184
Other expenses......... 36,267 20,070 27,127 28,037 15,433 8,190 5,236
--------- -------- -------- ------- ------- ------- -------
Total expenses....... 72,744 44,111 61,180 61,514 39,953 23,868 11,420
--------- -------- -------- ------- ------- ------- -------
Income before income
taxes............... 118,785 13,945 24,129 11,290 31,473 23,224 9,345
Income taxes............ 51,322 5,844 10,144 4,685 13,055 9,583 3,754
Minority interest in
income (loss) of
consolidated
subsidiaries........... 6,373 -- (208) -- -- -- --
--------- -------- -------- ------- ------- ------- -------
Income before
extraordinary item.. 61,090 8,101 14,193 6,605 18,418 13,641 5,591
Extraordinary item-
repurchase of 9 3/4%
Senior Notes due 2004,
net of income taxes.... -- -- -- 919 -- -- --
--------- -------- -------- ------- ------- ------- -------
Net income........... $ 61,090 $ 8,101 $ 14,193 $ 7,524 $18,418 $13,641 $ 5,591
========= ======== ======== ======= ======= ======= =======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- ---------- --------- ---------- -------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME PER SHARE(1):
Income before
extraordinary item.... $ 1.60 $ 0.24 $ 0.41 $ 0.19 $ 0.54 $ 0.45 $ 0.23
Extraordinary item-
repurchase of 9 3/4%
Senior Notes due
2004.................. -- -- -- 0.03 -- -- --
--------- --------- ---------- --------- ---------- -------- ---------
Net income........... $ 1.60 $ 0.24 $ 0.41 $ 0.22 $ 0.54 $ 0.45 $ 0.23
========= ========= ========== ========= ========== ======== =========
Weighted average
shares outstanding
(000s)................ 38,075 34,137 34,458 33,581 33,880 29,768 23,967
CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............ $ 555,691 $ (99,850) $ (668,666) $ 961,579 $ (903,050) $(78,865) $(156,481)
Net cash (used in)
provided by investing
activities............ (160,536) (271,190) (364,076) (796,638) (145,701) 21,302 (38,359)
Net cash (used in)
provided by financing
activities............ (376,383) 351,966 1,047,004 (177,314) 1,066,584 70,216 199,658
--------- --------- ---------- --------- ---------- -------- ---------
Net change in cash... $ 18,772 $ (19,074) $ 14,262 $ (12,373) $ 17,833 $ 12,653 $ 4,818
========= ========= ========== ========= ========== ======== =========
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- ---------- --------- ---------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA(2):
Loans originated:
ICII................. $ 318 $ 1,262 $ 1,816 $ 4,260 $ 6,019 $ 3,383 $ 1,416
SPTL................. 428 431 724 NA(3) NA(3) NA(3) NA(3)
SPFC................. 490 214 289 190 -- -- --
FMAC................. 304 8 164 -- -- -- --
IBC.................. 55 29 36 -- -- -- --
--------- --------- ---------- --------- ---------- -------- ---------
Total.............. $ 1,595 $ 1,944 $ 3,029 $ 4,450 $ 6,019 $ 3,383 $ 1,416
========= ========= ========== ========= ========== ======== =========
Loans securitized:
ICII................. $ -- $ 78 $ 177 $ -- $ -- $ -- $ --
SPTL................. 277 511 511 46 -- -- --
SPFC................. 422 135 165 -- -- -- --
FMAC................. 167 -- 105 -- -- -- --
IBC.................. 68 -- 85 -- -- -- --
--------- --------- ---------- --------- ---------- -------- ---------
Total.............. $ 934 $ 724 $ 1,043 $ 46 $ -- $ -- $ --
========= ========= ========== ========= ========== ======== =========
Outstanding balance of
loans and leases
securitized
(at end of
period)(4)............ $1,849 $794 $1,047 $45 $ -- $ -- $ --
SELECTED RATIOS:
Ratio of earnings to
fixed charges(5)...... 2.1x 1.2x 1.3x 1.2x 2.1x 2.2x 1.7x
Pre-tax interest
coverage ratio(6)..... 17.9 3.2 3.9 2.4 -- -- --
Ratio of indebtedness
to total
capitalization (at
end of period)(7)..... 28.5% 48.8% 46.1% 51.4% -- % -- % -- %
Average equity to
average assets........ 7.13 5.15 4.72 4.86 6.71 7.71 5.48
Return on average
common equity......... 51.79 13.59 17.59 10.57 31.76 37.75 35.07
Return on average
assets................ 3.69 0.70 0.82 0.51 2.13 2.91 1.92
SPTL REGULATORY CAPITAL
RATIOS (AT END OF PERI-
OD):
California leverage
limitation(8)......... 12.97% 13.37% 11.58% 11.50% 7.29% 8.73% 7.49%
Risk-based--Tier 1..... 9.47 12.05 11.72 14.21 10.27 14.94 11.04
Risk-based--Total...... 10.56 13.42 13.18 15.13 10.73 15.74 11.69
FDIC Leverage Ratio.... 8.46 7.83 8.04 8.08 9.47 8.78 7.54
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 2.64% 1.18% 1.55% 1.16% 0.64% 0.79% 1.66%
Allowance for loan
losses as a
percentage of non-
performing loans...... 31.04 58.04 44.30 53.83 65.91 79.10 23.84
Net charge-offs as a
percentage of average
total loans held for
investment............ 0.96 0.26 0.36 0.23 0.89 0.18 0.02
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------
AT
SEPTEMBER 30,
1996 1995 1994 1993 1992 1991
------------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 57,938 $ 39,166 $ 24,903 $ 37,277 $ 19,444 $ 6,791
Interest bearing
deposits.............. 314,192 267,776 10,600 90,000 30,000 45,000
Loans held for sale.... 812,257 1,341,810 263,807 1,238,006 328,575 238,963
Loans held for
investment, net....... 803,205 668,771 1,029,555 154,595 84,843 94,966
Securitization related
assets................ 122,332 58,272 4,558 529 982 942
Total assets........... 2,246,137 2,510,635 1,420,408 1,572,663 479,430 394,056
Deposits............... $1,052,352 $1,092,989 $ 934,621 $1,001,468 $422,551 $ 96,297
Borrowings from FHLB... 338,000 190,000 295,000 320,000 -- --
Other borrowings....... 400,045 875,815 -- 147,611 -- --
9 3/4% Senior Notes due
2004.................. 88,169 80,472 80,343 -- -- --
Total liabilities...... 2,024,788 2,416,533 1,344,536 1,504,411 429,652 373,772
Shareholders' equity... 221,349 94,102 75,872 68,252 49,778 20,284
</TABLE>
- -------
(1) Income per share and weighted average shares outstanding reflect 1-for-10,
1-for-10 and 1-for-19 stock dividends paid in 1996, 1993 and 1992,
respectively, a 3-for-2 stock split effected in 1995 and a 2-for-1 stock
split effected in 1996.
(2) Does not include loans originated or securitized by ICIFC.
(3) Information not available.
(4) Represents the outstanding balance of loans and leases securitized,
excluding loans held for sale and investment.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes, plus fixed charges. Fixed
charges represent interest expense on all indebtedness and the interest
factor of rent expense estimated to be one-third of occupancy expense.
(6) Ratio of (i) the sum of income before income taxes plus interest expense
on non-funding indebtedness to (ii) interest expense on non-funding
indebtedness.
(7) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
plus total shareholders' equity.
(8) Ratio of (i) SPTL's total shareholders' equity to (ii) total deposits.
29
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The following unaudited consolidated pro forma financial statements have
been prepared based on the Company's historical audited consolidated financial
statements for the year ended December 31, 1995 and unaudited consolidated
financial statements for the nine months ended September 30, 1996. The
unaudited consolidated pro forma balance sheet gives effect to the necessary
adjustments to reflect the Pro Forma Transactions and the Stock Sales as if
they had occurred at September 30, 1996. The unaudited consolidated pro forma
income statement for the nine months ended September 30, 1996 gives effect to
the necessary adjustments to reflect the Pro Forma Transactions as if they had
occurred at the beginning of said period. The unaudited consolidated pro forma
income statement for the year ended December 31, 1995 gives effect to the
necessary adjustments to reflect the Pro Forma Transactions and the CBCC
Acquisition as if they had occurred at the beginning of said period. The pro
forma information is for illustrative purposes only and should not be viewed
as a projection or forecast of the Company's performance for any future
period. Such pro forma information should be read in conjunction with the
related notes and with the Company's historical financial statements and notes
thereto included elsewhere herein.
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
------------------------------------------------------------------------------
ACTUAL SPFC(1) ICIFC(2) ACQUISITIONS(3) OFFERING(4) PRO FORMA
---------- --------- --------- --------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash.................... $ 57,938 $ 19,997 (5) $ (4,881) $(22,276)(6) $120,725 (7) $ 171,503
Interest bearing
deposits............... 314,192 -- -- -- -- 314,192
Investment in FHLB
stock.................. 16,900 -- -- -- -- 16,900
Securities available for
sale, at market........ 7,937 -- -- -- -- 7,937
Loans held for sale..... 812,257 (157,953) (171,705) -- -- 482,599
Loans held for
investment, net........ 803,205 -- -- 89,701 -- 892,906
Premises and equipment,
net.................... 12,388 (2,215) (556) 259 -- 9,876
Other real estate owned,
net.................... 11,303 -- -- -- -- 11,303
Securitization related
assets................. 122,332 (58,854) -- -- -- 63,478
Purchased and originated
servicing rights....... 14,038 -- (7,537) -- -- 6,501
Accrued interest on
loans.................. 8,880 (960) (549) -- -- 7,371
Goodwill................ 20,988 -- -- 10,000 -- 30,988
Investment in
subsidiaries........... -- 36,766 -- -- -- 36,766
Other assets............ 43,779 (2,301) (149) 4,464 3,930 (8) 49,723
---------- --------- --------- -------- -------- ----------
Total assets........ $2,246,137 $(165,520) $(185,377) $ 82,148 $124,655 $2,102,043
========== ========= ========= ======== ======== ==========
Liabilities and
shareholders' equity
Deposits................ $1,052,352 $ -- $ -- $ -- $ -- $1,052,352
Other borrowings........ 400,045 (141,078) (171,504) 81,500 -- 168,963
Borrowings from FHLB.... 338,000 -- -- -- -- 338,000
Senior notes............ 88,169 -- -- -- 131,424 219,593
Minority interest....... 43,678 (31,240) (9,713) -- -- 2,725
Other liabilities....... 102,544 (8,120)(9) (4,160) 648 (2,858) 88,054
---------- --------- --------- -------- -------- ----------
Total liabilities... 2,024,788 (180,438) (185,377) 82,148 128,566 1,869,687
Shareholders' equity:
Common stock.......... 142,943 -- -- -- -- 142,943
Retained earnings..... 74,082 14,918 -- -- (3,911) 85,089
Unrealized gain on
securities available
for sale, net........ 4,324 -- -- -- -- 4,324
---------- --------- --------- -------- -------- ----------
221,349 14,918 -- -- (3,911) 232,356
---------- --------- --------- -------- -------- ----------
Total liabilities
and shareholders'
equity............. $2,246,137 $(165,520) $(185,377) $ 82,148 $124,655 $2,102,043
========== ========= ========= ======== ======== ==========
</TABLE>
See accompanying notes to unaudited consolidated pro forma financial
statements.
30
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA INCOME STATEMENT
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------------
PRO
ACTUAL SPFC(10) ICIFC(10) ACQUISITIONS(11) OFFERING(12) FORMA
-------- -------- --------- ---------------- ------------ --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of loans.. $ 69,517 $(38,426) $ (5,949) $ 370 $ -- $ 25,512
Interest income........ 149,072 (8,326) (26,535) 10,000 -- 124,211
Interest expense....... 100,767 (4,756) (25,557) 3,293 10,044 83,791
-------- -------- -------- ------- -------- --------
Net interest income
before provision for
loan losses........... 48,305 (3,570) (978) 6,707 (10,044) 40,420
Provision for loan
losses................ 6,142 -- -- 1,892 -- 8,034
-------- -------- -------- ------- -------- --------
Net interest income
after provision for
loan losses........... 42,163 (3,570) (978) 4,815 (10,044) 32,386
Loan servicing income.. 2,264 -- (769) -- -- 1,495
Gain on sale of
servicing rights...... 7,808 -- -- -- -- 7,808
Gain on sale of SPFC
stock................. 62,007 -- -- -- -- 62,007
Equity in net income of
SPFC.................. -- 8,631 -- -- -- 8,631
Other income........... 7,770 -- (1) 600 -- 8,369
-------- -------- -------- ------- -------- --------
Total other income..... 79,849 8,631 (770) 600 -- 88,310
-------- -------- -------- ------- -------- --------
Total revenues....... 191,529 (33,365) (7,697) 5,785 (10,044) 146,208
-------- -------- -------- ------- -------- --------
Expenses:
Personnel expense...... 36,477 (7,398) (4,305) 2,124 -- 26,898
Amortization of PMSR's
and OMSR's............ 1,028 -- (286) -- -- 742
Occupancy expense...... 3,308 (349) (152) 121 -- 2,928
Data processing
expense............... 1,324 (296) (16) -- -- 1,012
Net expenses of OREO... 4,853 -- -- -- -- 4,853
Restructuring
provision............. 3,800 -- -- -- -- 3,800
General and
administrative
expense............... 14,047 (3,310) (1,672) 1,687 -- 10,752
Other expenses......... 7,907 -- -- -- -- 7,907
-------- -------- -------- ------- -------- --------
Total expenses....... 72,744 (11,353) (6,431) 3,932 -- 58,892
-------- -------- -------- ------- -------- --------
Income (loss) before
income taxes, minority
interest and
extraordinary item..... 118,785 (22,012) (1,266) 1,853 (10,044) 87,316
Income taxes............ 51,322 (11,412) (540) 747 (4,241) 35,876
Minority interest in
income of consolidated
subsidiary............. 6,373 (3,516) (719) -- -- 2,138
-------- -------- -------- ------- -------- --------
Net income before
extraordinary item.. $ 61,090 $ (7,084) $ (7) $ 1,106 $ (5,803) $ 49,302
======== ======== ======== ======= ======== ========
Income per share:
Income per share before
extraordinary item.... $1.60 $1.29
Weighted average number
of shares outstanding
(000s)................ 38,294 38,294
Ratio of earnings to
fixed charges(13)...... 2.1x 2.0x
</TABLE>
See accompanying notes to unaudited consolidated pro forma financial
statements.
31
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------
PRO
ACTUAL SPFC(10) ICIFC(10) ACQUISITIONS(11) OFFERING(12) FORMA
-------- -------- --------- ---------------- ------------ --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gain on sale of loans.. $ 39,557 $(9,316) $ (93) $ 576 $ -- $ 30,724
Interest income........ 129,482 (3,111) (1,249) 26,675 -- 151,797
Interest expense....... 95,728 (2,129) (1,348) 9,562 13,857 115,670
-------- ------- ------- ------- -------- --------
Net interest income
before provision for
loan losses........... 33,754 (982) 99 17,113 (13,857) 36,127
Provision for loan
losses................ 5,450 -- -- 3,015 -- 8,465
-------- ------- ------- ------- -------- --------
Net interest income
after provision for
loan losses........... 28,304 (982) 99 14,098 (13,857) 27,662
Loan servicing income.. 12,718 27 -- -- -- 12,745
Gain on sale of
servicing rights...... 3,578 -- -- -- -- 3,578
Equity in net income of
SPFC.................. -- 1,598 -- -- -- 1,598
Other income........... 1,152 3 -- 849 -- 2,004
-------- ------- ------- ------- -------- --------
Total other income..... 17,448 1,628 -- 849 -- 19,925
-------- ------- ------- ------- -------- --------
Total revenues........ 85,309 (8,670) 6 15,523 (13,857) 78,311
-------- ------- ------- ------- -------- --------
Expenses:
Personnel expense...... 34,053 (3,170) (197) 4,964 -- 35,650
Amortization of PMSR's
and OMSR's............ 3,986 -- -- -- -- 3,986
Occupancy expense...... 3,904 (232) (12) 354 -- 4,014
Data processing
expense............... 1,461 (9) -- -- -- 1,452
Net expenses of OREO... 1,912 -- -- -- -- 1,912
General and
administrative
expense............... 9,447 (1,203) (64) 2,561 -- 10,741
Other expenses......... 6,417 -- -- -- -- 6,417
-------- ------- ------- ------- -------- --------
Total expenses........ 61,180 (4,614) (273) 7,879 -- 64,172
Income (loss) before
income taxes, minority
interest and
extraordinary item..... 24,129 (4,056) 279 7,644 (13,857) 14,139
Income taxes............ 10,144 (1,717) 129 3,134 (5,850) 5,840
Minority interest in
income (loss) of
consolidated
subsidiary............ (208) -- 148 -- -- (60)
-------- ------- ------- ------- -------- --------
Net income (loss)
before extraordinary
item................. $ 14,193 $(2,339) $ 2 $ 4,510 $ (8,007) $ 8,359
======== ======= ======= ======= ======== ========
Income per share:
Income per share before
extraordinary item.... $0.41 $0.24
Weighted average number
of shares outstanding
(000s)................ 35,122 35,122
Ratio of earnings to
fixed charges(13)...... 1.3x 1.1x
</TABLE>
See accompanying notes to unaudited consolidated pro forma financial
statements.
32
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(1) Assumes the sale of 1,300,750 shares of common stock of SPFC on September
30, 1996, at the market price at the close of business on that day of
$25.25 per share. As a result of such assumed sale, the Company's
ownership percentage of SPFC common stock is assumed to have declined to
49% and SPFC is assumed to have been deconsolidated. The assumed gain on
sale of SPFC common stock of $25.8 million, net of related taxes of
$10.9 million, has been added to retained earnings. The unaudited
consolidated pro forma balance sheet reflects the Company's assumed 49%
investment in SPFC accounted for under the equity method. For further
information on this transaction, see "Business--General" and "--Other
Activities--SPFC."
(2) Assumes the sale of the Company's entire investment in ICIFC common stock
at book value of $98,000 on September 30, 1996, and the resultant
deconsolidation of ICIFC. For further information on this transaction,
see "Business--Other Activities--ICIFC."
(3) Assumes the Avco Acquisition and the DRI Transaction occurred on
September 30, 1996. For further information on these transactions, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--General--Strategic Focus and Acquisitions."
(4) Reflects the sale of the Notes for estimated net proceeds of $193.8
million, the repayment of the 9 3/4% Senior Notes due 2004 tendered
pursuant to the Tender Offer for $70.0 million, the recognition of $3.0
million in prepayment fees and the write-off of $3.7 million in
unamortized discount and debt issuance costs related to the 9 3/4% Senior
Notes due 2004, net of related taxes of $2.9 million, as a loss on early
extinguishment of debt and resultant charge to retained earnings.
(5) Reflects assumed proceeds on the sale of SPFC stock of $32.8 million and
the elimination of SPFC cash of $12.8 million due to the Deconsolidation.
(6) Reflects cash paid for the Avco Acquisition of $13.3 million and $9.0
million in loans related to the DRI Transaction.
(7) Reflects gross proceeds of the Offering of $200.0 million less the
Initial Purchasers' discount and estimated Offering expenses of $6.3
million, the repayment of 9 3/4% Senior Notes due 2004 tendered pursuant
to the Tender Offer for $70.0 million and prepayment fees of $3.0
million.
(8) Reflects adjustment to unamortized debt issuance costs as follows (in
thousands):
<TABLE>
<S> <C>
Debt issuance costs--Old Notes...................................... $6,250
Debt issuance costs--9 3/4% Senior Notes due 2004................... (2,320)
------
$3,930
======
</TABLE>
(9) Reflects accrued tax of $10.9 million relating to the assumed gain on
sale of SPFC stock and the elimination of SPFC's other liabilities of
$19.1 million due to the Deconsolidation.
(10) Assumes the Deconsolidation occurred at the beginning of the respective
periods and reflects the Company's assumed 49% ownership interest in SPFC
accounted for under the equity method. For presentation purposes, the
assumed gain on the sale of SPFC stock is not reflected in the unaudited
consolidated pro forma income statements.
(11) Amounts for 1996 and 1995 reflect the results of operations of the Avco
Acquisition and interest income on the loans to DRI at 6% per annum as if
the Avco Acquisition and the DRI Transaction occurred at the beginning of
the respective periods. Assumed interest income on the DRI loans is
$0.4 million and $0.5 million for the nine months ended September 30,
1996 and the year ended December 31, 1995, respectively. Goodwill with
respect to the Avco Acquisition is assumed to be amortized over 10 years.
Amounts for 1995 also reflect the CBCC Acquisition as if it occurred on
January 1, 1995. Goodwill with respect to the CBCC Acquisition is
amortized over 15 years. For further information regarding the CBCC
Acquisition, see "Business--Business Finance Lending--Asset-Based
Lending--Acquisition of CBC."
(12) Reflects a net increase in interest expense resulting from the Offering.
Does not reflect earnings on the investment of the proceeds from the
Offering. Assuming such proceeds had been invested at 5% at the beginning
of each period, pro forma income before extraordinary item would have
been $51.9 million and $11.8 million for the nine months ended September
30, 1996 and the year ended December 31, 1995, respectively.
(13) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes, plus fixed charges. Fixed
charges represent interest expense on all indebtedness and the interest
factor of rent expense estimated to be one-third of occupancy expense.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Organization
The consolidated financial statements include Imperial Credit Industries,
Inc. ("ICII") and its wholly-owned and majority-owned subsidiaries
(collectively the "Company"). All material intercompany balances and
transactions have been eliminated. The wholly-owned subsidiaries include
Southern Pacific Thrift and Loan Association ("SPTL"), Imperial Business
Credit, Inc. ("IBC"), ICI Funding Corporation ("ICIFC") and Imperial Credit
Advisors, Inc. ("ICAI"). The majority-owned consolidated subsidiaries include
Franchise Mortgage Acceptance Company, LLC ("FMAC") and Southern Pacific
Funding Corporation ("SPFC"). Minority interests in these subsidiaries are
reflected in other liabilities at December 31, 1995 and in Minority Interest
in Consolidated Subsidiaries at September 30, 1996 on the Company's
consolidated balance sheet. As of November 30, 1996, FMAC was owned 66.7% by
ICII and 33.3% by the President of FMAC. As of November 30, 1996, ICII owned
51.2% of the outstanding capital stock of SPFC with 48.8% owned by other
public investors.
General
Historically, the Company's primary business was the origination and sale of
conforming residential mortgage loans. This business experienced substantial
growth due to high levels of mortgage loan refinancing activity in 1992 and
1993, as interest rates dropped to historically low levels. However, as
interest rates increased and refinancing activity declined in 1994, conforming
residential mortgage loan originations on an industry-wide basis decreased
dramatically and pricing became increasingly competitive. The Company
recognized that the non-conforming residential mortgage loan market provided
greater opportunities for mortgage loan origination growth. As a result,
during 1995 and through the first nine months of 1996, the Company directed
additional capital and resources to its non-conforming residential mortgage
lending subsidiary, SPFC, and divested substantially all of its conforming
mortgage lending and servicing businesses. At the same time, the Company
entered or expanded its presence in higher margin commercial and consumer
lending markets. 1995 marked the first year for the Company that included
operations from both its historical operations and newly acquired or recently
started business lines. The Company now operates as a commercial and consumer
finance company providing loan and lease products in the following sectors:
franchise lending, business finance lending, commercial mortgage lending,
consumer lending and non-conforming residential mortgage lending.
Strategic Divestitures
During the fourth quarter of 1995, the Company sold its mortgage conduit
operations and SPTL's warehouse lending operations to Imperial Credit Mortgage
Holdings, Inc. ("ICMH"), a real estate investment trust, which subsequently
completed an initial public offering of its common stock. In exchange for
these assets, the Company received 11.8% of the capital stock of ICMH. As of
November 30, 1996, the Company owned 5.0% of the capital stock of ICMH.
Additionally, the Company's wholly-owned subsidiary, ICAI, entered into a
management agreement with ICMH pursuant to which it provides management
advisory services to ICMH in exchange for management fees. See "Business--
Other Activities."
In the first quarter of 1996, the Company sold the majority of its wholesale
mortgage origination offices related to its former conforming residential
mortgage lending business. The Company's wholesale offices in Colorado,
Florida, Oregon and Washington were converted to SPFC offices.
The Company recognized that maintaining a mortgage loan servicing
infrastructure was not economically viable in the absence of a conforming
residential mortgage loan origination business. Commencing in March 1996, the
Company sold substantially all of its conforming residential mortgage loan
servicing rights. Additionally, SPFC has subcontracted all remaining servicing
generated by its non-conforming residential mortgage lending business to
Advanta Mortgage Corp. U.S.A. ("Advanta"). As of November 30, 1996, the
34
<PAGE>
Company had subcontracted substantially all servicing related to such mortgage
lending business to Advanta. The Company continues servicing all loans and
leases originated by its equipment leasing and franchise lending businesses,
as well as all loans originated or acquired by SPTL.
Strategic Focus and Acquisitions
Part of the Company's strategy to diversify away from the conforming
residential mortgage business was to focus its residential mortgage
operations, through SPFC, on the origination, purchase and sale of non-
conforming residential mortgage loans secured primarily by single family
residences. During 1995 and the first nine months of 1996, a substantial
portion of the Company's operations were conducted through SPFC. For the nine
months ended September 30, 1996 and the year ended December 31, 1995, SPFC
originated or acquired $490.2 million and $288.5 million of non-conforming
residential mortgage loans, respectively. SPFC seeks to sell all mortgage
loans originated or acquired by it through its securitization program or
through whole loan sales. During the nine months ended September 30, 1996 and
the year ended December 31, 1995, SPFC sold $422.4 million and $164.9 million
through securitizations and $0 and $58.6 million through whole loan sales,
respectively.
In May 1995, the Company expanded its existing commercial equipment leasing
business conducted by IBC through the acquisition of the assets of First
Concord Acceptance Corporation ("FCAC"). This business was again expanded in
October 1996 when IBC acquired substantially all of the assets of Avco Leasing
Services, Inc. and all of the assets of Avco Financial Services of Southern
California, Inc. related to its business of originating and servicing business
equipment leases and agreed to assume certain related liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition"). IBC's lease originations were $54.6 million and $36.0 million,
and it securitized, including leases acquired through purchase transactions,
$67.7 million and $85.2 million during the nine months ended September 30,
1996 and the year ended December 31, 1995, respectively.
In June 1995, the Company expanded into franchise lending by establishing
FMAC, the assets of which were acquired from Greenwich Financial Capital
Products, Inc. During the nine months ended September 30, 1996, and for the
six-month period ended December 31, 1995, FMAC originated or acquired $304.4
million and $163.5 million and securitized $167.4 million and $105.2 million
of franchise loans, respectively.
In September 1995, the Company began making asset-based loans to middle
market companies by acquiring CoastFed Business Credit Corporation ("CBCC")
from Coast Federal Bank. This business, now a division of SPTL, was renamed
Coast Business Credit ("CBC"). At September 30, 1996 and December 31, 1995,
CBC had total commitments of $515.3 and $364.2 million, of which $278.9
million and $154.2 million of loans were outstanding, respectively.
In September 1996, the Company entered into various transactions with
Dabney/Resnick, Inc. (collectively, the "DRI Transaction"), subsequently
renamed Dabney/Resnick/Imperial, LLC ("DRI"), and its affiliated entities. DRI
engages in investment banking activities. ICII has acquired a 1% equity
interest in DRI and has purchased a warrant to acquire an additional 48%
interest therein.
As a part of the Company's diversification strategy, and the related
acquisitions of FMAC, FCAC and CBCC, the product mix of the Company's interest
earning assets has changed in 1996 to include a much larger percentage of
higher-yielding loan and lease products as compared to the previous year.
Deconsolidation
ICII expects that its ownership percentage of SPFC will be reduced below 50%
in the future at which point the financial statements of SPFC would not be
consolidated with those of ICII.
ICII owns 100% of the voting common stock of ICIFC which entitles it to a 1%
economic interest. ICIFC is the corporation through which ICMH conducts its
mortgage conduit operations. Since 100% of the common stock of ICIFC is
currently owned by ICII, ICII consolidates the financial statements of ICIFC
in its financial
35
<PAGE>
statements. As a result, the assets and liabilities of the Company reflected
on its balance sheet are greater than they would otherwise be absent such
consolidation. However, since ICII only owns 1% of the economic interest of
ICIFC, it considers ICIFC's operations immaterial to the Company. Therefore,
to more properly reflect the Company's true financial condition, the Company
intends to dispose of its common stock interest in ICIFC at which point the
financial statements of ICIFC would not be consolidated with those of ICII.
For a description of the pro forma effect of the aforementioned
deconsolidations of SPFC and ICIFC (collectively, the "Deconsolidation") on
the Company's financial statements, see "Unaudited Consolidated Pro Forma
Financial Statements." The discussion under "--Results of Operations" and "--
Liquidity and Capital Resources" set forth herein reflects the historical
operations of the Company and does not take into account pro forma adjustments
based upon the anticipated Deconsolidation.
Servicing Rights
The Company has created Capitalized Excess Servicing Fees Receivable as a
result of the sale of loans and (to a lesser extent) leases through various
trust vehicles. Each trust vehicle, primarily consisting of real estate
mortgage investment conduits ("REMICs"), is majority owned by an independent
third party who has made a substantial capital investment and has substantial
risks and rewards of ownership of the assets of the trust; therefore, these
trust vehicles are not consolidated with the Company. Capitalized Excess
Servicing Fees Receivable on the sale of loans and leases are determined by
computing the present value of the excess of the weighted average coupon on
the loans and leases sold over the sum of: (i) the coupon in the pass-through
certificates, (ii) a base servicing fee paid to the loan or lease servicer,
(iii) expected losses to be incurred on the portfolio of loans or leases sold,
and considering (iv) prepayment assumptions. Prepayment assumptions are based
on recent evaluations of the actual prepayments of the Company's servicing
portfolio or on market prepayment rates on new portfolios and consideration of
the current interest rate environment and its potential impact on prepayment
rates. The cash flows expected to be received by the Company, not considering
the expected losses, are discounted at an interest rate that the Company
believes an unaffiliated third-party purchaser would require as a rate of
return on such a financial instrument. Expected losses are discounted using a
rate equivalent to the risk-free rate for securities with a duration similar
to that estimated for the underlying loans and leases sold. The excess
servicing cash flows are available to the Company to the extent that there is
no impairment of the credit enhancements established at the time the loans and
leases are sold. Such credit enhancements are classified as retained interest
in loan and lease securitization on the consolidated balance sheets and
represent the amount of overcollateralization of the pass-through
certificates. Capitalized Excess Servicing Fees Receivable are amortized using
the interest method. Interest-only and residual certificates in loan
securitizations retained by SPFC are held as trading securities and are
adjusted to their respective market values quarterly with corresponding
charges and credits made to income in the adjustment period. To the extent
that actual future performance results are different from the excess cash
flows the Company estimated, the Company's Capitalized Excess Servicing Fees
Receivable will be adjusted quarterly with corresponding adjustments made to
income in that period. Carrying values of the Company's Capitalized Excess
Servicing Fees Receivable were subject to relative fair value allocations.
The Company's purchased and originated mortgage servicing rights ("PMSR's"
and "OMSR's") are subject to some degree of volatility in the event of
unanticipated prepayments or defaults. Prepayments in excess of those
anticipated at the time PMSR's and OMSR's are recorded result in accelerated
amortization. Such prepayments may result in the impairment of PMSR's and
OMSR's. At September 30, 1996 and December 31, 1995, PMSR's and OMSR's
together amounted to $14.0 million and $18.4 million, respectively. For the
nine months ended September 30, 1996 and the years ended December 31, 1995 and
1994, the Company experienced prepayment rates of 4%, 13% and 22%,
respectively, as a percentage of the servicing portfolio at the beginning of
each period. For the nine months ended September 30, 1996 and the years ended
December 31, 1995 and 1994, the Company's amortization rates of its PMSR's and
OMSR's were 11%, 23% and 19%, respectively as a percentage of the average
balance of PMSR's and OMSR's outstanding during the period. During the nine
months ended September 30, 1996 and the years ended December 31, 1995, 1994,
and 1993, the Company recognized accelerated amortization of PMSR's and OMSR's
due to prepayments of $0.6 million, $1.2 million,
36
<PAGE>
$0.3 million and $0.2 million, respectively. During the nine months ended
September 30, 1996 and the years ended December 31, 1995, 1994, and 1993, the
Company incurred no impairment related charge-offs of its PMSR's and OMSR's.
Accounting for IBC Leases
For financial reporting purposes, most of the IBC leases are classified as
direct financing leases. IBC accounts for its investment in direct financing
leases by recording as assets the total lease receivable, plus the estimated
residual value of the leased equipment, less the unearned income. The unearned
lease income represents the excess of the total lease receivable, plus the
estimated residual value, over the cost of the related equipment. The unearned
lease income is recognized as revenue over the term of the lease by using the
interest method.
Upon inception of a direct financing lease, IBC estimates the residual value
it expects to realize with respect to the leased equipment when the initial
term expires. A substantial amount of IBC's leases have a recorded residual
value. The recorded residual value is generally equal to 10% of IBC's original
acquisition cost. Following expiration of the initial lease term, IBC will
seek to recover its recorded residual value through: (i) renewal of the
original lease, (ii) sale of the leased equipment to the original lessee,
(iii) trade-in of the equipment or (iv) sale or lease of the equipment to
another party.
Following expiration of the initial term of a direct financing lease, if IBC
sells or trades the leased equipment for more than the recorded residual
value, it recognizes a gain. If IBC sells or trades the equipment for less
than such value, it recognizes a loss. When IBC renews a lease or re-leases
the equipment to another party, it records the rental payments as income when
earned and depreciates the carrying value of the leased equipment over its
remaining useful life.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Revenues for the nine months ended September 30, 1996 increased 230% to
$191.5 million as compared to $58.1 million for the same period of the
previous year. Expenses for the nine months ended September 30, 1996 increased
65% to $72.7 million as compared to $44.1 million for the same period of the
previous year. Net income for the nine months ended September 30, 1996
increased 654% to $61.1 million as compared to $8.1 million for the same
period of the previous year. Net income increased primarily due to increased
revenues from gain on sale of loans, net interest income, and gain on sale of
SPFC stock, partially offset by increased total expenses.
Gain on sale of loans increased 132% to $69.5 million for the nine months
ended September 30, 1996 as compared to $30.0 million for the same period of
the previous year. Gain on sale of loans consists primarily of gains recorded
upon the sale of loans, net of associated expenses, and to a lesser extent,
fees received on the origination of loans, and fees received for commitments
to fund loans. The increase was primarily the result of substantially
increased volume and profitability on the sale of various servicing retained
variable and fixed rate loan products. Gain on sale of loans includes: $38.4
million in gains recorded as a result of the securitization of $422.4 million
of the Company's sub-prime residential mortgage loans at SPFC, $3.6 million in
gains resulting from the sale of the Company's retained interest in the
securitization of $105.2 million of franchise mortgage loans at FMAC which was
accounted for as a financing at December 31, 1995, $4.6 million in gains
recorded as a result of the securitization of $167.4 million of franchise
loans in the second quarter of 1996, $11.2 million in gains recorded resulting
from the sale of $277.0 million of multi-family and commercial mortgage loans
at SPTL, and $1.5 million in gains recorded as a result of the sale of loans
held by the Company's former mortgage banking operations. Upon completion of
an analysis of the carrying values of the Company's excess servicing assets
during the third quarter, the Company wrote down the balance of excess
servicing assets by $2.5 million. Also included in gain on sale of loans were
$5.9 million in gains from the sale of loans at the Company's consolidated
subsidiary, ICIFC. See Note 1 of Notes to Consolidated Financial Statements.
37
<PAGE>
Net interest income, which consists of interest and fees net of interest
charges, and net interest margin at SPTL for the nine months ended September
30, 1996 increased 157% and 50% to $48.3 million and 4.03% compared to $18.8
million and 2.68% for the same period in the previous year. The increase in
net interest income and net interest margin was due primarily to two factors.
The increase in net interest income can be directly attributed to the
acquisitions completed throughout the last half of 1995, and the resultant
change in the composition of loans held for sale and investment from primarily
conforming single family residential mortgage loans to a more diversified mix
of loan products. The product mix of the Company's interest earning assets now
includes a much larger percentage of higher-yielding loan and lease products
as compared to the previous year. Interest income also increased as a result
of the Company's loan and lease securitizations, which contributed interest
income of $7.0 million from the accretion of discounts on the Company's
Capitalized Excess Servicing Fees Receivable. In anticipation of potential
writedowns of the Company's excess servicing fees, the Company began to slow
the rate of accretion of the discounts related to excess servicing assets in
the second quarter of 1996. Upon completion of an analysis of the carrying
values of the Company's excess servicing assets during the third quarter, the
Company accreted into interest income those discounts which had been deferred,
and simultaneously wrote down the balance of its excess servicing assets. The
net result of these events was to increase interest income by approximately
$2.5 million, with an offsetting writedown of excess servicing assets through
gain on sale of loans. The increase in interest income due to the factors
described above was partially offset by an increase in the average costs of
borrowing from all sources, including warehouse lines of credit, borrowings
from the FHLB, and SPTL customer deposits.
Loan servicing income for the nine months ended September 30, 1996 decreased
77% to $2.3 million as compared to $9.8 million for the same period in the
previous year. The decrease in loan servicing income was primarily due to a
decreased average balance of conforming residential mortgage loans serviced
for others, primarily as a result of the Company's sale or transfer of
substantially all of its conforming residential mortgage servicing rights in
connection with the Company's exit from the conforming mortgage banking
business. Additionally, loan servicing income continues to be negatively
affected by increased direct servicing costs related to the loan foreclosure
and property liquidation process.
During the nine months ended September 30, 1996 and 1995, the Company sold
mortgage loan servicing rights relating to $3.2 billion and $350.6 million
principal amount of loans, resulting in pre-tax gains of $7.7 million and $2.9
million, respectively. Gain on the sale of servicing rights consisted of the
cash proceeds received on the "bulk" sale of servicing rights, net of the
related capitalized purchased or originated servicing rights. The decline in
profitability on the sale of the conforming residential mortgage servicing
rights was due to a lower average purchase price and due to the increased
amounts of capitalized servicing rights on the portfolio sold in the nine
months ended September 30, 1996 as compared to the same period of the previous
year as a result of the Company's adoption of SFAS 122 in the first quarter of
1995. The decision to sell servicing rights was based upon the Company's exit
plan from the conforming mortgage banking operations.
During the nine months ended September 30, 1996, ICII sold approximately 42%
of its common stock in SPFC through an initial public offering of SPFC common
stock. ICII sold 2.3 million shares, with SPFC selling 3.5 million primary
shares in the initial public offering. As a result of these sales, the Company
recorded a pre-tax gain of $62.0 million. In November 1996, ICII sold an
additional 1.0 million shares of SPFC common stock through a secondary
offering in which ICII was the sole selling shareholder. As a result of this
sale, ICII further reduced its ownership in SPFC to 51.2%. As a result of the
Company's requirement to record income tax expense on its ownership interest
in SPFC's after tax income, the Company will only retain approximately 30% of
SPFC's net income or loss, so long as ICII maintains its present 51.2%
ownership interest in SPFC. ICII expects that its percentage ownership
interest of SPFC will be reduced below 50% at which point the financial
statements of SPFC would not be consolidated with those of ICII. For a further
description of the effect of such deconsolidation, see "Unaudited Consolidated
Pro Forma Financial Statements."
Other income for the nine months ended September 30, 1996 increased to $7.8
million as compared to $0.5 million for the same period of the previous year.
This increase was primarily due to fee income generated
38
<PAGE>
from the Company's advisory contract with ICMH and dividend payments received
by the Company on its investment in ICMH. Additionally, impacting other income
was the resolution and recovery of $2.5 million of certain outstanding
reconciling items at SPTL.
Personnel expenses increased 52% to $36.5 million for the nine months ended
September 30, 1996 as compared to $24.0 million for the same period of the
previous year. This increase was primarily the result of personnel expenses
related to the Company's acquisition and expansion activities throughout the
second half of 1995, partially offset by reductions in personnel expense at
the Company's former mortgage banking operations.
Amortization of PMSR's and OMSR's decreased 61% to $1.0 million for the nine
months ended September 30, 1996 as compared to $2.6 million for the same
period of the previous year. The decrease was the result of a decreased
outstanding balance of PMSR's and OMSR's as a result of the Company's sale of
servicing rights on conforming residential mortgage loans generated by the
former mortgage banking operations.
Occupancy expense increased 14% to $3.3 million for the nine months ended
September 30, 1996 as compared to $2.9 million for the same period of the
previous year. The increase primarily reflected an increase in lease expenses
as a result of the Company's acquisition of FMAC, FCAC and CBCC in the second
half of 1995.
Net expenses of other real estate owned ("OREO") increased 201% to $4.9
million for the nine months ended September 30, 1996 as compared to $1.6
million for the same period of the previous year. The increase in net expense
of OREO was primarily the result of the dramatic increase in the volume of
properties foreclosed on by the Company's former mortgage banking operations.
Federal Deposit Insurance Corporation ("FDIC") insurance premiums decreased
82% to $0.2 million for the nine months ended September 30, 1996 as compared
to $1.1 million for the same period of the previous year. FDIC insurance
premiums decreased primarily as a result of a decrease in the rate of the
insurance premium charged to SPTL for FDIC deposit insurance.
Restructuring charges were $3.8 million for the nine months ended September
30, 1996 as compared to no charge for the same period of the previous year.
The charge represents those costs incurred in connection with the Company's
exit from the conforming mortgage banking business in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract No. 94-3,
"Accounting for Restructuring Charges." During the first quarter of 1996, the
Company committed itself to, and began the execution of, an exit plan that
specifically identified the necessary actions to be taken to complete the exit
from the origination, sale and servicing of conforming residential mortgage
loans. During the nine months ended September 30, 1996, the Company incurred
charges against the allowance of approximately $2.3 million. The Company
believes that significant changes to the exit plan are not likely, and that
the exit plan should be completed in the first quarter of 1997. The Company
has included in the restructuring charge those costs resulting from the exit
plan that are not associated with, nor would have benefit for, the continuing
operations of the Company.
All other general and administrative expenses, including data processing,
professional services, and telephone and other communications expense
increased 97% to $23.3 million for the nine months ended September 30, 1996 as
compared to $11.8 million for the same period of the previous year. The
increase in general and administrative expenses was due primarily to the
Company's acquisition of FMAC, FCAC, and CBCC, as well as to the start up of
ICAI in 1995.
As a result of the change in the composition of the Company's investment
loan portfolio and an increase in nonaccrual loans, earnings were reduced by
an increase in the provision for loan losses. The provision for loan losses
increased 55% to $6.1 million for the nine months ended September 30, 1996, as
compared to $4.0 million for the same period of the previous year.
39
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 increased 17% to $85.3 million
as compared to $72.8 million for the previous year. Income before
extraordinary items increased 115% to $14.2 million as compared to $6.6
million for the previous year. Net income for the year ended December 31, 1995
increased 89% to $14.2 million as compared to $7.5 million for the previous
year. The 17% increase in revenue and the relatively unchanged level of
expenses accounted for the increase in the Company's net income.
Gain on sale of loans increased 359% to $39.6 million for the year ended
December 31, 1995 as compared to $8.6 million for the same period in the
previous year. The increase was primarily the result of substantially
increased profitability on the sale of various servicing retained variable and
fixed rate loan products through securitizations, together with an increase in
the volume of loans sold on a servicing released basis. Gain on sale of loans
includes $28.9 million in gains recorded as a result of the securitization of
$404.9 million of the Company's sub-prime residential mortgage loans, $98.3
million of non-conforming residential mortgage loans, $290.9 million of
conforming residential mortgage loans, $57.7 million of multi-family mortgage
loans, and $85.2 million of gross lease receivables. Also during 1995, the
Company securitized $105.2 million of franchise mortgage loans which was
accounted for as a financing.
Net interest income, which consists of interest and fees net of interest
charges, and net interest margin for the year ended December 31, 1995
increased 60% and 34% to $33.8 million and 2.11% compared to $21.1 million and
1.57% for the same period in 1994, respectively. The increase in net interest
income and net interest margin was due primarily to two factors. The Company
began 1995 with a loan portfolio consisting primarily of adjustable rate
residential mortgage loans ("ARMs") tied to either the 11th District Cost of
Funds index, or the 6 Month London Interbank Offering Rate ("LIBOR") index.
These loans were originated during 1994 by the Company's mortgage lending
operations, and the majority of these loans included a "teaser" period
(typically three months) in which the borrower paid an interest rate to the
mortgage lender that is substantially lower than the fully-indexed loan
interest rate. As these loans repriced throughout 1995 out of the "teaser"
period and became fully indexed, the Company's related interest income
increased commensurately. Interest income also increased as a result of the
Company's loan and lease securitizations, which contributed interest income of
$2.6 million from the accretion of discounts on the Company's Capitalized
Excess Servicing Fees Receivable. The increase in interest income due to the
factors described above was partially offset by an increase in the average
costs of borrowing from all sources, including warehouse lines of credit,
borrowings from the FHLB, and SPTL customer deposits.
Loan servicing income for the year ended December 31, 1995 decreased 22% to
$12.7 million as compared to $16.3 million for the same period in the previous
year. The decrease in loan servicing income was primarily due to a decreased
average balance of residential mortgage loans serviced for others, coupled
with an increase in direct servicing costs related to the loan foreclosure and
property liquidation process. As interest rates decreased throughout 1995, the
prepayment rate on the Company's residential mortgage loan servicing portfolio
did not increase dramatically, primarily the result of the relatively low
weighted average interest rate of 8.35% on the Company's residential mortgage
loan servicing portfolio. Total runoff amounted to $612.3 million or 13% of
the beginning balance of the residential mortgage loan servicing portfolio for
1995 as compared to $841.9 million or 22% of the beginning balance of the
residential mortgage loan servicing portfolio for 1994. The residential
mortgage loan servicing portfolio decreased 8% to $4.5 billion at December 31,
1995 from $4.9 billion at December 31, 1994.
During 1995 and 1994, the Company sold mortgage loan servicing rights
relating to $957.2 million and $2.9 billion principal amount of loans,
resulting in pre-tax gains of $3.6 million and $30.8 million, respectively.
During 1995, the average gain on sale of servicing rights decreased 66% to 37
basis points as compared to 108 basis points for the previous year. The
profitability on the sale of servicing decreased primarily as a result of the
Company's adoption of SFAS 122 which required the Company to capitalize
servicing rights related to loans originated. Gain on the sale of servicing
rights consists of the cash proceeds received on the "bulk" sale of
40
<PAGE>
servicing rights, net of the related capitalized PMSR's and OMSR's. The
decision to buy or sell servicing rights is based upon management's assessment
of the market for and current market value of servicing rights and the
Company's current and future earnings and cash flow objectives.
Expenses for the year ended December 31, 1995 were substantially unchanged
from the previous year at $61.2 million as compared to $61.5 million in 1994.
Personnel expenses increased 1.7% to $34.1 million in 1995 as compared to
$33.5 million in 1994. This increase was primarily the result of increased
personnel expenses related to the Company's acquisition and expansion
activities throughout 1995, partially offset by reductions in personnel
expense at the Company's mortgage banking operations.
Amortization of capitalized servicing rights increased 26% to $4.0 million
in 1995 as compared to $3.2 million in 1994, despite the decrease in the
runoff rate of the Company's residential servicing portfolio. This increase
was the result of an increase in prepayments of loans in the Company's
servicing portfolio with related capitalized servicing. Amortization as a
result of loan prepayments increased 275% to $1.2 million in 1995, as compared
to $0.3 million in 1994. Scheduled amortization of capitalized servicing
rights was $2.8 million in 1995, substantially equal to the $2.9 million in
1994.
Occupancy expense increased 15% to $4.0 million in 1995 as compared to $3.4
million in 1994. The increase primarily reflected an increase in lease
expenses as a result of the Company's acquisition of FMAC, FCAC and CBCC in
1995.
Net expenses of OREO increased 97% to $1.9 million in 1995 as compared to
$1.0 million in 1994. The increase in OREO expenses in 1995 was primarily the
result of an increase in OREO writedowns. OREO writedowns increased 465% to
$2.1 million in 1995 as compared to $0.4 million in 1994.
FDIC insurance premiums decreased 48% to $1.1 million in 1995 as compared to
$2.2 million in 1994. FDIC insurance premiums decreased primarily as a result
of a decrease in the premium charged for FDIC insurance in 1995. On June 1,
1995, the premium charged to SPTL decreased from 0.23% of deposits outstanding
to $2,000 annually. SPTL has been considered to be well capitalized by its
regulators.
All other general and administrative expenses, including data processing,
professional services, and telephone and other communications expense
decreased 12% to $16.2 million in 1995 as compared to $18.3 million in 1994.
The decrease was the result of the reversal in 1995 of $1.8 million of the
$2.0 million provision established in 1994 for potential operating losses. The
allowance was established as a result of the discovery of the lack of timely
reconciliation of several cash and loans in process clearing accounts at the
Company's principal subsidiary, SPTL. The Company corrected the accounting
deficiencies at SPTL that included the use of significant Company and external
resources to complete the reconciliations. At the completion of the
reconciliation process, nothing came to the attention of management that
caused the Company to believe any irregularities had taken place. Based on the
resolution of the unidentified reconciling items at December 31, 1994, $1.8
million of the remaining allowance was reversed. Excluding the establishment
in 1994 and the reversal in 1995 of the provision for operating losses,
general and administrative expenses as described increased 10% to $18.0
million in 1995 as compared to $16.3 million in 1994. The increase in general
and administrative expenses was due primarily to the Company's acquisition of
FMAC, FCAC, and CBCC, as well as to the start up of ICAI in 1995.
As a result of the change in the composition of the Company's investment
loan portfolio, earnings were reduced by an increase in the provision for loan
losses. The provision for loan losses was $5.5 million for 1995, an increase
of 6% from $5.2 million for the same period in 1994. The increase in the
provision was primarily the result of the increase in nonaccrual loans, and
the increase in the amount of net charge-offs. Total nonaccrual loans
increased 136% to $31.0 million at December 31, 1995, as compared to $13.1
million at December 31, 1994. Total nonaccrual loans as a percentage of loans
held for investment were 4.50% and 1.26% at December 31, 1995 and 1994,
respectively. Net charge-offs were $3.1 million for 1995, as compared to
$1.4 million for the same period in 1994.
41
<PAGE>
At December 31, 1995, of the $31.0 million of nonaccrual loans, 76%, 18% and
6% were single family, multi-family and non-residential loans, respectively,
as compared to 74%, 9% and 17%, respectively, at December 31, 1994. The
increase in nonaccrual loans represented by residential loans was due to the
expansion of the investment loan portfolio with residential (one-to-four
family) loans originated by the Company's former mortgage banking operations.
The Company's non-residential loans were comprised of commercial mortgages,
commercial loans, indirect equipment leases and consumer loans.
Non-performing assets ("NPA's") consist of nonaccrual loans, loans with
modified terms and OREO. Total NPA's increased 137% to $39.0 million at
December 31, 1995, as compared to $16.4 million at December 31, 1994. The
ratio of the allowance for loan losses to nonaccrual loans decreased to 44.3%
at December 31, 1995 from 53.8% at December 31, 1994. NPA's as a percentage of
total assets were 1.55% and 1.16% at December 31, 1995 and 1994, respectively.
The Company believes the overall increase in NPA's was a result of the
transfer of unsalable loans originated by the Company's former mortgage
banking operations to the held for investment portfolio. The Company
considered the level of NPA's related to its other lending activities to be
acceptable due to the attractive yield on these loans.
The ratio of the allowance for loan losses to nonaccrual loans decreased to
44.3% at December 31, 1995 from 53.8% at December 31, 1994. The Company
evaluated expected losses on nonaccrual loans in both periods on a loan-by-
loan basis and determined that the allowance was adequate to cover both
expected losses on nonaccrual loans and inherent losses in the remainder of
the Company's loans held for investment portfolio.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for losses considering such factors as
historical loan loss experience, evaluations made by bank regulators,
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
During 1994, as interest rates increased, the Company implemented cost
containment and revenue enhancement programs to offset the pressures of
reduced originations on earnings. In order to control costs, the Company
closed four mortgage origination offices in California and one office in New
Jersey, reduced staffing in the mortgage banking operations by 51%, and began
remarketing its excess leased facilities.
Revenues for the year ended December 31, 1994 increased 2% to $72.8 million
compared to $71.4 million for the same period in 1993. Income before the
extraordinary item decreased 64% to $6.6 million as compared to $18.4 million
for the previous year. Net income for the year ended December 31, 1994
decreased 59% to $7.5 million as compared to $18.4 million for the previous
year. Despite the 2% increase in revenue, net income decreased primarily due
to increased personnel, occupancy, and general and administrative expenses
resulting from the expansion of the mortgage banking business operations and
the opening of new offices late in 1993, as well as a $2.0 million provision
for operational losses accrued for the year ended December 31, 1994.
Gain on sale of loans decreased 53% to $8.6 million for the year ended
December 31, 1994 as compared to $18.1 million for the same period in the
previous year. Gain on sale of loans consisted primarily of gains recorded
upon the sale of mortgage loans, net of associated expenses, and to a lesser
extent, fees received on mortgage loan originations, and fees received for
commitments to fund mortgage loans. The decrease was primarily the result of a
lower profitability on the sale of servicing retained fixed rate loans and a
decrease in the principal amount of mortgage loans sold servicing released.
Gain on origination and sale of loans includes a $3.1 million gain recorded as
a result of the Company's first loan securitization and sale of $45.5 million
of sub-prime LIBOR ARMs in December 1994.
Loan servicing income for the year ended December 31, 1994 increased 141% to
$16.3 million as compared to $6.8 million for the same period in the previous
year. The increase in loan servicing income was primarily due to a
substantially higher average balance of loans serviced for others and an
increase in the weighted average service fee from approximately 26 basis
points in 1993 to approximately 34 basis points in 1994. The increase in
42
<PAGE>
the average servicing fee was due primarily to the Company's purchase of $1.0
billion of loans from the Resolution Trust Corporation ("RTC") which had a
weighted average service fee of 39 basis points in January 1994. The servicing
portfolio increased 26% to $4.9 billion at December 31, 1994 from $3.9 billion
at December 31, 1993.
During 1994 and 1993, the Company sold mortgage loan servicing rights
relating to $2.9 billion and $2.6 billion principal amount of loans, resulting
in pre-tax gains of $30.8 million and $23.7 million, respectively. During
1994, the average gain on sale of servicing rights increased 17% to 108 basis
points as compared to 92 basis points for the previous year. As interest rates
rose and prepayment speeds decreased in 1994, the value of the Company's
servicing portfolio increased, as evidenced by the significant increase in the
average gain on sale of servicing rights. Gain on the sale of servicing rights
consists of the cash proceeds received on the "bulk" sale of servicing rights,
net of the related capitalized servicing fees receivable and purchased
servicing rights.
Net interest income, which consists of interest and fees, net of interest
charges, and net interest margin for the year ended December 31, 1994
decreased 11% and 46% to $21.1 million and 1.57% compared to $23.8 million and
2.92% for the same period in 1993, respectively. The decrease in net interest
income and net interest margin was due primarily to the issuance of $90
million of the Old Notes by the Company in January, 1994. Excluding the
interest charges from the Old Notes, net interest income increased 24% and net
interest margin decreased 25% to $29.4 million and 2.18% compared to $23.8
million and 2.92% for the same period in 1993, respectively. The increase in
net interest income, excluding interest charges from the Old Notes, was due
primarily to a higher principal amount outstanding of mortgage loans held for
investment originated as a part of the Company's mortgage banking operations,
partially offset by an increase in borrowing costs and the corresponding
decrease in net interest margin.
Expenses for the year ended December 31, 1994 increased 54% to $61.5 million
from $40.0 million in the same period of 1993. The increase in expenses was
primarily due to increased levels of staffing during the first half of the
year as a result of the Company's expansion of its mortgage banking activities
in 1993, coupled with the expansion of the various lending divisions at SPTL
during 1994, as well as due to a $2.0 million provision for operational losses
accrued for the year ended December 31, 1994. Personnel expenses increased 37%
to $33.5 million in 1994 as compared to $24.5 million in 1993. This increase
was largely the result of increased personnel to process the growth in the
Company's mortgage loan originations and acquisitions and office expansion
during 1993.
Amortization of PMSR's and OMSR's increased 282% to $3.2 million in 1994 as
compared to $0.8 million in 1993. This increase was the result of an increase
in the outstanding balance of servicing rights outstanding with related
purchased and originated servicing rights in 1994 as a result of the Company's
adoption of EITF 92-10, "Loan Acquisitions Involving Table Funding
Arrangements." The adoption of EITF 92-10 increased the balance of capitalized
servicing rights from $0.7 million at December 31, 1992 to $10.0 million at
December 31, 1993 and to $16.7 million at December 31, 1994. As the balance of
purchased and originated servicing rights increased, amortization of purchased
and originated servicing increased as well. Amortization as a result of loan
prepayments increased 72% to $0.3 million in 1994, as compared to $0.2 million
in 1993. Scheduled amortization of capitalized servicing rights increased 342%
to $2.9 million in 1994, as compared to $0.6 million in 1993.
Occupancy expense increased 60% to $3.4 million in 1994 as compared to $2.1
million in 1993. The increase reflected the costs associated with the
Company's opening of new mortgage loan origination offices late in 1993.
Net expenses of OREO increased 72% to $1.0 million in 1994 as compared to
$0.6 million in 1993. OREO writedowns remained equivalent at $0.4 million in
1994 and $0.4 million in 1993.
FDIC insurance premiums increased 103% to $2.2 million in 1994 as compared
to $1.1 million in 1993. FDIC insurance premiums increased primarily as a
result of the increase in the average outstanding balance of customer deposits
outstanding during 1994 as compared to 1993. The average balance of deposits
subject to FDIC insurance premiums increased 66% to $992.5 million in 1994 as
compared to $596.5 million in 1993.
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<PAGE>
All other general and administrative expenses, including data processing,
professional services, and telephone and other communications expense
increased 69% to $18.3 million in 1994 as compared to $10.8 million in 1993.
The increase was the result of expenses associated with the expansion of
mortgage origination offices, increased geographic dispersion of the Company's
operations, installation of new data processing systems, as well as due to a
$2.0 million provision for operational losses accrued for the year ended
December 31, 1994.
As a result of the decision to increase the Company's investment loan
portfolio, earnings were reduced by an increase in the provision for loan
losses. The provision for loan losses was $5.2 million for 1994, an increase
of 119% from $2.4 million for the same period in 1993. The increase in the
provision was primarily the result of the increase in nonaccrual loans, the
increase in the amount of net charge-offs, and the dramatic increase in loans
held for investment. Total nonaccrual loans increased 165% to $13.1 million at
December 31, 1994, as compared to $4.9 million at December 31, 1993. Total
nonaccrual loans as a percentage of loans held for investment were 1.26% and
3.08% at December 31, 1994 and 1993, respectively. Net charge-offs were $1.4
million for 1994, as compared to $1.1 million for the same period in 1993.
At December 31, 1994, of the $13.1 million of nonaccrual loans, 74%, 9% and
17% were single family, multi-family and non-residential loans, respectively,
as compared to 47%, 23% and 30%, respectively, at December 31, 1993. The
increase in nonaccrual loans represented by residential loans was due to the
expansion of the investment loan portfolio with residential (one-to-four
family) loans originated by the Company's mortgage banking operations. The
Company's non-residential loans were comprised of commercial mortgages,
commercial loans, indirect equipment leases and consumer loans.
Total NPA's increased 64% to $16.4 million at December 31, 1994, as compared
to $10.0 million at December 31, 1993. NPA's as a percentage of total assets
were 1.16% and 0.64% at December 31, 1994 and 1993, respectively. The Company
considered the overall increase in NPA's to be the result of the then current
economic environment and the dramatic increase in the Company's portfolio of
loans held for investment. The Company viewed the level of NPA's related to
its other lending activities as acceptable due to the attractive yield on
these loans. At December 31, 1994, the average yield from mortgage loans held
for investment generated by the Company's other lending activities was 9.09%.
The ratio of the allowance for loan losses to nonaccrual loans decreased to
53.8% at December 31, 1994 from 65.9% at December 31, 1993. Although
nonaccrual loans increased since December 31, 1993, with a corresponding
decrease in allowance coverage, the Company evaluated expected losses on these
nonaccrual loans in both periods on a loan-by-loan basis and determined that
the allowance was adequate to cover both expected losses on nonaccrual loans
and inherent losses in the remainder of the Company's loans held for
investment portfolio.
44
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
General
The table below summarizes cash flows generated by and used in operating
activities:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------- ---------------------------------
1996 1995 1994 1993
------------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
OPERATING CASH INCOME:
Excess cash flows generated
by securitization trusts... $ 22,374 $ 7,458 $ -- $ --
Less cash required to be
invested in residual
assets(1).................. 17,992 7,458 -- --
--------- ---------- --------- ----------
Net excess cash flow from
securitization trusts...... 4,382 -- -- --
Other servicing fees........ 2,264 12,718 16,332 6,785
Interest received........... 143,399 122,627 81,441 50,547
Non cash SPFC stock sale.... (25,645) -- -- --
Other cash income........... 7,770 1,152 2,586 1,414
--------- ---------- --------- ----------
Total operating cash
income................... 132,170 136,497 100,359 58,746
OPERATING CASH EXPENSES:
Securitization and loan
acquisition costs.......... 15,851 6,784 239 --
Cash operating expenses..... 62,112 53,878 53,943 36,451
Taxes paid.................. 16,253 8,283 4,016 8,314
Interest paid............... 104,427 93,223 51,844 28,606
--------- ---------- --------- ----------
Total operating cash
expenses................. 198,643 162,168 110,042 73,371
--------- ---------- --------- ----------
Net operating cash flow... (66,473) (25,671) (9,683) (14,625)
Cash provided by (used in)
other payables and
receivables.................. 23,094 (63,265) (11,565) 5,832
Cash provided by (used in)
loans held for sale.......... 599,070 (579,730) 982,827 (894,257)
--------- ---------- --------- ----------
Net cash provided by (used
in) operating activities. $ 555,691 $ (668,666) $ 961,579 $ (903,050)
========= ========== ========= ==========
Change in securitization
related assets............... $ 64,060 $ 54,368 $ 3,904 $ --
Net cash (used in) provided by
financing activities......... $(376,383) $1,047,004 $(177,314) $1,066,584
</TABLE>
- --------
(1)Cash required to fund initial and required overcollateralization account
balances.
The Company has an ongoing need for capital to finance its lending
activities. This need is expected to increase as the volume of the Company's
loan and lease originations and acquisitions increases. The Company's primary
cash requirements include the funding of (i) loan and lease originations and
acquisitions pending their pooling and sale, (ii) points and expenses paid in
connection with the acquisition of wholesale loans, (iii) fees and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold, (v) ongoing administrative and other operating
expenses and (vi) the costs of the Company's warehouse credit and repurchase
facilities with certain financial institutions. The Company has financed its
activities through warehouse lines of credit and repurchase facilities with
financial institutions, equity and debt offerings in the capital markets,
deposits or borrowings at SPTL and securitizations. The Company believes that
such sources, together with the net proceeds of the Offering, will be
45
<PAGE>
sufficient to fund the Company's liquidity requirements for the foreseeable
future. There can be no assurance that the Company will have access to the
capital markets in the future or that financing will be available to satisfy
the Company's operating and debt service requirements or to fund its future
growth.
Through the first quarter of 1995, funding for the Company's former mortgage
banking operations was provided primarily by SPTL. In order for SPTL to
provide funding for the Company's mortgage banking business, SPTL historically
originated and held substantially all of the Company's mortgage loans held for
sale. In accordance with a series of agreements, ICII provided loan
solicitation, originations and acquisitions, and servicing to SPTL. The
agreements provided for the purchase of mortgage loans by ICII concurrent with
sales to outside investors. In the first quarter of 1995, the former mortgage
banking business became self-funded by using a gestation repurchase line
provided by DLJ Mortgage Capital, Inc. While the repurchase line reduced the
net interest income earned on loans held for sale, holding the loans at ICII
provides an additional source of cash for the parent company, and provides
additional liquidity for SPTL to finance all of its other lending activities.
SPTL historically obtained the liquidity necessary to fund the Company's
former mortgage banking operations and its own investing activities through
deposits and, if necessary through borrowings from the FHLB. At September 30,
1996 and December 31, 1995 and 1994, SPTL had available lines of credit from
the FHLB equal to 35% of its assets, or $559.4 million, $501.4 million and
$478.5 million, respectively. The highest FHLB advance outstanding during the
nine months ended September 30, 1996 was $338.0 million, with an average
outstanding balance of $213.9 million. The highest FHLB advance outstanding
during the year ended December 31, 1995 was $435.0 million, with an average
outstanding balance of $292.0 million. The outstanding balance of FHLB
advances was $190.0 million at December 31, 1995. The highest FHLB advance
outstanding during the year ended December 31, 1994 was $360.0 million, with
an average outstanding balance of $182.4 million. The outstanding balance of
FHLB advances was $295.0 million at December 31, 1994. During 1993 and 1994,
ICII contributed $26.0 million and $25.0 million, respectively, to SPTL's
capital in order to provide SPTL with adequate capital to increase its
deposits and borrowings.
SPTL has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPTL maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. The Company tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected
fundings. Cash management systems at SPTL allow SPTL to anticipate both
funding and sales and adjust deposit levels and short-term investments against
the demands of the Company's lending activities. For a further description of
SPTL's deposit generating activities and available funding, see "Business--
Funding and Securitizations."
In addition to warehouse lines of credit and SPTL borrowings, the Company
has also accessed the capital markets to fund its operations. In the second
quarter of 1992, the Company completed its initial public offering of
8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the
Company completed a stock offering of 4,879,808 shares of its common stock at
$13.00 per share for net proceeds of $59.2 million.
In January 1994, the Company issued $90.0 million principal amount of the
Old Notes. In October 1994, the Company repurchased $8.5 million of the Old
Notes. As of December 31, 1995, the Company was not in compliance with certain
debt covenants related to the Old Notes. Subsequent to December 31, 1995,
these defaults were corrected. In March 1996, the Company reissued the $8.5
million of Old Notes it purchased in October 1994. At September 30, 1996,
$90.0 million of the Old Notes were outstanding. The Company used a portion of
the proceeds of the Offering to purchase approximately $70.0 million of Old
Notes tendered pursuant to the Tender Offer.
In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which ICII was a selling shareholder. SPFC and ICII received net
proceeds from such offering of approximately $53.8 million and $35.9 million,
respectively. In November 1996, (i) SPFC issued $75.0 million of convertible
subordinated notes due 2006 and (ii) ICII sold 1.0 million shares of SPFC
common stock held by ICII for net proceeds of approximately $28.0 million.
After the sale of such common stock by ICII, ICII owned approximately 51.2% of
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<PAGE>
the issued and outstanding shares of SPFC's common stock, excluding shares
issuable upon exercise of options granted or to be granted pursuant to SPFC's
stock option plans and shares issuable upon conversion of the $75.0 million of
convertible subordinated notes, mentioned above.
Lines of Credit and Warehouse Facilities
The Company is dependent upon its ability to access warehouse credit and
repurchase facilities, in addition to its ability to continue to pool and sell
loans and leases in the secondary market, in order to fund new originations
and purchases. The Company has warehouse lines of credit and repurchase
facilities under which it had available an aggregate of approximately $141.0
million in financing at November 30, 1996 (excluding financing available to
ICIFC and SPFC, and amounts available to ICII under a $200 million warehouse
facility with PaineWebber Incorporated as described below). The Company
expects to be able to maintain existing warehouse lines of credit and
repurchase facilities (or to obtain replacement or additional financing) as
current arrangements expire or become fully utilized; however, 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 warehouse lines of credit and
repurchase facilities, the Company may have to curtail its loan origination
and purchasing activities, which could have a material adverse effect on the
Company's operations and financial position.
PaineWebber Incorporated has agreed to make available repurchase lines to
ICII in an amount equal to $200.0 million. PaineWebber provided ICII with
these funding capabilities for its former mortgage banking operations, where
ICII can close loans in its name. The loan collateral is held by an
independent third-party custodian and ICII has the ability to borrow against
that collateral at a percentage of the original principal balance. The rate
charged is LIBOR plus 65 to 85 basis points, depending on the loan product
type. This line does not have an expiration date, but is due on 30 days
demand. As of November 30, 1996, ICII had an outstanding balance of $13.5
million with respect to this facility. The Company does not intend to utilize
this facility in the future.
The Warehouse Lending Corporation of America has agreed to make available
repurchase lines to ICII in an amount equal to $20.0 million. The Warehouse
Lending Corporation of America has provided ICII with these funding
capabilities for its former mortgage banking operations, where ICII can
repurchase loans in its name. The loan collateral is held by an independent
third-party custodian and ICII has the ability to borrow against that
collateral at a percentage of the original principal balance. The rate charged
is LIBOR plus 250 basis points, depending on the loan product type.
Availability under this facility expired in August 1996. As of November 30,
1996, ICII had an outstanding balance of $6.2 million with respect to this
facility.
Imperial Warehouse Lending Group ("IWLG") has agreed to make available
repurchase lines to ICII in an amount equal to $20.0 million. IWLG has
provided ICII with these funding capabilities for its mortgage banking
operations, where ICII can close loans in its name. The loan collateral is
held by an independent third-party custodian and ICII has the ability to
borrow against that collateral at a percentage of the original principal
balance. The rate charged is Bank of America's Prime Lending Rate minus 25
basis points. This line has an expiration date of September 30, 1997. As of
November 30, 1996, ICII had an outstanding balance of $5.1 million with
respect to this facility.
CS First Boston has agreed to make available repurchase lines to FMAC in an
amount equal to $200.0 million. CS First Boston has provided FMAC with these
funding capabilities for its franchise mortgage banking operations, where FMAC
can close loans in its name. The loan collateral is held by an independent
third-party custodian and FMAC has the ability to borrow against that
collateral at a percentage of the original principal balance. The rate charged
is LIBOR plus 125 basis points. This line is guaranteed by ICII and has an
expiration date of December 1997. As of November 30, 1996, FMAC had an
outstanding balance of $114.3 million with respect to this facility.
Banco Santander has agreed to make available repurchase lines to FMAC in an
amount equal to $50.0 million. Banco Santander has provided FMAC with these
funding capabilities for its franchise mortgage
47
<PAGE>
banking operations, where FMAC can close loans in its name. The loan
collateral is held by an independent third-party custodian and FMAC has the
ability to borrow against that collateral at a percentage of the original
principal balance. The rate charged is LIBOR plus 225 basis points. This line
is guaranteed by ICII and expired November 1996; FMAC is currently negotiating
an extension of this facility. As of November 30, 1996, FMAC had an
outstanding balance of $32.6 million with respect to this facility.
Greenwich Financial Capital Products, Inc. ("Greenwich") has agreed to make
available repurchase lines to FMAC in an amount equal to $33.8 million.
Greenwich has provided FMAC with these funding capabilities for its franchise
mortgage operations, where FMAC can close loans in its name. The loan
collateral is held by an independent third-party custodian and FMAC has the
ability to borrow against that collateral at a percentage of the original
principal balance. The rate charged is LIBOR plus 175 basis points. This line
is guaranteed by ICII and is due on 30 days demand. As of November 30, 1996,
FMAC had an outstanding balance of $33.8 million with respect to this
facility.
CoreStates Bank, N.A. ("CoreStates") has agreed to make available repurchase
lines to IBC in an amount equal to $10.0 million. CoreStates has provided IBC
with these funding capabilities for its equipment leasing operations. The loan
collateral is held by an independent third-party custodian and IBC has the
ability to borrow against that collateral at a percentage of the original
principal balance. The rate charged is LIBOR plus 230 basis points. The
Company intends to use this credit line to fund IBC's equipment purchases.
This line is guaranteed by ICII and has an expiration date of November 1997.
As of November 30, 1996, IBC had an outstanding balance of $0.9 million with
respect to this facility.
Lehman Commercial Paper Inc. ("LCPI") has agreed to make available
repurchase lines to SPFC in an amount equal to $200.0 million. LCPI has
provided SPFC with these funding capabilities for its mortgage banking
operations, where SPFC can close loans in its name. The loan collateral is
held by an independent third-party custodian and SPFC has the ability to
borrow against that collateral at a percentage of the original principal
balance. The rate charged is LIBOR plus 30 basis points. This line is
guaranteed by ICII and has an expiration date of April 1, 1997. As of November
30, 1996, SPFC had an outstanding balance of $52.4 million with respect to
this facility.
In October 1996, Morgan Stanley Mortgage Capital, Inc. agreed to make
available to SPFC a $150.0 million warehouse line of credit for its mortgage
banking operations. The loan collateral is held by an independent third-party
custodian and SPFC has the ability to borrow against that collateral at a
percentage of the original principal balance. The rate charged is LIBOR plus
70 basis points. The lender of this facility did not require ICII's guarantee.
This line has an expiration date of October 22, 1997. As of November 30, 1996,
SPFC had an outstanding balance of $117.1 million with respect to this
facility.
IWLG has agreed to make available to ICIFC repurchase lines in an amount
equal to $600.0 million. IWLG has provided ICIFC with these funding
capabilities for its mortgage banking operations, where ICIFC can close loans
in its name. The loan collateral is held by an independent third-party
custodian and ICIFC has the ability to borrow against that collateral at a
percentage of the original principal balance. The rate charged is Bank of
America's Prime Rate. The Company intends to use this credit line to fund
ICIFC's mortgage loan originations and acquisition in the future. This line
has no expiration date. As of November 30, 1996, ICIFC had an outstanding
balance of $381.4 million with respect to this facility.
Securitizations
The Company currently pools and sells through securitization a substantial
portion of the loans or leases which it originates or purchases, other than
loans held by SPTL for investment. Accordingly, adverse changes in the
securitization market could impair the Company's ability to originate,
purchase and sell loans or leases on a
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favorable or timely basis. Any such impairment could have a material adverse
effect upon the Company's business and results of operations. In addition, the
securitization market for many types of assets is relatively undeveloped and
may be more susceptible to market fluctuations or other adverse changes than
more developed capital markets. Finally, any delay in the sale of a loan or
lease pool could cause the Company's earnings to fluctuate from quarter to
quarter.
In a securitization, the Company recognizes a gain on sale of the loans or
leases securitized upon the closing of the securitization but does not receive
the cash representing such gain until it receives the excess servicing fees,
which are payable over the actual life of the loans or leases securitized. As
a result, such transactions may not generate cash flows to the Company for an
extended period.
In addition, in order to gain access to the secondary market for loans and
leases, the Company has relied on monoline insurance companies to provide
guarantees on outstanding senior interests in the special purpose entities to
which such loans and leases are sold to enable it to obtain investment grade
ratings for such interests. To a limited extent, the Company also relies on
overcollateralization to support outstanding senior interests. However, any
unwillingness of the monoline insurance companies to guarantee the senior
interests in the Company's loan or lease pools could have a material adverse
effect on the Company's financial position and results of operations.
The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in securitizations require either (i) the
establishment of a reserve account that may be funded with an initial cash
deposit by the Company or (ii) the overcollateralization of the senior
interests by using interest receipts on the loans to reduce the outstanding
principal balance of the senior interests. The Company's interest in each
reserve account and overcollateralized amount is reflected in the Company's
financial statements as Capitalized Excess Servicing Fees Receivable. To the
extent that a loss is realized on the loans, the loss will either be paid out
of the reserve account or the overcollateralization amount or will be reduced
to the extent that funds are available and will result in a reduction in the
value of the Capitalized Excess Servicing Fees Receivable.
The Company may be required either to repurchase or to replace loans which
do not conform to the representations and warranties made by the Company in
the pooling and servicing agreements entered into when the loans are pooled
and sold through securitizations.
Franchise Lending. FMAC sells a majority of its loan origination volume in
securitizations and to a lesser extent through whole loan sales. FMAC
securitized $167.4 million and $105.2 million of franchise loans during the
nine months ended September 30, 1996 and the period from its inception at June
30, 1995 throughDecember 31, 1995, respectively.
Business Finance Lending. IBC sells its lease originations primarily through
a revolving securitization facility administered by Citicorp North America,
Inc. ("CNAI"). The facility has a three-year revolving period, which expires
on December 29, 1998, and a three and one-half year amortization period. Under
the facility, IBC entered into a sale agreement ("IBC Agreement") pursuant to
which IBC will sell lease receivables to its wholly-owned special purpose
subsidiary, IBC Funding Corp. ("IFC"). During the revolving period, Corporate
Receivables Corporation ("CRC"), a special purpose subsidiary administered by
CNAI, issues commercial paper to fund its purchases of IBC originations. The
purchase limit under the facility is $200.0 million and as of September 30,
1996, there was approximately $95.2 million of commercial paper outstanding
under the facility.
CRC purchases from IFC all receivables acquired by IFC pursuant to the IBC
Agreement. Such purchases are treated as sales for reporting purposes under
generally accepted accounting principles ("GAAP") and as financings for tax
purposes. CRC is conveyed a 100% ownership interest in the receivables,
together with a security interest in the underlying lease equipment, which
ownership and security interests have been perfected under the Uniform
Commercial Code. Payments of the purchase price are made directly from
payments by lessees on the lease receivables.
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Commercial Mortgage Lending. During the nine months ended September 30,
1996, SPTL securitized $277.0 million of multi-family and commercial real
estate loans. SPTL retained subordinated bonds of approximately $25.0 million
from the securitization and delivered the bonds into a total rate of return
swap with a financial institution. The provisions of the swap entitle SPTL to
receive the total return on the subordinated bonds delivered in exchange for a
floating payment of LIBOR plus a spread of 1.95%. The swap is an off balance
sheet instrument.
INFLATION
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of
the assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Inflation affects the Company
primarily through its effect on interest rates, since interest rates normally
increase during periods of high inflation and decrease during periods of low
inflation. During periods of decreasing interest rates, borrowers are more
likely to refinance their existing loans which may negatively impact the
Company's investments in capitalized excess servicing related assets.
ASSET QUALITY
As a result of the continuing change in the composition of the Company's
investment loan portfolio, earnings were reduced by an increase in the
provision for loan losses. The provision for loan losses increased to
$6.1 million for the nine months ended September 30, 1996, as compared to $5.5
million, $5.2 million and $2.4 million for the years ended December 31, 1995,
1994 and 1993, respectively. The increase in the provision for loan losses was
primarily the result of an increase in nonaccrual loans, an increase in the
amount of net charge-offs, and the continuing change in the composition of the
investment loan portfolio to higher-yielding loan products. Total nonaccrual
loans increased to $46.6 million at September 30, 1996, as compared to
$31.0 million, $13.1 million and $4.9 million at December 31, 1995, 1994 and
1993, respectively. Total nonaccrual loans as a percentage of loans held for
investment were 5.62%, 4.50%, 1.26% and 3.08% at September 30, 1996 and
December 31, 1995, 1994 and 1993, respectively.
Net charge-offs for the nine months ended September 30, 1996 and the years
ended December 31, 1995, 1994 and 1993 were $5.4 million, $3.1 million, $1.4
million and $1.1 million, respectively. Net charge-offs for the nine months
ended September 30, 1996 and the year ended December 31, 1995 by product type
were as follows: multi-family loans $1.0 million and $0.3 million,
respectively, consumer loans $0.6 million and $0.8 million, respectively,
conforming residential mortgage loans $2.0 million and $2.0 million,
respectively, commercial loans $0.4 million and $0.2 million, respectively,
and leases $1.5 million and $0.5 million, respectively.
The provision for loan losses was $6.1 million, $5.5 million, $5.2 million
and $2.4 million for the nine months ended September 30, 1996, and the years
ended December 31, 1995, 1994 and 1993, respectively. The increase in the
provision was primarily the result of the increase in nonaccrual loans and the
increase in the amount of net charge-offs. The ratio of the allowance for loan
losses to total loans held for investment was 1.74%, 1.99%, 0.68% and 2.03% at
September 30, 1996 and at December 31, 1995, 1994 and 1993, respectively. The
ratio of the allowance for loan losses to nonaccrual loans was 31.0%, 44.3%,
53.8% and 65.9% at September 30, 1996 and at December 31, 1995, 1994 and 1993,
respectively. Although nonaccrual loans increased for the nine months ended
September 30, 1996 from December 31, 1995, with a corresponding decrease in
allowance coverage, the Company evaluated expected losses on nonaccrual loans
on a loan-by-loan basis and determined that the allowance was adequate to
cover both expected losses on nonaccrual loans and inherent losses in the
remainder of the Company's loans held for investment portfolio. The Company
considers the allowance for loan losses to be adequate.
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The percentage of the allowance for loan losses to nonaccrual loans does not
remain constant due to the nature of the Company's portfolio of loans. The
collateral for each nonperforming mortgage loan is analyzed by the Company to
determine potential loss exposure, and in conjunction with other factors, this
loss exposure contributes to the overall assessment of the adequacy of the
allowance for loan losses. On an ongoing basis, management monitors the loan
portfolio and evaluates the adequacy of the allowance for loan losses. In
determining the adequacy of the allowance for loan losses, management
considers such factors as historical loan loss experience, underlying
collateral values, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio. Loans deemed by management to be uncollectible are charged to
the allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense
and credited to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the loan
portfolio. Future additions to the allowance for loan losses may be necessary.
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 its interest-bearing liabilities reprice. In
addition, a positive gap may not protect an institution with a large portfolio
of ARMs from increases in interest rates for extended time periods as such
instruments generally have periodic and lifetime interest rate caps. The
Company's ARMs are predominantly tied to LIBOR. Interest rates and the
resulting cost of funds increases in a rapidly increasing rate environment
could exceed the cap levels on these loan products and negatively impact net
interest income.
The Company has managed interest rate risk through the aggressive marketing
and funding of adjustable rate loans, which generally reprice at least semi-
annually and are generally indexed to LIBOR. As a result of this strategy, at
September 30, 1996, the Company's total interest-earning assets maturing or
repricing within one year exceeded its total interest-bearing liabilities
maturing or repricing in the same time by $53.4 million, representing a
positive cumulative gap ratio of 103.09%. The Company closely monitors its
interest rate risk as such risk relates to operational strategies. The
Company's cumulative gap position is at a level satisfactory to management and
the Company is currently attempting to maintain a positive gap position in
light of the current interest rate environment. 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.
Hedging
The Company has implemented various hedging strategies with respect to its
origination of loans and leases for sale. To date, this has included selling
short comparable maturity United States Treasury securities and preselling
loans through prefunding accounts in its securitizations. The Company is
subject to the risk of rising mortgage interest rates between the time it
commits to fund or purchase mortgage loans at a fixed price and the time it
sells or securitizes those mortgage loans. To mitigate this risk, the Company
enters into transactions designed to hedge interest rate risks, including
mandatory and optional forward selling of mortgage-backed
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securities or United States Treasury securities, and buying and selling of
futures on United States Treasury securities. The nature and quantity of these
hedging transactions is and will be determined by the management of the
Company based on various factors including market conditions and the expected
volume of mortgage loan originations and purchases.
The Company believes that it has implemented a cost-effective hedging
program to provide a level of protection against interest rate risks. However,
an effective hedging strategy is complex and no hedging strategy can
completely insulate the Company from interest rate risks. In addition, hedging
involves transaction and other costs which could increase as the period
covered by the hedging protection increases, such costs could also increase in
periods of risk and fluctuating interest rates. Therefore, the Company may be
prevented from effectively hedging its interest rate risks, without
significantly reducing the Company's return on equity.
The Company does not currently engage in the speculative use of trading
activities, including derivatives and synthetic instruments or hedging
activities, in controlling interest rate risk on its portfolio of loans held
for investment.
Former Mortgage Banking Loan Commitments
As of September 30, 1996, and December 31, 1995, 1994 and 1993, the Company
had open short-term commitments amounting to $0, $93.7 million, $168.5 million
and $464.4 million, respectively, to fund loans in process subject to credit
approval. Interest rate risk is mitigated by the use of forward contracts to
sell loans to investors.
Forward Contracts
The Company sells mortgage-backed securities through forward delivery
contracts with major dealers in such securities. At September 30, 1996, and
December 31, 1995, 1994 and 1993, the Company had $0, $192.5 million, $485.5
million and $451.6 million, respectively, in outstanding commitments to sell
mortgage loans through mortgage-backed securities. These commitments allow the
Company to enter into mandatory commitments when the Company notifies the
investor of its intent to exercise a portion of the forward delivery
contracts. The Company was obligated under mandatory commitments to deliver
loans to such investors at September 30, 1996, and December 31, 1995, 1994 and
1993 in the amounts of $0.7 million, $97.0 million, $79.0 and $596.9 million,
respectively.
The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
Options
The Company may purchase put options to hedge against adverse movements in
the value of the loans held for sale portfolio. The Company will realize a
gain or loss upon the expiration or closing of the option transaction. When an
option is exercised, the proceeds on sales for a written call option, the
purchase cost for a written put option or the cost of the security for a
purchased put or call option is adjusted by the amount of premium received or
paid. The risk in buying an option is limited to the cost of the premium.
The Company had $0, $20.0 million, $0 and $0 notional amount of written call
option contracts outstanding at September 30, 1996 and December 31, 1995, 1994
and 1993, respectively. The Company received $0, $82,600, $0 and $0 in
premiums related to the options outstanding at September 30, 1996 andDecember
31, 1995, 1994 and 1993, respectively. There were no option contracts
exercised during the nine months ended September 30, 1996 and the years ended
December 31, 1995, 1994 and 1993.
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REPRICING/MATURITY OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. The amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual terms of the asset or
liability.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-------------------------------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN MORE THAN 3 YEARS 5 YEARS NON-
3 MONTHS 3 MONTHS TO 6 MONTHS 1 YEAR TO TO 5 TO 10 MORE THAN INTEREST
OR LESS 6 MONTHS TO 1 YEAR 3 YEARS YEARS YEARS 10 YEARS BEARING TOTAL
---------- ----------- --------- --------- --------- --------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash.................... $ 57,938 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 57,938
Other interest-bearing
deposits............... 322,129 -- -- -- -- -- -- -- 322,129
FHLB stock.............. 16,900 -- -- -- -- -- -- -- 16,900
Mortgage loans held for
sale................... 812,257 -- -- -- -- -- -- -- 812,257
Loans held for
investment, net of
unearned discount and
deferred loan fees(1).. 361,069 149,575 62,979 31,489 70,851 78,724 62,979 -- 817,666
---------- --------- --------- -------- ------- ------- -------- -------- ----------
Total interest-earning
assets................. 1,570,293 149,575 62,979 31,489 70,851 78,724 62,979 -- 2,026,890
---------- --------- --------- -------- ------- ------- -------- -------- ----------
Less:
Allowance for loan
losses................. -- -- -- -- -- -- -- (14,461) (14,461)
---------- --------- --------- -------- ------- ------- -------- -------- ----------
Net interest-earning
assets................. 1,570,293 149,575 62,979 31,489 70,851 78,724 62,979 (14,461) 2,012,429
Non-interest-earning
assets................. -- -- -- -- -- -- -- 233,708 233,708
---------- --------- --------- -------- ------- ------- -------- -------- ----------
Total assets............ $1,570,293 $ 149,575 $ 62,979 $ 31,489 $70,851 $78,724 $ 62,979 $219,247 $2,246,137
========== ========= ========= ======== ======= ======= ======== ======== ==========
Interest-bearing
liabilities:
Deposits................ $ 454,059 $ 244,709 $ 292,671 $ 60,913 $ -- $ -- $ -- $ -- $1,052,352
Borrowings from FHLB.... 223,000 60,000 55,000 -- -- -- -- -- 338,000
Other borrowings........ 400,045 -- -- -- -- -- -- -- 400,045
9 3/4% Senior Notes due
2004................... -- -- -- -- -- 88,169 -- -- 88,169
---------- --------- --------- -------- ------- ------- -------- -------- ----------
Total interest-bearing
liabilities............ 1,077,104 304,709 347,671 60,913 -- 88,169 -- -- 1,878,566
Non-interest-bearing
liabilities............ -- -- -- -- -- -- -- 146,222 146,222
Shareholders' equity.... -- -- -- -- -- -- -- 221,349 221,349
---------- --------- --------- -------- ------- ------- -------- -------- ----------
Total liabilities and
shareholders' equity... $1,077,104 $ 304,709 $ 347,671 $ 60,913 $ -- $88,169 $ -- $367,571 $2,246,137
========== ========= ========= ======== ======= ======= ======== ======== ==========
Interest rate
sensitivity gap(2)..... $ 493,189 $(155,134) $(284,692) $(29,424) $70,851 $(9,445) $ 62,979 $ 148,324
Cumulative interest
sensitivity gap........ $ 493,189 $ 338,055 $ 53,363 $ 23,939 $94,790 $85,345 $148,324 $ 148,324
Cumulative interest
sensitivity gap as a
percentage of total
assets................. 21.96% 15.05% 2.38% 1.07% 4.22% 3.80% 6.60% 6.60%
Cumulative net interest
earning assets as a
percent of interest
bearing liabilities.... 145.79% 124.46% 103.09% 101.34% 105.29% 104.54% 107.90% 107.90%
</TABLE>
- -------
(1) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(2) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARMs, have
features which restrict changes in interest rates on a short term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those reflected in the table. Finally, the ability of many
borrowers to service their ARMs may decrease in the event of an interest rate
increase.
53
<PAGE>
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's net interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to (i) changes attributable to changes in volume (changes in
volume multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), (iii) changes in interest due to
both rate and volume and (iv) the net change.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 OVER 1995 DECEMBER 31, 1995 OVER 1994
------------------------------------- -------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- ------- -------- -------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(decrease)
in:
Interest-bearing
deposits.......... $ (1,126) $(2,061) $ (299) $ (3,486) $ 1,302 $ 1,079 $ 503 $ 2,884
FHLB stock........ (216) 164 (261) (313) 61 70 5 136
Loans held for
sale.............. 38,124 16,180 10,785 65,089 (14,656) 3,022 (1,496) (13,130)
Loans held for
investment, net... (35,473) 13,317 (23,893) (46,049) 54,467 (156) (110) 54,201
Capitalized
excess servicing
fees receivable... 5,837 256 (1,744) 4,349 2,608 -- -- 2,608
-------- ------- -------- -------- -------- -------- ------- --------
Total interest
income.......... 7,146 27,856 (15,412) 19,590 43,782 4,015 (1,098) 46,699
-------- ------- -------- -------- -------- -------- ------- --------
Deposits.......... 8,639 260 (15,055) (6,156) (5,297) 17,278 (2,181) 9,800
Borrowings from
Imperial Bank..... 302 -- -- 302 (129) -- -- (129)
FHLB borrowings... (6,284) (621) (2,969) (9,874) 3,315 4,270 1,339 8,924
Other borrowings.. 27,130 3,121 (7,756) 22,495 11,664 281 3,472 15,417
9 3/4% Senior
Notes due 2004.... 484 8 (2,220) (1,728) 177 (136) 1 42
-------- ------- -------- -------- -------- -------- ------- --------
Total interest
expense......... 30,271 2,768 (28,000) 5,039 9,730 21,693 2,631 34,054
-------- ------- -------- -------- -------- -------- ------- --------
Change in net
interest income.... $(23,125) $25,088 $ 12,588 $ 14,551 $ 34,052 $(17,678) $(3,729) $ 12,645
======== ======= ======== ======== ======== ======== ======= ========
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994 OVER 1993
------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
------- -------- ------- --------
<S> <C> <C> <C> <C>
Increase/(decrease)
in:
Interest-bearing
deposits.......... $ 1,621 $ (240) $ (241) $ 1,140
FHLB stock........ 78 346 74 498
Loans held for
sale.............. 3,958 (13,902) (1,382) (11,326)
Loans held for
investment, net... 46,362 (1,415) (6,060) 38,887
Capitalized
excess servicing
fees receivable... -- -- -- --
------- -------- ------- --------
Total interest
income.......... 52,019 (15,211) (7,609) 29,199
------- -------- ------- --------
Deposits.......... 15,620 2,386 1,627 19,633
Borrowings from
Imperial Bank..... (81) 63 (29) (47)
FHLB borrowings... 3,672 1,037 750 5,459
Other borrowings.. (1,651) 394 (263) (1,520)
9 3/4% Senior
Notes due 2004.... 8,338 -- -- 8,338
------- -------- ------- --------
Total interest
expense......... 25,898 3,880 2,085 31,863
------- -------- ------- --------
Change in net
interest income.... $26,121 $(19,091) $(9,694) $ (2,664)
======= ======== ======= ========
</TABLE>
54
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company
for the nine months ended September 30, 1996 and the years ended December 31,
1995, 1994 and 1993. 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 the nine months ended
September 30, 1996 and the years ended December 31, 1995, 1994 or 1993. 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>
NINE MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
--------------------------- --------------------------- --------------------------- -------------------------
YIELD/ YIELD/ YIELD/ YIELD/
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- ------- ---------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Interest-bearing
deposits........ $ 105,085 $ 2,155 2.73% $ 131,277 $ 5,641 4.30% $ 89,155 $ 2,757 3.09% $ 44,513 $ 1,617 3.63%
FHLB stock...... 15,411 676 5.85 19,720 989 5.02 18,398 853 4.64 15,096 355 2.35
Loans held for
sale............ 1,206,483 81,375 8.99 361,156 16,286 4.51 719,487 29,416 4.09 655,754 40,742 6.21
Loans held for
investment,
net(1).......... 718,923 57,909 10.74 1,091,536 103,958 9.52 521,200 49,757 9.55 98,961 10,870 10.98
Capitalized
excess servicing
fees receivable. 72,064 6,957 12.87 22,257 2,608 11.72 -- -- -- -- -- --
---------- -------- ---------- -------- ---------- ------- -------- -------
Total interest-
earning assets.. 2,117,966 149,072 9.38 1,625,946 129,482 7.96 1,348,240 82,783 6.14 814,324 53,584 6.58
---------- -------- ---------- -------- ---------- ------- -------- -------
Non interest-
earning assets... 113,079 45,167 70,117 34,202
---------- ---------- ---------- --------
Total assets.... $2,231,045 $1,671,113 $1,418,357 $848,526
========== ========== ========== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
Interest-bearing
liabilities:
Deposits........ $1,012,356 $ 45,409 5.98% $ 867,162 $ 51,565 5.95% $ 992,972 $41,765 4.21% $581,923 $22,132 3.80%
Borrowings from
Imperial Bank... 4,422 302 9.11 -- -- -- 1,415 129 9.12 2,619 176 6.72
Borrowings from
FHLB............ 210,040 9,546 6.06 310,425 19,420 6.26 235,922 10,496 4.45 136,423 5,037 3.69
Other
borrowings...... 669,067 38,858 7.74 251,684 16,363 6.50 18,877 946 5.01 57,084 2,466 4.32
9 3/4% Senior
Notes due 2004.. 86,212 6,652 10.29 81,500 8,380 10.28 79,807 8,338 10.45 -- -- --
---------- -------- ---------- -------- ---------- ------- -------- -------
Total interest-
bearing
liabilities(2).. 1,982,097 100,767 6.78 1,510,771 95,728 6.34 1,328,993 61,674 4.64 778,049 29,811 3.83
---------- -------- ---------- -------- ---------- ------- -------- -------
Non interest-
bearing
liabilities...... 101,673 88,306 19,025 14,690
Shareholders'
equity........... 147,275 72,036 70,339 55,787
---------- ---------- ---------- --------
Total
liabilities and
shareholders'
equity.......... $2,231,045 $1,671,113 $1,418,357 $848,526
========== ========== ========== ========
Net interest rate
spread........... $ 48,305 2.60% $ 33,754 1.62% $21,109 1.50% $23,773 2.75%
======== ======== ======= =======
Net interest
margin(2)........ 3.04% 2.08% 1.57% 2.92%
Ratio of
interest-earning
assets to
interest-bearing
liabilities...... 106.85% 107.62% 101.45% 104.66%
</TABLE>
- ----
(1) Net of deferred income and the allowance for loan losses, includes
nonaccrual loans.
(2) Average interest cost and net interest margin excluding the interest
expense from the Old Notes held at ICII during the nine months ended
September 30, 1996 and the years ended December 31, 1995, 1994 and 1993
were 6.62% and 3.46%, 6.11% and 2.59%, 4.27% and 2.18% and 3.83% and
2.92%, respectively.
55
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"), which establishes accounting for transfers and
servicing of financial assets and extinguishment of liabilities. This
statement specifies when financial assets and liabilities are to be removed
from an entity's financial statements, the accounting for servicing assets and
liabilities and the accounting for assets that can be contractually prepaid in
such a way that the holder would not recover substantially all of its recorded
investment.
Under SFAS 125, an entity recognizes only assets it controls and liabilities
it has incurred, discontinues recognition of assets only when control has been
surrendered, and discontinues recognition of liabilities only when they have
been extinguished. SFAS 125 requires that the selling entity continue to carry
retained interests, including servicing assets, relating to assets it no
longer recognizes. Such retained interests are based on the relative fair
values of the retained interests of the subject assets at the date of
transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral. Under
SFAS 125, certain collateralized borrowings may result in assets no longer
being recognized if the assets are provided as collateral and the secured
party takes control of the collateral. This determination is based upon
whether (i) the secured party is permitted to repledge or sell the collateral
and (ii) the debtor does not have the right to redeem the collateral on short
notice. Extinguishments of liabilities are recognized only when the debtor
pays the creditor and is relieved of its obligation for the liability, or when
the debtor is legally released from being the primary obligor under the
liability, either judicially or by the creditor.
SFAS 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assets in the form of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to, and over the period of, net servicing income or loss. Servicing
assets and liabilities are to be assessed for impairment based on their fair
value.
SFAS 125 modifies the accounting for interest-only strips or retained
interests in securitizations, such as capitalized servicing fees receivable,
that can be contractually prepaid or otherwise settled in such a way that the
holder would not recover substantially all of its recorded investment. In this
case, it requires that they be classified as available for sale or as trading
securities. Interest-only strips and retained interests are to be recorded at
market value. Changes in market value are included in operations, if
classified as trading securities, or in shareholders' equity as unrealized
holding gains or losses, net of the related tax effect, if classified as
available for sale. SFAS 125 will be effective for the Company on January 1,
1997. Management of the Company is currently in the process of evaluating the
financial impact of this statement on the Company.
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS
121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles (including goodwill) to be held and used by an entity by reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, the entity should estimate the future cash flows expected
to result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the
asset, an impairment analysis is required and the long-lived asset or
identifiable intangible would be reported at the lower of the carrying amount
or fair value less cost to sell. The Company adopted this Statement effective
January 1, 1996. The adoption of SFAS 121 did not have a material effect on
the Company's financial condition or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"). SFAS 123 applies to all transactions in which the
Company acquires goods or services by issuing equity instruments or by
incurring liabilities where the payment amounts are based on the Company's
common stock price, except for employee stock ownership plans. A new method of
accounting for stock based compensation arrangements with employees is
established by SFAS 123. The new method is based on the fair
56
<PAGE>
value method rather than the intrinsic value method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). SFAS 123 does
not require companies to adopt the new fair value method for purposes of
preparing their basic financial statements. Entities are allowed to either
continue to use the APB 25 method or adopt the fair value method set forth in
SFAS 123. Companies that do not adopt the new fair value method in SFAS 123
for purposes of preparing their basic financial statements are required to
include pro forma disclosures in the notes to the basic financial statements.
The pro forma disclosures should include the impact of the fair value method
on net income and income per share as if SFAS 123 had been adopted. SFAS 123
was adopted as of January 1, 1996. The impact on the Company of adopting SFAS
123 was not material.
RECENT DEVELOPMENT
The California Department of Corporations and the FDIC recently completed a
joint examination of SPTL. As a result of such examination, SPTL entered into
a joint memorandum of understanding with the FDIC and the California
Department of Corporations. The memorandum of understanding requires certain
measures to be taken in the areas of: (i) hiring and retention of management,
(ii) adoption of systems to monitor and control risk, (iii) correction of
certain violations of law, (iv) credit review and (v) enhancement of other
operational policies. SPTL does not believe that this informal agreement will
have an adverse effect either on itself or on the Company. In the event that
SPTL fails to comply with the memorandum of understanding, SPTL could be
subject to various enforcement actions, including cease and desist orders,
criminal or civil penalties, removal of management and directors from office,
termination of deposit insurance or the revocation of SPTL's charter. Any such
enforcement action could have a material adverse effect on the Company. See
"Business--Regulation."
57
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
GENERAL
The Company is a diversified commercial and consumer finance company. In
1995, the Company began to reposition its business from originating and
selling conforming residential mortgage loans to offering higher margin loan
and lease products. The Company accomplished this repositioning through a
business strategy that emphasizes: (i) opportunistic expansion and
acquisitions of businesses in niche segments of the financial services
industry, (ii) conservative and disciplined underwriting and credit risk
management, (iii) loan and lease originations, where possible, on a wholesale
basis, (iv) securitization or sale in the secondary market of substantially
all of the Company's loans and leases, other than those held for investment by
SPTL and (v) maintaining business and financial flexibility to take advantage
of changing market conditions with respect to specific financial services
businesses.
For the nine months ended September 30, 1996, a substantial portion of the
Company's operations were conducted through its non-conforming residential
mortgage lending subsidiary, SPFC. In June 1996, as part of the Company's
repositioning, SPFC engaged in an initial public offering of its common stock
pursuant to which ICII was a selling shareholder. In November 1996, ICII sold
additional shares of its SPFC common stock reducing its ownership percentage
to 51.2%. ICII expects that its percentage ownership of SPFC will be reduced
below 50% at which point the financial statements of SPFC would not be
consolidated with those of ICII. For a further description of the effect of
such deconsolidation, see "Unaudited Consolidated Pro Forma Financial
Statements."
The Company has diversified its loan and lease products by focusing on the
creation and acquisition of additional finance businesses in order to reduce
dependency on residential mortgage lending. When acquiring new businesses or
targeting expansion opportunities, the Company seeks to retain existing
management and recruit additional experienced management to increase growth
and profitability and to reduce the risks associated with operating the newly
acquired entity. For the nine months ended September 30, 1996 and the year
ended December 31, 1995, the Company originated or acquired $1.6 billion and
$3.1 billion of loans and leases, respectively. During these periods,
conforming residential mortgage loans decreased as a percentage of total loans
and leases from 58% to 20%, while non-conforming residential mortgage loans
increased as a percentage of total loans and leases from 28% to 31%,
commercial mortgage loans increased as a percentage of total loans and leases
from 9% to 32%, business loans and leases increased as a percentage of total
loans and leases from 3% to 14% and consumer loans increased slightly from 2%
to 3% of total loans and leases. In addition, during the nine months ended
September 30, 1996 and the year ended December 31, 1995, the Company completed
securitization transactions of $934.5 million and $1.0 billion, respectively.
The Company offers loan and lease products in the following sectors:
FRANCHISE LENDING
Acquisition of FMAC
In June 1995, the Company established FMAC, whose assets were acquired from
a division of Greenwich Financial Capital Products, Inc. ("Greenwich"),
including all of Greenwich's rights under certain servicing contracts entered
into by FMAC's predecessor (the "Servicing Contracts"). The Servicing
Contracts pertained to the servicing of franchise mortgage loans that were
previously securitized by Greenwich through FMAC's predecessor. In connection
with the acquisition, the Company and its affiliates assumed certain
liabilities related to the Servicing Contracts and Greenwich agreed to act as
the Company's exclusive agent in connection with the securitization of
franchise mortgage loans for a period of 24 months. The net purchase price for
these assets was approximately $7.8 million.
58
<PAGE>
Concurrently with the closing of the transactions described above, the
Company entered into an operating agreement with Wayne L. Knyal ("Knyal"), the
former president of FMAC's predecessor, for the formation of FMAC. FMAC was
formed to originate, securitize and service franchise mortgage loans. Under
the terms of the operating agreement, in exchange for a 66.7% ownership
interest in FMAC, the Company contributed to FMAC approximately $1.3 million
in cash and all of the assets purchased from Greenwich other than the
Servicing Contracts. In exchange for a 33.3% ownership interest in FMAC, Knyal
caused his wholly-owned subsidiary, Franchise Mortgage Acceptance Corporation
("FMAC Corporation"), to contribute to FMAC all of its rights under a
servicing contract pertaining to franchise mortgage loans that were previously
securitized by FMAC Corporation. FMAC's headquarters and operations center are
located in Greenwich, Connecticut.
General
FMAC is a full service franchise finance company engaged in the business of
originating loans and equipment leases to top-tier established franchisees of
national and regional franchise concepts, most of which are then securitized
into investment grade structures and sold to institutional investors. During
the nine months ended September 30, 1996, and for the six-month period ended
December 31, 1995, FMAC originated or acquired $304.4 million and $163.5
million and securitized $167.4 million and $105.2 million of franchise
mortgage loans, respectively. At September 30, 1996 and December 31, 1995,
none of the loans included on the Company's consolidated balance sheet
originated by FMAC were delinquent. The Company's current product line
consists of enterprise loans, which are loans to finance the operation of
existing franchise units, development loans, which are loans to fund
construction of new units, other real estate loans, which are loans to acquire
additional units, and equipment financing, which are loans and leases for
franchise equipment. To reduce credit risk, the Company strategically focuses
on lending to established franchise owners who typically own three or more
units, have three or more years of ownership experience in the concept, or
have an equivalent ownership tenure in a different major concept.
FMAC historically has focused on lending to national and regional franchise
concepts such as Taco Bell, Burger King, Hardee's, Pizza Hut, Wendy's and KFC.
The Company intends to further expand its lending within the food service
industries to casual dining and buffet style restaurant franchises.
Additionally, the Company intends to expand into other food and non-food
related franchise concepts.
In connection with its lending activities, the Company has taken equity
positions in borrowers and intends to expand such interests in the future to
improve its returns. For example, in June 1996, FMAC provided a $40.0 million
acquisition loan to Summerwood LP ("Summerwood") for the acquisition of 65
Taco Bell and six KFC restaurants in the greater Philadelphia area. The
restaurant assets were comprised of a mixture of fee and leased properties,
restaurant operating equipment, and the development rights for the
Philadelphia markets for 34 additional Taco Bell and 10 KFC restaurants.
Included in the transaction were warrants to acquire in excess of one-third of
the ownership of Summerwood.
In February 1996, FMAC established a division doing business under the name
Imperial Golf Finance Group, which expands FMAC's financing to owners and
operators of golf courses nationwide, with a focus on lending to experienced
golf course operators. For the nine months ended September 30, 1996, FMAC made
$3.2 million in loan originations related to the golf industry.
Industry Data
According to the 1996 Edition of the Franchise Opportunities Guide (the
"Guide"), there are more than 550,000 domestic franchise businesses currently
generating more than $800 billion in sales. According to the Guide, sales by
franchised businesses now total more than one-third of the United States
retail market and more than seven million people draw their paychecks from
franchised businesses.
The Company believes that substantial business opportunities exist in the
growing franchise finance market. Although the term franchise is typically
associated with fast food restaurants, there are a multitude of franchise
businesses offering a variety of products and services such as home sales, car
maintenance and hair cutting.
59
<PAGE>
Members of FMAC's management group have gained extensive experience in the
development and refinement of systems of operation, management and research
which have enhanced FMAC's ability to identify, evaluate and structure new
investments. FMAC's experience in the restaurant franchise industry results in
efficient, in-house performance of loan origination, real estate acquisition
and management. FMAC utilizes experienced loan originators recruited from
banking and commercial finance companies to analyze operations data, assess
real estate values, process and document loan files, and implement FMAC's
business growth strategy.
Loan Originations
Overview
Enterprise loans--Enterprise loans are fixed or variable rate loans offered
to finance the operation of existing franchise units. These loans are used to
refinance existing franchise debt of the borrower or for working capital
purposes. Enterprise loans generally have a term and amortization of up to 15
years and are partially secured by taking a first lien on all available
franchise furniture, fixtures and equipment. FMAC focuses on the cash flow of
the franchise concept for repayment of an enterprise loan since neither the
franchise mortgage nor the franchise agreement is assigned to secure the loan;
the continued ability of the borrower to operate the franchise in a cash
positive manner is essential to the borrower's ability to repay.
Development loans--Development loans are variable rate loans offered to fund
the development and construction of new franchise units. Development loans
generally have a term and amortization of up to 15 years and are secured by
the franchise mortgage or leasehold interest as well as all available
franchise furniture, fixtures and equipment.
Other real estate loans--Other real estate loans are fixed or variable rate
loans offered to acquire additional franchise units, which may include the
underlying real estate interest. Other real estate loans generally have a term
and amortization of up to 15 years and are secured by the franchise mortgage
or leasehold interest as well as all available franchise furniture, fixtures
and equipment.
Equipment financing--FMAC offers both equipment loans and equipment leases
to finance the acquisition of franchise concept equipment. Equipment loans and
leases generally have a term and amortization of up to five years and are
secured by the underlying financed equipment.
The following table sets forth FMAC's loan originations by type of loans for
the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------------------- -------------------------------------------
WEIGHTED WEIGHTED
NUMBER OF PRINCIPAL AVERAGE NUMBER OF PRINCIPAL AVERAGE
LOANS AMOUNT % OF TOTAL INTEREST LOANS AMOUNT % OF TOTAL INTEREST
ORIGINATED ORIGINATED ORIGINATIONS RATE ORIGINATED ORIGINATED ORIGINATIONS RATE
---------- ---------- ------------ -------- ---------- ---------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Enterprise Loans
Fixed rate loans....... 97 $ 51,777 17.0% 10.32% 82 $ 52,740 32.3% 10.11%
Variable rate loans.... 61 35,938 11.8 8.91% 30 12,377 7.6 8.53%
--- -------- ----- --- -------- -----
Total.................. 158 87,715 28.8 112 65,117 39.9
--- -------- ----- --- -------- -----
Development Loans
Fixed rate loans ...... -- -- -- -- -- -- -- --
Variable rate loans.... 50 64,818 21.3 9.45% 6 5,955 3.6 9.38%
--- -------- ----- --- -------- -----
Total.................. 50 64,818 21.3 6 5,955 3.6
--- -------- ----- --- -------- -----
Other Real Estate Loans
Fixed rate loans....... 119 98,375 32.3 10.32% 84 73,643 45.0 9.97%
Variable rate loans.... 63 53,523 17.6 8.96% 20 18,784 11.5 8.57%
--- -------- ----- --- -------- -----
Total.................. 182 151,898 49.9 104 92,427 56.5
--- -------- ----- --- -------- -----
Total(1).............. 390 $304,431 100.0% 222 $163,499 100.0%
=== ======== ===== === ======== =====
</TABLE>
- --------
(1) Excludes $0.7 million of equipment leases originated during the nine
months ended September 30, 1996. There were no equipment leases originated
during the period from June 30, 1995 through December 31, 1995.
60
<PAGE>
All of FMAC's borrowers must have a franchise agreement in place with an
approved concept franchisor. The following table sets forth FMAC's loan
originations by franchise concept.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
---------------------------------- ----------------------------------
NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
LOANS AMOUNT % OF TOTAL LOANS AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------ ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Taco Bell............... 150 $110,234 36.2% 44 $ 33,599 20.6%
Burger King............. 85 84,728 27.8 54 38,503 23.6
Hardee's................ 58 41,241 13.6 39 33,447 20.4
Wendy's................. 35 25,144 8.3 22 16,769 10.3
Pizza Hut............... 14 8,093 2.7 44 27,925 17.0
TGI Friday's............ 3 7,567 2.5 1 2,550 1.6
Long John Silvers....... 15 6,850 2.2 -- -- --
KFC..................... 11 5,905 1.9 18 10,706 6.5
Other................... 19 14,669 4.8 -- -- --
--- -------- ----- --- -------- -----
Total................ 390 $304,431 100.0% 222 $163,499 100.0%
=== ======== ===== === ======== =====
</TABLE>
Geographic Distribution--The following table sets forth by state the number
of loans originated by FMAC for the periods presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
---------------------------------- ----------------------------------
NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
LOANS AMOUNT % OF TOTAL LOANS AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------ ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania............ 54 $ 32,567 10.7% -- $ -- --%
Connecticut............. 34 30,749 10.1 14 7,859 4.8
New Jersey.............. 25 26,427 8.7 6 6,258 3.8
California.............. 21 18,511 6.1 16 10,475 6.4
Maryland................ 14 17,346 5.7 2 1,407 0.9
Texas................... 19 15,057 4.9 16 13,445 8.2
North Carolina.......... 9 12,372 4.1 17 9,588 5.9
Nevada.................. 18 11,284 3.7 -- -- --
New Hampshire........... 13 9,780 3.2 -- -- --
Delaware................ 13 8,685 2.8 -- -- --
Alabama................. 11 8,533 2.8 -- -- --
New York................ 14 8,208 2.7 9 6,464 4.0
Wisconsin............... 9 8,170 2.7 13 9,327 5.7
New Mexico.............. 19 8,015 2.6 1 189 0.1
Virginia................ 9 7,524 2.5 25 18,819 11.5
Massachusetts........... 10 7,203 2.4 4 4,197 2.6
Tennessee............... 8 6,850 2.2 -- -- --
Georgia................. 5 6,513 2.1 16 11,583 7.1
Ohio.................... 9 6,395 2.1 7 8,192 5.0
Minnesota............... 6 6,239 2.0 7 5,781 3.4
Illinois................ 8 5,041 1.7 6 4,986 3.1
Florida................. 7 4,168 1.4 6 4,634 2.8
South Carolina.......... 4 3,579 1.2 8 5,391 3.3
West Virginia........... 4 3,454 1.1 -- -- --
Oklahoma................ 13 3,445 1.1 9 1,929 1.2
Michigan................ 4 3,417 1.1 6 4,828 3.0
Indiana................. 5 3,257 1.1 -- -- --
Kansas.................. 1 3,029 1.0 3 1,927 1.2
Colorado................ 4 1,640 0.5 6 3,807 2.3
Kentucky................ 1 1,177 0.4 4 5,423 3.3
Iowa.................... 1 800 0.3 2 1,954 1.2
Alaska.................. 1 750 0.3 11 8,259 5.1
Missouri................ -- -- -- 4 3,884 2.4
Other................... 17 14,246 4.7 4 2,893 1.7
--- -------- ----- --- -------- -----
Total................ 390 $304,431 100.0% 222 $163,499 100.0%
=== ======== ===== === ======== =====
</TABLE>
61
<PAGE>
Underwriting
Under FMAC's current underwriting guidelines, each franchisee loan is
originated after a review of the applicant's ability to repay the franchisee
loan, the adequacy of the cash flow of both the franchise unit and the
borrower, and the real and tangible personal property that serves as
collateral for such franchisee loan. FMAC has created an underwriting model
which incorporates management's assumptions, which are based upon industry
statistics, into an underwriting formula. Loan officers input data provided by
potential borrowers and determine whether or not a loan would qualify under
FMAC's underwriting guidelines. FMAC's loan originations typically range in
size from $250,000 to $2.0 million for each franchise location. The majority
of borrowers are multiple unit operators.
For all loans, the borrower completes an environmental questionnaire and
FMAC obtains a report from a third party service which identifies
environmental risks in the vicinity. Certificates of occupancy are requested
on all units. Additionally, Uniform Commercial Code ("UCC") searches are
conducted for all borrowers before and after origination of a loan. FMAC
prefers franchisees to pay off all existing loans and equipment leases with
FMAC loan proceeds. For cases in which encumbrances will survive the funding
of the franchisee loan, FMAC reviews all such notes, pledge and security
agreements, and loan documents.
Although the franchise agreement is not assigned to secure the franchisee
loan, the continued ability of the borrower to operate the franchise is
essential to ensure the borrower's ability to repay the franchisee loan. FMAC
reviews a copy of the executed franchise agreement to verify (i) that the
borrower is the franchisee or has been granted an assignment of franchisee
rights from the franchisor, (ii) that the duration of the franchise term is as
reported by the borrower and (iii) that the renewal section of the agreement
provides for renewals of the franchise term, particularly when the franchise
term does not exceed the loan term. In the event a loan term exceeds the term
of a borrower's franchise agreement, the loan documentation provides that it
is an event of default (entitling FMAC to accelerate the loan at a premium) if
the franchise agreement is not renewed. If a franchise agreement is not
renewed, FMAC can permit a borrower to provide substitute collateral
satisfying FMAC's underwriting guidelines. Additionally, a certificate of good
standing is required from the franchisor. Units must meet minimum seasoning
requirements which are typically 12 months of operation. The amount of
seasoning generally required is three years for single unit borrowers and
three to 12 months for multi-unit borrowers.
FMAC reviews the organizational documents of borrowers which are business
entities and reviews the personal net worth of borrowers who are individuals.
Business credit reports are obtained for all borrowers. Personal credit
reports are obtained for majority owners of all borrowers. For borrowers
organized as sole proprietorships (other than multi-unit borrowers) and in
certain other cases, personal guarantees are required from the principals. All
former bankruptcies must be discharged and the time since discharge must be at
least five years except in extraordinary circumstances.
Three years of historical operating statements, if available, are required
of all borrowers. FMAC analyzes the revenue and expense numbers to determine
the ability of the unit to support the repayment of a prospective franchisee
loan. Two measures are calculated for this purpose: fixed charge coverage
ratio, i.e., the ratio of cash flow to fixed charges of both the borrower and
the unit, which is generally required to be 1.15x to 1.25x and loan-to-
business value of the unit. The "business value" of a franchise unit is
derived from a formula based upon the franchise concept and the revenues
(sales) and cash flow generated by the franchise unit through its operations,
which in turn is dependent upon and derived from a borrower's franchise
agreement with (or license from) the franchisor. In the case of development
loans, the maximum loan-to-business value is 70% and, in the case of
enterprise loans, the maximum loan-to-business value is 65%. Exceptions to
these maximum loan-to-business values may be made in certain circumstances and
with respect to single-unit borrowers more stringent loan-to-business value
standards are required.
62
<PAGE>
Marketing
FMAC originates the majority of its loans through its marketing department,
comprised of account executives located in seven offices that have established
relationships with franchise operators located in all 50 states. FMAC's
offices are in Alabama, California, Colorado, Connecticut, Georgia, Nebraska
and Washington. FMAC is actively seeking to expand and diversify its financing
operations pursuant to selected franchise operating statistics and other
criteria developed by FMAC, which are intended to identify attractive markets
for FMAC's products.
Applicants are identified through direct solicitation, targeted mailings,
phone solicitations, participation at franchisee conventions, and through
existing customer contacts. Prospective borrowers are contacted by a lending
officer and complete an application for each franchisee location. In addition
to an application, FMAC reviews substantial required documentation depending
on the nature of the borrower and the collateral securing the loan. If a
borrower meets FMAC's underwriting criteria, the account executive uses the
FMAC underwriting model to generate a loan proposal. FMAC funds over 90% of
all loan proposals generated by its underwriting model.
FMAC's databases include specific franchise location data for over 20
franchise concepts, including demographic information, traffic volumes and
information about surrounding retail and other commercial development that
generate customer traffic for franchise establishments. FMAC also maintains a
database of approximately 3,000 chain restaurant industry participants, as
well as databases of unit-level financial performance for existing and
prospective clients. FMAC has the ability to integrate information collected
on sales performance and restaurant location with a mapping system which
contains demographic, retail space, traffic count and street location
information for every significant market in the United States. FMAC also has
collected extensive data regarding management practices within several
franchised industries, franchisor practices and industry trends.
The information collected by FMAC is actively used to assess lending
opportunities, measure prospective credit risk, evaluate portfolio performance
and manage underperforming assets. FMAC intends to continually develop,
improve and use its knowledge of franchised enterprises through research and
broader application of information technology to lower portfolio risk, improve
performance, expand into other franchise concepts and improve its competitive
advantage.
BUSINESS FINANCE LENDING
The Company, through IBC, and SPTL's CBC, LPIG and Auto Lend divisions,
engages in business finance lending, which consists of commercial equipment
leasing, asset-based lending, loan participations and automobile inventory
financing for automobile dealers.
ASSET-BASED LENDING
Acquisition of CBC
On September 30, 1995, as part of the Company's strategy to diversify its
lending operations, the Company acquired from Coast Federal Bank, all of the
outstanding capital stock of CoastFed Business Credit Corporation ("CBCC"), a
financial services company engaged primarily in the asset-based commercial
lending business. The purchase price was approximately $150.0 million.
Concurrently with the closing of the transaction described above, CBCC was
merged with and into SPTL. Upon consummation of the merger, CBCC became the
Coast Business Credit operating division of SPTL ("CBC").
63
<PAGE>
General
CBC is a senior secured asset-based lender which has historically lent
primarily to California-based companies. While CBC's headquarters are located
in West Los Angeles, California and CBC's principal activities are based in
California, during 1996 CBC executed an expansion plan which has increased its
customer base outside of California. CBC now operates three loan production
centers in California and additional loan production centers in Boston,
Minneapolis, Atlanta, Portland and Seattle. At September 30, 1996, and
December 31, 1995, CBC had outstanding loans totaling $278.9 million and
$154.2 million, respectively. CBC had unused loan commitments of $236.4
million at September 30, 1996.
CBC's principal business is asset-based lending to small- to medium-sized
businesses with annual revenues ranging from approximately $10 million to $100
million. Generally, such businesses are constrained from obtaining financing
from more traditional credit sources such as commercial banks due to
inadequate equity capitalization, limited operating history, lack of
profitability or financing needs below commercial bank minimum size
requirements. CBC has focused its lending activities on high technology
businesses engaged in the computer industry, many of which are backed by
venture capital investors. At September 30, 1996, CBC had outstanding loans
totaling $74.3 million to technology companies.
At September 30, 1996, CBC's loan portfolio represented lending
relationships with 104 customers, with an average total loan per customer of
$2.7 million. The Company believes that CBC's relationships with venture
capital investors and its industry expertise contribute to CBC's ability to
distinguish itself from its competitors and grow its lending relationships.
The Company believes that CBC's pricing is competitive with pricing charged
by other commercial finance companies. In addition, CBC attempts to be
flexible in the structuring of its revolving credit lines and to provide
prompt service in order to gain an advantage over its competitors. When CBC
competes against more traditional lenders, it competes less on price and more
on flexibility, speed of funding and the relative simplicity of its
documentation. CBC strives to fund its initial advance under a loan to an
approved client within three weeks of CBC's receipt of required information
with respect to the client, and strives to fund future advances generally by
the next business day after CBC's receipt of required documentation.
Loan Products and Originations
CBC's loans are categorized based on the type of collateral securing the
loan. CBC makes revolving loans primarily secured by accounts receivable and
secondarily by inventory. It also makes term loans secured by real property,
equipment or other fixed assets. CBC also periodically enters into
participations with other commercial finance companies. CBC's loans typically
have maturities of two to five years, providing borrowers with greater
flexibility to manage their borrowing needs. These loans have an automatic
renewal for a one year period at the end of such contract term unless
terminated by either party (usually requiring 60 days written notice prior to
the end of such term). Equipment loans are term loans typically with three- to
five-year amortization periods, but are due and payable upon termination of
the master loan and security agreement.
The principal types of loans made by CBC are as follows:
Accounts Receivable Loans--These loans are revolving lines of credit that
are collateralized principally by accounts receivable. Borrowers normally
remit their customer accounts receivable payments directly to CBC, usually on
a daily basis. CBC deposits the payments daily and applies the funds to the
borrowers' loan balances. CBC typically lends up to 80% of the principal
balance of accounts receivable that meet CBC's eligibility requirements.
Inventory Loans--These loans are revolving lines of credit that are
collateralized by eligible inventory restricted to raw materials and finished
goods and are made only in conjunction with accounts receivable loans to
qualifying borrowers. Borrowers are required to provide CBC with monthly
inventory designations that are
64
<PAGE>
supported by a physical listing or a copy of a perpetual computer listing.
These reports are compared to the borrower's financial statements for accuracy
and CBC advances a percentage of the eligible inventory value. Inventory loans
are primarily structured as revolving lines of credit, but under certain
circumstances may be structured to incorporate monthly amortization.
Participation Loans--These loans consist of term loans or revolving lines of
credit in which CBC and other lenders (banks or other asset-based lenders)
jointly lend to borrowers when the loan amount exceeds the lending limits of
an individual lender.
Set forth below is a table showing the principal amount of CBC's loans
outstanding as of September 30, 1996 and December 31, 1995, and the percentage
of CBC's portfolio comprised of each loan type as of such date.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
1996 1995
----------------- -----------------
OUTSTANDING % OF OUTSTANDING % OF
BALANCE TOTAL BALANCE TOTAL
----------- ----- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Accounts receivable loans.............. $209.8 75.2% $127.3 82.6%
Inventory loans........................ 31.8 11.4 18.9 12.3
Participation loans(1)................. 37.3 13.4 8.0 5.1
------ ----- ------ -----
Total................................ $278.9 100.0% $154.2 100.0%
====== ===== ====== =====
</TABLE>
- --------
(1) Participation loans include $42.3 million and $10.3 million purchased and
$5.0 million and $2.3 million sold at September 30, 1996 and December 31,
1995, respectively.
The weighted average yield on CBC's loans outstanding was 12.14% and 13.25%
at September 30, 1996 and December 31, 1995, respectively.
CBC had commitments to make additional fundings on lines of credit with
existing borrowers totaling approximately $236.4 million and $209.9 million at
September 30, 1996 and December 31, 1995, respectively; however, each
additional funding is contingent upon the borrower's maintaining both
sufficient collateral and compliance with the terms and conditions of the loan
documents.
Underwriting
Before a credit line is established, CBC policy requires a review of the
prospective client, its principals, business and customer base, including a
review of financial statements and other financial information, legal
documentation, samples of invoices and related documentation, operational
matters and accounts receivable and payable. Following this review, CBC
confirms certain matters with respect to the prospective client's business and
the collectibility of the client's commercial receivables and other potential
collateral by conducting public record searches for liens, conducting credit
reviews of the prospective client and its principals, contacting major
customers and suppliers to identify potential problems, and conducting an on-
site audit of the prospective client's invoice, bookkeeping and collection
procedures to verify that they are properly conducted and operationally
compatible with CBC's operations. For high technology borrowers, particular
emphasis is placed on comprehending the underlying value of the technology
itself, including the value of the borrowers' intangible assets.
After the preliminary review and diligence, CBC requires the prospective
borrower to provide a deposit for fees, orders appraisals if lending against
inventory, equipment or real estate and schedules an audit. CBC's audit staff
conducts audits generally consisting of a due diligence review of the
prospective borrower's accounting and financial records, including a
statistical review of accounts receivable and charge-off history. CBC auditors
then submit their audit reports and work papers to CBC's credit committee for
review prior to the extension of credit.
65
<PAGE>
In making a decision to approve a credit line, CBC establishes credit limits
under the revolving credit line and analyzes the prospective client's customer
base to assure compliance with CBC's policies generally limiting CBC's overall
exposure to individual borrowers, especially with respect to privately held or
non-investment grade borrowers. When deemed necessary for credit approval, CBC
may obtain guaranties or other security from a client or its affiliates and
may also obtain subordination and intercreditor agreements from the borrower's
other lenders. Although CBC's underwriting guidelines specify a review of the
factors described above, CBC does not apply a rigid scoring system to
prospective borrowers and decisions to enter into a relationship with a
prospective client are made on a case-by-case basis.
CBC's underwriting guidelines and policies provide that, prior to each
funding of a loan, the account executive assigned to the borrower (i) obtains
the original or a copy of the invoice to be sent to the borrower and the
purchase order (if one is required by CBC) related to such invoice, (ii)
confirms the validity and accuracy of a representative sampling of invoices
and (iii) mails a letter, on the borrower's letterhead, to the new borrower's
customer which introduces CBC and requests that payment be made directly to
CBC.
Credit Monitoring and Controls
An assigned CBC account executive monitors each borrower's credit,
collateral and advances. All account executives are required to meet with each
of their assigned borrowers at least quarterly to monitor the borrower's
business, physically inspect the borrower's facilities and equipment and
discuss problems the borrower may be experiencing.
CBC monitors borrowers' accounts receivable using three forms. The first
form is an accounts receivable aging analysis report prepared monthly by the
loan processor and reviewed by the account executive, and which includes,
among other things, details pertaining to account concentrations and aging
trends. The second is an accounts receivable activity summary prepared weekly
by the loan processor and reviewed by the account executive, summarizing
borrowings, repayments and pledged collateral. The third is a daily report
prepared by the borrower and reviewed by the account executive to determine
credit availability for a particular day.
In addition to the foregoing monitoring procedures, interim audits of all
borrowers are scheduled as deemed appropriate. Also, each account is reviewed
on its anniversary date and revolving lines are reviewed and reconciled on a
monthly basis.
Where liquidation is required for repayment of an outstanding loan, CBC
attempts to effect a consensual possession of the subject collateral property
and joint collection of accounts receivable. In certain instances, court
action may be required to ensure collection of receivables and possession of
pledged assets. CBC has not experienced any loan losses since its acquisition
by the Company.
Marketing
CBC obtains business through referrals from banks, venture capitalists,
accounting firms, management consultants, existing borrowers, other finance
companies and independent brokers. CBC's marketing officers call on CBC's
referral sources to identify and receive introductions to potential clients
and to identify potential clients from database searches. CBC currently
compensates its marketing personnel with what it believes are competitive base
salaries and commissions based on funded transactions in order to motivate and
reward the creation of new business and the renewal of existing business. Such
commissions can be a significant portion of the total compensation paid to
CBC's marketing personnel. CBC's marketing personnel have no credit decision
authority.
The Company believes that CBC's marketing strengths are its rapid response
time and high level of service. The Company believes that, based on CBC's
experience with technology credits and valuation of their associated tangible
and intangible assets, CBC is able to quickly evaluate potential borrowers,
providing it with a
66
<PAGE>
competitive advantage over other lenders with less experience lending to high
technology companies. The Company also believes that CBC's ability to quickly
evaluate credit decisions and provide loans to borrowers who, for various
reason, have not established relationships with traditional lenders, has
resulted in a loyal customer base.
EQUIPMENT LEASING
In May 1995, the Company expanded its existing commercial equipment leasing
business conducted by its wholly-owned subsidiary, Imperial Business Credit,
Inc. ("IBC"), through the acquisition of the assets and the assumption of
certain liabilities of First Concord Acceptance Corporation ("FCAC"), a
Colorado corporation engaged in the origination, acquisition and servicing of
business equipment leases. The sale was effectuated pursuant to an asset
purchase agreement among the Company, FCAC and Oren L. Benton, FCAC's majority
shareholder ("Benton"). In connection with the purchase of FCAC's assets, the
Company or its affiliates also purchased 100% of the partnership interests of
three partnerships controlled by Benton that were formed for the purpose of
securitizing certain of FCAC's lease receivables. The net purchase price for
FCAC's assets and the partnership interests was approximately $21 million.
In October 1996, IBC acquired substantially all of the assets of Avco
Leasing Services, Inc. and all of the assets of Avco Financial Services of
Southern California, Inc. related to its business of originating and servicing
business equipment leases and agreed to assume certain related liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition").
General
IBC's corporate headquarters are located in Rancho Bernardo, California. IBC
carries out its business equipment leasing operations from both its
headquarters and its sales office in Denver, Colorado.
IBC's lease originations totaled $54.6 million and $36.0 million for the
nine months ended September 30, 1996 and the year ended December 31, 1995,
respectively. During the nine months and year ended September 30, 1996 and
December 31, 1995, IBC securitized $67.7 million and $85.2 million of leases.
Lease Finance Operations
IBC is in the business of leasing equipment, including copying, data
processing, communication, printing and manufacturing equipment, exclusively
to business users. Initial lease terms typically range from 24 months to 60
months. IBC will commit to purchase this equipment only when it has a signed
lease with a lessee who satisfies its credit and funding requirements.
Substantially all the leases written by IBC are full-payout ("direct
financing") leases that allow IBC to sell or re-lease the equipment upon
termination of the lease. IBC occasionally purchases small portfolios of
existing equipment leases from brokers with whom it has established
relationships. These portfolios are evaluated on an individual basis according
to IBC's established credit policy. The Company believes that these
acquisitions allow IBC to grow with greater efficiency than usual at a level
of decreased risk due to the portfolio aging that has occurred on the books of
the originating broker. IBC uses an established computer system and related
software systems to process lease applications, book leases and post lease
payments and closely monitor credit processing and collections. These systems
have in part been developed by IBC management.
Upon expiration of the initial lease terms of its direct-financing leases,
IBC expects, on average, to realize slightly more than the "residual value" at
which the leased equipment is carried on IBC's books. IBC's ability to recover
the recorded estimated residual value depends on the accuracy of initial
estimates of the equipment's useful life, the market conditions for used
equipment when leases expire, and the effectiveness of IBC's program for re-
leasing or otherwise disposing of leased equipment. Residual recovery,
however, is not required for IBC to achieve a profitable return on its
investment. The residual is usually worth 1% to 2% of the gross yield
depending upon the original lease term, further mitigating against the
residual risk inherent in the portfolio.
67
<PAGE>
The following table sets forth IBC's lease originations by equipment type
for the period presented.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996
----------------------------------
NUMBER PRINCIPAL
OF LEASES AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computers--over $10,000......... 342 $11,049 20.2%
Manufacturing/Machine work...... 219 7,366 13.5
Restaurant...................... 146 3,330 6.1
Miscellaneous equipment......... 135 3,174 5.8
Radio television production
equipment...................... 112 2,784 5.1
Heavy equipment................. 62 2,595 4.8
Furniture and fixtures.......... 86 2,565 4.7
Health/Sports equipment......... 97 2,461 4.5
Print/Typeset equipment......... 83 2,132 3.9
Automotive...................... 81 1,838 3.4
Dry cleaning/Washing............ 71 1,838 3.4
Clothing manufacture............ 44 1,827 3.3
Other........................... 776 11,653 21.3
----- ------- -----
Total......................... 2,254 $54,612 100.0%
===== ======= =====
</TABLE>
IBC uses a non-cancelable lease, the terms and conditions of which vary only
slightly from transaction to transaction. In substantially all of the leases,
lessees are obligated to: (i) remit all rents due, regardless of the
performance of the equipment, (ii) operate the equipment in a careful and
proper manner and in compliance with governmental rules and regulations, (iii)
maintain and service the equipment, (iv) insure the equipment against casualty
losses and public liability, bodily injury and property damage and (v) pay
directly, or reimburse IBC for, any taxes associated with the equipment, its
use, possession or lease, except those relating to net income derived by IBC
therefrom. The lease provides that IBC, in the event of a default by a lessee,
may declare the entire unpaid balance of rentals due and payable immediately,
and may seize and remove the equipment for subsequent sale, re-lease or other
disposition.
Underwriting
IBC maintains written credit policies that IBC believes are prudent and
customary within the lease finance industry. Such policies form the basis for
IBC's standardized lease forms and approval processes. On occasion, IBC will
make exceptions to its written credit policy for lease brokers with whom IBC
has had past positive experience. In general, IBC's credit policies encourage
leasing of income-generating equipment. Within these guidelines, there are few
specific equipment or industry prohibitions.
IBC's credit policies allow it to accept credit investigations provided by
select brokers and has generated a database about the brokers with whom it
does business. IBC also maintains a written collection policy to provide
standard collection guidelines. In those instances when a portfolio of leases
is acquired, documentation provided by the originating lessor is checked for
compliance with IBC's documentation standards before accepting the portfolio
for purchase.
Marketing
IBC markets its equipment lease products through its own in-house sales
force and through its network of professional equipment lease brokers. IBC's
20 person in-house sales force calls end user customers and vendors to solicit
their equipment lease transactions. IBC intends to expand its marketing
efforts to include more vendors. The sales force also calls on IBC's network
of professional equipment lease brokers to solicit these professionals to send
their lease transactions to IBC.
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<PAGE>
IBC's broker advisory panel consists of a group of its more productive
brokers brought together on an annual basis, so that they may have an open
interchange of ideas and information regarding IBC and the leasing
marketplace. IBC believes the advisory panel serves a multi-purpose function
by allowing IBC to reward those brokers that provide a profitable base of
business to IBC, and also providing IBC the opportunity to market new ideas
and concepts to those brokers before a general release to the leasing
community. IBC believes that it benefits by obtaining information on how the
brokers work with IBC's competitors (such as special programs and market
trends), and this information can then be used to drive future marketing
plans.
LOAN PARTICIPATION AND INVESTMENT GROUP
SPTL's Loan Participation and Investment Group ("LPIG") was formed in
September 1995 to invest in and purchase syndicated commercial loan
participations in the secondary market originated by commercial banks. During
the nine months ended September 30, 1996, LPIG purchased senior secured loan
participations with outstanding loan commitments totaling $236.1 million.
Loans outstanding under these commitments at September 30, 1996 were $127.1
million. At September 30, 1996, none of LPIG's loans were 30 days or more
delinquent.
The principal types of loans acquired by LPIG are senior secured bank loans
consisting of: (i) revolving lines of credit which allow the borrower to
borrow and repay proceeds as needed for working capital purposes, (ii) long-
term loans with a specific amortization schedule which requires the borrower
to repay the borrowed loans over time, usually on a quarterly basis or (iii)
letters of credit which are normally funded as a sublimit under the revolving
line of credit commitment. The loans are generally secured by a first priority
lien on all of the borrower's property including accounts receivable,
inventory and furniture, fixtures and equipment, as well as liens on owned
real estate. At September 30, 1996, loan participations held by LPIG ranged in
size from approximately $900,000 to approximately $10.0 million.
LPIG believes that its purchase of senior secured loan participations allows
it to build and maintain a loan portfolio without costly direct customer loan
servicing and loan origination costs. In addition, such purchases facilitate
the maintenance of a portfolio which is diversified both geographically and by
industry.
LPIG's loan underwriting policy requires an analysis of the borrower's
ability to repay its debts, as well as an evaluation of the effects of general
economic and industry trends and various competitive factors affecting the
borrower.
LPIG's commitments/outstandings by industry type at September 30, 1996:
<TABLE>
<CAPTION>
% OF TOTAL % OF TOTAL
COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING
AMOUNT AMOUNT AMOUNT AMOUNT
---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Manufacturing................. $ 71,725 30.5% $ 35,718 28.1%
Television broadcasting....... 25,000 10.6 8,819 6.9
Paper......................... 18,512 7.9 10,946 8.6
Supermarkets.................. 17,975 7.6 10,893 8.6
Defense....................... 13,320 5.7 10,104 8.0
Hotels........................ 10,000 4.2 -- 0.0
Credit information services... 10,000 4.2 8,182 6.4
Air carrier................... 10,000 4.2 3,019 2.4
Cable television.............. 10,000 4.2 7,250 5.7
Radio broadcasting............ 10,000 4.2 -- 0.0
Retail drugs.................. 9,938 4.2 6,308 5.0
Outdoor advertising........... 9,820 4.2 9,820 7.7
Food distribution............. 5,000 2.1 5,000 3.9
Restaurants................... 5,000 2.1 5,000 3.9
Direct mail advertising....... 4,956 2.1 2,456 1.9
Park management............... 4,810 2.0 3,610 2.9
-------- ----- -------- -----
Total....................... $236,056 100.0% $127,125 100.0%
======== ===== ======== =====
</TABLE>
69
<PAGE>
AUTO LEND GROUP
SPTL's Auto Lend Group ("Auto Lend") was established in September 1996, to
provide financing for automobile inventory for automobile dealers. The
principal types of loans originated are fixed-rate lines of credit. Auto Lend
had $2.5 million of loans outstanding at September 30, 1996. SPTL believes
that Auto Lend's products offer synergistic opportunities, when offered in
connection with SPTL's sub-prime auto lending ability, to provide car dealers
a complete financing package. See "--Consumer Lending--Auto Lending Division."
COMMERCIAL MORTGAGE LENDING
SPTL's Income Property Loan Division ("IPLD") was formed in February 1994 to
expand the Company's apartment and commercial property lending business. For
the nine months ended September 30, 1996 and the year ended December 31, 1995,
IPLD funded approximately $182.2 million and $160.0 million in loans,
respectively. During the nine months ended September 30, 1996 and the year
ended December 31, 1995, SPTL completed securitizations of approximately
$277.0 million and $57.7 million of multi-family and commercial mortgage loans
originated and purchased by IPLD, respectively. At September 30, 1996 and
December 31, 1995 $2.0 million and $0.4 million or 1.9% and 0.04%,
respectively, of IPLD's outstanding loans were 30 days or more delinquent. At
September 30, 1996 and December 31, 1995, $2.0 million and $0.4 million,
respectively, of IPLD originated loans were held for investment by SPTL. IPLD
generally seeks to make 70% of its loans secured by apartment buildings and
30% of its loans secured by other commercial properties. Most of IPLD's
business is generated through in-house loan representatives who market the
loans directly to mortgage brokers and borrowers. Virtually all of IPLD's
loans are secured by properties in California.
The focus of IPLD's lending activity is the small loan market for apartments
and commercial loans and its maximum loan amount is $2.5 million. SPTL
believes that IPLD employs conservative underwriting criteria, which include a
maximum loan-to-value ratio of 70% and minimum debt coverage ratio of 1.2x on
all loans. Loans secured by income properties entail additional risk as
compared to single family residential lending. The payment experience on such
loans is generally dependent on the successful operation of the related
commercial or multi-family property and can be greatly impacted by adverse
conditions in local real estate markets or in the economy.
All of IPLD's loan programs include 30-year adjustable rate loans tied to
the 6-month LIBOR, 1-year Treasury, or Bank of America prime indexes. Margins
vary depending on product type, property location and credit history of the
borrower. With respect to apartment loans, IPLD uses standard government
agency documentation and approved independent appraisers.
CONSUMER LENDING
Through SPTL, the Company also makes consumer loans consisting of sub-prime
automobile finance loans, home improvement loans and other consumer credit.
AUTO LENDING DIVISION
ALD was formed in October 1994 to finance new and used automobile purchase
contracts. ALD's borrowers are generally credit-impaired and therefore are
unable to access alternative sources of financing from banks and captive
automobile finance companies. ALD seeks to offset the increased risk of
default in its portfolio with higher yields and aggressive servicing and
collection activities.
During the nine months ended September 30, 1996 and the year ended December
31, 1995, ALD originated approximately $24.8 million and $19.0 million,
respectively, in automobile loans. SPTL currently generates automobile loans
through three Northern California retail offices and anticipates expanding its
activities within California.
HOME IMPROVEMENT LOANS AND OTHER CONSUMER CREDIT
CCD was formed in early 1994 to offer loans primarily to finance home
improvements and consumer goods. CCD's business is developed through a network
of retailers and contractors throughout California. All loans are centrally
processed, approved and funded at CCD's headquarters in Irvine, California.
70
<PAGE>
Home improvement loans offered by CCD range from $5,000 to $350,000 and
include major remodeling projects that are sometimes coupled with
refinancings. CCD's typical loan is secured by a junior lien. In addition, CCD
purchases unsecured installment sales contracts to finance certain home
improvements such as air conditioning, roofing and kitchen and bathroom
remodeling.
During the nine months ended September 30, 1996 and the year ended December
31, 1995, CCD originated $16.5 million and $14.6 million in loans,
respectively, all of which are held for investment. At September 30, 1996 and
December 31, 1995 $0.6 million and $0.6 million or 1.6% and 2.3%,
respectively, of CCD's outstanding loans were 30 days or more delinquent.
OTHER ACTIVITIES
SPFC
During the nine months ended September 30, 1996 and the year ended December
31, 1995, a substantial portion of the Company's operations were conducted
through its non-conforming residential mortgage lending subsidiary, SPFC. SPFC
commenced operations in January 1993 as a division of SPTL, and has been an
operating subsidiary of ICII since April 1995. SPFC completed an initial
public offering of its common stock in June 1996 and its stock is listed on
the New York Stock Exchange under the symbol "SFC." As of November 30, 1996,
ICII owned 51.2% of SPFC; ICII expects that its percentage ownership of SPFC
will be reduced to below 50% at which point the financial statements of SPFC
would not be consolidated with those of ICII. For a description of the effect
of such deconsolidation, see "Unaudited Consolidated Pro Forma Financial
Statements."
SPFC is a specialty finance company engaged in the business of originating,
purchasing and selling high-yielding, sub-prime mortgage loans secured
primarily by one-to-four family residences. The majority of SPFC's loans are
made to owners of single family residences who use the loan proceeds for
purposes such as debt consolidation, financing of home improvements and
educational expenditures. SPFC focuses on lending to individuals who often
have impaired or unsubstantiated credit histories and/or unverifiable income.
As a result, SPFC's customers are less likely to qualify for loans from
conventional sources and generally pay higher interest rates as compared to
interest rates charged by conventional mortgage sources. Substantially all of
SPFC's mortgage loans originated or purchased during the nine months ended
September 30, 1996 and the year ended December 31, 1995, were secured by first
mortgages, and the remainder were secured by second mortgages. SPFC originates
and purchases loans through its wholesale division (the "Wholesale Division"),
its correspondent program (the "Correspondent Program"), its
retail/telemarketing division (the "Retail/Telemarketing Division") and its
institutional division (the "Institutional Division").
SPFC originates a majority of its loans through its Wholesale Division,
which is currently comprised of approximately 62 account executives located in
15 sales offices who have established relationships with independent mortgage
brokers. For the nine months ended September 30, 1996, the Wholesale Division
originated loans in 45 states and the District of Columbia. Of the Wholesale
Division's 15 sales offices, six are located in California, two in Oregon, and
one in each of Washington, Florida, Colorado, Illinois, Massachusetts, Utah
and Virginia. The Wholesale Division originated $345.6 million and $267.4
million of loans during the nine months ended September 30, 1996 and the year
ended December 31, 1995 respectively, representing 70.5% and 92.7% of total
loan originations and purchases during the respective periods.
SPFC recently formed its Retail/Telemarketing Division to solicit loans
directly from prospective borrowers. The Retail/Telemarketing Division
originates loans through predictive dialing machines, which combine telephone
dialing technology with an on-line computer to facilitate the loan origination
process. The predictive dialing machine (i) automatically dials prospective
borrowers, (ii) provides the telemarketer with an on-screen marketing
presentation to market efficiently SPFC's loan products and (iii) provides an
interactive loan underwriting program and loan quotation system to assess
immediately the prospect's borrowing capability.
SPFC purchases loans through its Correspondent Program. Loans purchased
through the Correspondent Program are complete loan packages that have been
underwritten and funded by mortgage bankers or financial
71
<PAGE>
institutions. All loans purchased through the Correspondent Program are
reunderwritten by SPFC's underwriting staff to determine that the loan
packages are complete and materially adhere to SPFC's underwriting guidelines.
During the nine months ended September 30, 1996 and the year ended December
31, 1995 SPFC purchased $130.6 million and $21.1 million of mortgage loans,
respectively, through its Correspondent Program. The Institutional Division,
which began operations in 1996, also originates and purchases loans through
relationships developed with small- to medium-sized commercial banks, savings
banks and thrift institutions. During the nine months ended September 30,
1996, the Institutional Division originated and purchased $13.7 million of
mortgage loans.
SPFC sells a majority of its loan origination and purchase volume through
public securitizations. Generally, in each securitization transaction, SPFC
retains an interest in the loans sold through interest-only and residual
certificates, which are amortized over an estimated average life. Cash flow
received from these interest-only and residual certificates is subject to the
prepayment and loss characteristics of the underlying loans. During the nine
months ended September 30, 1996 and the year ended December 31, 1995, SPFC
securitized $422.4 million and $164.9 million of mortgage loans, respectively.
SPFC retains the servicing rights on all loans it originates or purchases.
In September 1995, SPFC chose to outsource its loan servicing operations to
Advanta Mortgage Corp. USA. As of September 30, 1996, SPFC's servicing
portfolio (inclusive of securitized loans for which SPFC has ongoing risk of
loss but has no remaining servicing rights or obligations) was $651.3 million.
The delinquency experience as a percentage of loans held for sale or
securitization included in SPFC's servicing portfolio and securitized loans
originated by SPFC but serviced by an affiliate or by an outside party was
3.9%, 3.4%, 1.3% and 6.9%, at September 30, 1996 and December 31, 1995, 1994
and 1993, respectively.
ICAI
Imperial Credit Advisors, Inc. ("ICAI"), a wholly owned subsidiary of ICII,
oversees the day-to-day operations of ICMH, pursuant to a management agreement
more fully described in "Certain Transactions--Relationships with ICMH--Other
Transactions--General."
DRI
In September 1996, the Company entered into various transactions with
Dabney/Resnick, Inc. subsequently renamed Dabney/Resnick/Imperial, LLC
("DRI"). DRI engages in investment banking activities. ICII has acquired a 1%
equity interest in DRI and has purchased a warrant to acquire an additional
48% interest therein.
DRI is an investment bank that serves institutional, high net worth, and
corporate clients. DRI's services include securities underwriting, sales and
trading, financial advisory services, investment research, and asset
management. DRI manages and underwrites public offerings of securities,
arranges private placements and provides advisory and other services in
connection with mergers, acquisitions, restructurings, and other financial
transactions.
ICIFC
In November 1995, the Company contributed to ICIFC certain of the operating
assets and customer lists of the Company's mortgage conduit operations in
exchange for 100% of ICIFC's common stock, representing 1% of the economic
interest in ICIFC. ICMH owns 99% of ICIFC's non-voting preferred stock,
representing 99% of the economic interest in ICIFC. Since 100% of the common
stock of ICIFC is owned by the Company, the Company consolidates the financial
statements of ICIFC in its financial statements. As a result, the assets and
liabilities of the Company reflected on its balance sheet are significantly
greater than they would otherwise be absent such consolidation. However, since
the Company only owns 1% of the economic interest of ICIFC, it considers
ICIFC's operations immaterial to the Company.
To more properly reflect the Company's future financial condition the
Company intends to dispose of its common stock interest in ICIFC at which
point the financial statements of ICIFC would not be consolidated with those
of ICII. For a further description of the effect of such deconsolidation, see
"Unaudited Consolidated Pro Forma Financial Statements."
72
<PAGE>
LOANS HELD FOR INVESTMENT
The following table sets forth certain information regarding the Company's
loans held for investment. Substantially all of the Company's loans held for
investment are held by SPTL:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------------
1996 1995 1994 1993
---------------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans secured by real
estate:
One to four family....... $ 59,204 $228,721 $ 897,494 $ 73,636
Multi-family............. 234,608 7,028 82,004 61,908
Commercial............... 25,698 133,189 30,287 21,663
-------- -------- ---------- --------
319,510 368,938 1,009,785 157,207
-------- -------- ---------- --------
Leases................... 120 7,297 23,667 2,969
Installment loans........ 28,094 1,900 4,290 12
Commercial loans......... 481,819 311,122 5,882 247
-------- -------- ---------- --------
829,543 689,257 1,043,624 160,435
-------- -------- ---------- --------
Unearned income.......... (6,138) (5,217) (5,900) (1,406)
Deferred loan fees....... (5,739) (1,540) (1,115) (1,180)
-------- -------- ---------- --------
817,666 682,500 1,036,609 157,849
Allowance for loan
losses.................. (14,461) (13,729) (7,054) (3,254)
-------- -------- ---------- --------
Total................ $803,205 $668,771 $1,029,555 $154,595
======== ======== ========== ========
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, asset-based loans to
middle market companies mainly in California, and loans to experienced
franchisees of national and regional restaurant franchises. As a result, the
loan portfolio has a high concentration in the same geographic region.
Although the Company has a diversified portfolio, a substantial portion of its
debtors' ability to honor their contracts is dependent upon the economy of
California.
With respect to loans held for investment at SPTL, a continuing decline in
California real estate values may adversely affect the underlying loan
collateral. In order to reduce the Company's risk of loss on any one credit,
the Company has historically sought to maintain a fairly low average loan size
within the portfolio of loans held for investment. The average loan size and
single largest loan, excluding loans originated by CBC, of the loans
originated by and held for investment at SPTL at September 30, 1996 and
December 31, 1995 were $0.1 million and $5.8 million, and $0.1 million and
$3.4 million, respectively. The largest loan held for investment at September
30, 1996 and December 31, 1995 was a performing loan secured by a first deed
of trust.
NPA's consist of nonaccrual loans, loans with modified terms and OREO. The
Company's policy is to place all loans 90 days or more past due on nonaccrual.
Any mortgage loans held for sale originated or acquired as part of the
Company's former mortgage banking operations which are held more than 90 days
after origination are classified as mortgage loans held for investment and are
transferred at the lower of carrying value or market value. Such loans may be
unsalable for a variety of reasons, including documentation deficiencies,
payment defaults or borrower misrepresentations.
The former mortgage banking operations' OREO arises primarily through
foreclosure on mortgage loans repurchased from investors, typically due to a
breach of representations or warranties. During the nine months ended
September 30, 1996 and for years ended December 31, 1995, 1994 and 1993, the
impact of loans repurchased as the result of borrower misrepresentations was
not material.
73
<PAGE>
The following table sets forth the amount of NPA's attributable to the
Company's former mortgage banking operations and to all of its other lending
activities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
AT SEPTEMBER 30, 1996 1995 1994 1993
---------------------- ---------------------- --------------------- ---------------------
FORMER FORMER FORMER FORMER
ALL OTHER MORTGAGE ALL OTHER MORTGAGE ALL OTHER MORTGAGE ALL OTHER MORTGAGE
LENDING BANKING LENDING BANKING LENDING BANKING LENDING BANKING
ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS ACTIVITIES OPERATIONS
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
One to four family..... $ 17,798 $21,049 $ 2,652 $ 20,990 $ 4,012 $ 5,697 $ 1,124 $ 1,198
Commercial property.... 2,684 -- 1,824 -- 2,201 -- 1,481 --
Multi-family property.. 5,054 -- 5,522 -- 1,195 -- 1,136 --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total nonaccrual loans.. 25,536 21,049 9,998 20,990 7,408 5,697 3,741 1,198
---------- ------- ---------- -------- -------- ---------- -------- ----------
OREO:
One to four family..... 5,383 3,797 1,937 4,173 1,217 1,277 189 2,148
Commercial property.... 1,076 -- 211 -- 445 -- 358 --
Multi-family property.. 1,047 -- 858 -- 329 -- 781 --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total OREO.............. 7,506 3,797 3,006 4,173 1,991 1,277 1,328 2,148
---------- ------- ---------- -------- -------- ---------- -------- ----------
Loans with modified
terms:
One to four family..... 1,314 -- 870 -- 76 -- 47 --
Commercial property.... -- -- -- -- -- -- 702 --
Multi-family property.. -- -- -- -- -- -- 871 --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total loans with
modified terms......... 1,314 -- 870 -- 76 -- 1,620 --
---------- ------- ---------- -------- -------- ---------- -------- ----------
Total NPAs.............. $ 34,356 $24,846 $ 13,874 $ 25,163 $ 9,475 $ 6,974 $ 6,689 $ 3,346
========== ======= ========== ======== ======== ========== ======== ==========
Total loans and OREO.... $1,575,196 $77,907 $1,168,783 $869,463 $216,555 $1,094,144 $120,606 $1,281,313
Total NPA's as a
percentage of loans and
OREO................... 2.18% 31.89% 1.19% 2.89% 4.38% 0.64% 5.55% 0.26%
</TABLE>
The following table summarizes certain information regarding the Company's
allowance for loan losses and losses on OREO:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Allowance at beginning of period. $13,729 $ 7,054 $ 3,255 $ 1,995
Business acquisitions and bulk
loan purchases.................. -- 4,320 -- --
Loans charged off................ (5,523) (3,106) (1,436) (1,124)
Recoveries on loans previously
charged off..................... 113 11 85 34
------- ------- ------- -------
Net charge-offs.................. (5,410) (3,095) (1,351) (1,090)
Provision for losses charged to
expenses........................ 6,142 5,450 5,150 2,350
------- ------- ------- -------
Allowance at end of period.... $14,461 $13,729 $ 7,054 $ 3,255
======= ======= ======= =======
OREO losses:
OREO writedowns................. $ 2,459 $ 2,085 $ 369 $ 406
Loss (gain) on sale of OREO..... 1,709 (957) (119) (62)
------- ------- ------- -------
Total OREO losses............. $ 4,168 $ 1,128 $ 250 $ 344
======= ======= ======= =======
</TABLE>
74
<PAGE>
The percentage of the allowance for loan losses to nonaccrual loans will not
remain constant due to the nature of the Company's portfolio of mortgage
loans. The collateral for each non-performing mortgage loan is analyzed by the
Company to determine potential loss exposure, and in conjunction with other
factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan losses. On an ongoing basis, management
monitors the loan portfolio and evaluates the adequacy of the allowance for
loan losses. In determining the adequacy of the allowance for loan losses,
management considers such factors as historical loan loss experience,
underlying collateral values, evaluations made by bank regulatory authorities,
assessment of economic conditions and other appropriate data to identify the
risks in the loan portfolio. Loans deemed by management to be uncollectible
are charged to the allowance for loan losses. Recoveries on loans previously
charged off are credited to the allowance. Provisions for loan losses are
charged to expense and credited to the allowance in amounts deemed appropriate
by management based upon its evaluation of the known and inherent risks in the
loan portfolio. While management believes that the current allowance for loan
losses is sufficient, future additions to the allowance may be necessary.
FUNDING AND SECURITIZATIONS
The Company's liquidity requirements are met primarily by repurchase
facilities, warehouse lines of credit from financial institutions,
securitizations, whole loan sales, SPTL customer deposits and FHLB borrowings.
The Company has also accessed the capital markets through equity and debt
offerings.
Repurchase and Warehouse Facilities
The Company is dependent upon its ability to access repurchase facilities
and warehouse lines of credit in order to fund new originations and purchases.
The Company has repurchase facilities and warehouse lines of credit, under
which it had available approximately $141.0 million in financing at November
30, 1996 excluding financing available to ICIFC and SPFC, and amounts
available under a $200 million warehouse facility with PaineWebber
Incorporated (the "PaineWebber Line") which the Company does not anticipate
using in the future. At such date, approximately $192.8 million in borrowings
were outstanding under such facilities, excluding borrowings by ICIFC and SPFC
and the PaineWebber Line. See "--Other Activities--ICIFC."
The Company, excluding ICIFC's and SPFC's lines and facilities and the
PaineWebber Line, had various warehouse lines and reverse repurchase
facilities available as follows at November 30, 1996.
<TABLE>
<CAPTION>
PRINCIPAL
COMMITMENT AMOUNT
AMOUNT(1) OUTSTANDING INDEX EXPIRATION DATE
---------- ----------- ----- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Warehouse Lending
Corporation of America
(ICII)................. $ 20,000 $ 6,175 LIBOR plus 250 basis points Expired (2)
Imperial Warehouse
Lending Group (ICII)... 20,000 5,077 Bank of America Prime Rate September 30, 1997
minus 25 basis points
CS First Boston (FMAC).. 200,000 114,284 LIBOR plus 125 basis points December 31, 1997
Banco Santander (FMAC).. 50,000 32,583 LIBOR plus 225 basis points Expired (3)
Greenwich Financial
Capital Products, Inc.
(FMAC)................. 33,766 33,766 LIBOR plus 175 basis points 30 days on demand
CoreStates Bank, N.A.
(IBC).................. 10,000 891 LIBOR plus 230 basis points November 30, 1997
-------- --------
Total................. $333,766 $192,776
======== ========
</TABLE>
- --------
(1) At November 30, 1996, SPFC had two warehouse facilities, a $150 million
commitment with Morgan Stanley Mortgage Capital, Inc. having an index of
LIBOR plus 70 basis points, of which $117.1 million was outstanding at
such date, and a $200 million commitment with Lehman Commercial Paper Inc.
having an index of LIBOR plus 80 to 95 basis points, of which $52.4
million was outstanding at such date. In addition, at November 30, 1996,
ICIFC had a $600 million commitment from IWLG having an index of Bank of
America's Prime Rate, of which $381.4 million was outstanding at such
date. At November 30, 1996, ICII had a $200 million commitment under the
PaineWebber Line having an index of LIBOR plus 65 to 85 basis points, of
which $13.5 million was outstanding at such date.
(2) The availability under this facility expired in August 1996. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
(3) FMAC is currently negotiating an extension of this facility. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
75
<PAGE>
Securitizations and Whole Loan Sales
During the nine months ended September 30, 1996, the Company had completed
five loan and lease securitizations totaling $934.5 million. Non-conforming
residential mortgage loans totaled $422.4 million, multi-family and commercial
mortgage loans totaled $277.0 million, franchise loans totaled $167.4 million
and equipment leases totaled $67.7 million. The Company has retained interests
in loan and lease securitizations, representing the excess of the total amount
of loans and leases sold in the securitization over the amounts represented by
interests in the securities sold to investors. The retained interests in the
loan and lease securitizations were $33.2 million and $13.0 million at
September 30, 1996 and December 31, 1995, respectively.
The Company pools and sells through securitizations and whole loan sales all
of the loans and leases which it originates or purchases other than loans held
by SPTL for investment. The Company believes that securitizations provide it
with greater operating leverage and a reduced cost of funds. Securitizations
are generally treated by the Company as sales for financial reporting purposes
and, accordingly, the associated securitized loans and leases are not
reflected on the Company's balance sheet, except for its retained interests.
Adverse changes in the securitization market could impair the Company's
ability to originate, purchase and sell loans or leases on a favorable or
timely basis. Any such impairment could have a material adverse effect upon
the Company's business and results of operations. In addition, the
securitization market for many types of assets is relatively undeveloped and
may be more susceptible to market fluctuations or other adverse changes than
more developed capital markets. Finally, any delay in the sale of a loan or
lease pool could cause the Company's earnings to fluctuate from quarter to
quarter.
In a securitization, the Company recognizes a gain on sale of the loans or
leases securitized upon the closing of the securitization, but does not
receive the cash representing such gain until it receives the excess servicing
fees, which are payable over the actual life of the loans or leases
securitized. As a result, such transactions may not generate cash flows to the
Company for an extended period.
In addition, in order to gain access to the secondary market for loans and
leases, the Company has relied on monoline insurance companies to provide
guarantees on outstanding senior interests in the special purpose entities to
which such loans and leases are sold to enable it to obtain investment grade
ratings for such interests. To a limited extent, the Company also relies on
overcollateralization to support outstanding senior interests. However, any
unwillingness of the monoline insurance companies to guarantee the senior
interests in the Company's loan or lease pools could have a material adverse
effect on the Company's financial position and results of operations.
76
<PAGE>
The following table sets forth the securitizations effected by the Company
since inception:
<TABLE>
<CAPTION>
PRINCIPAL
ISSUE AMOUNT
DATE ISSUANCE NAME SECURITIZED
-------------- --------------------------------------------- -------------
(IN MILLIONS)
<C> <S> <C>
December 1994 Prudential Securities 1994-6................. $ 45.5
March 1995 Prudential Securities 1995-1................. 95.5
June 1995 Southern Pacific Secured Assets Corp. 55.3
("SPSAC") 1995-1.............................
August 1995 Second delivery of SPSAC 1995-1.............. 20.0
August 1995 Donaldson, Lufkin & Jenrette ("DLJ") 1995-4.. 290.9
September 1995 SPSAC 1995-2................................. 261.7
November 1995 DLJ 1995-5................................... 98.3
November 1995 Second delivery of SPSAC 1995-2.............. 28.0
December 1995 Third delivery of SPSAC 1995-2............... 2.3
December 1995 FMAC 1995-B.................................. 105.2
December 1995 Citicorp North America, Inc.................. 85.2
March 1996 SPSAC 1996-1................................. 102.4
June 1996 SPSAC 1996-2................................. 130.0
June 1996 Second delivery of SPSAC 1996-2.............. 190.0
June 1996 FMAC 1996-A.................................. 167.4
September 1996 Southern Pacific Thrift & Loan 1996 C-1...... 276.0
December 1996 SPSAC 1996-3................................. 240.0
December 1996 FMAC 1996-B.................................. 157.0
--------
Total........................................ $2,350.7(1)
========
</TABLE>
- --------
(1) Excludes IBC's monthly deliveries to a Citicorp North America, Inc.
securitization vehicle which totaled $68.0 million for the nine months
ended September 30, 1996.
SPTL Deposits
SPTL obtains its funds from depositors by issuing FDIC insured passbook
accounts and term certificates of deposit. SPTL solicits both individual and
institutional depositors for new accounts through print advertisements and
computerized referral networks. SPTL currently maintains two deposit gathering
facilities in Southern California. At such facilities, tellers provide banking
services to customers such as accepting deposits and permitting withdrawals.
However, customers are not offered check writing services or offered demand
deposit accounts. Generally, certificates of deposit are offered for terms of
one to 12 months. See "--Regulation--Thrift and Loan Operations--Limitations
on Types of Deposits" for a description of limitations on types of deposits
that SPTL, as a thrift and loan, can accept.
The following table sets forth the distribution of SPTL's deposit accounts
(prior to intercompany elimination), and the weighted average nominal interest
rates on each category of deposits:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996 AT DECEMBER 31, 1995
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
% OF INTEREST % OF INTEREST
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- -------- ---------- -------- -------- ---
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 35,514 3.3% 4.98% $ 51,146 4.7% 1.27%
Time deposits of less
than $100,000.......... 783,921 72.5 5.79 286,794 26.2 5.97
Time deposits of
$100,000 and over...... 262,519 24.2 5.58 755,499 69.1 5.67
---------- ----- ---------- -----
Total................. $1,081,954 100.0% 5.72% $1,093,439 100.0% 5.54%
========== ===== ========== =====
</TABLE>
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The following table sets forth the dollar amount of deposits by time
remaining to maturity:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996 AT DECEMBER 31, 1995
------------------------- ------------------------
% OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS
------------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months or less........... $ 494,124 45.7% $ 356,353 32.6%
Over three months through six
months........................ 239,527 22.1 259,300 23.7
Over six months through twelve
months........................ 286,435 26.5 367,285 33.6
Over twelve months............. 61,868 5.7 110,501 10.1
------------- -------- ------------ -------
Total........................ $ 1,081,954 100.0% $ 1,093,439 100.0%
============= ======== ============ =======
</TABLE>
Certificates of deposit of $100,000 and over totaled approximately $262.5
million, $755.5 million and $382.3 million at September 30, 1996 and December
31, 1995 and 1994, respectively. Interest expense associated with certificates
of deposit of $100,000 and over was approximately $10.4 million, $15.4 million
and $16.8 million for the nine months ended September 30, 1996, the years
ended December 31, 1995 and 1994, respectively.
Since December 31, 1991, SPTL has increased its deposits as necessary so
that deposits together with cash, liquid assets and FHLB borrowings, have been
sufficient to provide SPTL funding for its lending activities. The weighted
average interest rate of the deposit accounts was 5.72% at September 30, 1996
as compared to 5.54% at December 31, 1995 and 4.80% at December 31, 1994. The
Company believes that SPTL's local marketing strategies, as well as its
utilization of domestic money markets, have been the basis by which SPTL has
been able to acquire new deposits at levels consistent with management's
financial targets. Certain levels of growth of SPTL's assets and deposits
require notice to the FDIC.
As an additional source of funds, SPTL was approved in 1991 to become a
member of the FHLB. Currently, SPTL is approved for borrowings from the FHLB
pursuant to a secured line of credit that is automatically adjusted subject to
applicable FHLB regulations and available pledged collateral. At September 30,
1996 $338.0 million was outstanding bearing an average interest rate of 6.00%.
COMPETITION
The businesses in which the Company operates are highly competitive. The
Company faces significant competition from other commercial and consumer
finance lenders, commercial banks, credit unions, thrift institutions and
securities firms, among others. Many of these competitors are substantially
larger and have more capital and other resources than the Company. Competition
can take many forms, including convenience in obtaining a loan or lease,
customer service, marketing and distribution channels and interest rates
charged to borrowers. In addition, the current level of gains realized by the
Company and its competitors on the sale of their loans and leases could
attract additional competitors into these markets, with the possible effect of
lowering gains that may be realized on the Company's future loan and lease
sales.
Wholesale originations are expected to remain a significant part of the
Company's loan and lease production programs. As a wholesale purchaser of
loans and leases, the Company is exposed to fluctuations in the volume and
cost of wholesale loans and leases resulting from competition with other
purchasers of such loans and leases, market conditions and other factors.
Management believes that SPTL's most direct competition for deposits comes
from savings and loan associations, other thrift and loan companies,
commercial banks and credit unions. The Company's cost of funds fluctuates
with general market interest rates. During certain interest rate environments,
additional significant competition for deposits may be expected from corporate
and governmental debt securities as well as money market mutual funds.
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REGULATION
The Company's businesses are subject to extensive regulation in the United
States at both the federal and state level. In the Company's home equity loan
and financing businesses, regulated matters include loan origination, credit
activities, maximum interest rates and finance and other charges, disclosure
to customers, the terms of secured transactions, the collection, repossession
and claims handling procedures utilized by the Company, multiple qualification
and licensing requirements for doing business in various jurisdictions and
other trade practices. As a part of the financing and asset securitization
business, the Company is required to register as a broker-dealer with certain
Federal and state securities regulatory agencies and is a member of the NASD.
Truth in Lending
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions including loans of the type originated by the Company. The
Company believes that it is in compliance with TILA in all material respects.
The enforcement provisions applicable to TILA grant broad powers to the
appropriate federal regulatory agencies or the Federal Trade Commission to
enforce TILA with respect to those entities not otherwise subject to federal
regulations, such as the Company. TILA also contains criminal penalties for
wilful violations and grants a private right of action with specified
statutory damage rewards for certain violations. If the Company were found not
to be in compliance with TILA with respect to certain loans, aggrieved
borrowers could have the right to rescind their mortgage loan transactions and
to demand the return of finance charges paid to the Company, and other damages
provided under TILA. The Board of Governors of the Federal Reserve System
recently amended Regulation Z to add rescission "tolerances" to the rule to
limit the rule's rescission remedy to disclosure inaccuracies of the finance
charge which amount to over one percent of the face amount of the note. The
new rule also implements amendments to TILA which provide for rescission after
the initiation of foreclosure proceedings under certain circumstances.
TILA applies to all individuals and businesses that regularly extend
consumer credit which is subject to a finance charge or is payable by a
written agreement in more than four installments and is primarily for
personal, family or household purposes. As such, TILA is applicable to the
Company and its subsidiaries. Generally, TILA requires a creditor to make
certain disclosures to the consumer concerning, among other things, finance
charges and annual percentage rates. In addition to these general
requirements, recent amendments to TILA require additional disclosures in
connection with certain types of mortgage loans. These additional disclosure
requirements apply to loans (other than mortgage loans to finance the
acquisition or initial construction of a dwelling) with (i) total points and
fees upon origination in excess of eight percent of the loan amount or $400,
whichever is greater or (ii) an annual percentage rate of more than ten
percentage points higher than comparably maturing United States Treasury
securities ("Covered Loans"). Effective January 1, 1996, the $400 figure was
adjusted by the Board of Governors of the Federal Reserve System to $412, in
accordance with Regulation Z. These TILA provisions prohibit lenders from
originating Covered Loans that are underwritten solely on the basis of the
borrower's home equity without regard to the borrower's ability to repay the
loan. The Company believes that only a small portion of loans originated in
1995 are of the type that, unless modified, are prohibited by TILA. It is the
Company's policy to apply to all Covered Loans underwriting criteria that take
into consideration the borrower's ability to repay.
TILA also prohibits lenders from including prepayment fee clauses in Covered
Loans to borrowers except in cases in which the penalty can be exercised only
during the first five years following consummation of the loan, the consumer's
total monthly debt-to-income ratio does not exceed 50% and the Covered Loans
are not used to refinance existing loans originated by the same lender. The
Company will continue to collect prepayment fees on loans originated prior to
October 1995 (the effective date of the prepayment provision of TILA) and on
non-Covered Loans, as well as on Covered Loans in permitted circumstances.
Because the prepayment
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<PAGE>
provisions of TILA did not become effective until October 1995, the level of
prepayment fee revenue was not substantially affected in 1995, but the level
of prepayment fee revenue may decline in future years. TILA imposes other
restrictions on Covered Loans, including restrictions on balloon payments and
negative amortization features, which the Company does not believe will have a
material impact on its operations.
Other Lending Laws
The Company and its subsidiaries are also required to comply with the Equal
Credit Opportunity Act of 1974, as amended ("ECOA"), which prohibits creditors
from discriminating against applicants on the basis of race, color, religion,
sex, age or marital status. The ECOA also prohibits discrimination in the
extension of credit based on the fact that all or part of the applicant's
income derives from a public assistance program or the fact that the applicant
has in good faith exercised any right under the Consumer Credit Protection
Act. Regulation B promulgated under ECOA restricts creditors from obtaining
certain types of information from loan applicants. It also requires certain
disclosures by the lender regarding consumer rights and requires lenders to
advise applicants of the reasons for any credit denial. In instances where the
applicant is denied credit or the rate or charge for loans increases as a
result of information obtained from a consumer credit agency, another statute,
the Fair Credit Reporting Act of 1970, as amended, requires lenders to supply
the applicant with the name and address of the reporting agency. The Company
is also subject to the Real Estate Settlement Procedures Act of 1974, as
amended, and is required to file an annual report with the Department of
Housing and Urban Development pursuant to the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures which must be followed by, mortgage lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loans and to
demand the return of finance charges paid to the Company.
In addition, certain of the loans originated or purchased by the Company,
such as Title I home improvement loans, are insured by an agency of the
Federal government. Such loans are subject to extensive government regulation.
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.
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 have been liable for cleanup of a property and
adjacent properties that are contaminated by releases from the mortgaged
property if the lender engages in certain activities. These activities include
foreclosure on the property and participation in the management or operational
aspects of such property. In 1996 CERCLA was amended to eliminate federal
lender liability under CERCLA in certain circumstances, including foreclosure
if the lender resells the property at the earliest practicable, commercially
reasonable time on commercially reasonable terms. In addition, the amendments
defined the term participation in management, which provided some guidance to
lenders about the nature of activities that would and would not give rise to
liability under CERCLA. These amendments do not apply to state Superfund laws.
Also, foreclosure and other activities on contaminated property may subject a
lender to state tort liability.
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<PAGE>
Future Laws
Because each of the Company's businesses is highly regulated, the laws,
rules and regulations applicable to the Company are subject to modification
and change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations will not be adopted in the future which could make compliance more
difficult or expensive, restrict the Company's ability to originate, broker,
purchase or sell loans, further limit or restrict the amount of commissions,
interest and other charges earned on loans originated, brokered, purchased or
sold by the Company, or otherwise adversely affect the business or prospects
of the Company.
THRIFT AND LOAN OPERATIONS
SPTL is subject to regulation, supervision and examination under both
Federal and California law. SPTL is subject to supervision and regulation by
the California Commissioner of Corporations (the "Commissioner") and, as a
member of the federal deposit insurance fund, by the FDIC. Neither the
Company's mortgage banking operations nor SPTL's thrift business is regulated
or supervised by the Office of Thrift Supervision, which regulates savings and
loan institutions. ICII is not directly regulated or supervised by the
Commissioner, the FDIC, the Federal Reserve Board or any other bank regulatory
authority, except with respect to the general regulatory and enforcement
authority of the Commissioner and the FDIC over transactions and dealings
between ICII or any of its other subsidiaries and SPTL, and except with
respect to both the specific limitations regarding ownership of the capital
stock of a parent company of any thrift and loan association and the specific
limitations regarding the payment of dividends from SPTL discussed below.
General
SPTL is governed by the California Industrial Loan Law and the rules and
regulations of the Commissioner that, among other things, regulate in certain
limited circumstances the maximum interest rates payable on, and the terms of,
certain thrift deposits as well as the collateral requirements and maximum
maturities of the various types of loans that are permitted to be made by
California chartered industrial loan companies, also known as thrift and loan
companies or thrifts. As SPTL's primary regulator, the Commissioner has broad
supervisory and enforcement authority with respect to SPTL and its affiliates.
The enforcement authority of the Commissioner over thrift and loan companies
includes the ability to impose penalties for and to seek correction of
violations of laws or regulations or unsafe or unsound practices by assessing
monetary penalties, issuing cease and desist or removal and prohibition orders
against a company, its directors, officers or employees and other persons,
initiating injunctive actions or even taking possession of the business and
property of a thrift and loan company. In general, such enforcement actions
may be initiated for violations of laws, regulations, cease and desist orders
or the thrift and loan company's articles of incorporation or for unsafe or
unsound conditions or practices. Certain provisions of the California
Industrial Loan Law also provide for the institution of civil or criminal
actions against thrift and loan companies and their officers, directors,
employees and affiliates with respect to violations of the law and related
regulations.
SPTL's deposits are insured by the FDIC to the full extent permissible by
law. 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. SPTL is
subject to the rules and regulations of the FDIC to the same extent as other
state financial institutions that are insured by that entity. This supervision
and regulation is intended primarily for the protection of depositors, and to
ensure services for the public's convenience and advantage and to ensure the
safety and soundness of the regulated institution. The approvals of the FDIC
and the Commissioner are required before any merger, consolidation or change
in control, or the establishment or relocation of an office facility of SPTL.
The FDIC, as insurer of SPTL's deposits, also has broad enforcement authority
over state-chartered thrift and loan companies, including the power in
appropriate circumstances to issue cease-and-desist orders and removal and
prohibition orders and to terminate the insurance of their insured accounts.
The FDIC is required to notify the Commissioner of its intent to take certain
types of enforcement actions with respect to a California chartered, FDIC
insured thrift and loan company and of the
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<PAGE>
grounds therefor. If satisfactory corrective action is not effectuated within
an appropriate time by action of the Commissioner, the FDIC may proceed with
its enforcement action. The FDIC may also terminate the deposit insurance of
any insured depository institution if it determines that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed by in writing by the FDIC.
In September 1996, President Clinton signed into law, as part of a 1997
omnibus spending bill, the Economic Growth and Regulatory Paperwork Reduction
Act of 1996, which simplifies and streamlines across a broad spectrum the
regulation of federally-insured depository institutions in diverse areas
including consumer credit, truth-in-lending, real estate residential lending,
regulatory applications, branching, disclosures and advertising, regulatory
examinations, insider lending and lender and fiduciary exposure for
environmental contamination under the Comprehensive Environmental Response,
Compensation and Liability Act (i.e., "Superfund" Liability) and the Solid
Waste Disposal Act, and the elimination (after five years) of civil liability
under the Truth in Savings Act.
The California Department of Corporations and the FDIC recently completed a
joint examination of SPTL. As a result of such examination, SPTL entered into
a joint memorandum of understanding with the FDIC and the California
Department of Corporations. The memorandum of understanding requires certain
measures to be taken in the areas of: (i) hiring and retention of management,
(ii) adoption of systems to monitor and control risk, (iii) correction of
certain violations of law, (iv) credit review and (v) enhancement of other
operational policies. SPTL does not believe that this informal agreement will
have a material adverse effect on the Company. In the event that SPTL fails to
comply with the memorandum of understanding, SPTL and its affiliates, officers
and directors could be subject to various enforcement actions, including cease
and desist orders, criminal and civil penalties, removal from office,
termination of deposit insurance or the revocation of SPTL's charter. Any such
enforcement action could have a material adverse effect on the Company.
Limitations on Investments
Subject to restrictions imposed by California law, SPTL is permitted to make
secured and unsecured consumer and non-consumer loans. The maximum term for
repayment of loans made by thrift and loan companies may be as long as 40
years and 30 days depending upon collateral and priority of the lender's lien
on the collateral, except that loans with repayment terms in excess of 30
years and 30 days may not in the aggregate exceed five percent of total
outstanding loans and obligations of the thrift. Although secured loans may
generally be repayable in unequal periodic payments during their respective
terms, consumer loans secured by real property with terms in excess of three
years must be repayable in substantially equal periodic payments unless such
loans were made or purchased by the thrift and loan under the Garn-St. Germain
Depository Institutions Act of 1982 (which applies primarily to one to four
unit single family residential loans).
California law limits lending activities outside of California by thrift and
loan companies to no more than 40% of total assets. California law contains
extensive requirements for the diversification of the loan portfolio of thrift
and loan companies. A thrift and loan with outstanding certificates of deposit
may not, among other things: (i) place more than 25% of its loans or other
obligations in loans or obligations that are secured only partially, but not
primarily, by real property; (ii) make any one loan secured primarily by
improved real property that exceeds 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends; (iii) lend an amount in excess
of five percent of its paid-up and unimpaired capital stock and surplus not
available for dividends upon the security of the stock of any one corporation;
(iv) 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; and (v) have
more than 70% of its total assets in loans that have remaining terms to
maturity in excess of seven years and are secured solely or primarily by real
property. At each of September 30, 1996 and December 31, 1995, SPTL had paid-
up and unimpaired capital stock and surplus not available for dividends of
$80.5 million and $80.5 million, respectively.
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At September 30, 1996 and December 31, 1995, SPTL satisfied its California
investment law requirements. SPTL originates and holds a portion of the
Company's loans held for sale, of which a majority have a maturity of greater
than seven years. SPTL believes that it will be able to continue to meet its
requirements by managing the types of loans originated and where the loans are
domiciled.
Under California law, thrift and loan companies are generally limited to
investments that are legal investments for commercial banks. In general,
California commercial banks are prohibited from investing an amount exceeding
15% of shareholders' equity in the securities of any one issuer, except for
specified obligations of the United States, California and local governments
and agencies. 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 as premises 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.
Effective January 1, 1997, SPTL may organize operating subsidiaries to
engage in a variety of activities that are part of or incidental to the
banking business. This results from changes in the California Industrial Loan
Law passed in 1996. In general, these subsidiaries, each capitalized with as
much as 10% of SPTL's gross capital (subject to a 25% gross capital limit for
all such subsidiaries), may sell loan originations to SPTL without being
subject to limitations on "covered transactions" under federal banking law
(see "--Transactions with Affiliates"), and up to 20% of the voting stock of
each subsidiary may be held by other parties. In addition, a subsidiary
capitalized with up to 5% of SPTL's gross capital will be able to enter into
partnerships and limited liability companies provided that the subsidiary
retains veto power over investments of the partnership or other company.
Transactions With Affiliates
Under California law, a thrift and loan 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 Commissioner. In addition, a thrift and loan may
not make any loan to, or hold an 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 an affiliate that is listed on a national securities exchange. As a
result of these requirements, SPTL may not make loans to ICII or other
affiliates or purchase a contract, loan or chose in action of ICII or other
affiliates. However, subject to prior approval of the Commissioner, exemptions
from these restrictions are available for purchase of loans from affiliates
which are licensed mortgage brokers (such as ICII) or other certain types of
licensed lenders. However, these purchases would be subject to strict
limitations under federal law.
Federal law also limits transactions between SPTL and its affiliates.
Generally, such transactions must be on terms and under conditions, including
credit standards, that are substantially the same, or at least as favorable to
SPTL, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated companies. In addition, SPTL is prohibited from
engaging in "covered transactions" with an affiliate if the aggregate amount
of such transactions with such affiliate would exceed 10% of SPTL's capital
stock and surplus, or in the case of all affiliates, if the aggregate amount
of such transactions exceeds 20% of SPTL's capital stock and surplus. "Covered
transactions" include loans or extensions of credit to an affiliate, a
purchase of or investment in securities issued by an affiliate, a purchase of
assets from an affiliate (subject to certain exemptions), the acceptance of
securities issued by an affiliate as collateral security for a loan or
extension of credit to any person or company, or the issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. For certain
"covered transactions," collateral requirements in specified amounts will be
applicable. SPTL also is prohibited from purchasing low-quality assets from
its affiliates, except under limited circumstances. SPTL engages in many
transactions which involve its affiliates, including ICII and its other
subsidiaries. As such, many of the transactions between the Company and SPTL
are subject to federal and state affiliate transaction regulations.
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<PAGE>
Under the California Industrial Loan Law, it is unlawful for SPTL to offer
or sell any security in an issuer transaction unless the sale has been
qualified under applicable provisions of the California Corporate Securities
Act of 1968, as amended. The Commissioner, however, has authority to exempt
any such transaction which the Commissioner determines is not comprehended
within the purposes of the qualification requirements and which the
Commissioner finds not necessary or appropriate in the public interest or for
the protection of investors, investment certificate holders, and the
industrial loan company industry as a whole. The Commissioner also has
authority to restrict, limit, prohibit or otherwise condition the uses of
proceeds from the sale of securities, the extent to which a security may be
included within the definition of capital, or the extent to which the proceeds
from the sale of securities may be included in the investment certificate
ratio or used to increase outstanding investment certificates. SPTL reasonably
believes that it would qualify for an exemption from qualification and has no
reason to believe it would not have full use of the proceeds as intended as
well as full leverage authority as defined under the Industrial Loan Law.
Capital; Limitations on Borrowings
Under California law, a thrift and loan is subject to certain leverage
limitations that are not generally applicable to commercial banks or savings
and loan associations. In particular, a thrift and loan institution that has
been in operation in excess of 60 months may have outstanding at any time
deposits not to exceed 20 times paid-up and unimpaired capital and surplus as
restricted in its by-laws as not available for dividends, with the exact
limitation subject to order by the Commissioner. The Commissioner has issued
an order to SPTL authorizing the maximum 20 times leverage standard.
Thrift and loan companies are not permitted to borrow, except by the
issuance of certificates of deposit, in an amount exceeding 300% of
outstanding capital stock, surplus and undivided profits, without the
Commissioner's prior consent. All sums borrowed in excess of 150% of
outstanding capital stock, surplus and undivided profits must be unsecured
borrowings or, if secured, approved in advance by the Commissioner, and be
included as certificates of deposit for purposes of computing the above
ratios; however, collateralized FHLB advances are excluded for this test of
secured borrowings and are not specifically limited by California law.
In 1989, the FDIC and the other federal regulatory agencies adopted final
risk-based capital adequacy standards applicable to financial institutions
like SPTL whose deposits are insured by the FDIC. These guidelines provide a
measure of capital adequacy and are intended to reflect the degree of risk
associated with both on and off balance sheet items, including residential
loans sold with recourse, legally binding loan commitments and standby letters
of credit. Under these regulations, financial institutions are required to
maintain capital to support activities that in the past did not require
capital. Because ICII, unlike SPTL, is not directly regulated by any bank
regulatory agency, it is not subject to any minimum capital requirements. See
"--Holding Company Regulations."
A financial institution's risk-based capital ratio is calculated by dividing
its qualifying capital by its risk-weighted assets. Financial institutions
generally are expected to meet a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 50% of qualifying total capital
must be in the form of core capital (Tier 1), which includes common stock,
noncumulative perpetual preferred stock, minority interests in equity capital
accounts of combined subsidiaries and allowed mortgage servicing rights less
all intangible assets other than allowed mortgage servicing rights and
purchased credit card relationships, subject to certain amount limitations.
Supplementary capital (Tier 2) consists of the allowance for loan losses up to
1.25% of risk-weighted assets, cumulative preferred stock, intermediate-term
preferred stock, hybrid capital instruments and term subordinated debt. The
maximum amount of Tier 2 capital that may be recognized for risk-based capital
purposes is limited to 100% of Tier 1 capital (after any deductions for
disallowed intangibles). The aggregate amount of term subordinated debt and
intermediate term preferred stock that may be treated as Tier 2 capital is
limited to 50% of Tier 1 capital. Certain other limitations and restrictions
apply as well. At September 30, 1996, the Tier 2 capital of SPTL consisted
solely of its allowance for loan losses.
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The FDIC has adopted a 3% minimum leverage ratio that is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions, even those that invest predominantly in low risk assets,
continue to maintain a minimum level of core capital. A financial
institution's minimum leverage ratio is determined by dividing its Tier 1
capital by its quarterly average total assets, less intangibles not includable
in Tier 1 capital. The FDIC rules provide that a minimum leverage ratio of 3%
is required for institutions that have been determined to be in the highest
category used by regulators to rate financial institutions. All other
organizations are required to maintain leverage ratios of at least 100 to 200
basis points above the 3% minimum.
At September 30, 1996, SPTL was in compliance with all of its capital
requirements.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires the federal banking regulators to take "prompt corrective action"
with respect to banks that do not meet minimum capital requirements. In
response to this requirement, the FDIC adopted final rules based upon FDICIA's
five capital tiers. The FDIC's rules provide that an institution is "well
capitalized" if its risk-based capital ratio is 10% or greater; its Tier 1
risk-based capital ratio is 6% or greater; its leverage ratio is 5% or
greater; and the institution is not subject to a capital directive of a
federal bank regulatory agency. A bank is "adequately capitalized" if its
risk-based capital ratio is 8% or greater; its Tier 1 risk-based capital ratio
is 4% or greater; and its leverage ratio is 4% or greater (3% or greater for
the highest rated institutions). An institution is considered
"undercapitalized" if its risk-based capital ratio is less than 8%; its Tier 1
risk-based capital ratio is less than 4%, or its leverage ratio is 4% or less
(less than 3% for the highest rated institutions). An institution is
"significantly undercapitalized" if its risk-based capital ratio is less than
6%; its Tier 1 risk-based capital ratio is less than 3%; or its leverage ratio
is less than 3%. A bank is deemed to be "critically undercapitalized" if its
ratio of tangible equity (Tier 1 capital) to total assets is equal to or less
than 2%. An institution may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it engages in
unsafe or unsound banking practices. Under this standard, SPTL is currently
"well capitalized"; this classification, however, is a regulatory capital
classification used for internal regulatory purposes, and is not necessarily
indicative of SPTL's financial condition and operations.
Undercapitalized institutions are required to submit a capital restoration
plan for improving capital. In order to be accepted, such plan must include a
financial guaranty from the institution's holding company that the institution
will return to capital compliance. If such a guarantee were deemed to be a
commitment to maintain capital under the Federal Bankruptcy Code, a claim for
a subsequent breach of the obligations under such guarantee in a bankruptcy
proceeding involving the holding company would be entitled to a priority over
third party general unsecured creditors of the holding company.
Undercapitalized institutions: are prohibited from making capital
distributions or paying management fees to controlling persons; may be subject
to growth limitations; acquisitions, branching and entering into new lines of
business are restricted; and transactions with affiliates or the appointment
of additional directors or senior executive officers are restricted. Finally,
the institution's regulatory agency has discretion to impose certain of the
restrictions generally applicable to significantly undercapitalized
institutions.
In the event an institution is deemed to be significantly undercapitalized,
it may be required to: sell stock; merge or be acquired; restrict transactions
with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss
specified directors or officers. If the institution is a bank holding company,
it may be prohibited from making any capital distributions without prior
approval of the Federal Reserve Board and may be required to divest a
subsidiary. ICII is not a bank holding company, as that term is defined under
the Bank Holding Company Act of 1956 (the "BHCA"). A critically
undercapitalized institution is generally prohibited from making payments on
subordinated debt and may not, without the approval of its principal bank
supervisory agency, enter into a material transaction other than in the
ordinary course of business; engage in any covered transaction; or pay
excessive compensation or bonuses. Critically undercapitalized institutions
are subject to appointment of a receiver or conservator. Effectively, the FDIC
would have general enforcement powers over SPTL and the Company in the event
that SPTL is deemed undercapitalized.
85
<PAGE>
SPTL's Capital Ratios. The following tables indicate SPTL's capital ratios
under (i) the California leverage limitation, (ii) the FDIC risk-based capital
requirements, using rules effective December 31, 1995, and (iii) a 3% FDIC
minimum leverage ratio, at each of September 30, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996 AT DECEMBER 31, 1995
----------------------------------------------
AMOUNT RATIO AMOUNT RATIO
------------- ---------------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
California Leverage Limitation:
Deposits....................... $1,081,954 $ 1,093,250
Paid-up and unimpaired capital
and surplus amount
outstanding................... 140,353 12.97% 126,599 11.58%
Minimum required............... 54,098 5.00% 54,663 5.00%
Excess......................... 86,255 71,936
FDIC Risk-Based Capital Require-
ment:
Risk weighted assets........... $1,317,921 $ 942,481
Tier 1 capital amount
outstanding................... 124,774 9.47% 110,484 11.72%
Minimum required(1)............ 52,717 4.00% 37,699 4.00%
Excess......................... 72,057 72,785
Total capital amount
outstanding................... 139,235 10.56% 124,213 13.18%
Minimum required(1)............ 105,434 8.00% 75,398 8.00%
Excess......................... 33,801 48,815
FDIC Leverage Ratio:
Average assets................. $1,474,764 $1,373,797
Tier 1 capital amount
outstanding................... 124,774 8.46% 110,484 8.04%
Minimum required............... 44,243 3.00% 41,214 3.00%
Excess......................... 80,531 69,270
</TABLE>
- --------
(1) Minimum FDIC risk-based capital ratio to qualify as "adequately
capitalized."
Limitations on Types of Deposits
Because of the limitations described in "--Holding Company Regulations"
below, SPTL currently offers only passbook accounts and certificates of
deposit and does not offer NOW accounts, checking accounts or similar demand
accounts.
Insurance Premiums
The FDIC administers two separate deposit insurance funds, the Bank
Insurance Fund ("BIF"), which insures the deposits of institutions which were
insured by the FDIC prior to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund
("SAIF"), which insures the deposits of institutions which were insured by the
Federal Savings and Loan Insurance Corporation prior to the enactment of
FIRREA. SPTL is a member of the BIF and currently pays a regular assessment
rate of $2,000 per year.
As required by FDICIA, the FDIC has established a risk-based system for
setting deposit insurance assessments. Under the risk-based assessment system,
an institution's insurance assessments vary depending on the level of capital
the institution holds and the degree to which it is of supervisory concern to
the FDIC. Once an insurance fund has reached its designated reserve ratio of
1.25%, and as long as there are no outstanding borrowings by the FDIC from the
United States Treasury, the FDIC is not permitted to charge assessment
premiums that would increase the reserve ratio of the insurance fund above its
designated reserve ratio. The BIF reached its designated reserve ratio in
1995. Consequently, the assessment rate for BIF deposits of institutions that
are well-capitalized and well-managed is $2,000 per institution per year.
86
<PAGE>
Recent Legislation
A new California state regulatory agency was created in 1996 to be known as
the Department of Financial Institutions ("DFI"). The DFI will become
effective July 1, 1997. All state chartered depository institutions will be
licensed and regulated after July 1, 1997 by the DFI, which includes banks,
savings associations, credit unions, and industrial loan companies. SPTL, an
industrial loan company, will be subject to the jurisdiction of the DFI as its
state regulator. Currently SPTL is regulated by the Commissioner. It is
anticipated that the same administrative and examination staffs will transfer
to the DFI from the Commissioner's office, thereby ensuring continuity of
regulatory personnel familiar with the administration of the Industrial Loan
Law; however, no assurance can be given that this will occur. Persons who are
unfamiliar with the Industrial Loan Law and the scope of operations of
industrial loan companies, such as SPTL, will be interpreting the Industrial
Loan Law in the office of general counsel and office of policy of the DFI. It
is expected that this will not have any material effect on SPTL.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted which, among other things, imposes on BIF-insured deposits a
special premium assessment on domestic deposits at one-fifth the premium rate
imposed on SAIF-insured deposits, which will be used to pay the interest on
Financial Corporation ("FICO") bonds issued by the federal government as part
of the savings association bailout provisions of the 1989 FIRREA legislation.
In the year 2000, however, the Funds Act requires BIF-insured institutions to
share in the payment of the FICO obligations on a pro-rata basis with all
savings institutions, with annual assessments expected to equal approximately
2.4 basis points until the year 2017, and to be completely phased out by 2019.
The Funds Act also prohibits the merger of the BIF and SAIF insurance funds
unless the savings institution charter has been eliminated on January 1, 1999.
In addition, on November 26, 1996, the FDIC determined to maintain the
current downward adjustment to the assessment rate schedule applicable to
deposits of BIF institutions for the semi-annual assessment period beginning
January 1, 1997. For such period, the BIF assessment rates will range from 0
to 27 basis points.
Safety and Soundness Guidelines
In July 1995, certain federal bank regulatory agencies, including the FDIC,
adopted Interagency Guidelines establishing standards for safety and soundness
as required by the FDICIA. In accordance with these Guidelines, institutions
are required to establish policies and procedures regarding: (i) internal
controls and information; (ii) internal audit systems; (iii) loan
documentation; (iv) credit underwriting; (v) interest rate exposure; and
(vi) asset growth. In addition, under these Guidelines institutions must
maintain safeguards to prevent the payment of compensation and fees which are
excessive or could lead to a material loss for the institution. The federal
bank regulatory agencies recently amended the Interagency Guidelines to
include asset quality and earnings standards. The new guidelines require an
institution to identify problem assets and estimate inherent losses. The
earnings standards under the revised guidelines require an institution to
establish monitoring and reporting systems.
Holding Company Regulations
The Competitive Equality Banking Act of 1987 ("CEBA") subjected certain
previously unregulated companies to regulation as bank holding companies by
expanding the definition of the term "bank" in the BHCA. SPTL remained exempt
from the definition of "bank" under the BHCA, and therefore ICII was exempt
from regulation as a bank holding company. SPTL may cease to fall within those
exceptions if it engages in certain operational practices, including accepting
demand deposit accounts. SPTL currently has no plans to engage in any
operational practice that would cause it to fall outside of one or more of the
exceptions to the term "bank" as defined by CEBA. Pursuant to CEBA, ICII and
its affiliates are treated as if ICII were a bank holding company for the
limited purposes of applying certain restrictions on loans to insiders and
anti-tying provisions.
87
<PAGE>
Limitations on Dividends
Under the California Industrial Loan Law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office.
In addition, no distribution of dividends is permitted unless: (i) such
distribution would not exceed a thrift and loan's retained earnings, (ii) any
payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), and (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities).
Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their by-laws to restrict such capital
from the payment of dividends. The amount of restricted capital maintained by
a thrift also provides the basis for establishing the maximum amount that a
thrift may lend to one single borrower. As of September 30, 1996 and December
31, 1995, $80.5 million and $80.5 million, respectively, of SPTL's capital was
so restricted.
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, thrift and loans 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. Under the Financial Institutions Supervisory
Act and FIRREA, federal regulators also have 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 a
thrift and other factors, that such regulators could assert that the payment
of dividends in some circumstances might constitute unsafe or unsound
practices and prohibit payment of dividends even though technically
permissible.
Pursuant to FDICIA, SPTL is prohibited from paying dividends if the payment
of such dividends would cause the institution to become "undercapitalized."
These limitations on the payment of dividends may restrict the Company's
ability to utilize cash from SPTL which may have been otherwise available to
the Company for working capital.
Limitations on Acquisitions of Voting Stock of the Company
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 Commissioner. Similarly, the
federal Change in Bank Control Act of 1978 requires any person or company that
wishes to obtain "control" of an insured depository institution to notify the
appropriate Federal banking agency, which would be the FDIC in the case of
SPTL, 60 days prior to the proposed acquisition. If the FDIC has not issued a
notice disapproving the proposed acquisition within that time period
(including a possible 90 day extension), the person may acquire such
institution. For purposes of the statute, "control" is defined as the power,
directly or indirectly, to direct the management or policies of an insured
depository institution or to vote 25% or more of any class of voting
securities of an insured depository institution.
Restrictions on Loans from Imperial Bank
Under certain provisions of the California Financial Code and implementing
regulations thereunder, lending by banks such as Imperial Bank is subject to
certain limitations. Loans by Imperial Bank to any single obligor are limited
to 15% of gross capital (25% with acceptable collateral). As a result, at
September 30, 1996, loans by Imperial Bank to the Company were limited to
approximately $62.2 million. At September 30, 1996, no amounts were
outstanding from Imperial Bank to the Company.
88
<PAGE>
Restriction on Investments by Imperial Bank
FDICIA restricts the ability of state chartered banks, such as Imperial
Bank, to hold equity securities not permissible for national banks. Such
impermissible investments must be disposed of before December 19, 1996.
Imperial Bank acquired its interest in the Company at its formation, which
interest has since been reduced by the Company's sale of common stock to third
parties, as well as a sale of stock by Imperial Bank subsequent to the initial
public offering of the Company. Pursuant to FDICIA, Imperial Bank may be
required to divest its remaining ownership of the Company, which is currently
less than 25%. Imperial Bank has requested approval from the FDIC to retain
its investment in the Company. There can be no assurance that the FDIC will
not require divestiture, or that such divestiture, if required, would not
adversely affect the trading market for the Company's common stock. See
"Certain Transactions."
EMPLOYEES
As of September 30, 1996, the Company had 372 employees, excluding 219
employees at SPFC; (63 at ICII, 196 at SPTL, 49 at IBC, 60 at FMAC, and four
at ICAI). Management believes that its relations with these employees are
satisfactory. Neither ICII nor any of its subsidiaries is a party to any
collective bargaining agreement.
PROPERTIES
The Company's executive offices occupy 7,393 square feet of space in
Torrance, California at a current monthly rental of approximately $11,459.
The Company's administrative facilities occupy approximately 25,122 square
feet of space in Santa Ana Heights, California. The Company leases these
facilities pursuant to a ten-year lease, commencing September 1, 1992 and
subleases a portion of these premises to ICMH resulting in a current net
monthly rental of approximately $37,300. See "Certain Transactions--
Relationships with ICMH."
The Company currently leases offices in San Diego, Walnut Creek, Newport
Beach, Woodland Hills, Sacramento, San Jose and Irvine, California, as well as
in Parsippany, New Jersey; Greenville, Delaware; Bellevue, Washington; Denver,
Colorado; Boca Raton, Florida; Allentown, Pennsylvania; and Lake Oswego and
Grants Pass, Oregon. SPTL operates in California through branches and loan
production offices and in other states through loan production offices and
representatives.
LEGAL PROCEEDINGS
The predecessor entity to FMAC, and an officer of such entity and of FMAC,
among others, are named as defendants in De Wald et al. vs. Knyal et al. filed
on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an
accounting, monetary and punitive damages for alleged breach of contract,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing and fraud arising from an alleged business relationship. The Company
has not been named as a defendant in this lawsuit.
The Company is a defendant in Allen vs. ICII, filed in the Orange County
Superior Court and served on the Company on October 2, 1996, in which a former
employee alleges that she was subjected to discriminatory treatment and to
discharge because of her race and in retaliation for alleged complaints of
improper conduct against other Company personnel. The former employee seeks
reimbursement for lost wages and benefits, damages for emotional distress and
punitive damages. The Company believes that plaintiff's claims are invalid and
that all actions taken with respect to the ex-employee were based on poor
performance.
89
<PAGE>
On September 6, 1996, a former employee filed suit against the Company in
Sanders vs. ICII, filed in the U.S. District Court for the Middle District of
Florida, alleging sexual harassment and sexual discrimination. The complaint
seeks compensatory damages, non-economic damages and punitive damages as a
result of the alleged misconduct. Discovery has only recently commenced, but
the Company believes the claims to be invalid.
ComUnity National Asset Corporation vs. Markel et al. was filed in the Orange
County Superior Court against an officer of ICAI, among others, on April 1,
1995, alleging breach of contract, breach of fiduciary duty, breach of implied
covenant of good faith and fair dealing and statutory and common law
misappropriation of trade secrets, restitution for unfair competition,
negligence, and damages for conversion. The plaintiff seeks compensatory,
punitive and exemplary damages in an unspecified amount and restitution of
profits derived from the alleged infractions. Although neither the Company nor
ICAI were named defendants in this action, ICAI has executed an indemnity
agreement with the officer pursuant to the indemnity provisions of California
law. Substantial discovery has been completed.
All of the above referenced actions are being actively defended.
90
<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<S> <C> <C>
H. Wayne Snavely(1)(2)...................... 55 Chairman of the Board, President and Chief
Executive Officer
Kevin E. Villani............................ 48 Executive Vice President and Chief Financial
Officer
Irwin L. Gubman............................. 54 General Counsel and Secretary
Paul B. Lasiter............................. 30 Senior Vice President and Controller
Stephen J. Shugerman(1)..................... 49 President of SPTL and a Director
Joseph R. Tomkinson(1)...................... 49 Director
Robert S. Muehlenbeck....................... 48 Director
G. Louis Graziadio, III(2).................. 46 Director
Perry A. Lerner(2)(3)....................... 52 Director
James Clayburn LaForce, Jr.(2)(3).......... 67 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
H. WAYNE SNAVELY has been Chairman of the Board and Chief Executive Officer
of the Company since December 1991 and President since February 1996. From
1986 to February 1992, Mr. Snavely served as Executive Vice President of
Imperial Bancorp and Imperial Bank with direct management responsibility for
the following bank subsidiaries and divisions: Imperial Bank Mortgage, SPTL,
Imperial Trust Company, Wm. Mason & Company, Imperial Ventures, Inc. and The
Lewis Horwitz Organization. From 1983 through 1986, Mr. Snavely was employed
as Chief Financial Officer of Imperial Bancorp and Imperial Bank. Mr. Snavely
served as a director of Imperial Bank from 1975 to 1983 and currently serves
as a director. Mr. Snavely is Chairman of the Board of SPFC and ICMH.
KEVIN E. VILLANI has been the Executive Vice President and Chief Financial
Officer of the Company since September 1995. From 1993 to 1996, Mr. Villani
was Associate Professor of Clinical Finance and Real Estate for the University
of Southern California. From 1985 to 1990, he was the Executive Vice President
and Chief Financial Officer for Imperial Corporation of America. From 1982 to
1985, he served in various senior executive capacities at the Federal Home
Loan Mortgage Corporation. From 1975 to 1982, he served as the Financial
Economist, The Director for the Division of Housing Finance Analysis and The
Deputy Assistant Secretary for the Office of Economic Affairs and Chief
Economist for the Department of Housing and Urban Development. From 1974 to
1975, he was an economist for the Federal Reserve Bank of Cleveland. Mr.
Villani has also served as a consultant to the World Bank and USAID on
banking, housing, finance, and privatization.
IRWIN L. GUBMAN has been the General Counsel and Secretary of ICII since
October 1996. From February 1992 to September 1996, Mr. Gubman was a Partner
at Coudert Brothers serving in various capacities including syndicated
lending, structured finance, and regulatory matters. From December 1970 to
September 1991, Mr. Gubman served in various capacities at Bank of America,
most recently as Senior Vice President and Associate General Counsel. From
March 1968 to October 1970, Mr. Gubman was an Attorney Advisor for the U.S.
Arms Control and Disarmament Agency. From September 1967 to March 1968, Mr.
Gubman was a Legal Advisor to the Government of Liberia.
91
<PAGE>
PAUL B. LASITER has been Senior Vice President and Controller of the Company
since November 1992. From June 1988 to November 1992, Mr. Lasiter was a
Supervising Senior Accountant for KPMG Peat Marwick, specializing in the
financial institutions industry. Mr. Lasiter is a Certified Public Accountant.
STEPHEN J. SHUGERMAN has been President of SPTL since June 1987 and has been
a Director of the Company since December 1991. From June 1985 to May 1987, Mr.
Shugerman was President of ATI Thrift & Loan Association, a privately owned
thrift and loan association, and, from 1979 to 1985, he was Senior Vice
President of Imperial Thrift and Loan Association, a former subsidiary of
Imperial Bank. Mr. Shugerman has recently served as President of the
California Association of Thrift & Loan Companies. Mr. Shugerman is a director
of SPFC.
JOSEPH R. TOMKINSON has been a Director of the Company since December 1991.
Mr. Tomkinson has been the Vice Chairman of the Board and Chief Executive
Officer of ICMH since August 1995. Mr. Tomkinson served as President of the
Company from January 1992 to February 1996 and from 1986 to January 1992, he
was President of Imperial Bank Mortgage, a subsidiary of Imperial Bank, one of
the companies combined to become ICII in 1992. From 1984 to 1986, he was
employed as Executive Vice President of Loan Production for American Mortgage
Network, a privately owned mortgage bank.
ROBERT S. MUEHLENBECK has been a Director of the Company since December
1991. Mr. Muehlenbeck is also an Executive Vice President of Imperial Bank.
Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated and has
been involved in commercial and residential real estate development and
finance activities.
G. LOUIS GRAZIADIO, III has been a Director of the Company since February
1992. Mr. Graziadio has been Chairman of the Board and Chief Executive Officer
of Ginarra Holdings, Inc. (as well as predecessor and affiliated companies)
since 1979. Ginarra Holdings, Inc. is a privately held California corporation
engaged in a wide range of investment activities. Mr. Graziadio has been
actively involved, since 1972, in real estate development, construction and
home building. Mr. Graziadio is a Director of Imperial Bancorp and Imperial
Trust Company, an indirect subsidiary of Imperial Bancorp.
PERRY A. LERNER has been a Director of the Company since May 1992. Mr.
Lerner has been with the law firm of O'Melveny & Myers since 1982, having been
a partner with the firm since 1984. Mr. Lerner was an Attorney-Advisor of the
International Tax Counsel of the United States Treasury Department from 1973
to 1976.
JAMES CLAYBURN LAFORCE, JR. has been a Director of the Company since May
1992. From July 1978 to July 1993, Mr. LaForce was the Dean of The Anderson
School, University of California at Los Angeles. In addition, Mr. LaForce was
appointed in January 1991 to the position of Acting Dean of the Hong Kong
University of Science and Technology, Hong Kong.
Directors of the Company hold office until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier resignation or removal. All officers are appointed by and serve
at the discretion of the Board of Directors, subject to employment agreements,
where applicable. There are no family relationships between any directors or
officers of the Company. George L. Graziadio, Jr., the President, Chief
Executive Officer and the Chairman of the Board of Directors of Imperial
Bancorp ("Bancorp"), is the father of G. Louis Graziadio, III. The Graziadio
family and related entities are significant shareholders of Bancorp.
92
<PAGE>
EXECUTIVE COMPENSATION
The following table provides information concerning the cash and non-cash
compensation earned and received by the Company's Chief Executive Officer and
its most highly compensated executive officers (the "Named Executive
Officers") whose salary and bonus during the fiscal year ended December 31,
1996 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------ ------------
NAME AND PRINCIPAL FISCAL OTHER ANNUAL OPTIONS
POSITION YEAR SALARY BONUS COMPENSATION GRANTED
------------------ ------ -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely......... 1996 $300,000 $700,000 $ 28,564(1) (2)
Chief Executive Officer 1995 300,000 252,603 32,960(1)
1994 256,398 125,621 23,782(1)
Kevin E. Villani......... 1996 200,000 200,000 12,986(3) (2)
Chief Financial Officer 1995 59,103 25,000 2,295(3)
1994 -- -- --
Paul B. Lasiter.......... 1996 87,500 50,000 6,886(4) (2)
Senior Vice President 1995 67,500 30,000 5,459(4)
and Controller 1994 60,000 5,000 4,998(4)
Stephen J. Shugerman..... 1996 200,000 400,000 20,963(5) (2)
President of SPTL 1995 200,000 166,027 16,372(5)
1994 166,500 81,531 16,702(5)
Joseph R. Tomkinson...... 1996 -- 28,650 -- (2)
Former President(6) 1995 300,000 166,027 16,644(7)
1994 256,398 101,480 20,182(7)
William S. Ashmore....... 1996 -- -- -- (2)
Former Executive Vice,
President, 1995 328,640 -- 122,033(8)
Secondary Marketing(9) 1994 328,640 -- 79,466(8)
</TABLE>
- --------
(1) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the
Company of $18,000, $18,000 and $18,000, respectively, and (ii) aggregate
contributions paid by the Company of $10,564, $14,960 and $5,782
respectively, under employee benefit plans.
(2) See "--Stock Option Plans" for details regarding the terms of such
options.
(3) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the
Company of $6,000, $1,773 and $0, respectively, and (ii) aggregate
contributions paid by the Company of $6,986, $522 and $0, respectively.
Under employee benefit plans.
(4) In 1996, 1995 and 1994, consists of $6,886, $5,459 and $4,998,
respectively, under employee benefit plans.
(5) In 1996, 1995 and 1994, consists of (i) a car allowance paid by the
Company of $10,800, $10,800 and $10,800, respectively, and (ii) aggregate
contributions paid by the Company of $10,163, $5,572 and $5,902,
respectively.
(6) Mr. Tomkinson resigned as President of the Company in February 1996, but
remains a director.
(7) In 1995 and 1994, consists of (i) a car allowance paid by the Company of
$14,400 and $14,400, respectively, and (ii) aggregate contributions paid
by the Company of $2,244 and $5,782, respectively, under employee benefit
plans.
(8) In 1995 and 1994, consists of (i) commissions of $101,790 and $70,255,
respectively, based upon mortgage loan originations and sales, (ii) a car
allowance paid by the Company of $6,000 and $6,000, respectively, and
(iii) aggregate contributions paid by the Company of $14,243 and $3,211,
respectively under employee benefit plans.
(9) Mr. Ashmore resigned as Executive Vice President of Secondary Marketing in
February 1996.
93
<PAGE>
OPTION GRANTS, EXERCISES AND YEAR END VALUES
No stock options were granted by the Company to any of the Named Executive
Officers during the fiscal year ended December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF UNEXERCISED VALUE OF ALL
UNEXERCISED SENIOR UNEXERCISED
OPTIONS AT FY- MANAGEMENT IN-THE-MONEY
SHARES END UNDER THE OPTIONS AT OPTIONS AT
ACQUIRED OPTION PLAN FY-END FY-END
ON VALUE EXERCISABLE/ EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2) UNEXERCISABLE(3)
---- -------- --------- ---------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely........ 61,137 1,408,885 415,285 917,052/-- 18,210,475/3,838,983
Kevin E. Villani........ 13,200 183,500 --/136,800 --/-- --/1,557,299
Stephen J. Shugerman.... 300,000 4,305,651 61,137/115,285 158,524/-- 4,262,921/1,020,233
Paul B. Lasiter......... 14,190 170,463 3,300/37,160 --/-- 60,800/521,610
Joseph R. Tomkinson..... 750,000 8,850,157 76,422/50,000 167,052/-- 4,805,175/365,625
William S. Ashmore...... 7,640 101,469 --/7,640 --/-- --/144,444
</TABLE>
- --------
(1) For a description of the terms of such options, see "--Stock Option
Plans--1992 Stock Option Plan."
(2) For a description of the terms of such options, see "--Senior Management
Stock Options."
(3) Based on a price per share of $21.00, which was the price of a share of
Common Stock as quoted on the Nasdaq National Market at the close of
business on December 31, 1996.
EMPLOYMENT AGREEMENTS
On January 1, 1992, Mr. Snavely entered into a five-year employment
agreement at an annual salary of $200,000, subject to adjustment for
inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount
to be determined by the Board of Directors, but in no event to exceed his base
salary. Effective July 1, 1994, Mr. Snavely's employment agreement was amended
to reflect an annual salary of $300,000, plus a bonus based on 1.5% of the
Company's pre tax profits in excess of $10.0 million. Mr. Snavely's total
compensation may not exceed $1.0 million annually.
On January 1, 1992, Mr. Shugerman entered into a five-year employment
agreement with an annual salary of $125,000, subject to adjustment for
inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount
to be determined by the Board of Directors, but in no event to exceed his base
salary. Effective July 1, 1994, Mr. Shugerman's employment agreement was
amended to reflect an annual salary of $200,000, plus a bonus based on 1.0% of
the Company's pre-tax profits in excess of $10.0 million and the attainment of
defined Company goals. Mr. Shugerman's total compensation may not exceed
$600,000 annually.
Pursuant to the aforementioned employment agreements with Messrs. Snavely
and Shugerman, the Company is required to pay compensation to each, following
termination, as follows: (i) with cause: the Company shall only be obligated
to pay salary through the date on which termination occurs or (ii) without
cause: the Company is required to pay the base salary owed through the term of
the agreement plus a bonus equal to at least what was paid in the previous
period not to exceed 100% of current salary. The Company is negotiating new
employment arrangements with Messrs. Snavely and Shugerman.
SENIOR MANAGEMENT STOCK OPTIONS
Effective January 1992, members of senior management of the Company received
ten year options to purchase shares of the Company's common stock (the "Common
Stock"). Such options are not covered by the Company's option plans described
below. The exercise price of these options is $0.88 per share for one-half of
the options, with the other half exercisable at $1.40 per share. These options
are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen
J. Shugerman were granted 917,053, 917,053 and 458,526 of such options,
respectively.
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In April 1996, Mr. Tomkinson sold 750,000 shares of Common Stock he acquired
under the option agreement described above. In November 1996, Mr. Shugerman
sold 300,000 shares of Common Stock he acquired under the option agreement
described above.
The Company recognizes compensation expense with respect to the senior
management stock options because they were granted at less than the estimated
market value of the Company's Common Stock. The total compensation expense was
$2.2 million, all of which was recognized as of December 31, 1995. See Note 22
of Notes to Consolidated Financial Statements.
STOCK OPTION PLANS
1992 STOCK OPTION PLAN
A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 1,646,564 options were outstanding at September 30,
1996.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years. With respect to any participant who owns stock representing more
than 10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any option must be at least equal to 110% of the fair market
value on the date of grant.
1996 STOCK OPTION PLAN
The Company has adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is
administered by a committee of directors appointed by the Board of Directors
(the "Committee"). ISOs may be granted to the officers and key employees of
the Company or any of its subsidiaries. The exercise price for any option
granted under the 1996 Stock Option Plan may not be less than 100% (110% in
the case of ISOs granted to an employee who is deemed to own in excess of 10%
of the outstanding Common Stock) of the fair market value of the shares of
Common Stock at the time the option is granted. The purpose of the 1996 Stock
Option Plan is to provide a means of performance-based compensation in order
to attract and retain qualified personnel and to provide an incentive to those
whose job performance affects the Company. The effective date of the 1996
Stock Option Plan was June 21, 1996. A total of 3,000,000 shares of the
Company's Common Stock has been reserved for issuance under the 1996 Stock
Option Plan and a total of 877,800 options were outstanding at September 30,
1996.
If an option granted under the 1996 Stock Option Plan expires or terminates,
or an Award is forfeited, the shares subject to any unexercised portion of
such option or Award will again become available for the issuance of further
options or Awards under the 1996 Stock Option Plan.
Unless previously terminated by the Board of Directors, no options or Awards
may be granted under the 1996 Stock Option Plan after June 21, 2006.
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Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO.
Under current law, ISOs may not be granted to any individual who is not also
an officer or employee of the Company or any subsidiary.
Each option must terminate no more than 10 years from the date it is granted
(or five years in the case of ISOs granted to an employee who is deemed to own
in excess of 10% of the combined voting power of the Company's outstanding
Common Stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
The exercise price of any option granted under the 1996 Stock Option Plan is
payable in full (i) in cash, (ii) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1996 Stock Option Plan, (iii) by cancellation of indebtedness owed by the
Company to the optionholder, or (iv) by any combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
PROFIT SHARING AND 401(K) PLAN
On July 1, 1993, the Company terminated its participation in Imperial
Bancorp's 401(k) and profit sharing plans, establishing its own 401(k) plan.
On September 30, 1993, Imperial Bancorp transferred all plan assets to the
Company.
Under the Company's 401(k) plan, employees may elect to enroll on the 1st of
any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $0.3 million, $0.2 million, $0.2 million, and $0.2 million
for the nine months ended September 30, 1996 and the years ended December 31,
1995, 1994 and 1993, respectively.
An additional Company contribution may be made, at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company discretionary contributions would be
allocated as a 50% match of employee contributions, on the first 4% of the
employee's deferrals. Discretionary contributions of $200,000 were charged to
operations in 1995 and 1994.
Company matching contributions are made as of December 31st each year.
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LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
The Company's Articles of Incorporation and Bylaws provide for
indemnification of the officers and directors of the Company to the full
extent permitted by law. The General Corporation Law of the State of
California permits a corporation to limit, under certain circumstances, a
director's liability for monetary damages in actions brought by or in the
right of the corporation. The Company's Articles of Incorporation also provide
for the elimination of the liability of directors for monetary damages to the
full extent permitted by law.
The Company has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Articles of
Incorporation and Bylaws. These agreements, among other things, indemnify the
Company's directors and officers for certain expenses (including attorneys'
fees), judgments, fines, and settlement amounts incurred in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, as a director or officer
of any subsidiary of the Company, or as a director or officer of any other
enterprise to which the person provides services at the request of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
The Company has $10.0 million of directors' and officers' liability insurance.
At present, there is no pending litigation or proceeding involving a director,
officer or employee of the Company as to which indemnification is sought, nor
is the Company aware of any threatened litigation or proceeding that may
result in claims for indemnification, except as set forth in "Business--Legal
Proceedings."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of
January 31, 1997, by (i) each director of the Company, (ii) each executive
officer whose salary exceeded $100,000 for the year ended December 31, 1996,
(iii) each person who is known to the Company to own beneficially more than 5%
of the Common Stock, and (iv) all directors and executive officers of the
Company as a group. Unless otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
BENEFICIALLY % OF TOTAL
BENEFICIAL OWNER(1) OWNED OUTSTANDING(2)
------------------- ------------ --------------
<S> <C> <C>
Imperial Bank(3)............................. 9,396,106 23.5%
Wellington Management Co.(4)................. 3,151,072 7.9%
H. Wayne Snavely(5).......................... 1,262,616 3.2%
Joseph R. Tomkinson(6)....................... 144,422 *
Stephen J. Shugerman(7)...................... 223,483 *
G. Louis Graziadio, III(8)................... 91,733 *
Robert S. Muehlenbeck(9)..................... 67,507 *
Perry A. Lerner(9)........................... 64,437 *
J. Clayburn LaForce(9)....................... 61,137 *
Paul Lasiter(10)............................. 22,176 *
Kevin E. Villani............................. -- --
All Directors and Officers as a Group (10
persons)(11)................................ 1,937,511 4.8%
</TABLE>
- --------
* Less than 1%.
(1) Each of such persons may be reached through the Company at 23550
Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505,
telephone (310) 373-1704.
(2) Percentage ownership is based on 38,443,586 shares of Common Stock
outstanding as of January 31, 1997.
(3) Imperial Bank, headquartered in Los Angeles, California, is a California
chartered bank whose deposits are insured by the FDIC. The address of
Imperial Bank is 9920 La Cienega Boulevard, Inglewood, California 90301.
(4) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 1995. The shares are owned by various
investment advisory clients of Wellington Management Company (or of
Wellington Trust Company, National Association, WMC's wholly-owned
subsidiary), which is deemed a beneficial owner of the shares only by
virtue of the direct or indirect investment and/or voting discretion they
possess pursuant to the provisions of investment advisory agreements with
such clients.
(5) Includes 917,052 shares subject to stock options exercisable within 60
days of January 31, 1997.
(6) Includes 143,474 shares subject to stock options exercisable within 60
days of January 31, 1997. Mr. Tomkinson resigned as an officer of the
Company in February 1996 but remains a director.
(7) Includes 219,661 shares subject to stock options exercisable within 60
days of January 31, 1997.
(8) Includes 77,637 shares subject to stock options exercisable within 60
days of January 31, 1997.
(9) Includes 61,137 shares subject to stock options exercisable within 60
days of January 31, 1997.
(10) Includes 6,930 shares subject to stock options exercisable within 60 days
of January 31, 1997.
(11) Includes 1,548,165 shares subject to stock options exercisable within 60
days of January 31, 1997.
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CERTAIN TRANSACTIONS
PRINCIPAL SHAREHOLDER; LIMITATIONS ON INVESTMENT; CONFLICTS OF INTEREST
At November 30, 1996, Imperial Bank owned 9,396,106 shares of Common Stock,
or 24.6% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
FDICIA restricts the ability of state chartered banks, such as Imperial
Bank, to hold equity securities and requires impermissible investments to be
disposed of before December 19, 1996. Imperial Bank acquired its interest in
the Company at its formation, which interest has been reduced by the Company's
sale of Common Stock to third parties, as well as through a sale of stock by
Imperial Bank subsequent to the initial public offering of the Company. The
9.4 million shares of the Company's Common Stock held by Imperial Bank may be
subject to divestiture under FDICIA. Imperial Bank has requested approval from
the FDIC to retain its investment in the Company and the FDIC has extended the
FDICIA-imposed deadline pending a decision on Imperial Bank's application. The
regional office of the FDIC has acknowledged the request and requested and
received additional information on the Company, and has recommended to its
Washington, D.C. headquarters that Imperial Bank be allowed to retain its
stock ownership in the Company subject to certain conditions. The Federal
Reserve Bank of San Francisco has requested that Bancorp make an application
under Section 4 of the Bank Holding Company Act for approval for Imperial Bank
to retain the Company's stock. Bancorp has deferred any application pending
the results of the FDIC application.
Because Imperial Bank owns less than 50% of the outstanding shares of the
Company and the Company is operated as a company independent of Imperial Bank
and Bancorp, the Company believes that, in the event of an insolvency,
bankruptcy or receivership proceeding involving Imperial Bank or Bancorp, a
court, exercising reasonable judgment after full consideration of all relevant
factors, would not order the substantive consolidation of the assets and
liabilities of the Company with either Imperial Bank or Bancorp.
Two directors of the Company also serve on the Board of Directors of
Imperial Bank or its parent, Imperial Bancorp. See "Management."
PAYMENT AND TERMINATION AGREEMENT
On January 1, 1992, Mr. Tomkinson entered into a five-year employment
agreement at an annual salary of $200,000, subject to adjustment for
inflation, plus an annual bonus to be paid out of a "bonus pool" in an amount
to be determined by the Board of Directors, but in no event to exceed his base
salary. Effective July 1, 1994, Mr. Tomkinson's employment agreement was
amended to reflect an annual salary of $300,000, plus a bonus based on 1.0% of
the Company's pre-tax profits in excess of $10.0 million and the attainment of
defined Company goals. Mr. Tomkinson's total compensation may not exceed
$750,000 annually. Mr. Tomkinson resigned as an officer of the Company in
February 1996.
In February 1996, the Company entered into a Payment and Termination
Agreement with Mr. Tomkinson. Under the terms of this agreement, Mr. Tomkinson
will receive, as settlement for termination of Mr. Tomkinson's employment with
the Company on November 20, 1995 (the "Termination Date"), the following: (i)
the amount by which (A) the aggregate of all compensation Mr. Tomkinson would
have been entitled to receive under his employment agreement with the Company
from the Termination Date through the original termination date of the
employment agreement on December 31, 1996, exceeds (B) the aggregate
Mr. Tomkinson is entitled to receive from ICMH under his employment agreement
with ICMH during such period, (ii) all accrued but unpaid compensation due Mr.
Tomkinson under his employment agreement with the Company through the
Termination Date and (iii) the full and immediate vesting of all stock options
held by Mr. Tomkinson covering shares of the capital stock of the Company. Mr.
Tomkinson received $28,650 under this agreement.
BANK DEPOSITS
The Company had deposits (including escrow balances) with SPTL which were
approximately $16.5 million, $36.0 million and $38.8 million at September 30,
1996, December 31, 1995 and December 31, 1994, respectively.
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BORROWING ARRANGEMENTS
In October 1995, Imperial Bank extended ICII a $10.0 million revolving line
of credit bearing interest at the prime rate (8.50% at December 31, 1995). All
amounts outstanding under this line were repaid in May 1996.
In September 1993, the Company obtained a $20.0 million revolving line of
credit from Imperial Bank, secured by all the assets of the Company. The line
of credit had an expiration date of March 31, 1994 and carried a rate of prime
plus 1% (prime was 6% at December 31, 1993). At December 31, 1993, the Company
had $20.0 million outstanding on the line of credit. In January 1994, the
Company repaid the Imperial Bank line of credit in full and the security
interest was released.
Additional or modified arrangements and transactions may be entered into by
the Company, Imperial Bank, and their respective subsidiaries, after the date
hereof. Any such future arrangements and transactions will be determined
through negotiation between the Company and Imperial Bank, and it is possible
that conflicts of interest will be involved. The Audit Committee of the Board
of Directors of the Company, consisting of directors independent of both
management and Imperial Bank, must independently approve all transactions by
and between the Company and Imperial Bank.
RELATIONSHIPS WITH SPFC
THE CONTRIBUTION TRANSACTION
In October 1994, ICII incorporated SPFC as part of a strategic decision to
form a separate subsidiary through which to operate SPTL's residential lending
division. To further this strategy, in December 1994, ICII made a capital
contribution of $250,000 to SPFC in exchange for 100% of its outstanding
capital stock, and in April 1995, ICII caused SPTL to contribute to SPFC
certain customer list~s of SPTL's residential lending division relating to the
ongoing operations of such division. In addition, in April 1996 all employees
of SPTL's residential lending division became employees of SPFC. SPTL retained
all other assets and all liabilities related to the contributed operations
including all residual interests generated in connection with securitizations
effected by SPTL's residential lending division.
ARRANGEMENTS WITH ICII AND ITS AFFILIATES
The Company and SPFC have entered into agreements for the purpose of
defining their ongoing relationship. The agreements have been developed in the
context of a parent/subsidiary relationship and therefore are not the result
of arm's length negotiations between independent parties. It is the intention
of the Company and SPFC that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements. However, there can be no assurance that each
of such agreements, or the transactions provided for therein, have been
effected on terms at least as favorable to the Company or to SPFC as could
have been obtained from unaffiliated parties.
Additional or modified arrangements and transactions may be entered into by
the Company, SPFC and their respective affiliates. Any such future
arrangements and transactions will be determined through negotiations between
the Company and SPFC, and it is possible that conflicts of interest will
develop. The unaffiliated directors of SPFC, consisting of directors
independent of the Company and SPFC, must independently approve all
transactions between the Company and SPFC.
The following is a summary of certain arrangements and transactions between
the Company and SPFC.
TAX AGREEMENT
The Company entered into an agreement (the "SPFC Tax Agreement") with SPFC
for the purposes of (i) providing for filing certain tax returns, (ii)
allocating certain tax liability and (iii) establishing procedures for certain
audits and contests of tax liabilities.
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Under the SPFC Tax Agreement, ICII agreed to indemnify and hold SPFC
harmless from any tax liability attributable to periods ending on or before
June 1996 in excess of such taxes as SPFC has already paid or provided for.
For periods ending after June 1996, SPFC will pay its tax liability directly
to the appropriate taxing authorities. To the extent that (i) there are audit
adjustments that result in a tax detriment to SPFC or (ii) SPFC incurs losses
that are carried back to an earlier period and such adjustment described in
(i) or loss described in (ii) results in a tax benefit to ICII or its
affiliates, then ICII will pay to SPFC an amount equal to the tax benefit as
that benefit is realized. ICII also agreed to indemnify SPFC for any liability
arising out of the filing of federal consolidated returns by ICII or any
return filed with any state or local taxing authority. To the extent there are
audit adjustments that result in any tax detriment to ICII or any of its
affiliates with respect to any period ending on or before June 1996 and, as a
result thereof, SPFC for any taxable period after June 1996 realizes a tax
benefit, then SPFC shall pay to ICII the amount of such benefit at such time
or times as SPFC actually realizes such benefit.
ICII generally will control audits and administrative and judicial
proceedings with respect to periods ending on or before June 1996, although
ICII cannot compromise or settle any issue that increases SPFC's liability
without first obtaining the consent of SPFC. SPFC generally controls all other
audits and administrative and judicial proceedings.
SERVICES PROVIDED BY ICII
SPFC has been historically allocated expenses of various administrative
services provided to it by ICII. The costs of such services were not directly
attributable to a specific division or subsidiary and primarily included
general corporate overhead, such as accounting and cash management services,
human resources and other administrative functions. These expenses were
calculated as a pro rata share of certain administrative costs based on
relative number of employees and assets and liabilities of the division or
subsidiary, which management believed was a reasonable method of allocation.
The allocation of expenses for the nine months ended September 30, 1996 and
the years ended December 31, 1995 and 1994 were approximately $422,000,
$256,000 and $92,700, respectively.
SPFC intends to provide by itself many of the services previously provided
by ICII. ICII currently provides to SPFC mortgage loan production software and
hardware and data communications management, the managing of the 401(k) plan
in which SPFC participates, and insurance coverage, including health
insurance.
OTHER ARRANGEMENTS
From the point of commencement of operations until March 1994, SPTL served
as the servicer of SPFC's loans. From March 1994 through September 1995, SPFC
subcontracted all of its servicing obligations under mortgage loans originated
or acquired on a servicing released basis to ICII pursuant to a servicing
agreement containing fees and other terms that were comparable to industry
standards. In addition, ICII was the servicer of loans securitized by SPFC in
1994 and 1995 under the respective pooling and servicing agreements. Effective
May 1, 1996 ICII transferred the servicing for all of SPFC's loans it serviced
to Advanta or subcontracted with Advanta to perform such servicing functions.
In February and March 1996, certain of ICII's conforming residential
mortgage origination offices were transferred to SPFC.
In March 1996, SPFC entered into a $10.0 million revolving credit and term
loan agreement with SPTL. Advances under this agreement were collateralized by
the Company's interest-only and residual certificates (other than those
retained by SPTL pursuant to the Contribution Transaction) at an interest rate
of 2% above LIBOR. In April 1996, the loan was repaid and the agreement was
canceled.
During 1995, SPFC borrowed approximately $1.5 million from ICII, such sum
bearing interest at approximately 10.3% per annum. At June 18, 1996 the amount
owed to ICII was approximately $17.0 million. As of September 30, 1996, all
amounts owed to ICII had been repaid.
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<PAGE>
SPFC has entered into a registration rights agreement with ICII, pursuant to
which SPFC has agreed to register for sale under the Securities Act in the
future all of ICII's remaining shares of SPFC's common stock, subject to
certain conditions.
LCPI has agreed to make available repurchase lines to SPFC in an amount
equal to $200.0 million. LCPI has provided SPFC with these funding
capabilities for its mortgage banking operations, where SPFC can close loans
in its name. The loan collateral is held by an independent third-party
custodian and SPFC has the ability to borrow against that collateral at a
percentage of the original principal balance. The rate charged is LIBOR plus
30 basis points. This line is guaranteed by ICII and has an expiration date of
April 1, 1997. As of November 30, 1996, SPFC had an outstanding balance of
$52.4 million with respect to this facility. ICII does not intend to guarantee
any other indebtedness of SPFC.
RELATIONSHIPS WITH ICMH
THE CONTRIBUTION TRANSACTION
On November 20, 1995, the effective date of ICMH's initial public stock
offering (the "Effective Date"), the Company contributed to ICIFC certain of
the operating assets and certain customer lists of the Company's mortgage
conduit operations including all of ICII's mortgage conduit operations'
commitments to purchase mortgage loans subject to rate locks from
correspondents (having a principal balance of $44.3 million at November 20,
1995), in exchange for shares representing 100% of the common stock and 100%
of the outstanding non-voting preferred stock of ICIFC. Simultaneously, on the
Effective Date, in exchange for 500,000 shares of ICMH common stock, the
Company (i) contributed to ICMH all of the outstanding non-voting preferred
stock of ICIFC, which represents 99% of the economic interest in ICIFC, (ii)
caused SPTL to contribute to ICMH certain of the operating assets and certain
customer lists of SPTL's warehouse lending division and (iii) executed a non-
compete agreement (the "Non-Compete Agreement") and a right of first refusal
agreement (the "Right of First Refusal Agreement"), each having a term of two
years from the Effective Date. Of the 500,000 shares issued pursuant to the
contribution, 450,000 shares were issued to ICII and 50,000 shares were issued
to SPTL. All of the outstanding shares of common stock of ICIFC were retained
by ICII. Lastly, ICMH contributed all of the aforementioned operating assets
of SPTL's warehouse lending operations contributed to it by SPTL to IWLG in
exchange for shares representing 100% of the common stock of IWLG thereby
forming it as a wholly owned subsidiary. At November 20, 1995, the net
tangible book value of the assets to be contributed pursuant to the
contribution was $525,000. The Company and SPTL retained all other assets and
liabilities related to the contributed operations which at November 20, 1995
consisted mostly of $11.7 million of PMSRs, $22.4 million of finance
receivables and $26.6 million in advances made by the Company and SPTL to fund
mortgage conduit loan acquisitions and to fund finance receivables,
respectively.
Pursuant to the Non-Compete Agreement, the Company, except as set forth
below, and any 25% entity may not compete with ICMH's Warehouse Lending
Operations and may not establish a network of third party correspondent loan
originators or another end-investor in non-conforming mortgage loans. The
Company has also agreed that (i) in addition to any other remedy that may be
available to ICMH, it will sell all of the outstanding shares of common stock
of ICIFC to be retained by the Company pursuant to the contribution to any
third party reasonably acceptable to ICMH in the event that ICII or a 25%
entity establishes a network of third party correspondent loan originators
during the term of the Non-Compete Agreement and (ii) any sale by ICIFC of
shares of its capital stock or sale or transfer by the Company of any shares
of the common stock of ICIFC which the Company owns may only be made to a
party reasonably acceptable to ICMH. Pursuant to the Non-Compete Agreement,
SPTL may continue to act as an end-investor in non-conforming mortgage loans
and SPFC may continue its business, which is primarily to act as a wholesale
originator and bulk purchaser of non-conforming mortgage loans. Pursuant to
the Right of First Refusal Agreement, the Company will grant ICIFC a right of
first refusal to purchase all non-conforming mortgage loans that ICII or any
25% entity originates or acquires and subsequently offers for sale and ICIFC
will grant the Company, or any 25% entity designated by the Company, a right
of first refusal to purchase all conforming mortgage loans that ICIFC acquires
and subsequently offers for sale.
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OTHER ARRANGEMENTS AND TRANSACTIONS WITH ICMH
The Company and ICMH have entered into agreements for the purpose of
defining their ongoing relationships. These agreements have been developed in
the context of a parent/subsidiary relationship and therefore are not the
result of arm's-length negotiations between independent parties. It is the
intention of the Company and ICMH that such agreements and the transactions
provided for therein, taken as a whole, are fair to both parties, while
continuing certain mutually beneficial arrangements.
ICMH has entered into a sublease with the Company to lease a portion of its
facilities as ICMH's executive offices and administrative facilities at an
aggregate monthly rental of approximately $12,900. The sublease expires in
2002.
The following is a summary of certain arrangements and transactions between
and the Company and ICMH.
Tax Agreement
ICMH has entered into an agreement (the "ICMH Tax Agreement") effective as
of the Effective Date with the Company for the purposes of (i) providing for
filing certain tax returns, (ii) allocating certain tax liability and (iii)
establishing procedures for certain audits and contests of tax liability.
Under the ICMH Tax Agreement, the Company has agreed to indemnify and hold
ICMH harmless from any tax liability attributable to periods ending on or
before November 20, 1995 in excess of such taxes as ICMH has already paid or
provided for. For periods ending after the November 20, 1995, ICMH will pay
its tax liability directly to the appropriate taxing authorities. To the
extent (i) there are audit adjustments that result in a tax detriment to ICMH
or (ii) ICMH incurs losses that are carried back to an earlier year and any
such adjustment described in (i) or loss described in (ii) results in a tax
benefit to ICII or its affiliates, then the Company will pay to ICMH an amount
equal to the tax benefit as that benefit is realized. ICII will also agree to
indemnify ICMH for any liability associated with the contribution of the
preferred stock of ICIFC and certain operational assets of SPTL's warehouse
lending division or any liability arising out of the filing of a federal
consolidated return by the Company or any return filed with any state or local
taxing authority. To the extent there are audit adjustments that result in any
tax detriment to the Company or any of its affiliates with respect to any
period ending on or before November 20, 1995, and, as a result thereof, ICMH
for any taxable period after the Effective Date realizes a tax benefit, then
ICMH shall pay to the Company the amount of such benefit at such time or times
as ICMH actually realizes such benefit.
ICII generally controls audits and administrative and judicial proceedings
with respect to periods ending on or before the November 20, 1995, although
ICII cannot compromise or settle any issue that increases ICMH's liability
without first obtaining the consent of ICMH. ICMH generally controls all other
audits and administrative and judicial proceedings.
Services Agreement
ICIFC and IWLG have been historically allocated expenses of various
administrative services provided by ICII. The costs of such services were not
directly attributable to a specific division or subsidiary and primarily
included general corporate overhead, such as accounting and cash management
services, human resources and other administrative functions. These expenses
were calculated as a pro rata share of certain administrative costs based on
relative assets and liabilities of the division or subsidiary, which
management believed was a reasonable method of allocation. The allocations of
expenses for the nine months ended September 30, 1996 and the years ended
December 31, 1995 and 1994, $395,000, $269,000 and $517,000, respectively, for
ICIFC and IWLG combined.
ICMH and ICII have entered into a services agreement effective as of
November 20, 1995 (the "ICMH Services Agreement") under which ICII provides
various services to ICMH, including data processing, human resource
administration, general ledger accounting, check processing and payment of
accounts payable.
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The Company charges fees for each of the services which it provides under
the ICMH Services Agreement based upon usage. The ICMH Services Agreement has
an initial term that ends on December 31, 1996 and is renewable annually
thereafter. ICMH may terminate the ICMH Services Agreement, in whole or in
part, upon one month's written notice. As of December 1, 1996, this agreement
was still in effect. As part of the services to be provided under the ICMH
Services Agreement, ICII provides ICMH with insurance coverage and self
insurance programs, including health insurance. The charge to ICMH for
coverage will be based upon a pro rata portion of the costs to the Company for
the various policies. The Company charges fees for each of the services which
it provides to entities affiliated with ICMH under the ICMH Services Agreement
based upon usage.
OTHER TRANSACTIONS
General
ICAI, a wholly-owned subsidiary of the Company, oversees the day-to-day
operations of ICMH, subject to the supervision of ICMH's Board of Directors,
pursuant to a management agreement (the "Management Agreement") effective as
of November 20, 1995, for a current term expiring on January 31, 1997. ICAI
and ICMH are discussing a five-year extension to the Management Agreement
whereby amounts payable thereunder would be subordinated to a specified rate
of return payable to ICMH stockholders.
ICAI is entitled to receive a per annum base management fee payable monthly
in arrears of an amount equal to (i) 3/8 of 1% of gross mortgage assets of
ICMH composed of other than agency certificates, conforming mortgage loans or
mortgage-backed securities secured by or representing interests in conforming
mortgage loans, plus (ii) 1/8 of 1% of the remainder of gross mortgage assets
of ICMH plus (iii) 1/5 of 1% of the average daily asset balance of the
outstanding amounts under IWLG's warehouse lending facilities. The term "gross
mortgage assets" means for any month the weighted average book value of ICMH's
Mortgage Assets (as defined in the Management Agreement), before reserves for
depreciation or bad debts or other similar noncash reserves, computed at the
end of such month. During the nine months ended September 30, 1996 and the
year ended December 31, 1995, ICAI earned $1.4 million and $37,888 in
management fees, respectively.
ICAI is entitled to receive as incentive compensation for each fiscal
quarter, an amount equal to 25% of the net income of ICMH, before deduction of
such incentive compensation, in excess of the amount that would produce an
annualized Return on Equity (as defined in the Management Agreement) equal to
the ten-year United States Treasury rate plus 2%. "Return on equity" is
calculated for any quarter by dividing ICMH's net income for the quarter by
its average net worth for the quarter. For such calculations, the "net income"
of ICMH means the income of ICMH determined in accordance with GAAP before
ICAI's incentive compensation, the deduction for dividends paid and any net
operating loss deductions arising from losses in prior periods. A deduction
for all of ICMH's interest expenses for borrowed money is also taken in
calculating net income. "Average net worth" for any period means the
arithmetic average of the sum of the gross proceeds from any offering of its
equity securities by ICMH, before deducting any underwriting discounts and
commissions and other expenses and costs relating to such offering, plus
ICMH's retained earnings (without taking into account any losses incurred in
prior periods) computed by taking the daily average of such values during such
period. The definition "return on equity" is only for purposes of calculating
the incentive compensation payable, and is not related to the actual
distributions received by ICMH's stockholders. The 25% incentive payment to
ICAI is calculated quarterly in arrears before any income distributions are
made to stockholders for the corresponding period. During the nine months
ended September 30, 1996 and the year ended December 31, 1995, ICAI earned
$0.7 million and zero, respectively, for ICAI's incentive payment.
Pursuant to the Management Agreement, ICMH also pays all operating expenses
except those specifically required to be borne by ICAI under the Management
Agreement. The operating expenses generally required to be borne by ICAI
include the compensation and other employment costs of ICAI's officers in
their capacities as such and the cost of office space and out-of-pocket costs,
equipment and other personnel required for oversight of ICMH's operations. The
expenses that are paid by ICMH include issuance and transaction costs incident
to the acquisition, disposition and financing of investments, regular legal
and auditing fees and expenses of ICMH,
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the fees and expenses of ICMH's Directors, premiums for directors' and
officers' liability insurance, premiums for fidelity and errors and omissions
insurance, servicing and subservicing expenses, the costs of printing and
mailing proxies and reports to stockholders, and the fees and expenses of
ICMH's custodian and transfer agent, if any. Reimbursements of expenses
incurred by ICAI which are the responsibility of ICMH are made monthly. During
the nine months ended September 30, 1996 and the year ended December 31, 1995,
there were no monies paid to ICAI as reimbursement of expenses.
Purchase of Residual Interests
Effective December 31, 1996, ICII sold $46.9 million of residual interests
to ICIFC. In connection therewith, ICII lent ICIFC 100% of the purchase price.
This loan bears interest at a rate of 12% per annum, and is secured by the
residual interests.
Bulk Mortgage Loan Purchases
In December 1995, ICIFC entered into a number of agreements with the Company
and SPTL to purchase bulk mortgage loan packages. All mortgage loan purchase
agreements were entered into under the following terms.
On December 5, 1995 and December 13, 1995, ICIFC purchased from the Company
bulk mortgage loan packages of 30-year fully amortized six-month adjustable
LIBOR and one-year adjustable United States Treasury Bill rate loans and 30-
and 15-year fixed rate second trust deed mortgages with servicing rights on
all mortgage loans released to ICIFC. The principal balances of the mortgages
at the time of purchase was $106.7 million and $66.2 million, respectively,
with a premium paid of $2.1 million and $1.6 million, respectively.
On December 29, 1995, ICIFC purchased from SPTL two bulk mortgage loan
packages of 30-year fully amortized six-month adjustable LIBOR and one-year
adjustable United States Treasury Bill rate loans. The principal balances of
the loans in the servicing released and servicing retained bulk package at the
time of purchase was $300.0 million and $28.5 million with premiums paid of
$3.4 million and $142,395, respectively.
Purchase of Mortgage-Backed Securities
On December 29, 1995, ICMH purchased, from SPTL, DLJ Mortgage Acceptance
Corp. Pass-Through Certificates Series 1995-4, Class B-1 and Class B-2 issued
August 29, 1995. These certificates consist primarily of a pool of certain
conventional, 11th District Cost of Funds adjustable rate, one-to-four family,
first lien mortgage loans, with terms to maturity of not more than 30 years.
The mortgage loans underlying the certificates were originated or acquired by
ICII. All of the mortgage loans are serviced by ICII in its capacity as master
servicer. ICMH purchased Class B-1 certificates having an initial certificate
principal balance of $4.8 million and the Class B-2 certificates having an
initial certificate principal balance of $2.2 million for a price of 78.54 or
$4.8 million and for a price of 70.01 or $2.3 million, respectively, equating
to a discount of $1.0 million and $0.7 million, respectively. The Class B-1
certificates are single "B" rated mortgage securities and the Class B-2 are
double "BB" rated mortgage securities. There was no gain or loss recorded by
either party as a result of this transaction.
Purchase of Subordinated Lease Receivables
On December 29, 1995, ICMH purchased a subordinated interest in a lease
receivable securitization from IBC. The lease receivables underlying the
security were originated by IBC. ICMH purchased the subordinated lease
receivable based on the present value of estimated cash flows using a discount
rate of 12% which resulted in a purchase price of $8.4 million. As a result of
the purchase, IBC recorded a gain of $1.6 million. The purchase price was
based upon a market discount rate as confirmed by an independent third party.
In March 1996, IBC repurchased the subordinated interest from ICMH, and as of
September 30, 1996, holds the subordinated interest as an investment vehicle.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Registration Rights Agreement requires that the Company file a
registration statement under the Securities Act with respect to the New Notes
and, upon the effectiveness of such registration statement, offer to the
Holders of the Old Notes the opportunity to exchange their Old Notes for a
like principal amount of New Notes, which will be issued without a restrictive
legend and, except as set forth below, may be reoffered and resold by the
Holder without registration under the Securities Act. Upon the completion of
the Exchange Offer, the Company's obligations with respect to the registration
of the Old Notes and the New Notes will terminate, except as provided below. A
copy of the Indenture and the Registration Rights Agreement delivered in
connection therewith have been filed as exhibits to the Registration Statement
of which this Prospectus is a part. Following the completion of the Exchange
Offer, Holders of Old Notes not tendered will not have any further
registration rights, except as provided below, and the Old Notes will continue
to be subject to certain restrictions on transfer. Accordingly, the liquidity
of the market for the Old Notes could be adversely affected upon completion of
the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third-parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a Holder thereof (other than
any such Holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such
Holder represents to the Company that (i) such New Notes are acquired in the
ordinary course of business of such Holder, (ii) such Holder is not engaging
in and does not intend to engage in a distribution of such New Notes and (iii)
such Holder has no arrangement or understanding with any person to participate
in the distribution of such New Notes. Any Holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the New Notes
cannot rely on such interpretation by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction. Each broker-
dealer that receives New Notes for its own account in exchange for Old Notes,
where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of such New Notes. See "Plan of Distribution."
In the event that any holder of Old Notes would not receive freely tradeable
New Notes in the Exchange Offer or is not eligible to participate in the
Exchange Offer, such Holder can elect, by so indicating on the Letter of
Transmittal and providing certain additional necessary information, to have
such Holder's Old Notes registered in a "shelf" registration statement on an
appropriate form pursuant to Rule 415 under the Securities Act.
In the event that the Company is obligated to file a "shelf" registration
statement, it will be required to keep such "shelf" registration statement
effective for a period of three years or such shorter period that will
terminate when all of the Old Notes covered by such registration statement
have been sold pursuant thereto. Other than as set forth in this paragraph, no
holder will have the right to require the Company to register such Holder's
Notes under the Securities Act. See "Procedures for Tendering Old Notes."
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the SEC on or prior to 30 days
after the Issue Date, (ii) the Company will use its best efforts to have the
Exchange Offer Registration Statement declared effective by the SEC on or
prior to 90 days after the Issue Date, (iii) unless the Exchange Offer would
not be permitted by applicable law or SEC policy, the Company will commence
the Exchange Offer and use its best efforts to issue on or prior to
30 business days after the date on which the Exchange Offer Registration
Statement was declared effective by the SEC, New Notes in exchange for all
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to
file the Shelf Registration Statement, the Company will use its best efforts
to file the Shelf Registration Statement with the
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SEC on or prior to 30 days after such filing obligation arises (and in any
event within 60 days after the Issue Date) and to cause the Shelf Registration
to be declared effective by the SEC on or prior to 30 days after such
obligation arises. If (a) the Company fails to file any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified for such filing, (b) any of such Registration Statements is not
declared effective by the SEC on or prior to the date specified for such
effectiveness (the Effectiveness Target Date), or (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a Registration Default), then the Company will
pay Liquidated Damages to each Holder of Notes, with respect to the first 90-
day period immediately following the occurrence of such Registration Default
in an amount equal to $0.05 per week per $1,000 principal amount of Notes held
by such Holder. The amount of the Liquidated Damages will increase by an
additional $0.05 per week per $1,000 principal amount of Notes with respect to
each subsequent 90-day period until all Registration Defaults have been cured,
up to a maximum amount of Liquidated Damages of $0.50 per week per $1,000
principal amount of Notes. All accrued Liquidated Damages will be paid by the
Company to the Holders by wire transfer of immediately available funds or by
federal funds check. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 P.M.,
New York City time, on , 1997; provided, however, that if the Company, in
its sole discretion, has extended the period of time during which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended. As of the date of this Prospectus,
$200,000,000 aggregate principal amount of the Old Notes is outstanding. This
Prospectus, together with the Letter of Transmittal, is first being sent on or
about , 1997, to all Holders of Old Notes known to the Company. The
Company's obligation to accept Old Notes for exchange pursuant to the Exchange
Offer is subject to certain customary conditions as set forth under "--Certain
Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Company.
Any Old Notes not accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 or any integral multiple thereof. The Company
expressly reserves the right to amend or terminate the Exchange Offer, and not
to accept for exchange any Old Notes not theretofore accepted for exchange,
upon the occurrence of any of the conditions of the Exchange Offer specified
below under "--Certain Conditions to the Exchange Offer." The Company will
give oral or written notice of any extension, amendment, non-acceptance or
termination to
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the Holders of the Old Notes as promptly as practicable, such notice in the
case of any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
Only a registered Holder of Old Notes may tender such Old Notes in the
Exchange Offer. The tender to the Company of Old Notes by a Holder thereof as
set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering Holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to
Chemical Trust Company of California (the "Exchange Agent") at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along with the Letter of Transmittal, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent prior to the Expiration Date, or (iii) the Holder must
comply with the guaranteed delivery procedures described below. THE METHOD OF
DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS
IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS
OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal Rights"), as the case may be, must be guaranteed (see
"--Guaranteed Delivery Procedures") unless the Old Notes surrendered for
exchange pursuant thereto are tendered (i) by a registered Holder of the Old
Notes who has not completed the box entitled "Special Issuance Instructions"
or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for
the account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guaranties must be by a financial
institution (including most banks, savings and loan associations and brokerage
houses) that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Program or the Stock Exchanges
Medallion Program (collectively, "Eligible Institutions"). If Old Notes are
registered in the name of a person other than a signer of the Letter of
Transmittal, the Old Notes surrendered for exchange must be endorsed by or be
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered Holder exactly as the name or names of the
registered Holder or Holders appear on the Old Notes with the signature
thereon guarantied by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
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representative capacity, such person should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Note which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. None of the Company, the Exchange Agent or any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification.
By tendering, each Holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder, and that neither the Holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. If any Holder or any such
other person is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company or is engaged in or intends to engage in, or has an
arrangement or understanding with any person to participate in, a distribution
of such New Notes to be acquired pursuant to the Exchange Offer, such Holder
or any such other person (i) may not rely on the applicable interpretation of
the staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution." The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the New Notes promptly after acceptance of
the Old Notes. See "--Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company will be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive as set forth below under "Description of the Notes--Book-Entry,
Delivery and Form" a New Note having a principal amount equal to that of the
surrendered Old Note. Accordingly, registered Holders of New Notes on the
relevant record date for the first interest payment date following the
consummation of the Exchange Offer will receive interest accruing from the
most recent date to which interest has been paid on the Old Notes or, if no
interest has been paid, from January 23, 1997. Old Notes accepted for exchange
will cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders whose Old Notes are accepted for exchange will not
receive any payment in respect of accrued interest on such Old Notes otherwise
payable on any interest payment date the record date for which occurs on or
after consummation of the Exchange Offer.
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In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are
not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount
than the Holder desires to exchange, such unaccepted or non-exchanged Old
Notes will be returned without expense to the tendering Holder thereof (or, in
the case of Old Notes tendered by book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or a facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the
address set forth below under "--Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
Holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) on or prior to 5:00 P.M., New York
City time, on the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the Holder of Old Notes and the amount of Old Notes tendered,
stating that the tender is being made thereby and guaranteeing that within
three New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution within three NYSE trading days after the
date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at the
address set forth below under "--Exchange Agent." Any such notice of
withdrawal must specify the name of the person having tendered the Old Notes
to be withdrawn, identify the Old Notes to be withdrawn (including the
principal amount of such Old Notes), and (where certificates for Old Notes
have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing
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Holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution in which case such guarantee will not be required. If Old
Notes have been tendered pursuant to the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at the Book-Entry Transfer Facility to be credited with the
withdrawn Old Notes and otherwise comply with the procedures of such facility.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose
determination will be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
Holder thereof without cost to such Holder (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the Book-
Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained with
such Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "--Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, and subject to
its obligations pursuant to the Registration Rights Agreement, the Company
shall not be required to accept for exchange, or to issue New Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer, if
at any time before the acceptance of such New Notes for exchange, any of the
following events shall occur:
(i) any injunction, order or decree shall have been issued by any court
or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(ii) the Exchange Offer will violate any applicable law or any applicable
interpretation of the staff of the SEC.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company in whole or in part at any time and from time to time
in its sole discretion. The failure by the Company at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order is threatened by the SEC or in effect with
respect to the Registration Statement of which this Prospectus is a part or
the qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
The Exchange Offer is not conditioned on any minimum principal amount of Old
Notes being tendered for exchange.
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EXCHANGE AGENT
Chemical Trust Company of California has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at the address set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests or Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
Chemical Trust Company, Exchange Agent
By Hand/Overnight Courier/By Mail: By Facsimile:
c/o The Chase Manhattan Bank (212) 638-7380
Attn: Mr. Carlos Estevez
55 Water Street Confirm by Telephone:
Second Floor, Room #234 (212) 638-0828
New York, New York 10041
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
The Exchange Agent also acts as trustee under the Indenture.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$ .
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that Holders who instruct
the Company to register New Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering Holder will be responsible for the payment
of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act and
applicable state securities laws. The Company does not currently anticipate
that it will register Old Notes under the Securities Act. See "Description of
the Notes--Exchange Offer; Registration Rights." Based on interpretations by
the staff of the SEC, as set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by Holders thereof (other than any such Holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course or such Holders' business and such Holders, other than
broker-dealers, have no arrangement or understanding with any person to
participate in the distribution of such New Notes. However, the SEC has not
considered the Exchange Offer in the context of a no-action letter
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and there can be no assurance that the staff of the SEC would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each Holder, other than a broker-dealer, must acknowledge that
it is not engaged in, and does not intend to engage in, a distribution of such
New Notes and has no arrangement or understanding to participate in a
distribution of New Notes. If any Holder is an affiliate of the Company or is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such Holder (i) may not rely on the applicable
interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes pursuant to the Exchange
Offer must acknowledge that such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities and that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of New Notes received in exchange for Old
Notes where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." In addition, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with. The Company has agreed, pursuant to the Registration
Rights Agreement, subject to certain limitations specified therein, to
register or qualify the New Notes for offer or sale under the securities laws
of such jurisdictions as any holder reasonably requests in writing. Unless a
Holder so requests, the Company does not currently intend to register or
qualify the sale of the New Notes in any such jurisdictions. See "The Exchange
Offer."
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DESCRIPTION OF NOTES
GENERAL
The Old Notes were issued pursuant to an Indenture, dated as of January 23,
1997 (the "Indenture") between the Company and Chemical Trust Company of
California, as trustee (the "Trustee"). The New Notes will also be issued
pursuant to the Indenture. The Old Notes and the New Notes will be treated as
a single class of securities under the Indenture.
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (the
"Trust Indenture Act"). The Notes are subject to all such terms, and Holders
of the Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. Copies of the proposed form of Indenture and Registration Rights
Agreement may be obtained as set forth under "--Additional Information." The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions." For purposes of this summary, the term
"Company" refers only to ICII and not to any of its Subsidiaries.
The Old Notes are, and the New Notes will be, general unsecured obligations
of the Company ranking pari passu with all future Indebtedness of the Company,
if any, that is not subordinated to the Notes and senior to any Indebtedness
of the Company that is subordinated to the Notes. The Notes will be
unconditionally guaranteed on a senior unsecured basis by each of the
Subsidiary Guarantors. See "--Subsidiary Guarantees."
As of the Issue Date, all of the Company's Subsidiaries will be Restricted
Subsidiaries. However, under certain circumstances, the Company will be able
to designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are in an aggregate principal amount of $200.0 million and will
mature on January 15, 2007. Interest on the Notes will accrue at the rate of 9
7/8% per annum and will be payable semi-annually in arrears on January 15 and
July 15, commencing on July 15, 1997, to Holders of record on the immediately
preceding January 1 and July 1, respectively. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Issue Date. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal, premium,
if any, and interest and Liquidated Damages, if any, on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company,
payment of interest and Liquidated Damages may be made by check mailed to the
Holders of the Notes at their respective addresses set forth in the register
of Holders of Notes; provided that all payments of principal, premium,
interest and Liquidated Damages with respect to Notes the Holders of which
have given wire transfer instructions to the Company will be required to be
made by wire transfer of immediately available funds to the accounts specified
by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Notes will be issued in denominations of
$1,000 and integral multiples thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under Old Notes are, and under the New
Notes will be, guaranteed through the Subsidiary Guarantees by each of the
Subsidiary Guarantors, which consist of all Restricted Subsidiaries other than
SPTL and the Special Purpose Subsidiaries. Each Subsidiary Guarantor will
unconditionally guarantee, jointly and severally, the full and prompt
performance of the Company's obligations
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under the Indenture and the Notes, including payment of principal and interest
on the Notes. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited to the maximum amount as will, after
giving effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor and after giving effect to any collections from or payments made by
or on behalf of any other Subsidiary Guarantor in respect of the obligations
of such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant
to the contributions obligations under the Indenture, result in the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. ICIFC and SPFC will not be Subsidiary Guarantors or Subsidiaries of
the Company under the Indenture unless the Deconsolidation fails to occur on
or prior to March 31, 1997.
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity (other than ICII) whether or
not affiliated with such Subsidiary Guarantor unless (i) subject to the
provisions of the following paragraph, the Person formed by or surviving any
such consolidation or merger (if other than such Subsidiary Guarantor) assumes
all the obligations of such Subsidiary Guarantor pursuant to a supplemental
indenture in form and substance reasonably satisfactory to the Trustee; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) such Subsidiary Guarantor, or any Person formed by
or surviving any such consolidation or merger, would have Consolidated Net
Worth (immediately after giving effect to such transaction) equal to or
greater than the Consolidated Net Worth of such Subsidiary Guarantor
immediately preceding the transaction.
The Indenture provides that in the event of (i) the designation of any
Subsidiary Guarantor as an Unrestricted Subsidiary or (ii) a sale or other
disposition of all or substantially all of the assets of any Subsidiary
Guarantor to a third party or any Unrestricted Subsidiary, by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor, in either case, in a transaction or
manner that does not violate any of the covenants in the Indenture, then such
Subsidiary Guarantor (in the event of such a designation or a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of
the capital stock of such Subsidiary Guarantor) or the Person acquiring the
property (in the event of a sale or other disposition of all or substantially
all of the assets of such Subsidiary Guarantor) will be released from and
relieved of any obligations under its Subsidiary Guarantee; provided that any
Net Proceeds of such sale or other disposition are applied in accordance with
the covenant described under the caption "--Certain Covenants--Asset Sales,"
and provided further, however, that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under all of its
guarantees of, and under all of its pledges of assets or other security
interests that secure, any other Indebtedness of the Company or its Restricted
Subsidiaries shall also terminate upon such release, sale or disposition.
OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to January
15, 2002. Thereafter, the Notes will be subject to redemption at any time at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on January 15 of the years
indicated below:
<TABLE>
<S> <C>
YEAR PERCENTAGE
---- ----------
2002............................................................ 104.938%
2003............................................................ 103.292%
2004............................................................ 101.645%
2005 and thereafter............................................. 100.000%
</TABLE>
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Notwithstanding the foregoing, during the first three years after the Issue
Date, the Company may redeem up to an aggregate of 35% of the aggregate
principal amount of Notes originally issued in the Offering at a redemption
price of 109 7/8% of the principal amount thereof, in each case plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the redemption
date, with the net proceeds of an Equity Offering; provided however, that at
least 65% of the aggregate principal amount of Notes initially issued remains
outstanding immediately after the occurrence of such redemption.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. Notes called for redemption become due and payable on the
date fixed for redemption. On and after the redemption date, interest ceases
to accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
CERTAIN COVENANTS
Change of Control
The Indenture provides that upon the occurrence of a Change of Control, each
Holder of Notes will have the right to require the Company to repurchase all
or any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to
the date of purchase (the "Change of Control Payment").
Within 10 days following any Change of Control, the Company will mail a
notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase Notes pursuant to
the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes as a result of a Change of Control.
The Change of Control Offer will remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), the Company
will purchase all Notes tendered in response to the Change of Control Offer.
Payment for any Notes so purchased will be made in the same manner as interest
payments are made.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and
unpaid interest will be paid to the Person in whose name a Note is registered
at the close of business on such record date, and no additional interest will
be payable to Holders who tender Notes pursuant to the Change of Control
Offer.
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On the Change of Control Payment Date, the Company will, to the extent
lawful, (a) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (b) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (c) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the Holders of Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or other restructuring.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale in excess of $1.0
million unless (i) the Company (or the Restricted Subsidiary, as the case may
be) receives consideration at the time of such Asset Sale at least equal to
the fair market value (evidenced by a resolution of the Board of Directors,
except for sales of Securitization Related Assets, which require no such
resolution) of the assets or Equity Interests issued or sold or otherwise
disposed of and (ii) at least 75% of the consideration therefor received by
the Company or such Restricted Subsidiary is in the form of cash or Cash
Equivalents; provided that the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet, excluding
contingent liabilities and trade payables), of the Company or any such
Restricted Subsidiary that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any securities, notes or
other obligations received by the Company or any such Restricted Subsidiary
from such transferee that are promptly, but in no event more than 30 days
after receipt, converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the Restricted Subsidiary may apply such Net Proceeds, (a) to
permanently reduce Senior Indebtedness (other than the Notes or the Subsidiary
Guarantees) of the Company or of the Subsidiary Guarantors, or (b) to an
Investment (excluding guarantees of Indebtedness or other obligations), the
making of a capital expenditure or the acquisition of other tangible assets,
in each case in or with respect to a Related Business. Any Net Proceeds from
Asset Sales that are not applied or invested as provided in the first sentence
of this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. To the extent that the aggregate amount
of Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes. Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero.
An Asset Sale Offer will remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Asset Sale Offer Period
(the "Asset Sale Purchase Date"), the Company will purchase the principal
amount of Notes required to be purchased pursuant to this covenant (the "Asset
Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been
tendered, all
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Notes tendered in response to the Asset Sale Offer. Payment for any Notes so
purchased will be made in the same manner as interest payments are made.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Asset Sale Offer.
On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Notes or portions thereof tendered pursuant to the
Asset Sale Offer, or if less than the Asset Sale Offer Amount has been
tendered, all Notes tendered, and will deliver to the Trustee an Officers'
Certificate stating that such Notes or portions thereof were accepted for
payment by the Company in accordance with the terms of this covenant. The
Company, the Depository or the Paying Agent, as the case may be, will promptly
(but in any case not later than five days after the Asset Sale Purchase Date)
mail or deliver to each tendering Holder an amount equal to the purchase price
of the Notes tendered by such Holder and accepted by the Company for purchase,
and the Company will promptly issue a new Note, and the Trustee, upon written
request from the Company will authenticate and mail or deliver such new Note
to such Holder, in a principal amount equal to any unpurchased portion of the
Note surrendered. Any Note not so accepted will be promptly mailed or
delivered by the Company to the Holder thereof. The Company will publicly
announce the results of the Asset Sale Offer on the Asset Sale Purchase Date.
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
or any of its Subsidiaries' Equity Interests in their capacity as such (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company or dividends or distributions payable to
the Company or any Restricted Subsidiary that is a Subsidiary Guarantor or to
SPTL); (ii) purchase, redeem or otherwise acquire or retire for value
(including without limitation in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company or other Affiliate of the Company (other than
any such Equity Interests owned by the Company or any Restricted Subsidiary of
the Company that is a Subsidiary Guarantor or by SPTL); (iii) make any payment
on or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is subordinated to the Notes (other
than Notes), except a payment of interest or principal at Stated Maturity; or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) at the time of and immediately after giving effect to such Restricted
Payment, the Company would be able to incur at least $1.00 of additional
Indebtedness pursuant to the test described in the first sentence of the
covenant described in "Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the
Issue Date (excluding Restricted Payments permitted by clauses (x) and (y)
of the next succeeding paragraph), is less than the sum of (i) 25% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit), plus (ii) 100% of
the
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aggregate net cash proceeds received by the Company from the issue or sale
since the Issue Date of Equity Interests (other than Disqualified Stock) of
the Company or of debt securities of the Company that have been converted
into such Equity Interests (other than Equity Interests (or convertible
debt securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), (iii) to the extent that any Restricted Investment
that was made after the Issue Date is sold for cash or otherwise liquidated
or repaid for cash, the lesser of (A) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (B) the initial amount of such Restricted Investment, (iv) 25% of
any dividends received by the Company or a Wholly Owned Restricted
Subsidiary that is a Subsidiary Guarantor or by SPTL after the Issue Date
from an Unrestricted Subsidiary of the Company, plus (v) $15.0 million.
The foregoing provisions will not prohibit: (v) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (w) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary in exchange
for, or out of the proceeds of, the substantially concurrent sale (other than
to a Subsidiary of the Company) of other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any such net
cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (x) the defeasance, redemption or repurchase of
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness or the substantially concurrent sale (other
than to a Subsidiary of the Company) of Equity Interests of the Company (other
than Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (y) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or any Subsidiary of the
Company held by any member of the Company's (or any of its Subsidiaries')
management pursuant to any management equity subscription agreement or stock
option agreement or other management agreement or plan; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $500,000 in any twelve-month period plus the
aggregate cash proceeds received by the Company during such twelve-month
period from any reissuance of Equity Interests by the Company to members of
management of the Company and its Subsidiaries; and (z) the repurchase,
redemption or other retirement for value of any Equity Interests of any
Restricted Subsidiary in a Strategic Investor Repurchase Transaction; and no
Default or Event of Default shall have occurred and be continuing immediately
after such transaction.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such Investments at the
time of such designation, (y) the fair market value of such Investments at the
time of such designation and (z) the original fair market value of such
Investments at the time they were made. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the
Restricted Payment of the asset(s) proposed to be transferred by the Company
or such Subsidiary, as the case may be, pursuant to the Restricted Payment.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations may be based upon the Company's latest available financial
statements.
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Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume, guaranty
or otherwise become directly or indirectly liable with respect to
(collectively, "incur") any Indebtedness (including Acquired Debt) and that
the Company will not permit any of its Restricted Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company or any
Subsidiary Guarantor may incur Indebtedness (including Acquired Debt) or any
Subsidiary Guarantor may issue preferred stock or SPTL may incur Permitted
SPTL Preferred Stock if, on the date of such incurrence and after giving
effect thereto, the Company's Consolidated Leverage Ratio does not exceed 2.0
to 1.0.
The foregoing provisions will not apply to:
(i) Indebtedness of the Company existing on the Issue Date;
(ii) the incurrence by the Company of Indebtedness represented by the
Notes or by the Subsidiary Guarantors of Indebtedness represented by the
Subsidiary Guarantees;
(iii) the incurrence of Permitted Warehouse Indebtedness by the Company
or any of its Restricted Subsidiaries, and any Guarantee by the Company of
such Indebtedness incurred by a Restricted Subsidiary, provided, however,
that to the extent any such Indebtedness of the Company or a Subsidiary
Guarantor ceases to constitute Permitted Warehouse Indebtedness, such
Indebtedness shall be deemed to be incurred at such time by the Company or
such Subsidiary Guarantor, as the case may be;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred or that was
outstanding at the Issue Date;
(v) the incurrence by the Company or a Restricted Subsidiary of Hedging
Obligations directly related to (A) Indebtedness of the Company or a
Restricted Subsidiary incurred in conformity with the provisions of the
Indenture, (B) Receivables held by the Company or its Restricted
Subsidiaries pending sale in a Qualified Securitization Transaction, (C)
Receivables of the Company or its Restricted Subsidiaries that have been
sold pursuant to a Warehouse Facility, (D) Receivables that the Company or
the Restricted Subsidiary reasonably expects to purchase or commit to
purchase, finance or accept as collateral, or(E) Securitization Related
Assets and other assets owned or financed by the Company or its Restricted
Subsidiaries in the ordinary course of business; provided, however, that,
in the case of each of the foregoing clauses (A) through (E), such Hedging
Obligations are eligible to receive hedge accounting treatment in
accordance with GAAP as applied by the Company and its Restricted
Subsidiaries on the Issue Date; and
(vi) Indebtedness of the Subsidiary Guarantors or of SPTL to the Company
or Permitted SPTL Preferred Stock issued to the Company to the extent that
such Indebtedness or such Permitted SPTL Preferred Stock constitutes a
Permitted Investment of the Company of the type permitted under the
definition of Permitted Investments;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
other than a Special Purpose Subsidiary of intercompany Indebtedness owing
to the Company or any of its Restricted Subsidiaries other than a Special
Purpose Subsidiary; provided, however, that (i) any subsequent issuance or
transfer of any Capital Stock which results in any such Indebtedness being
held by a Person other than a Restricted Subsidiary and (ii) any sale or
transfer of any such Indebtedness to a Person that is not either the
Company or a Restricted Subsidiary (other than a Special Purpose
Subsidiary) shall be deemed, in each case, to constitute the incurrence of
such Indebtedness by the Company or such Subsidiary, as the case may be;
(viii) the incurrence by a Special Purpose Subsidiary of Non-Recourse
Debt in a Qualified Securitization Transaction and the incurrence by the
Company's Unrestricted Subsidiaries of Non-Recourse
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Debt; provided, however, that if any such Indebtedness ceases to be Non-
Recourse Debt of the Special Purpose Subsidiary or other Unrestricted
Subsidiary, such event shall be deemed to constitute an incurrence of
Indebtedness by a Restricted Subsidiary of the Company; and
(ix) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness in an aggregate principal amount which, together with the
principal amount of all Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the date of Incurrence (other than Indebtedness
permitted by clauses (ii) through (vii) above, or the first paragraph of
this covenant), does not exceed $10.0 million.
Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, create, incur or otherwise cause or suffer to exist or become effective
any Lien for the benefit of any Indebtedness ranking pari passu with or junior
to the Notes, other than Permitted Liens, upon any property or assets of the
Company or any Restricted Subsidiary of the Company or any shares of stock or
debt of any Restricted Subsidiary of the Company which owns property or
assets, now owned or hereafter acquired, unless (i) if such lien secures
Indebtedness which is pari passu with the Notes, then the Notes are secured on
an equal and ratable basis or (ii) if such lien secures Indebtedness which is
junior to the Notes, any such lien shall be junior to a lien granted to the
holders of the Notes. The Indenture will provide that the Company will not,
and will not permit any of its Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired, or any income or profits therefrom or assign or convey any
right to receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) pay any indebtedness
owed to the Company or any of its Restricted Subsidiaries, (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the Issue
Date, (b) the Warehouse Facilities as in effect as of the Issue Date, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, additions, replacements or refinancings thereof; provided that
such amendments, modifications, restatements, renewals, increases,
supplements, refundings, additions, replacements or refinancings are no more
restrictive with respect to such dividend and other payment restrictions than
those contained in the Warehouse Facilities as in effect on the Issue Date,
(c) Indebtedness or other contractual requirements of a Special Purpose
Subsidiary in connection with a Qualified Securitization Transaction; provided
that such restrictions apply only to such Special Purpose Subsidiary, (d) the
Indenture and the Notes, (e) applicable law, (f) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of
its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired;
provided that, in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred, (g) by reason of customary non-
assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices, (h) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, or (i) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
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Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Subsidiary with an
unrelated Person and (ii) the Company delivers to the Trustee (a) with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $2.0 million, a resolution of
the Board of Directors set forth in an Officers' Certificate certifying that
such Affiliate Transaction complies with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors and (b) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $10.0 million, in addition to such Officers'
Certificate, an opinion as to the fairness to the Holders of such Affiliate
Transaction from a financial point of view issued by an investment banking
firm of national standing which is not an Affiliate of the Company; provided,
however, that such fairness opinion shall not be required with respect to a
Qualified Securitization Transaction or other transaction that is made in the
ordinary course of business of the Company or such Restricted Subsidiary, as
the case may be, and is consistent with the past business practice of the
Company or such Restricted Subsidiary. Notwithstanding the foregoing, the
following shall not be deemed Affiliate Transactions: (i) any employment
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (ii) any issuance of securities, or
other payments, compensation, benefits, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors in the
ordinary course of business and consistent with the past practice of the
Company or such Restricted Subsidiary, (iii) the grant of stock options or
similar rights to employees and directors of the Company pursuant to plans
approved by the Board of Directors in the ordinary course of business and
consistent with the past practice of the Company or such Restricted
Subsidiary, (iv) loans or advances to employees in the ordinary course of
business in accordance with the past practices of the Company or its
Restricted Subsidiaries, but in any event not to exceed $500,000 in aggregate
principal amount outstanding at any one time, (v) the payment of reasonable
fees to directors of the Company and its Restricted Subsidiaries who are not
employees of the Company or its Restricted Subsidiaries, (vi) transactions
between or among the Company and/or its Restricted Subsidiaries, (vii)
Restricted Payments and Permitted Investments (other than Strategic Investor
Repurchase Transactions) that are permitted by the provisions of the Indenture
described above under the caption "--Restricted Payments," and (viii)
transactions between a Special Purpose Subsidiary and any Person in which the
Special Purpose Subsidiary has an Investment.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any line of business that is not a Related Business (except as a
result of Investments in other businesses made or acquired in connection with
the activities or conduct of the Related Businesses in the ordinary course of
business by the Company and its Restricted Subsidiaries, including Investments
obtained as a result of the foreclosure of Liens securing amounts lent by the
Company or any of its Restricted Subsidiaries).
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any Notes are outstanding, the Company will
furnish to the Holders of Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K even if the Company were not required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed
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with the SEC on Form 8-K even if the Company were not required to file such
reports. In addition, whether or not required by the rules and regulations of
the SEC, the Company will file a copy of all such information and reports with
the SEC for public availability (unless the SEC will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. In addition, the Company and the Subsidiary Guarantors
have agreed that, for so long as any Notes remain outstanding, they will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
Additional Subsidiary Guarantees
The Indenture provides that the Company will not, and will not permit any of
the Subsidiary Guarantors to, make any Investment in any Subsidiary that is
not a Subsidiary Guarantor unless either (i) such Investment is permitted by
the covenant entitled "Restricted Payments," or (ii) such Subsidiary executes
a Subsidiary Guarantee and delivers an opinion of counsel in accordance with
the provisions of the Indenture.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes and the Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated
Net Worth of the Company immediately preceding the transaction and (B) will,
at the time of such transaction and after giving pro forma effect thereto as
if such transaction had occurred at the beginning of the applicable four-
quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the test described in the first sentence of the
covenant described above under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock."
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when
due of the principal of or premium, if any, on the Notes; (iii) failure by the
Company to comply with the provisions described under the captions "--Change
of Control," "--Asset Sales," "--Restricted Payments" or "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; (iv) failure by the Company for
60 days after notice to comply with any of its other agreements in the
Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, which default (a)
is caused by a failure to pay principal of or premium, if any, or interest on
such Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any
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such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more; (vi) failure
by the Company or any of its Significant Subsidiaries to pay final judgments
aggregating in excess of $5.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) except as permitted by the
Indenture or if, at the time thereof, any Subsidiary Guarantee of a Subsidiary
Guarantor that is a Significant Subsidiary shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be
in full force and effect or any Subsidiary Guarantor that is a Significant
Subsidiary, or any Person acting on behalf of any such Subsidiary Guarantor,
shall deny or disaffirm, in writing, its obligation under its Subsidiary
Guarantee and (viii) certain events of bankruptcy or insolvency with respect
to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company or any Subsidiary, all
outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
January 15, 2002 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to January 15, 2002, then the
initial optional redemption premium specified in the Indenture shall also
become immediately due and payable to the extent permitted by law upon the
acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, the principal of, or Liquidated Damages, if any, with
respect to, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator, organizer, member, manager or
shareholder of the Company, as such, shall have any liability for any
obligations of the Company under the Notes, the Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Notes by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the SEC that such a waiver is
against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on
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such Notes when such payments are due from the trust referred to below, (ii)
the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in United States dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the Issue Date, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must have delivered to the Trustee an
opinion of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes; provided that the covenants entitled "Asset Sales" and "Change of
Control" are not redemption provisions; (iii) reduce the rate of or change the
time for payment of interest or Liquidated Damages on any Note; (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest or Liquidated Damages on the Notes (except a rescission of
acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the Notes and a waiver of the payment default that
resulted from such acceleration); (v) make any Note payable in money other
than that stated in the Notes; (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of or premium, if any, or interest or
Liquidated Damages, on the Notes; (vii) waive a redemption payment with
respect to any Note; or (viii) make any change in the foregoing amendment and
waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with
requirements of the SEC in order to effect or maintain the qualification of
the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days or apply to the SEC for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
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"Acquired Debt" means, with respect to any specified Person (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Subsidiary of such specified Person, including, without
limitation, Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, control
(including, with correlative meanings, the terms controlling, controlled by
and under common control with), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. Notwithstanding the foregoing, no Person (other than
the Company or any Restricted Subsidiary of the Company) in whom a Special
Purpose Subsidiary makes an Investment in connection with a Qualified
Securitization Transaction shall be deemed to be an Affiliate of the Company
or any of its Restricted Subsidiaries solely by reason of such Investment.
"Asset Sale" means (a) any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (other than as permitted under "--Certain
Covenants--Merger, Consolidation or Sale of Assets" or "--Subsidiary
Guaranties") (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law
to be held by a Person other than the Company or a Restricted Subsidiary, as
the case may be), (ii) all or substantially all the assets of any division or
line of business of the Company or any Restricted Subsidiary, (iii) any other
assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary, as the case
may be, including any sale of the stock of a Restricted Subsidiary, or (iv)
any Securitization Related Asset, or (b) any issuance of Capital Stock (other
than non-convertible preferred stock that is not Disqualified Stock) by any of
the Company's Restricted Subsidiaries, except any such issuance to the Company
or any Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor.
Notwithstanding the foregoing, an "Asset Sale" does not include (a) a
disposition by a Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary or by the Company to a Wholly Owned Restricted Subsidiary, (b) a
disposition that constitutes a Restricted Payment permitted by the covenant
described under "--Certain Covenants--Restricted Payments"), (c) sales of
Receivables in Qualified Securitization Transactions for the fair market value
thereof, including cash in an amount at least equal to 75% of the book value
thereof as determined in accordance with GAAP, (d) transfers of Receivables by
a Special Purpose Subsidiary to third parties in a Qualified Securitization
Transaction and (e) any trade or exchange by the Company or any Restricted
Subsidiary of any assets for similar assets of a Related Business owned or
held by another Person; provided that (1) the fair market value of the assets
traded or exchanged by the Company or such Restricted Subsidiary (including
any cash or Cash Equivalents to be delivered by the Company or such Restricted
Subsidiary) is reasonably equivalent to the fair market value of the asset or
assets (together with any cash or Cash Equivalents) to be received by the
Company or such Restricted Subsidiary and (2) such exchange is approved by a
majority of the directors of the Company who are not employees of the Company
or its Restricted Subsidiaries.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capitalized Excess Servicing Fees Receivables" mean, with respect to the
sale of Receivables in a Qualified Securitization Transaction, the present
value of the excess of the weighted average coupon on the Receivables sold
over the sum of (i) the coupon in the pass-through certificates, (ii) a base
servicing fee paid to the loan or lease servicer and (iii) expected losses to
be incurred on the portfolio of Receivables sold, considering prepayment
assumptions.
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"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means: (i) United States dollars; (ii) Government
Securities (except that for purpose of this definition, Government Securities
must have a remaining Weighted Average Life to Maturity of not more than one
year from the date of investment therein); (iii) commercial paper or other
short-term corporate obligation that has received a rating of at least A-1 or
AA from Standard & Poor's Corporation ("S&P"), P-1 or Aa2 from Moody's
Investor Services, Inc. ("Moody's"), F-1 or AA from Fitch Investor Service,
Inc. ("Fitch"), or D-1 or AA from Duff & Phelps Credit Rating Co., ("Duff");
(iv) time deposits, certificates of deposit, bank acceptances or bank notes
issued by any bank having capital surplus and undivided profits aggregating at
least $500 million (or the foreign currency equivalent thereof) and at least a
high A rating (or the equivalent) from any two of the following: S&P, Moody's,
Thomson Bankwatch, Inc. or IBCA, Inc.; (v) money market preferred stocks
which, at the date of acquisition and at all times thereafter, are accorded
ratings of at least mid AA by any two of the following: S&P, Moody's, Fitch or
Duff; (vi) tax-exempt obligations that are accorded ratings at the time of
investment therein of at least mid AA (or equivalent short-term ratings) by
any two of the following; S&P, Moody's, Fitch or Duff; (vii) master repurchase
agreements with foreign or domestic banks having capital and surplus of not
less than $500 million (or the foreign equivalent thereof) or primary dealers
so long as (a) such bank or dealer has a rating of at least mid AA from any
two of the following: S&P, Moody's, Fitch or Duff; (b) such agreements are
collateralized with obligations of the United States government or its
agencies at a ratio of 102%, or with other collateral rated at least mid AA
from any two of the following: S&P, Moody's, Fitch or Duff, at a rate of 103%
and, in either case marked to market weekly and (c) such securities shall be
held by a third-party agent; (viii) guaranteed investment contracts and/or
agreements of a bank, insurance company or other institution whose unsecured,
uninsured and unguaranteed obligations (or claims-paying ability) are, at the
time of investment therein, rated AAA by any two of the following: S&P,
Moody's, Fitch or Duff; (ix) money market funds, the portfolio of which is
limited to investments described in clauses (i) through (viii); (x) with
respect to Non-Domestic Persons, instruments that are comparable to those
described in clauses (i), (ii), (iv) and (vii) in the country in which such
Non-Domestic Person is organized or has its principal business operations; and
(xii) up to $1.0 million in the aggregate of other financial assets held by
Restricted Subsidiaries. In no event shall any of the Cash Equivalents
described in clauses (iii) through (viii), (x) and (xi) above have a final
maturity more than one year from the date of investment therein.
"Change of Control" means the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having the right to vote in the election of directors; (ii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any directors
who are members of such Board of Directors of the Company on the date hereof
and any new directors whose election by such Board of Directors of the Company
or whose nomination for election by the shareholders of the Company was
approved by a vote of 66 2/3% of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
(iii) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all, or substantially all, the assets of
the Company and its Restricted Subsidiaries, taken as a whole, to any person
or entity or group (as so defined) of persons, or entities (other than to any
Wholly Owned Restricted Subsidiary of the Company); (iv) the merger or
consolidation of the Company with or into another corporation or the merger of
another corporation into the Company with the effect that immediately after
such transaction any person or entity or group (as so defined) of persons or
entities shall have become the beneficial owner of securities of the surviving
corporation of such merger or consolidation representing a majority of the
combined voting power of the outstanding securities of the surviving
corporation ordinarily having the right to vote in the election of directors;
or (v) the adoption of a plan relating to the liquidation or dissolution of
the Company.
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"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries, excluding Warehouse Indebtedness and
Guarantees thereof permitted to be incurred pursuant to clause (iii) of the
covenant described under "--Incurrence of Indebtedness and Issuance of
Preferred Stock" to (ii) the Consolidated Net Worth of the Company.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Subsidiary Guarantor, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any
prior governmental approval (that has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders, (iii) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded, (iv) the
cumulative effect of a change in accounting principles shall be excluded, and
(v) the Net Income of any Unrestricted Subsidiary shall be excluded, whether
or not distributed to the Company or one of its Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Issue Date in
the book value of any asset owned by such Person or a consolidated Restricted
Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Restricted Subsidiaries and in Persons that are not Restricted
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the Stated Maturity of the Notes.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten primary public offering of Equity
Interests (other then Disqualified Stock) of the Company pursuant to an
effective registration statement under the Securities Act.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other then Indebtedness under the Warehouse Facilities) in
existence on the Issue Date, until such amounts are repaid.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates, in either case in the ordinary course of business and not for
speculative or investment purposes.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such Person is responsible or liable,
(ii) all Capital Lease Obligations of such Person, (iii) all obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations of such Person and all obligations of such Person
under any title retention agreement (but excluding trade accounts payable and
expense accruals arising in the ordinary course of business), (iv) all
obligations of such Person for the reimbursement of any obligor on any letter
of credit, banker's acceptance or similar credit transaction (other than
obligations with respect to letters of credit securing obligations (other than
obligations described in (i) through (iii) above) entered into in the ordinary
course of business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no
later than the tenth Business Day following receipt by such Person of a demand
for reimbursement following payment on the letter of credit), (v) the amount
of all obligations of such Person with respect to the redemption, repayment or
other repurchase of any Disqualified Stock other than Permitted SPTL Preferred
Stock (but excluding any accrued dividends), (vi) all Warehouse Indebtedness,
(vii) all obligations of the type referred to in clauses (i) through (vi) of
other Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guaranty, (viii)
all obligations of the type referred to in clauses (i) through (vii) of other
Persons secured by any Lien on any property or asset of such Person (whether
or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured and (ix) to the extent not
otherwise included in this definition, Hedging Obligations of such Person.
Except in the case of Warehouse Indebtedness (the amount of which shall be
determined in accordance with the definition thereof) the amount of
Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and the maximum
liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date. Notwithstanding the
foregoing, the term "Indebtedness" does not include deposit liabilities of any
Restricted Subsidiary, the deposits of which are insured by the Federal
Deposit Insurance Corporation or any successor agency or Indebtedness of any
Restricted Subsidiary to the Federal Home Loan Bank of San Francisco or any
successor thereto incurred in the ordinary course of business and secured by
qualifying mortgage loans or mortgage-backed securities.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities
by the Company for consideration consisting of common equity securities of the
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Company shall not be deemed to be an Investment. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary
of the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value (as
determined as set forth in the last paragraph under the covenant entitled "--
Restricted Payments") of the Equity Interests of such Restricted Subsidiary
not sold or disposed of; provided, however, that this requirement shall not
apply if (i) the class of Equity Interests of the Restricted Subsidiary owned
by the Company is registered under Section 12 of the Exchange Act and is
listed on a national securities exchange or quoted on a national quotations
system and (ii) if the Company has entered into an agreement with the
Restricted Subsidiary that provides the Company with the right to demand
(subject to customary restrictions) registration of all of its Equity
Interests under the Securities Act.
"Issue Date" means the date on which the Note are originally issued.
"Lien" means, with respect to any Person, any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind on the assets of such Person
(including (i) any conditional sale or other title retention agreement or
lease in the nature thereof, and (ii) any claim (whether direct or indirect
through subordination or other structural encumbrance against any
Securitization Related Asset sold or otherwise transferred by such Person to a
buyer, unless such Person is not liable for any losses thereon).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and after any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); and (ii) no default with respect to which (including any rights
that the holders thereof may have to take enforcement action against an
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any other Indebtedness (other than the Notes being offered hereby)
of the Company or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and (iii) as to which the lenders have
been notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary (i) in a Subsidiary Guarantor or in SPTL or a Person that will,
upon the making of such Investment, become a Subsidiary Guarantor; provided,
however, that the primary business of such Subsidiary Guarantor is a Related
Business; and provided further, that any Investment by the Company in SPTL
must be in the form of Permitted SPTL Preferred Stock or in a security senior
to such stock; (ii) in another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys
all or substantially all its assets to, the Company or a Subsidiary Guarantor;
provided, however, that such Person's primary business is a Related Business,
(iii) comprised of Cash Equivalents, (iv) comprised of Receivables owing to
the Company or any Restricted Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms, (v) comprised of payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to
be treated as expenses for accounting purposes and that are made in the
ordinary course of business, (vi) comprised of stock, obligations or
securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments, (vii) in any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Sale as permitted pursuant to the covenant described under "--Certain
Covenants--Asset Sales," (viii) comprised of Receivables of the Company or any
of its Wholly Owned Restricted Subsidiaries, or (ix) comprised of
Securitization Related Assets arising in a Qualified Securitization
Transaction.
"Permitted Liens" means, with respect to any Person: (a) pledges or deposits
by such Person under worker's compensation laws, unemployment insurance laws
or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government
bonds to secure surety or appeal bonds to which such Person is a party, or
deposits as security for contested taxes or import duties or for the payment
of rent, in each case Incurred in the ordinary course of business; (b) Liens
imposed by law, such as carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an
appeal or other proceedings for review; (c) Liens for property taxes not yet
subject to penalties for non-payment or which are being contested in good
faith and by appropriate proceedings; (d) Liens in favor of issuers of surety
bonds or letters of credit issued pursuant to the request of and for the
account of such Person in the ordinary course of its business; provided,
however, that such letters of credit do not constitute Indebtedness; (e) minor
survey exceptions, minor encumbrances, easements or reservations of, or rights
of others for, licenses, rights of way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions as
to the use of real property or Liens incidental to the conduct of the business
of such Person or to the ownership of its properties which were not Incurred
in connection with Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use
in the operation of the business of such Person; (f) Liens securing
Indebtedness Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, property of such Person (but excluding
Capital Stock of another Person); provided, however, that the Lien may not
extend to any other property owned by such Person or any of its Subsidiaries
at the time the Lien is Incurred, and the Indebtedness secured by the Lien may
not be Incurred more than 180 days after the latest of the acquisition,
completion of construction, repair, improvement, addition or commencement of
full operation of the property subject to the Lien; (g) Liens on Receivables
owned by the Company or a Restricted Subsidiary, as the case may be, to secure
Indebtedness permitted under the provisions described in clause (ii) under "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
and Liens to secure Indebtedness under mortgage loan repurchase agreements or
repurchase facilities permitted under the provisions described in clause (iii)
under "Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock"; (h) Liens on Securitization Related Assets (or on the Capital Stock of
any Subsidiary of such Person substantially all the assets of which are
Securitization Related Assets); provided, however, that, (x) any such Liens
may only encumber Securitization Related Assets, in an amount not to exceed
75% of the excess, if any, of (i) the total amount of Securitization Related
Assets, determined on a consolidated basis in accordance with GAAP, as of the
creation of such Lien over (ii) an amount equal to 150%
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of all unsecured Senior Indebtedness of the Company and its Restricted
Subsidiaries as of the time of creation of such Lien; and (y) the balance of
Securitization Related Assets, not permitted to be encumbered by the foregoing
proviso (x) shall remain unencumbered by any Lien; (i) Liens on Receivables
and other assets of a Special Purpose Subsidiary incurred in connection with a
Qualified Securitization Transaction; (j) Liens existing on the Issue Date;
(k) Liens on property or shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Lien may not extend to any other property owned by
such Person or any of its Subsidiaries; (l) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including, any
acquisition by means of a merger or consolidation with or into such Person or
a Subsidiary of such Person; provided, however, that such Liens are not
created, incurred or assumed in connection with, or in contemplation of such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (m) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person
owing to such Person or a Restricted Subsidiary of such Person; (n) Liens
(other than on any Securitization Related Assets) securing Hedging
Obligations; (o) Liens on cash or other assets (other than Securitization
Related Assets) securing Warehouse Indebtedness of the Company or its
Restricted Subsidiaries; (p) Liens to secure any Permitted Refinancing
Indebtedness as a whole, or in part, with any Indebtedness permitted under the
Indenture to be Incurred and secured by any Lien referred to in the foregoing
clauses (f), (j), (k) and (l); provided, however, that (x) such new Lien shall
be limited to all or part of the same property that secured the original Lien
(plus improvements to or on such property) (y) the Indebtedness secured by
such Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding, principal amount or, if greater, committed amount of the
Indebtedness described under clauses (f), (j), (k) or (l), as the case may be,
at the time the original Lien became a Permitted Lien and (B) an amount
necessary to pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement; (q) Liens securing
deposit liabilities of any Restricted Subsidiary, the deposits of which are
insured by the Federal Deposit Insurance Corporation or any successor agency
or Indebtedness of any Restricted Subsidiary to the Federal Home Loan Bank of
San Francisco or any successor thereto incurred in the ordinary couse of
business and secured by qualifying mortgage loans or mortgage-backed
securities; and (r) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries. Notwithstanding the foregoing,
"Permitted Liens" will not include any Lien described in clauses (f), (j) or
(k) above to the extent such Lien applies to any Additional Assets acquired
directly or indirectly from Net Proceeds pursuant to the covenant described
under "--Certain Covenants--Sale of Assets."
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount (or accreted value, if
applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded (plus the amount
of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Notes on
terms at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (v) such Indebtedness may not include a Guaranty of Indebtedness
of a Person that is not a Subsidiary of the Company.
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"Permitted SPTL Preferred Stock" means nonvoting (except as provided in the
second proviso below), noncumulative, perpetual preferred stock of SPTL which
would qualify as Tier 1 capital or the equivalent thereof on an unrestricted
basis for purposes of the capital requirements contained in 12 C.F.R. Part
325, Subpart A, or any successor provision; provided that the total
liquidation preference of such preferred stock outstanding at any time shall
not exceed 20% of the Consolidated Net Worth of SPTL (after giving effect to
the issuance of such preferred stock); and provided further, that the holders
of such stock may be granted the right to elect directors constituting less
than a majority of the board of directors of SPTL if dividends on such have
not been paid for six dividend periods, whether consecutive or not, and until
such time as SPTL has paid or declared and set apart for payment dividends for
four consecutive dividend periods.
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets
as to which such Warehouse Indebtedness relates are or, prior to any funding
under the related Warehouse Facility with respect to such assets, were
eligible to be recorded as held for sale on the consolidated balance sheet of
the Company in accordance with GAAP, (ii) such Warehouse Indebtedness will be
deemed to be Permitted Warehouse Indebtedness (a) in the case of a Purchase
Facility, only to the extent the holder of such Warehouse Indebtedness has no
contractual recourse to the Company and its Restricted Subsidiaries to satisfy
claims in respect of such Permitted Warehouse Indebtedness in excess of the
realizable value of the Receivables financed thereby, and (b) in the case of
any other Warehouse Facility, only to the extent of the lesser of (A) the
amount advanced by the lender with respect to the Receivables financed under
such Warehouse Facility, and (B) the principal amount of such Receivables and
(iii) any such Indebtedness has not been outstanding in excess of 364 days.
"Purchase Facility" means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary of
the Company sells Receivables to a financial institution and retains a right
of first refusal upon the subsequent resale of such Receivables by such
financial institution.
"Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which (i) the Company or any of its Restricted
Subsidiaries (other than a Special Purpose Subsidiary) sells, convey or
otherwise transfers to a Special Purpose Subsidiary or (ii) the Company, any
of its Restricted Subsidiaries or a Special Purpose Subsidiary sells, conveys
or otherwise transfers to a special purpose owner trust or other Person
Receivables (together with any assets related to such Receivables, including,
without limitation, all collateral securing such Receivables, all contracts
and all guarantees or other obligations in respect of such Receivables,
proceeds of such Receivables and other assets which are customarily
transferred in connection with asset securitization transactions involving
Receivables) of the Company or any of its Restricted Subsidiaries in
transactions constituting "true sales" under the Bankruptcy Laws and as
"sales" under GAAP, as evidenced by an Opinion of Counsel to such effect.
"Receivables" means consumer, mortgage and commercial loans, equipment or
other lease receivables and receivables purchased or originated by the Company
or any Restricted Subsidiary in the ordinary course of business; provided,
however, that for purposes of determining the amount of a Receivable at any
time, such amount shall be determined in accordance with GAAP, consistently
applied, as of the most recent practicable date.
"Related Business" means any consumer or commercial finance business or any
financial advisory or financial service business.
"Residual Certificates" means, with respect to the sale of Receivables in a
Qualified Securitization Transaction, any certificates representing
Receivables not sold or transferred in such transaction or otherwise retained
by or returned to the Person transferring such Receivables.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
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"Retained Interest" means, with respect to the sale of Receivables in a
Qualified Securitization Transaction, the interest and rights retained by the
Person in the Receivables transferred or sold in a Qualified Securitization
Transaction, including any rights to receive cash flow attributable to such
Receivables.
"Securitization Related Assets" means, with respect to a Qualified
Securitization Transaction: (i) the Capitalized Excess Servicing Fees
Receivable retained by the Person who transfers or sells Receivables in such a
transaction, (ii) the Retained Interest held by such Person in the Receivables
sold or transferred in such transaction and (iii) Residual Certificates
retained by such Person in such transaction.
"Senior Indebtedness" means all Indebtedness of the Company or the
Subsidiary Guarantors that is not, by its terms, subordinated in right of
payment to the Notes.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Special Purpose Subsidiary" means a Wholly Owned Restricted Subsidiary of
the Company (a) that is designated (as set forth below) as a "Special Purpose
Subsidiary" by the Board of Directors of the Company, (b) that does not engage
in, and whose charter prohibits it from engaging in, any activities other than
Qualified Securitization Transactions, (c) no portion of the Indebtedness or
any other Obligations (contingent or otherwise) of which (i) is guaranteed by
the Company or any other Restricted Subsidiary of the Company, (ii) is
recourse to or obligates the Company or any other Restricted Subsidiary of the
Company in any way other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Securitization Transaction or (iii) subjects any
property or asset of the Company or any other Restricted Subsidiary of the
Company, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Securitization Transaction, (d) with which neither
the Company nor any other Restricted Subsidiary of the Company has any
material contract, agreement, arrangement or understanding other than on terms
no less favorable to the Company or such Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company and
(e) with which neither the Company nor any other Restricted Subsidiary of the
Company has any obligation to maintain or preserve such Restricted
Subsidiary's financial condition or cause such Restricted Subsidiary to
achieve certain levels of operating results. Any such designation by the Board
of Directors of the Company shall be evidenced to the Trustee by filing with
the Trustee a certified copy of the resolution of the Board of Directors of
the Company giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"SPFC" means Southern Pacific Funding Corporation, a California corporation
and a partially owned Subsidiary of the Company.
"SPTL" means Southern Pacific Thrift & Loan Association, a California
corporation and a Subsidiary of the Company.
"Stated Maturity" means, with respect to any installment of principal or
interest on any series of Indebtedness, the date on which such payment of
principal or interest was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such principal or interest prior to the
date originally scheduled for the payment thereof.
"Strategic Investor Repurchase Transaction" means the repurchase, redemption
or other retirement for value of any Equity Interests of any Restricted
Subsidiary (a) from a strategic partner or investor owning such Equity
Interests that, except for such Investment, would not be an Affiliate of the
Company or its Restricted Subsidiaries and (b) in a transaction whose terms
comply with the provisions set forth in "--Affiliate Transactions."
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"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof); provided, that SPFC and ICIFC shall not be considered Subsidiaries
of the Company unless the Company owns more than 50% of the total voting power
of shares of Capital Stock on or after March 31, 1997.
"Subsidiary Guarantors" means each of (i) the Restricted Subsidiaries other
than SPTL and the Special Purpose Subsidiaries and (ii) any other subsidiary
that executes a Subsidiary Guarantee in accordance with the provisions of the
Indenture, and their respective successors and assigns.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) is not party to
any agreement, contract, arrangement or understanding with the Company or any
Restricted Subsidiary of the Company unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (b) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (c) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (d) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "Certain Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," (ii) such Subsidiary becomes a Subsidiary
Guarantor, and (iii) no Default or Event of Default would be in existence
following such designation.
"Warehouse Facility" means any funding arrangement, including a Purchase
Facility, with a financial institution or other lender or purchaser, to the
extent (and only to the extent) funding thereunder is used exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary of the Company for the purpose of (i) pooling such
Receivables prior to securitization or (ii) sale, in each case in the ordinary
course of business.
"Warehouse Indebtedness" means the greater of (x) the consideration received
by the Company or its Restricted Subsidiaries under a Warehouse Facility and
(y) in the case of a Purchase Facility, the book value of the Receivables
financed under such Warehouse Facility until such time as such Receivables are
(i) securitized, (ii) repurchased by the Company or its Restricted
Subsidiaries or (iii) sold by the counterparty under the Warehouse Facility to
a Person who is not an Affiliate of the Company.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned
by such Person or by one or more Wholly Owned Restricted Subsidiaries of such
Person and one or more Wholly Owned Subsidiaries of such Person.
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CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain of the material U.S.
federal income tax aspects of the acquisition, ownership and disposition of
the New Notes. This discussion is a summary for general information only and
does not consider all aspects of U.S. federal income tax that may be relevant
to the purchase, ownership and disposition of the New Notes by a prospective
investor in light of such investor's personal circumstances. This discussion
also does not address the U.S. federal income tax consequences of ownership of
New Notes not held as capital assets within the meaning of Section 1221 of the
U.S. Internal Revenue Code of 1986, as amended (the "Code"), or the U.S.
federal income tax consequences to investors subject to special treatment
under the U.S. federal income tax laws, such as dealers in securities or
foreign currency, tax-exempt entities, banks, thrifts, insurance companies,
persons that hold the New Notes as part of a "straddle", a "hedge" against
currency risk or a "conversion transaction", persons that have a "functional
currency" other than the U.S. dollar, and investors in pass-through entities.
In addition, this discussion is generally limited to the tax consequences to
initial holders. It does not describe any tax consequences arising out of the
tax laws of any state, local or foreign jurisdiction.
This discussion is based upon the Code, existing and proposed regulations
thereunder, and current administrative rulings and court decisions. All of the
foregoing is subject to change, possibly on a retroactive basis, and any such
change could affect the continuing validity of this discussion.
PROSPECTIVE HOLDERS OF THE NEW NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE
LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR
SITUATIONS.
U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a New Note that is (i) a citizen or
resident (as defined in Section 7701(b) (1) of the Code) of the United States,
(ii) a corporation organized under the laws of the United States or any
political subdivision thereof or therein or (iii) an estate or trust, the
income of which is subject to U.S. federal income tax regardless of the source
(a "U.S. Holder"). Certain U.S. federal income tax consequences relevant to a
holder other than a U.S. Holder are discussed separately below.
EXCHANGE OFFER
The exchange of the Old Notes for New Notes pursuant to the Exchange Offer
should not be a taxable exchange for U.S. federal income tax purposes. As a
result, there should be no federal income tax consequences to U.S. Holders
exchanging the Old Notes for the New Notes pursuant to the Exchange Offer.
STATED INTEREST
Interest on a New Note will be taxable to a U.S. Holder as ordinary interest
income at the time it accrues or is received in accordance with such holder's
method of accounting for tax purposes.
MARKET DISCOUNT
If a New Note is acquired at a "market discount", some or all of any gain
realized upon a sale, other disposition or payment at maturity (or earlier),
or some or all of the proceeds of a partial principal payment, of such Note
may be treated as ordinary income, as described below. For this purpose,
"market discount" is the excess (if any) of the stated redemption price at
maturity over the purchase price, subject to a statutory de minimis exception.
Unless a U.S. Holder has elected to include the market discount in income as
it accrues, any
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gain realized on any subsequent disposition of such a Note (other than in
connection with certain nonrecognition transactions) or payment at maturity
(or earlier), or some or all of the proceeds of a partial principal payment
with respect to such Note, will be treated as ordinary income to the extent of
the market discount accrued during the period such Note was held.
The amount of market discount treated as having accrued will be determined
either (i) on a ratable basis by multiplying the market discount times a
fraction, the numerator of which is the number of days the New Note was held
by the U.S. Holder and the denominator of which is the total number of days
after the date such U.S. Holder acquired the New Note up to and including the
date of its maturity or (ii) if the U.S. Holder so elects, on a constant
interest rate method. A U.S. Holder may make that election with respect to any
New Note but, once made, such election is irrevocable.
In lieu of recharacterizing gain upon disposition as ordinary income to the
extent of accrued market discount at the time of disposition, a U.S. Holder of
a New Note acquired at a market discount may elect to include market discount
in income currently, through the use of either the ratable inclusion method or
the elective constant interest method. Once made, the election to include
market discount in income currently applies to all Notes and other obligations
held by the U.S. Holder that are purchased at a market discount during the
taxable year for which the election is made, and all subsequent taxable years
of the U.S. Holder, unless the Internal Revenue Service (the "IRS") consents
to a revocation of the election. If an election is made to include market
discount in income currently, the basis of the New Note in the hands of the
U.S. Holder will be increased by the market discount thereon as it is included
in income.
Unless a U.S. Holder who acquires a New Note at a market discount elects to
include market discount in income currently, such U.S. Holder may be required
to defer deductions for any interest paid on indebtedness allocable to such
Notes in an amount not exceeding the deferred income until such income is
realized.
BOND PREMIUM
If a U.S. Holder purchases a New Note and immediately after the purchase the
adjusted basis of the New Note exceeds the sum of all amounts payable on the
instrument after the purchase date (other than qualified stated interest), the
New Note has "bond premium." A U.S. Holder may elect to amortize such bond
premium over the remaining term of such Note (or, in certain circumstances,
until an earlier call date).
If bond premium is amortized, the amount of interest that must be included
in the U.S. Holder's income for each period ending on an interest payment date
or at the stated maturity, as the case may be, will be reduced by the portion
of premium allocable to such period based on the New Note's yield to maturity.
If such an election to amortize bond premium is not made, a U.S. Holder must
include the full amount of each interest payment in income in accordance with
its regular method of accounting and will receive a tax benefit from the
premium only in computing such Holder's gain or loss upon the sale or other
disposition or payment of the principal amount of the New Note.
An election to amortize premium will apply to amortizable bond premium on
all Notes and other bonds, the interest on which is includible in the U.S.
Holder's gross income, held at the beginning of the U.S. Holder's first
taxable year to which the election applies or are thereafter acquired, and may
be revoked only with the consent of the IRS.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Upon the disposition of a New Note by sale, exchange or redemption, a U.S.
Holder will generally recognize gain or loss equal to the difference between
(i) the amount realized on the disposition (other than amounts attributable to
accrued interest) and (ii) the U.S. Holder's tax basis in the New Note. A U.S.
Holder's tax basis in a New Note generally will equal the cost of the Note
(net of accrued interest) to the U.S. Holder increased by amounts includible
in income as market discount (if the holder elects to include market discount
on a current basis) and reduced by any amortized bond premium.
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Provided the New Note is held as a capital asset, such gain or loss (except
as otherwise provided by the market discount rules otherwise provide) will
generally constitute capital gain or loss and will be long-term capital gain
or loss if the U.S. Holder has held such New Note for more than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under the Code, a U.S. Holder of a New Note may be subject, under certain
circumstances, to information reporting and/or backup withholding at a 31%
rate with respect to cash payments in respect of interest or the gross
proceeds from dispositions thereof. This withholding applies only if the
holder (i) fails to furnish its social security or other taxpayer
identification number ("TIN") within a reasonable time after a request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report interest
properly, or (iv) fails, under certain circumstances, to provide a certified
statement, signed under penalty of perjury, that the TIN provided is its
correct number and that it is not subject to backup withholding. Any amount
withheld from a payment to a U.S. Holder under the backup withholding rules is
allowable as a credit (and may entitle such holder to a refund) against such
holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS. Certain persons are exempt from backup
withholding, including corporations and financial institutions. U.S. Holders
of New Notes should consult their tax advisors as to their qualification for
exemption from withholding and the procedure for obtaining such exemption.
NON-U.S. HOLDERS
The following discussion is limited to the U.S. federal income tax
consequences relevant to a holder of a New Note that is not (i) a citizen or
resident of the United States, (ii) a corporation organized under the laws of
the United States or any political subdivision thereof or therein or (iii) an
estate or trust, the income of which is subject to U.S. federal income tax
regardless of the source (a "Non-U.S. Holder").
This discussion does not deal with all aspects of U.S. federal income and
estate taxation that may be relevant to the purchase, ownership or disposition
of the New Notes by any particular Non-U.S. Holder in light of such Holder's
personal circumstances, including holding the New Notes through a partnership,
trust or estate. For example, persons who are partners in foreign partnerships
or beneficiaries of foreign trusts or estates who are subject to U.S. federal
income tax because of their own status, such as United States residents or
foreign persons engaged in a trade or business in the United States, may be
subject to U.S. federal income tax or income and gain from the New Notes, even
though the entity is not so subject.
For purposes of the following discussion, interest and gain on the sale,
exchange or other disposition of the New Note will be considered "U.S. trade
or business income" if such income or gain is (i) effectively connected with
the conduct of a U.S. trade or business or (ii) in the case of a treaty
resident, attributable to a U.S. permanent establishment (or to a fixed base)
in the United States.
STATED INTEREST
Generally, any interest paid to a Non-U.S. Holder of a New Note that is not
U.S. trade or business income will not be subject to United States tax if the
interest qualIfies as "portfolio interest." Generally, interest on the New
Notes will qualify as portfolio interest if (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total voting power of all
voting stock of the Company and is not a "controlled foreign corporation" with
respect to which the Company is a "related person" within the meaning of the
Code, (ii) the Non-U.S. Holder is not a bank receiving such interest on an
extension of credit made pursuant to a loan agreement entered into in the
ordinary course of its trade or business and (iii) the beneficial owner, under
penalty of perjury, certifies that the beneficial owner is not a United States
person and such certificate provides the beneficial owner's name and address.
140
<PAGE>
The gross amount of payments to a Non-U.S. Holder of interest that do not
qualify for the portfolio interest exception and that are not U.S. trade or
business income will be subject to U.S. federal income tax at the rate of 30%,
unless a U.S. income tax treaty applies to reduce or eliminate withholding.
U.S. trade or business income will be taxed at regular U.S. rates rather than
the 30% withholding rate. To claim the benefit of a tax treaty or to claim
exemption from withholding because the income is U.S. trade or business
income, the Non-U.S. Holder must provide a properly executed Form 1001 or 4224
(or such successor forms as the IRS designates), as applicable, prior to the
payment of interest. These forms must be periodically updated. Under proposed
regulations, the Forms 1001 and 4224 will be replaced by Form W-8. Also under
proposed regulations, a Non-U.S. Holder who is claiming the benefits of a
treaty may be required to obtain a U.S. taxpayer identification number and to
provide certain documentary evidence issued by foreign governmental
authorities to prove residence in the foreign country. Certain special
procedures are provided in the proposed regulations for payments through
qualified intermediaries.
SALE, EXCHANGE OR REDEMPTION OF NOTES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange or
redemption of a New Note generally will not be subject to U.S. federal income
tax, unless (i) such gain is U.S. trade or business income, (ii) subject to
certain exceptions, the Non-U.S. Holder is an individual who holds the New
Note as a capital asset and is present in the United States for 183 days or
more in the taxable year of the disposition, or (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of U.S. tax law applicable to
certain U.S. expatriates.
FEDERAL ESTATE TAX
New Notes held (or treated as held) by an individual who is a Non-U.S.
Holder at the time of his or her death will not be subject to U.S. federal
estate tax provided that the individual does not actually or constructively
own 10% or more of the total voting power of all voting stock of the Company
and income on the Notes was not U.S. trade or business income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder any
interest that is subject to withholding or that is exempt from U.S.
withholding tax pursuant to a tax treaty or the portfolio interest exception.
Copies of these information returns may also be made available under the
provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. Holder resides (or is otherwise subject to tax).
The regulations provide that backup withholding and information reporting
will not apply to payments of principal on the New Notes by the Company to a
Non-U.S. Holder, if the Holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes an exemption (provided that
neither the Company nor its paying agent has actual knowledge that the holder
is a United States person or that the conditions of any other exemption are
not, in fact, satisfied).
The payment of the proceeds from the disposition of New Notes to or through
the United States office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner
certifies as its non-U.S. status under penalty of perjury or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the Holder is a U.S. person or that the conditions of any other
exemption are not, in fact, satisfied. The payment of the proceeds from the
disposition of a New Note to or through a non-U.S. office of a non-U.S. broker
that is not a U.S. related person will not be subject to information reporting
or backup withholding. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for U.S. federal income tax purposes or (ii)
a foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of
a United States trade or business.
141
<PAGE>
In the case of the payment of proceeds from the disposition of New Notes to
or through a non-U.S. office of a broker that is either a U.S. person or a
U.S. related person, the regulations require information reporting on the
payment unless the broker has documentary evidence in its files that the owner
is a Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through foreign offices of a
broker that is a U.S. person or a U.S. related person (absent actual knowledge
that the payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability, provided that the requisite
procedures are followed.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer or the purchasers of any such New Notes. Any broker-
dealer that resells New Notes that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and any profit on any such resale of New Notes
and any commission or concessions received by any such persons may be deemed
to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
Supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company has agreed, pursuant to
the Registration Rights Agreement, to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for all the holders of
the Notes as a single class) other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
142
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Notes offered
hereby will be passed upon for the Company and certain of the Subsidiary
Guarantors by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation,
Beverly Hills, California.
EXPERTS
The financial statements of Imperial Credit Industries, Inc. as of December
31, 1994, and 1995, and for each of the years in the three-year period ended
December 31, 1995, have been included herein in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the December 31,
1995, consolidated financial statements contains an explanatory paragraph
regarding the adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights."
143
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Consolidated Financial Statements:
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Changes in Shareholders' Equity............... F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Condensed Consolidated Financial Statements:
Consolidated Balance Sheets.............................................. F-37
Consolidated Statements of Income........................................ F-38
Consolidated Statements of Cash Flows.................................... F-39
Notes to Consolidated Financial Statements............................... F-40
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights," for the year ended December 31,
1995.
KPMG PEAT MARWICK LLP
Los Angeles, California
March 28, 1996, except as to
note 26, which is as of
January 17, 1997
F-2
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
Cash.......................................... $ 39,165,775 $ 24,903,671
Interest bearing deposits..................... 267,775,615 10,600,000
Investment in Federal Home Loan Bank stock.... 22,750,000 18,817,300
Securities available for sale, at market...... 5,962,500 --
Loans held for sale (Fair value of
$1,345,509,326 and $264,506,440 at December
31, 1995 and 1994, respectively)............. 1,341,809,910 263,807,378
Loans held for investment, net................ 668,771,208 1,029,555,671
Capitalized excess servicing fees receivable.. 44,031,189 4,319,393
Purchased and originated servicing rights..... 18,428,520 16,745,522
Retained interest in loan and lease
securitizations.............................. 14,241,098 238,990
Accrued interest on loans..................... 10,164,585 5,917,543
Premises and equipment, net................... 11,369,004 12,374,689
Other real estate owned, net.................. 7,179,157 3,268,009
Goodwill...................................... 20,345,931 --
Other assets.................................. 38,640,656 29,860,668
-------------- --------------
Total assets................................ $2,510,635,148 $1,420,408,834
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits...................................... $1,092,988,944 $ 934,621,084
Borrowings from Imperial Bank................. 5,000,000 --
Borrowings from Federal Home Loan Bank........ 190,000,000 295,000,000
Other borrowings.............................. 875,815,309 --
Bonds......................................... 111,995,353 --
Senior Notes.................................. 80,472,360 80,343,905
Other liabilities............................. 60,260,718 34,571,324
-------------- --------------
Total liabilities........................... 2,416,532,684 1,344,536,313
-------------- --------------
Commitments and contingencies (notes 19 and
23)
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized;
none issued or outstanding................... -- --
Common stock, no par value. Authorized
40,000,000 shares; 14,578,481 and 9,620,953
shares issued and outstanding at December 31,
1995 and December 31, 1994, respectively..... 51,981,388 51,155,925
Retained earnings............................. 38,909,853 24,716,596
Unrealized gain on securities available for
sale, net.................................... 3,211,223 --
-------------- --------------
Total shareholders' equity.................. 94,102,464 75,872,521
-------------- --------------
Total liabilities and shareholders'
equity................................... $2,510,635,148 $1,420,408,834
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
REVENUE:
Gain on sale of loans................. $ 39,556,776 $ 8,627,771 $ 18,148,870
------------ ----------- ------------
Interest on loans..................... 120,244,242 79,172,615 51,612,124
Interest on investments............... 6,630,028 3,610,130 1,972,301
Interest on other finance activities.. 2,607,536 -- --
------------ ----------- ------------
Total interest income............... 129,481,806 82,782,745 53,584,425
Interest expense...................... 95,728,042 61,673,723 29,811,337
------------ ----------- ------------
Net interest income................. 33,753,764 21,109,022 23,773,088
Provision for loan and lease losses... 5,450,000 5,150,000 2,350,000
------------ ----------- ------------
Net interest income after provision
for loan and lease losses............ 28,303,764 15,959,022 21,423,088
------------ ----------- ------------
Loan servicing income................. 12,718,059 16,331,844 6,784,927
Gain on sale of servicing rights...... 3,578,325 30,837,437 23,655,276
Gain on sale of securities............ -- -- 211,979
Other income.......................... 1,152,249 1,048,198 1,201,576
------------ ----------- ------------
Total other income.................. 17,448,633 48,217,479 31,853,758
------------ ----------- ------------
Total revenue......................... 85,309,173 72,804,272 71,425,716
------------ ----------- ------------
EXPENSES:
Personnel expense..................... 34,053,432 33,477,183 24,519,650
Amortization of PMSR's and OMSR's..... 3,986,048 3,176,260 830,888
Occupancy expense..................... 3,903,966 3,399,121 2,123,617
Data processing expense............... 1,461,114 1,322,950 326,978
Net expenses of other real estate
owned................................ 1,912,681 969,040 564,114
Professional services................. 2,768,639 1,528,149 767,677
FDIC insurance premiums............... 1,137,357 2,170,387 1,070,387
Telephone and other communications.... 2,509,110 2,820,303 1,977,231
General and administrative expense.... 9,447,313 12,651,083 7,772,271
------------ ----------- ------------
Total expenses...................... 61,179,660 61,514,476 39,952,813
------------ ----------- ------------
Income before income taxes............ 24,129,513 11,289,796 31,472,903
Income taxes.......................... 10,144,019 4,685,194 13,054,454
Minority interest in loss of
consolidated subsidiaries............ (207,763) -- --
------------ ----------- ------------
Income before extraordinary item...... 14,193,257 6,604,602 18,418,449
Extraordinary item--repurchase of
Senior Notes, net of
income taxes......................... -- 919,286 --
------------ ----------- ------------
Net income.......................... $ 14,193,257 $ 7,523,888 $ 18,418,449
============ =========== ============
INCOME PER SHARE:
Primary:
Income before extraordinary item...... $ 0.82 $ 0.39 $ 1.09
Extraordinary item--repurchase of
Senior Notes......................... -- 0.06 --
------------ ----------- ------------
Net Income............................ $ 0.82 $ 0.45 $ 1.09
============ =========== ============
Fully Diluted:
Income before extraordinary item...... $ 0.81 $ 0.39 $ 1.09
Extraordinary item--repurchase of
Senior Notes......................... -- 0.06 --
------------ ----------- ------------
Net Income............................ $ 0.81 $ 0.45 $ 1.09
============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
SECURITIES
NUMBER OF AVAILABLE TOTAL
SHARES COMMON RETAINED FOR SALE, SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS NET EQUITY
----------- ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 8,726,315 $39,322,548 $10,455,623 $ -- $49,778,171
Exercise of stock op-
tions.................. 7,370 56,011 -- -- 56,011
Stock dividend.......... 873,373 11,681,364 (11,681,364) --
Net income, 1993........ -- -- 18,418,449 -- 18,418,449
---------- ----------- ----------- ---------- -----------
Balance, December 31,
1993................... 9,607,058 51,059,923 17,192,708 -- 68,252,631
Exercise of stock op-
tions.................. 13,895 96,002 -- -- 96,002
Net income, 1994........ -- -- 7,523,888 -- 7,523,888
---------- ----------- ----------- ---------- -----------
Balance, December 31,
1994................... 9,620,953 51,155,925 24,716,596 -- 75,872,521
Exercise of stock op-
tions.................. 147,019 825,463 -- -- 825,463
3-for-2 stock split..... 4,810,509 -- -- -- --
Unrealized gain on secu-
rities available for
sale, net.............. -- -- -- 3,211,223 3,211,223
Net income, 1995........ -- -- 14,193,257 -- 14,193,257
---------- ----------- ----------- ---------- -----------
Balance, December 31,
1995................... 14,578,481 $51,981,388 $38,909,853 $3,211,223 $94,102,464
========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
-------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................... $ 14,193,257 $ 7,523,888 $ 18,418,449
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Provision for loan losses............ 5,450,000 5,150,000 2,350,000
(Recovery) provision for
operational losses................... (1,819,000) 2,000,000 --
Depreciation and amortization........ 6,382,140 4,766,552 2,660,160
Accretion of discount................ (2,607,536) -- --
Gain on sale of servicing
rights.............................. (3,578,325) (30,837,437) (23,655,276)
Gain on sale of loans................ (39,556,776) (8,627,771) (18,148,870)
Stock option compensation expense.... 653,400 435,600 435,600
Writedowns on other real estate
owned............................... 2,085,000 369,131 406,089
Provision for deferred income
taxes............................... 2,120,241 2,677,920 3,076,100
Gain on repurchase of senior
notes............................... -- (1,538,349) --
Net change in loans held for
sale................................ (579,729,746) 982,827,357 (894,257,137)
Gain on securities................... -- -- (211,979)
Net change in accrued interest on
loans............................... (4,247,042) (1,342,105) (3,037,696)
Net change in other assets........... (66,575,625) (15,952,518) 4,195,206
Net change in other liabilities...... (1,435,825) 14,126,387 4,719,192
-------------- -------------- -------------
Net cash (used in) provided by
operating activities:................. (668,665,837) 961,578,655 (903,050,162)
-------------- -------------- -------------
Cash flows from investing
activities:
Net change in interest bearing
deposits............................ (257,175,615) 79,400,000 (60,000,000)
Purchase of servicing rights......... (8,128,031) (14,764,526) (12,522,886)
Proceeds from sale of servicing
rights.............................. 12,815,190 26,898,995 20,364,284
Proceeds from sale of other
real estate owned................... 7,071,366 1,174,340 1,264,445
Purchase of securities available for
sale................................ -- -- (165,383,503)
Sale of securities available
for sale............................ -- -- 165,595,482
Net change in loans held for
investment.......................... 61,656,259 (882,389,638) (75,967,747)
Purchases of premises and
equipment........................... (1,367,547) (6,140,216) (6,050,946)
Purchases of Federal Home
Loan Bank stock..................... (3,932,700) (817,300) (13,000,000)
Cash utilized for acquisitions....... (175,014,966) -- --
------------- -------------- -------------
Net cash used in investing
activities:.......................... (364,076,044) (796,638,345) (145,700,871)
-------------- -------------- -------------
Cash flows from financing activities:
Net change in deposits............... 158,367,860 (66,846,959) 578,916,555
Net change in borrowings from
Imperial Bank....................... 5,000,000 (20,000,000) 20,000,000
Advances from Federal Home
Loan Bank........................... 347,000,000 988,000,000 790,500,000
Repayments of advances from
Federal Home Loan Bank.............. (452,000,000) (1,013,000,000) (470,500,000)
Net change in other
borrowings.......................... 875,815,309 (147,611,302) 147,611,302
Issuance of bonds.................... 111,995,353 -- --
Proceeds from offering of
Senior Notes........................ -- 88,593,300 --
Repurchase of Senior Notes........... -- (6,545,000) --
Proceeds from exercise of
stock options....................... 825,463 96,002 56,011
-------------- -------------- -------------
Net cash provided by (used in)
financing activities:................. 1,047,003,985 (177,313,959) 1,066,583,868
Net change in cash..................... 14,262,104 (12,373,649) 17,832,835
Cash at beginning of year.............. 24,903,671 37,277,320 19,444,485
-------------- -------------- -------------
Cash at end of year.................... $ 39,165,775 $ 24,903,671 $ 37,277,320
============== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION
Imperial Credit Industries, Inc. (the Company), incorporated in 1986 in the
State of California, is 39.8% owned by Imperial Bank. In 1991 Imperial Bank
recapitalized the Company to conduct a full service mortgage banking
operation.
The consolidated financial statements include Imperial Credit Industries,
Inc. ("ICII"), its wholly-owned subsidiaries and majority-owned subsidiaries
(collectively the "Company"). The wholly-owned subsidiaries include Southern
Pacific Thrift and Loan Association ("SPTL"), Southern Pacific Funding
Corporation ("SPFC"), Imperial Business Credit, Inc. ("IBC") and Imperial
Credit Advisors, Inc. ("ICAI"). The majority-owned consolidated subsidiaries
include Franchise Mortgage Acceptance Company, LLC ("FMAC"), and ICI Funding
Corporation ("ICIFC"). These minority interests are shown in other liabilities
on the consolidated balance sheet. FMAC is owned two-thirds by the Company and
one-third by the President of FMAC. The Company owns 100% of the voting common
of ICIFC which entitles it to a 1% economic interest. Imperial Credit Mortgage
Holdings, Inc. ("ICMH"), an unconsolidated affiliated company, owns all of the
ICIFC non-voting preferred stock which entitles it to a 99% economic interest.
All material intercompany balances and transactions have been eliminated.
STRATEGIC DIVESTITURES
In 1995, the Company began to diversify away from the conforming residential
mortgage lending business, the Company's traditional focus, and into other
select lending businesses. The Company expanded several existing businesses
and commenced several new businesses, including non-conforming residential
mortgage banking, commercial mortgage banking, business lending and consumer
lending. The Company's loans and leases by sector consist primarily of the
following: non-conforming residential mortgage banking; commercial mortgage
banking--franchise loans, income producing loans, and manufactured housing
community loans; business lending--equipment leasing and asset-based
financing; consumer loans--sub-prime auto loans and Title I home improvement
loans. The Company solicits loans and leases from brokers on a wholesale and
portfolio basis directly from borrowers. The majority of the Company's loans
and leases, other than those held by SPTL for investment, are sold in
secondary markets through securitizations and whole loan sales.
During the fourth quarter of 1995, the Company sold its mortgage conduit
operations and SPTL's warehouse lending operations to ICMH, a newly formed
Maryland corporation that subsequently engaged in an initial public offering
of its common stock. In exchange for these assets, the Company received
approximately 11.8% of the capital stock of ICMH. This investment is included
in securities available for sale on the consolidated balance sheet.
Additionally, ICAI entered into a management agreement with ICMH pursuant to
which it advises upon the day-to-day operations of ICMH and for which it is
paid a management fee.
During the first quarter of 1996 the Company sold substantially all of its
conforming residential mortgage loan servicing rights and the majority of its
wholesale mortgage origination offices related to its conforming residential
mortgage lending business. The Company's wholesale offices in Florida,
Colorado, Washington and Oregon have been converted to SPFC offices. (See Note
29). Additionally, the Company has undertaken to transfer all servicing rights
related to its residential non-conforming mortgage banking business to Advanta
Corporation. The Company intends to continue servicing all loans and leases
originated by its equipment leasing and franchise mortgage lending businesses
as well as all loans held for investment at SPTL.
F-7
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
STRATEGIC FOCUSES AND ACQUISITIONS
The Company, through SPFC, has refocused its residential mortgage operations
on the origination, purchase and sale of non-conforming residential mortgage
loans secured primarily by one-to-four family residences. The majority of
SPFC's loans are made to owners of single family residences who use a portion
of the loan proceeds for such purposes as debt consolidation, financing of
home improvements and educational expenditures, among others.
In May 1995, the Company substantially expanded its existing equipment
leasing business, IBC, through the acquisition of First Concord Acceptance
Corporation ("FCAC"). IBC conducts its business equipment leasing operations
from its headquarters in Rancho Bernardo, California and its operations center
in Denver, Colorado.
In June 1995, the Company established FMAC which acquired the Franchise
Mortgage Acceptance Company division of Greenwich Financial Capital Products,
Inc. FMAC is owned two-thirds by the Company and one-third by the President of
FMAC. Through FMAC, the Company originates, securitizes and services franchise
mortgage loans, primarily to nationally recognized restaurant franchisees.
FMAC's headquarters and operations center are located in Greenwich,
Connecticut.
In September 1995, the Company acquired CoastFed Business Credit Corporation
("CBCC") from Coast Federal Bank, Federal Savings Bank. CBCC, now a division
of SPTL operating under the name Coast Business Credit Corporation ("CBC"),
provides asset-based lending to middle market companies located mainly in
California. CBC's predecessor corporation began operations in 1955 under the
management of its current chief executive officer and it is headquartered in
Los Angeles, California.
2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the dates of the
balance sheets and revenues and expenses for the periods. Actual results could
differ significantly from those estimates.
Prior years' consolidated financial statements have been reclassified to
conform to the 1995 presentation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market.
In order for the Company to maintain an orderly market for the loans it
originates, the Company sells mortgage-backed securities through forward
delivery contracts. Such forward delivery contracts that have not been
completed at the end of an accounting period are used in determining the
market value of unsold loans.
The Company also enters into commitments with institutional investors. These
commitments may provide either optional or mandatory delivery of closed
mortgages. The fees paid for commitments are recognized over the term of the
commitment or as the commitment is filled, whichever occurs sooner.
Loans which are ineligible for sale, generally 90 days past due are
transferred to loans held for investment at the lower of cost or market on the
day of transfer.
F-8
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Loans Held for Investment
Loans held for investment are stated at the principal outstanding. Interest
income is recorded on the accrual basis in accordance with the terms of the
receivables, except that accruals are discontinued when the payment of
principal or interest is 90 or more days past due. Future collections of
interest are included in interest income or applied to the loan balance based
on an assessment of the likelihood that the loan will be repaid.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan losses. In determining the adequacy of
the allowance for loan losses, management considers such factors as historical
loan loss experience, underlying collateral values, known problem loans,
evaluations made by bank regulatory authorities, assessment of economic
conditions and other appropriate data to identify the risks in the loan
portfolio. Loans deemed by management to be uncollectible are charged to the
allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense
and credited to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the loan
portfolio.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), as amended in October 1994
by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures", was
adopted January 1, 1995. These standards require that the value of impaired
loans be established by discounting the expected future cash flows at the
loan's effective interest rate, or by the current observable market price or
the fair value of its collateral. The Company considers a loan to be impaired
when, based upon current information and events, it believes it will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. Many factors are considered in the determination of impairment. The
measurement of collateral dependent impaired loans is based on the fair value
of the loan's collateral. Non-collateral dependent loans are valued based on a
present value calculation of expected future cash flows, discounted at the
loan's effective rate. Cash receipts on impaired loans not performing
according to contractual terms are generally used to reduce the carrying value
of the loan, unless the Company believes it will recover the remaining
principal balance of the loan. Impairment losses are included in the allowance
for loan losses through a charge to the provision for loan losses. Adjustments
to impairment losses due to changes in the fair value of collateral of
impaired loans are included in the provision for loan losses. Upon disposition
of an impaired loan, loss of principal, if any, is recorded through a charge-
off to the allowance for loan losses.
In originating or acquiring loans, the Company evaluates the borrower's
credit worthiness and debt ratios, the property appraisal and the loan-to-
value ratio. The maximum amount of credit risk related to the Company's
investment in loans is represented by the outstanding principal balance of the
loans plus accrued interest.
Capitalized Excess Servicing Fees Receivable
The Company has created capitalized excess servicing fees receivable as a
result of the sale of loans and to a lesser extent leases into various trust
vehicles. These various trust vehicles, primarily consisting of real estate
mortgage investment conduits, are majority owned by an independent third party
who has made a substantial capital investment and has substantial risks and
rewards of ownership of the assets of the trust; therefore, these trust
vehicles are not consolidated with the Company. Capitalized excess servicing
fees receivable on the sale of loans and leases are determined by computing
the present value of the excess of the weighted average coupon on the loans
and leases sold (ranging from 9.0% to 13.3%) over the sum of: (1) the coupon
in the pass through certificates (ranging from 6.2% to 7.4%), (2) a base
servicing fee paid to the loan or lease servicer (ranging from 0.40% to
0.50%), (3) expected losses to be incurred on the portfolio of loans or leases
sold (ranging from 0.25%
F-9
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
to 0.50% over the life of the loan), and considering (4) prepayment
assumptions. Prepayment assumptions are based on recent evaluations of the
actual prepayments of the Company's servicing portfolio or on market
prepayment rates on new portfolios and consideration of the current interest
rate environment and its potential impact on prepayment rates. The cash flows
expected to be received by the Company, not considering the expected losses,
are discounted at an interest rate that the Company believes an unaffiliated
third-party purchaser would require as a rate of return on such a financial
instrument. Expected losses are discounted using a rate equivalent to the
risk-free rate for securities with a duration similar to that estimated for
the underlying loans and leases sold. The combined result is an effective
overall rate of approximately 15%. The excess servicing cash flows are
available to the Company to the extent that there is no impairment of the
credit enhancements established at the time the loans and leases are sold.
Such credit enhancements are classified as retained interest in loan and lease
securitization on the consolidated balance sheets and represent the amount of
overcollateralization of the certificates. Capitalized excess servicing fees
receivable are amortized using the interest method. To the extent that actual
future performance results are different from the excess cash flows the
Company estimated, the Company's capitalized excess servicing fees receivable
will be adjusted quarterly with corresponding adjustments made to income in
that period. The carrying value of the Company's capitalized excess servicing
fees receivable was subject to a relative fair value allocation.
Purchased and Originated Servicing Rights
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends
Statement of Financial Accounting Standards No. 65, "Accounting for Certain
Mortgage Banking Activities", to require that a mortgage banking enterprise
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. The Statement applies
prospectively in fiscal years beginning after December 15, 1995 although
earlier application is encouraged. The Company adopted the provisions of SFAS
122 for the year ended December 31, 1995. The adoption of SFAS 122 resulted in
an increase in the Company's revenues and net income of $6.2 million, and $3.6
million, respectively, in 1995.
Purchased servicing represents the cost of acquiring the right to service
mortgage loans. Originated servicing rights are recorded when mortgage loans
are originated and subsequently sold or securitized with the servicing rights
retained. The total cost of the mortgage loans is allocated to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based
on their relative fair values. The cost relating to purchased and originated
servicing is capitalized and amortized in proportion to, and over the period
of, estimated future net servicing income.
In accordance with SFAS 122, the Company assesses the impairment of the
purchased and originated servicing portfolio based on the fair value of those
rights on a stratum-by-stratum basis with any impairment recognized through a
valuation allowance for each impaired stratum. For the purpose of measuring
impairment, the Company has stratified the capitalized mortgage servicing
rights using the following risk characteristics: loan program type and
interest rate traunch in 100 basis point increments.
In order to determine the fair value of the servicing rights, the Company
uses market prices under comparable servicing sales contracts, when available,
or alternatively, it uses a valuation model that calculates the present value
of future cash flows. Assumptions used in the valuation model include market
discount rates and anticipated prepayment speeds. The prepayment speeds are
determined from market sources for fixed rate mortgages with similar coupons
and prepayment reports for comparable variable rate loans. In addition, the
Company uses market comparables for estimates of the cost of servicing per
loan, float value, an inflation rate,
F-10
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
ancillary income per loan and default rates. Amounts capitalized are recorded
at cost, net of accumulated amortization and valuation allowance.
Sales of Servicing Rights
The Company recognizes gain or loss on the sale of servicing rights when the
sales contract has been executed and the risks and rewards of ownership are
determined to have passed to the purchasing party.
Sales of Loans
The Company divides gains or losses on sales of loans into two categories:
cash gains and capitalized excess servicing fees receivable on mortgage loans
sold. Cash gain or loss is the difference between the Company's carrying value
net of commitment fees paid for a mortgage loan and the proceeds from the sale
of a loan. If the mortgage loans are sold with servicing released to the
purchaser of the loans, the value of the servicing will be reflected in the
cash gain on the sale of such loans. If the loans are sold with servicing
retained by the Company, the Company will recognize the value of the service
contract as monthly fees are collected from borrowers and will recognize as a
gain the present value of future excess service fees to be received less a
normal service fee. Present value computations utilize estimated interest
rates, prepayment, default, and loss assumptions that management believes
market participants would use for similar instruments.
The Company recognizes gain or loss on the sale of loans when the sales
transaction settles and the risks and rewards of ownership are determined to
have passed to the purchasing party.
Loan Origination Income
Origination fees received on mortgage loans held for sale, net of direct
costs related to the origination of the loans, are deferred until the time of
sale and are included in the computation of the gain or loss on the sale of
the related loans. Commitment fee income is deferred until each mortgage loan
is funded and sold, and recorded as a part of the gain on sale of the loan in
the same percentage as such mortgage loan is to the total commitment. Any
remaining deferred commitment fee income is recognized at expiration of the
commitment. When exercise of such commitment is deemed remote, the fee is
recognized over the remaining commitment period.
Origination fees on loans held for investment, net of direct costs related
to the origination of the loans, are deferred and amortized over the
contractual lives of the related loans using the interest method.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (3
to 7 years). Leasehold improvements are amortized over the terms of their
related leases or the estimated useful lives of improvements, whichever is
shorter.
Interest Bearing Deposits
Interest bearing deposits consist of time certificates, investment in
federal funds and money market accounts. Amounts are carried at cost.
F-11
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Other Real Estate Owned
Other real estate owned ("OREO") are transferred from the loan portfolio at
fair value. The excess carrying value, if any, of the loan over the estimated
fair value less estimated selling costs is charged to the allowance for loan
losses. Any subsequent impairments in value are recognized through a valuation
allowance. Subsequent increases in fair value are credited to income and
reduce the valuation allowance. Subsequent increases in the fair value of an
asset are only recognized to the extent that decreases in fair value were
recorded through the valuation allowance. Gains and losses from sales of OREO,
provisions for losses on OREO, and net operating expenses of OREO are recorded
in operations and included in the caption "net expenses of other real estate
owned" in the accompanying consolidated statements of income.
Income Taxes
The Company files a combined California franchise tax return and a
consolidated Federal income tax return with its subsidiaries.
The Company accounts for income taxes using the asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. 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.
Goodwill
Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the asset.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable intangibles
(including goodwill) to be held and used by an entity by reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, the entity should estimate the future cash flows expected
to result from the use of the asset and its eventual disposition. If the sum
of the expected future cash flows is less than the carrying amount of the
asset, an impairment analysis is required and the long-lived asset or
identifiable intangible would be reported at the lower of the carrying amount
or fair value less cost to sell. The Statement is effective for financial
statements for fiscal years beginning after December 15, 1995. The adoption of
SFAS 121 is not expected to have a material effect on the Company's financial
condition or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). SFAS 123
applies to all transactions in which the Company acquires goods or services by
issuing equity instruments or by incurring liabilities where the payment
amounts are based on the Company's common stock price, except for the Employee
Stock Ownership Plan. A new method of accounting for stock based compensation
arrangements with employees is established by SFAS 123. The new
F-12
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
method is based on the fair value method rather than the intrinsic value
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). SFAS 123 does not require companies to adopt the new
fair value method for purposes of preparing their basic financial statements.
Entities are allowed to either continue to use the APB 25 method or adopt the
fair value method set forth in SFAS 123. Companies that do not adopt the new
fair value method in SFAS 123 for purposes of preparing their basic financial
statements are required to include pro-forma disclosures in the notes to the
basic financial statements. The pro-forma disclosures should include the
impact of the fair value method on net income and income per share as if SFAS
123 had been adopted. SFAS 123 may be adopted for fiscal years beginning after
December 31, 1995. The impact on the Company of adopting SFAS 123 would not be
material. Management has decided not to adopt the fair value standards set
forth in SFAS 123 for purposes of preparing its basic financial statements.
4. ACQUISITIONS
Coast Business Credit
On September 30, 1995, the Company completed the acquisition of CBCC for a
purchase price of $150 million. The acquisition was recorded using the
purchase method of accounting. Under this method of accounting the purchase
price was allocated to the respective assets acquired with a fair value of
$139 million and liabilities assumed with a fair value of $5 million at the
date of the purchase transaction. The excess of the purchase price over the
fair value of the net assets acquired has been recorded as goodwill of
approximately $16 million.
The unaudited consolidated information below indicates on a proforma basis
the results of operations of CBCC as if this significant subsidiary had been
acquired by the Company as of January 1, 1995 and 1994.
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1995 1994
------- -------
(DOLLAR AMOUNTS
IN THOUSANDS,
EXCEPT
PER SHARE DATA)
<S> <C> <C>
Total revenue.................................................. $93,182 $82,894
Net income..................................................... 17,687 11,864
Fully diluted earnings per share............................... $ 1.01 $ 0.71
</TABLE>
FMAC
On June 30, 1995, the Company completed the acquisition of certain net
assets of FMAC for a net purchase price of $7.8 million which includes $3.8
million in contingent consideration for loans in the pipeline at the time of
acquisition and additional fundings up to a maximum principal amount of such
loans equal to $250,000,000. The acquisition was recorded using the purchase
method of accounting. Under this method of accounting the purchase price was
allocated to the respective assets acquired with a fair value of $3.8 million
at the date of the purchase transaction. The excess of the purchase price over
the fair value of the net assets acquired has been recorded as goodwill of
approximately $4 million.
Imperial Business Credit, Inc.
On May 31, 1995, the Company completed the acquisition of net assets of FCAC
for a purchase price of approximately $21 million. The acquisition was
recorded using the purchase method of accounting. Under this method of
accounting the purchase price was allocated to the respective assets acquired
with a fair value of $41 million and liabilities assumed with a fair value of
$20 million at the date of the purchase transaction.
F-13
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
------------ ------------ -----------
<S> <C> <C> <C>
Cash paid during the period for:
Interest............................... $ 93,222,732 $ 51,843,962 $28,605,726
Income taxes........................... 8,282,813 4,016,389 8,313,972
Significant non-cash activities:
Loans transferred from held for
investment to held for sale........... 505,037,021 -- --
Loans transferred to OREO.............. 12,301,525 3,431,236 5,345,984
Loans transferred from held for sale to
held for investment................... 83,397,590 787,902,125 31,592,459
Loans to facilitate the sale of OREO... 1,315,250 2,357,425 1,287,050
Retained interest in loan and lease
securitizations....................... 14,002,108 238,990 --
Unrealized gain on securities available
for sale.............................. 5,442,750 -- --
</TABLE>
6. INVESTMENT IN FHLB STOCK
As a member of the FHLB system, the Company's wholly owned subsidiary, SPTL,
is required to maintain an investment in the capital stock of the FHLB in an
amount at least equal to the greater of 1% of residential mortgage assets, or
5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock
and loans are pledged to secure FHLB advances.
7. LOANS HELD FOR SALE
Loans held for sale consisted of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
-------------- ------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4................................ $1,083,037,625 $263,807,378
Multi-family..................................... 171,199,161 --
-------------- ------------
1,254,236,786 263,807,378
Leases............................................. 17,787,116 --
Commercial loans................................... 69,786,008 --
-------------- ------------
$1,341,809,910 $263,807,378
============== ============
</TABLE>
F-14
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
8. LOANS HELD FOR INVESTMENT, NET
Loans held for investment consisted of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
------------ --------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4............................... $228,721,251 $ 897,494,220
Multi-family.................................... 7,027,788 82,004,179
Commercial...................................... 133,189,268 30,287,088
------------ --------------
368,938,307 1,009,785,487
Leases............................................ 7,296,735 23,667,103
Installment loans................................. 1,900,382 4,289,749
Commercial loans.................................. 311,121,613 5,881,461
------------ --------------
689,257,037 1,043,623,800
Unearned income................................... (5,216,767) (5,899,735)
Deferred loan fees................................ (1,540,353) (1,114,493)
------------ --------------
682,499,917 1,036,609,572
Allowance for loan losses..................... (13,728,709) (7,053,901)
------------ --------------
$668,771,208 $1,029,555,671
============ ==============
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real property
in California, leases secured by equipment, asset based loans to middle market
companies mainly in California, and loans to experienced franchisees of
nationally recognized restaurant concepts. As a result, the loan portfolio has
a high concentration in the same geographic region. Although the Company has a
diversified portfolio, a substantial portion of its debtor's ability to honor
their contracts is dependent upon the economy of California.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of year.............. $ 7,053,901 $ 3,254,748 $ 1,994,957
Provision for losses charged to ex-
pense.................................. 5,450,000 5,150,000 2,350,000
Business acquisitions and bulk loan pur-
chases................................. 4,320,064 -- --
Loans charged off....................... (3,105,943) (1,435,960) (1,124,236)
Recoveries on loans previously charged
off.................................... 10,687 85,113 34,027
----------- ----------- -----------
Net charge-offs......................... (3,095,256) (1,350,847) (1,090,209)
----------- ----------- -----------
Balance, end of period.................. $13,728,709 $ 7,053,901 $ 3,254,748
=========== =========== ===========
</TABLE>
As of December 31, 1995 and 1994 and 1993, non-accrual loans totaled
$30,987,791, $13,105,226, and $4,938,164 respectively. Interest income foregone
on nonaccrual loans was $491,658 for the year ended December 31, 1995.
F-15
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
At December 31, 1995, the recorded investment in loans which have been
deemed impaired in accordance with SFAS 114 totaled $31.9 million, of which
$31.0 million were on non accrual status and $0.9 million were classified as
restructured loans. Restructured loans meet the definition of impairment under
SFAS 114. Impaired loans totaling $31.9 million required a specific allowance
for potential losses. The total specific allowance for potential losses
related to such loans was $5.6 million. Impaired loans averaged $21.1 million
during 1995. During 1995, total interest income recognized on the impaired
loans during 1995 was not material.
9. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE
Changes in capitalized excess servicing fees receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994 1993
----------- ---------- ---------
<S> <C> <C> <C>
Beginning Balance.......................... $ 4,319,393 $ 529,470 $ 982,986
Present value of excess servicing fees on
loans sold................................ 42,352,733 4,260,699 38,256
Amortization............................... (2,640,937) (470,776) (491,772)
----------- ---------- ---------
Ending balance............................. $44,031,189 $4,319,393 $ 529,470
=========== ========== =========
</TABLE>
At December 31, 1995 capitalized excess servicing fees receivables are
recorded net of an allowance for credit losses of $8,749,988.
The servicing portfolio associated with these capitalized excess servicing
rights at December 31, 1995 and 1994 was $664.6 million and $45.5 million,
respectively.
10. PURCHASED AND ORIGINATED SERVICING RIGHTS
Changes in purchased and originated servicing rights were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Beginning Balance....................... $16,745,522 $ 9,965,636 $ 698,878
Additions............................... 7,339,799 8,781,244 12,522,886
Increase as a result of the FMAC acqui-
sition................................. 3,804,855 -- --
Bulk purchase of servicing.............. 757,208 5,983,282 --
Sales of servicing rights............... (6,232,816) (4,808,380) (2,425,240)
Amortization--prepayments............... (1,175,743) (313,284) (182,666)
Amortization--scheduled................. (2,810,305) (2,862,976) (648,222)
----------- ----------- -----------
Ending balance.......................... $18,428,520 $16,745,522 $ 9,965,636
=========== =========== ===========
</TABLE>
The servicing portfolio associated with purchased and originated servicing
rights at December 31, 1995 and 1994 was $2.6 billion and $2.7 billion,
respectively.
F-16
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
11. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Premises and equipment................................ $17,295,468 $15,795,636
Leasehold improvements................................ 705,673 406,580
----------- -----------
18,001,141 16,202,216
Less accumulated depreciation and amortization........ (6,632,137) (3,827,527)
----------- -----------
$11,369,004 $12,374,689
=========== ===========
</TABLE>
12. DEPOSITS
Deposits of $100,000 and over totaled approximately $755.5 million, $382.3
million, and $372.2 million at December 31, 1995, 1994, and 1993,
respectively. Interest expense associated with certificates of deposit of
$100,000 and over was approximately $15.4 million, $16.8 million, and $6.8
million for the years ended December 31, 1995, 1994, and 1993, respectively.
13. BORROWINGS FROM IMPERIAL BANK
In November 1995, the Company renewed a $10 million line of credit with
Imperial Bank. At December 31, 1995, $5 million was outstanding which accrues
interest at the prime lending rate.
14. BORROWINGS FROM FEDERAL HOME LOAN BANK
SPTL is approved as a member of the Federal Home Loan Bank ("FHLB") to
borrow up to a maximum of 35% of the assets of SPTL. These borrowings must be
fully collateralized by qualifying mortgage loans and may be in the form of
overnight funds or term borrowings at SPTL's option. At December 31, 1995,
approximately $275 million of loans were pledged as collateral for FHLB
borrowings. At December 31, 1995, $190.0 million was outstanding bearing an
average interest rate of 6.10%. During 1995, SPTL had an average outstanding
balance of $292.0 million and the highest outstanding balance at any month end
was $435.0 million. At December 31, 1994, $295.0 million was outstanding
bearing an average interest rate of 6.19%. During 1994, SPTL had an average
outstanding balance of $182.4 million at an average rate of 5.76% and the
highest outstanding balance at any month end was $360.0 million.
15. OTHER BORROWINGS
Other borrowings primarily consist of revolving warehouse lines of credit to
fund the Company's and its subsidiaries lending activities. At December 31,
1995, approximately $909 million of loans were pledged as collateral for other
borrowings. These lines of credit are short term and management believes these
lines will be renewed in the normal course of business. Certain covenants
exist in regards to these lines of credit of which the Company was in
compliance with at December 31, 1995.
F-17
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
ICII and its subsidiaries has various revolving warehouse lines of credit
available at December 31, 1995, as follows:
<TABLE>
<CAPTION>
INTEREST
RATE COMMITMENT OUTSTANDING
-------- ---------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
DLJ (ICII)................................... 6.38% $ 400,000 $173,056
DLJ (SPFC)................................... 6.74% 50,000 41,182
PaineWebber (ICII)........................... 6.40% 200,000 30,402
Banco Santander (FMAC)....................... 7.94% 25,000 22,668
Lehman Brothers (SPFC)....................... 5.48% 200,000 54,949
Imperial Warehouse Lending Group (ICIFC)..... 8.50% 600,000 550,290
Warehouse Lending Corporation of America
(ICII)...................................... 8.19% 20,000 3,268
---------- --------
$1,495,000 $875,815
========== ========
</TABLE>
16. BONDS
In December 1995, the Company, through a special purpose entity (SPE) issued
pass through certificates (the Bonds) secured by $101 million of franchise
mortgage loans to various investors. The debentures consist of three separate
classes, Class A, Class B and Class C, with principal balances at December 31,
1995 of approximately $92.6 million, $4.2 million and $4.2 million,
respectively. The Class C bonds are subordinate to Class B and both Class B
and C are subordinate to Class A. The Bonds have a weighted average loan rate
of 9.63%, a pass through rate of 8.59%, and stated maturity of 13 years. The
premium associated with the Bonds of $11 million is being amortized as an
adjustment to interest expense over the anticipated life of the Bonds. Due to
the Company's retained interest in the SPE and the disproportionate payments
on the pass through certificates, the Company accounted for this transaction
as a financing.
17. SENIOR NOTES
<TABLE>
<CAPTION>
BALANCE AT DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Senior notes.......................................... $81,500,000 $81,500,000
Unamortized discount.................................. (1,027,640) (1,156,095)
----------- -----------
Net balance, senior notes............................. $80,472,360 $80,343,905
=========== ===========
</TABLE>
In January 1994, the Company issued $90,000,000 of Senior Notes with a
stated interest rate of 9.75% which mature on January 15, 2004. In October
1994, the Company repurchased $8,500,000 of the Senior Notes, recognizing a
pre-tax gain of $1,538,349, and recording an extraordinary gain, net of taxes
of $919,286. At December 31, 1995, $81,500,000 of the Senior Notes were
outstanding and the interest rate on the Senior Notes was 9.75%. The Senior
Notes may be redeemed after January 15, 1999 at the option of the Company
until maturity at a declining premium, plus accrued interest. The Senior Notes
are unsecured and rank pari passu with all other senior unsecured indebtedness
of the Company, but are effectively subordinated to the liabilities of
Southern Pacific Thrift and Loan Association, the Company's wholly-owned
subsidiary. The Trust Indenture (the Indenture) for the Senior Notes includes
provisions which limit the ability of the Company to incur additional
indebtedness or issue certain stock of the Company, to make certain
investments, engage in certain transactions with affiliates, create
restrictions on the ability of subsidiaries to pay dividends or certain other
distributions, create liens and encumbrances, or allow its subsidiaries to
issue certain classes of stock. As of December 31, 1995, the Company was not
in compliance with certain debt covenants related to the Senior Notes.
Subsequent to December 31, 1995, these defaults were corrected.
F-18
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Total interest expense on the Senior Notes for the years ended December 31,
1995 and 1994 was $8,380,115 and $8,338,830 respectively.
18. PREFERRED AND COMMON STOCK
The Company has authorized 8,000,000 shares of Preferred Stock. The Board
has the authority to issue the preferred stock in one or more series, and to
fix the designations, rights, preferences, privileges, qualifications and
restrictions, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund
terms, any or all of which may be greater than the rights of the Common Stock.
On October 24, 1995, the Company paid a 3-for-2 stock split to shareholders
of record as of October 10, 1995.
On December 30, 1993, the Company paid a stock dividend to shareholders of
record as of December 20, 1993. One new share of Common Stock was issued for
each, 10 shares currently held by shareholders.
Per Share Information:
Primary and fully diluted income per common share are computed based on the
weighted average number of shares outstanding during the year plus common
stock equivalents deemed to be dilutive. The number of shares used in the
computations are given retroactive effect for stock dividends and splits for
all periods presented. The weighted average number of shares including common
stock equivalents was 17,229,134 in 1995, 16,790,567 in 1994, and 16,939,864
in 1993 for primary income per share, and 17,560,831 in 1995, 16,791,015 in
1994, and 16,940,147 in 1993 for fully diluted income per share. In addition
to the stock dividends described above, the weighted average number of shares
outstanding for primary and fully diluted earnings per share have been
adjusted to reflect the Company's 1-for-10 stock dividend paid on February 12,
1996.
19. RESTRICTIONS ON AVAILABILITY OF FUNDS FROM SPTL
Under the California industrial loan law, a thrift and loan may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed a thrift and loan's retained earnings, (ii)
any payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio and (iii) after giving effect to
the distribution, either (y) the sum of a thrift and loan's assets (net of
goodwill, capitalized research and development expenses and deferred charges)
would be not less than 125% of its liabilities (net of deferred taxes,
deferred income and other deferred credits), or (z) current assets would be
not less than current liabilities (except that if a thrift and loan's average
earnings before taxes for the last two fiscal years had been less than average
interest expense, current assets must be not less than 125% of current
liabilities).
Subject to the above limitations, and according to SPTL's by-laws, at
December 31, 1995, all of SPTL's capital and surplus in excess of $80.5
million is available for the payment of dividends.
Additionally, SPTL 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 California Commissioner of Corporations. In addition, SPTL may not make
any loan to, or hold an 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 an affiliate that is listed on a national securities exchange.
F-19
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The California Department of Corporations and the FDIC recently completed a
joint examination of SPTL. SPTL has not yet received from the Department of
Corporations or the FDIC the formal reports of their examinations. However,
based on the exit interviews conducted by such agencies with the Board of
Directors of SPTL, SPTL expects that the reports of examination will note
certain violations of applicable law and regulations, and that the agencies
will require SPTL to take remedial action to correct any violations which have
not previously been corrected. In addition, after the dates of such
examinations and exit interviews, it has come to management's attention that
certain transactions entered into in early 1996 between SPTL on the one hand,
and ICII and certain of its affiliates on the other hand, involving
approximately $19 million in the aggregate, are not in accord with applicable
California law governing transactions with affiliates. SPTL is in the process
of modifying its arrangements with affiliates to bring them into compliance
with applicable laws and regulations. Certain of such modifications may
require approval by the Commissioner. SPTL is unable at this time to determine
whether the Commissioner or the FDIC may consider commencing enforcement
action against SPTL, ICII or its affiliates, or their respective officers,
directors or employees, although the Company believes any such action would
not be warranted under the circumstances. Enforcement could include, among
other things, injunctive relief, cease and desist orders, criminal or civil
penalties, removal from office or the revocation of SPTL's charter. Any such
enforcement action could have a material adverse effect on the Company.
20. INCOME TAXES
The Company's income taxes for the years ended December 31, 1995, 1994 and
1993 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal.................................. $ 7,803,474 $1,483,225 $ 7,399,903
State.................................... 2,451,831 524,049 2,578,451
----------- ---------- -----------
Total current.......................... 10,255,305 2,007,274 9,978,354
----------- ---------- -----------
Deferred:
Federal.................................. 1,846,423 2,079,484 2,517,724
State.................................... 273,818 598,436 558,376
----------- ---------- -----------
Total deferred......................... 2,120,241 2,677,920 3,076,100
----------- ---------- -----------
Taxes charged to shareholders' equity...... (2,231,527) -- --
----------- ---------- -----------
Taxes on income before extraordinary item.. 10,144,019 4,685,194 13,054,454
Current taxes--extraordinary item.......... -- 619,063 --
----------- ---------- -----------
Income taxes............................... $10,144,019 $5,304,257 $13,054,454
=========== ========== ===========
</TABLE>
The Company's current income taxes payable totaling approximately $5,480,954
and $3,477,607 are reflected in other liabilities in the accompanying
consolidated balance sheet at December 31, 1995 and 1994, respectively.
F-20
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Deferred income taxes arise from differences on 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
at December 31, 1995 and 1994 which is included in other liabilities on the
consolidated balance sheets.
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax receivables:
Allowance for loan losses........................ $ 5,294,777 $ 3,200,770
Unrealized gain on loans and securities.......... 3,871,250 --
Allowance for operational losses................. -- 844,300
State taxes...................................... -- 764,447
Executive stock options.......................... 737,819 592,972
Other............................................ 299,711 722,556
------------ ------------
Total.......................................... 10,203,557 6,125,045
------------ ------------
Valuation allowance.............................. -- --
------------ ------------
Deferred tax receivable, net of valuation allow-
ance............................................ 10,203,557 6,125,045
------------ ------------
Deferred tax liabilities:
Purchased and originated servicing rights........ (5,808,906) (4,454,568)
Gain on sale of servicing........................ (1,026,836) (4,741,401)
Excess servicing gains .......................... (5,068,998) --
Leases........................................... (2,508,865) --
Deferred loan fees............................... (1,902,641) (1,481,071)
Other............................................ (1,368,057) (808,510)
------------ ------------
Total.......................................... (17,684,303) (11,485,550)
------------ ------------
Net deferred tax liability......................... $ (7,480,746) $ (5,360,505)
============ ============
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks in making this
assessment. Based upon the schedule of reversals and available tax carrybacks,
management believes it is more likely than not the Company will realize the
benefits of the deferred tax assets.
A reconciliation of the income tax provision and the amount computed by
applying the statutory Federal corporate income tax rate to income before
income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate........................ 35.0% 35.0% 35.0%
Increase (reduction) in rate resulting from:
State income taxes, net of Federal benefit.................. 7.3 7.2 7.2
Other, net.................................................. (0.3) (0.7) (0.7)
---- ---- ----
Effective income tax rate..................................... 42.0% 41.5% 41.5%
==== ==== ====
</TABLE>
F-21
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
21. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
On July 1, 1993, the Company terminated its participation in Imperial
Bancorp's 401(k) and profit sharing plans, establishing its own 401(k) plan.
On September 30, 1993, Imperial Bancorp transferred all plan assets to the
Company.
Under the Company's 401(k) plan, employees may elect to enroll on the 1st of
any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $208,991, $218,984, and $158,173 for the years ended
December 31, 1995, 1994 and 1993, respectively.
An additional Company contribution may be made, at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company matching funds would be allocated as a
50% match of employee contributions, on the first 4% of the employee's
deferrals. Discretionary contributions of $200,000 were charged to operations
in each of the years ending December 31, 1995 and 1994, and 1993.
Company matching contributions are made as of December 31st each year.
Stock Option Plan
In December 1991, the Company initiated a nonqualified stock option plan for
employees, officers and directors of the Company. A total of 1,042,106 shares
of the Company's common stock have been reserved for issuance under this plan.
The plan expires in 2002. The exercise price of all options granted under the
option plan are equal to the fair value of such shares on the date of grant.
Options vest at 20% per year beginning one year after the grant date.
A summary of changes in outstanding stock options follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Options outstanding, beginning of year............. 799,105 560,250 468,930
Options granted.................................... 179,250 379,619 174,900
Options exercised.................................. (147,019) (20,843) (12,157)
Options canceled................................... (87,070) (119,921) (71,423)
-------- -------- -------
Options outstanding, end of year................... 744,266 799,105 560,250
======== ======== =======
</TABLE>
There were 117,821 options available for future grants at December 31, 1995.
F-22
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Information as to stock option activity and prices of shares is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ------------
<S> <C> <C>
Shares under option at:
December 31, 1995..................................... 744,266 $4.61-$18.83
December 31, 1994..................................... 799,105 $ 4.61-$7.33
December 31, 1993..................................... 560,250 $ 4.61-$6.67
Options exercised during the year:
December 31, 1995..................................... 147,019 $ 4.61-$7.33
December 31, 1994..................................... 20,843 $ 4.61
December 31, 1993..................................... 12,157 $ 4.61
Options exercisable at:
December 31, 1995..................................... 212,184 $ 4.61-$7.33
December 31, 1994..................................... 172,065 $ 4.61-$6.67
December 31, 1993..................................... 92,058 $ 4.61-$6.67
</TABLE>
The stock option information presented in the above tables reflects the 3-
for-2 stock split paid in 1995, the 1-for-10 stock dividend paid in 1993, and
the 1-for-19 stock dividend paid in 1992.
22. EXECUTIVE COMPENSATION
Employment Agreements
On July 1, 1994, the Company entered into three year employment contracts
with three senior officers which provide for, in the aggregate, minimum annual
compensation in the aggregate of $800,000, subject to adjustment for
inflation, plus an annual bonus of up to 3.5% of the Company's pre tax profits
in excess of $10 million. The total compensation of the three senior officers
is limited in the aggregate to $2,350,000 annually. These amendments canceled
all previous employment agreements. Under these employment agreements, the
officers are entitled to receive bonuses approved by the Company's Board of
Directors based on performance and the attainment of defined Company goals.
Stock Options
On January 1, 1992, the Company granted to three senior officers of the
Company, options to purchase a total of 1,042,106 shares adjusted for stock
dividends of the Company's Common Stock. The exercise price of these options
is $1.95 per share of common stock for one-half of the options, with the other
half exercisable at $3.08 per share. These options became exercisable in
September 1995 (vesting was accelerated from January 1, 1997), they expire on
December 1, 2001 and are not covered by the Company's stock option plan.
Compensation expense relating to these options has been recorded in the
Company's consolidated financial statements over a four year period ending
December 31, 1995 for an amount representing the difference between the
exercise price of the options and the market price of the Company's stock at
the grant date. The aggregate amount of compensation expense recognized on
these stock options since their grant date is $2,178,000. The amount of
compensation expense recorded for the years ended December 31, 1995, 1994, and
1993 related to the stock options was $871,200, $435,600, and $435,600,
respectively.
F-23
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
23. COMMITMENTS AND CONTINGENCIES
Loan Servicing
As of December 31, 1995 and 1994 the Company was servicing loans for others
totaling approximately $4.6 billion and $3.7 billion, respectively. Properties
securing the mortgage loans in the Company's servicing portfolio are primarily
located in California. As of December 31, 1995, 60.3%, 4.5% and 4.6% of the
Company's servicing portfolio were loans from California, Washington and New
Jersey, respectively. The majority of conforming conventional loans serviced
by the Company are securitized through Federal National Mortgage Association
(FNMA) or Federal Home Loan Mortgage Corporation (FHLMC) programs on a
nonrecourse basis, whereby foreclosure losses are generally the responsibility
of FNMA or FHLMC and not the Company.
Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $36,048,201 and $38,793,463 at December 31, 1995 and 1994,
respectively. These funds are segregated in special bank accounts and are held
as deposits at SPTL.
Servicing rights on approximately $3.1 billion of mortgage loans were sold
subsequent to December 31, 1995. See note 29.
The loan servicing of SPFC of $41.7 million is being subserviced by a third
party and is not included in the above servicing numbers.
Sales of Loans and Servicing Rights
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of
mortgage loans and the purchasers of servicing rights. Under certain
circumstances, the Company is required to repurchase mortgage loans if there
has been a breach of representations or warranties.
During the year ended December 31, 1995, the Company retained servicing
rights on $794.9 million of mortgage loans sold through traditional secondary
market channels and $1.0 billion on loans and leases sold through
securitizations. Additionally, the Company released servicing rights to the
purchasers on $1.1 billion of mortgage loans sold. During the year ended
December 31, 1994, the Company retained servicing rights on $3.7 billion of
mortgage loans sold, and released servicing rights to the purchasers on $721.4
million of mortgage loans sold. During the year ended December 31, 1993, the
Company retained servicing rights on $3.5 billion of mortgage loans sold and
released servicing rights to the purchasers on $1.6 billion.
Loan Commitments
As of December 31, 1995 and 1994, the Company had open short-term
commitments amounting to $93,691,204 and $168,462,575, respectively, to fund
mortgage loan applications in process subject to credit approval. Therefore,
there is no exposure to credit loss in this type of commitment until the loans
are funded. Interest rate risk is mitigated by the use of forward contracts to
sell loans to investors. Additionally, as of December 31, 1995 the Company had
commitments to fund franchise loans and commercial loans of $56.8 million and
$209.9 million, respectively.
Forward Contracts
The Company sells mortgage-backed securities through forward delivery
contracts with major dealers in such securities. At December 31, 1995 and
1994, the Company had $192,500,000 and $485,498,900, respectively, in
outstanding commitments to sell mortgage loans through mortgage-backed
securities. These
F-24
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
commitments allow the Company to enter into mandatory commitments when the
Company notifies the investor of its intent to exercise a portion of the
forward delivery contracts. The Company was obligated under mandatory
commitments to deliver loans to such investors at December 31, 1995 and 1994
in the amounts of $97,000,000 and $78,991,000, respectively.
The credit risk of forward contracts relates to the counterparties' ability
to perform under the contract. The Company evaluates counterparties based on
their ability to perform prior to entering into any agreements.
The Company also sells mortgage loans to institutional investors. At
December 31, 1995 and 1994 optional commitments outstanding to institutional
investors totaled $0 and $89,471,575, respectively. These commitments are on a
"best efforts" basis, and therefore market value is not applicable.
The Company also enters into agreements with building contractors to fund
loans to home buyers over a specific period of time. The loans are funded
subject to credit approvals based on standard underwriting requirements
established by the Company. At December 31, 1995 and 1994, the Company had $0
and $92,000,000, respectively, of outstanding commitments to fund loans. The
fair market value of these commitments is not material.
Options
The Company generally purchases put options or writes covered call options
to hedge against adverse movements in the value of the loans held for sale
portfolio.
The Company will realize a gain or loss upon the expiration or closing of
the option transaction. When an option is exercised, the proceeds on sales for
a written call option, the purchase cost for a written put option, or the cost
of the security for a purchased put or call option is adjusted by the amount
of premium received or paid.
The risk in writing a call option is that the Company gives up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in buying an option is that the Company pays a
premium whether or not the option is exercised.
The Company had $20,000,000 and $0 notional amount of written call option
contracts outstanding at December 31, 1995 and 1994, respectively. The Company
received $82,600 and $0 in premiums related to the options outstanding at
December 31, 1995 and 1994, respectively. There were no option contracts
exercised during the year.
Lease Commitments
Minimum rental commitments under all noncancelable operating leases at
December 31, 1995 were as follows:
<TABLE>
<S> <C>
1996.......................................................... $ 3,068,017
1997.......................................................... 2,538,609
1998.......................................................... 1,809,792
1999.......................................................... 1,002,389
2000.......................................................... 813,658
Thereafter.................................................... 848,790
-----------
Total....................................................... $10,081,255
===========
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was
$3,565,881, $3,117,817, and $2,032,409, respectively.
F-25
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Legal Proceedings
The Company has been advised that on July 11, 1995, a former employee filed
suit against the Company, seeking unspecified damages, alleging sexual
harassment and that subsequent probationary status and termination of
employment were actions of retaliation for having raised sexual harassment
complaints. After investigation of the charges, the Company believes the
sexual harassment claims are invalid and that the employee's discharge was the
direct result of their own misconduct. The Company intends to vigorously
defend itself against this action.
The Company is also a defendant in a complaint filed on May 17, 1995 by an
individual that previously performed appraisal services for the Company. The
complaint alleges defamation, negligence, and intentional infliction of
emotional distress based on claimed publication by the Company asserting the
plaintiff's possible involvement in a loan purchase fraud, which the plaintiff
claims caused injury to their appraisal business. The plaintiff asserts they
have incurred damages amounting to $2.5 million as a result of the Company's
actions and is also claiming special damages in the amount of $2.4 million.
The Company denies all wrongdoing, contending the publications in question
were not defamatory, were privileged and were not the cause of injury to the
plaintiff. Trial is set for September 1996. The Company believes it has
sufficient defenses to all of the plaintiff's claims and that the Company will
prevail in this litigation.
The Company is also a defendant in a punitive class action filed on May 22,
1995, naming all persons having been charged documentation preparation fees by
the Company. This action seeks recovery based on the Company's charging of
documentation preparation fees in connection with loans alleging the Company
engaged in the unauthorized practice of law by charging a fee for the
selection, preparation and completion of loan documents without a license to
practice law. Actual damages claimed are estimated at $1.4 million. However,
under the Consumer Protection Act, exposure could be treble the claimed
amount. Management believes the suit is without merit and intends to contest
the suit vigorously. Management believes that based on information it
presently possesses that this claim, when concluded, will not have a material
adverse affect on the Company.
The Company has been informed an employee has made an unasserted claim
charging sexual harassment. This unasserted claim does not state specific
damage amounts and the potential liability, if any, is not determinable since
discovery on the merits of the unasserted claim has not yet begun. The Company
denies all wrongdoing and believes the case, if asserted, will be resolved
without any material effect on the financial position or results of operations
of the Company.
The Company is a defendant against complaints of violation of the Federal
Truth In Lending Act, (TILA) Unjust Enrichment and violation of Federal Real
Estate Settlement Procedures Act. The dispute arises out of a Truth in Lending
Disclosure Statement received by the plaintiff relating to a refinance of
their residence in which charges were allegedly mischaracterized. The Company
was served with an amended class action complaint on January 11, 1995 and a
second amendment on October 12, 1995. The exposure to the Company if the case
were to be class action certified is currently inestimable as, under TILA, a
creditor can be held liable for actual damages sustained; plus an amount the
court may allow but no more than the lesser of $500,000 or one percent of the
creditor's net worth; plus attorney's fees and costs. The Company intends to
defend the complaint vigorously and management believes the resolution of this
case will not materially affect the financial position or results of
operations of the Company.
The Company is involved in additional litigation arising in the normal
course of business of which management believes based in part upon the advice
of legal counsel, will not have a material effect on the consolidated
financial statements.
F-26
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement 107, "Disclosures about Fair Values of Financial
Instruments," (SFAS 107) requires disclosures of fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. Such instruments include
securities, loans receivable, time deposits and various off-balance sheet
items. Because no market exists for a portion of the Company's loans held for
investment, fair value estimates are based on judgments regarding credit risk,
investor expectation of future economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
In addition, 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.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and interest bearing deposits: The carrying values reported in the
consolidated balance sheet approximate fair values due to the short-term
nature of the assets.
Securities available for sale: The carrying value reported on the
consolidated balance sheet is the fair value, based on quoted market prices.
Investment in Federal Home Loan Bank stock: The carrying value reported in
the consolidated balance sheet approximates fair value.
Capitalized excess servicing fees receivable: The carrying value reported in
the consolidated balance sheet approximates fair value. The fair value was
estimated by discounting future cash flows using rates that an unaffiliated
third-party purchaser would require on instruments with similar terms and
remaining maturities.
Purchased and originated servicing rights: The carrying value reported in
the consolidated balance sheet approximates fair value. In accordance with
SFAS 122, the Company assesses the impairment of the capitalized mortgage
servicing portfolio based on the fair value of those rights on a stratum-by-
stratum basis with any impairment recognized through a valuation allowance for
each impaired stratum. For the purpose of measuring impairment, the Company
has stratified the capitalized mortgage servicing rights using the following
risk characteristics: loan program type and interest rate trench in 100 basis
point increments. Impairment is measured using estimated fair value.
Retained interest in loan and lease securitizations: The carrying value
reported in the consolidated balance sheet approximates fair value. The fair
value was estimated by discounting future cash flows using rates that an
unaffiliated third-party purchaser would require on instruments with similar
terms and remaining maturities.
Loans held for sale: Fair value of the Company's portfolio of loans held for
sale is based on forward delivery contract prices or quoted market prices.
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 loans.
F-27
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Expected future cash flows are estimated using maturity dates for performing
loans, with cash flows on non-performing loans estimated on an individual
basis. For non-performing 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. For consumer
loans, market rates of interest are based on current market rates charged for
these loans.
Deposits: Fair values disclosed are estimated by discounting the expected
cash flows at current market rates over expected maturities.
Borrowings from Imperial Bank: The carrying value reported in the
consolidated balance sheet approximates fair value, due to the short-term
nature of the borrowing.
Borrowings from Federal Home Loan Bank: The carrying value reported in the
consolidated balance sheet approximates fair value, due to the relatively
short term maturities, and the variable interest rates on the borrowings.
Other borrowings: The carrying value reported in the consolidated balance
sheet approximates fair value, due to the variable interest rates on the
borrowings.
Bonds: The carrying value reported in the consolidated balance sheet
approximates fair value.
Senior Notes: Fair values of the Company's Senior Notes are based on quoted
market prices of the notes.
Off-balance sheet instruments: Fair values of the Company's mandatory
forward commitments and mortgage loan applications in process are based on
quoted market prices of the related loans. The fair value of the options
approximates the unamortized premium. Fair values of loan commitments to
extend credit are based on fees currently charged to enter into similar
agreements.
F-28
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS:
Cash.................... $ 39,165,775 $ 39,165,775 $ 24,903,671 $ 24,903,671
Interest bearing depos-
its.................... 267,775,615 267,775,615 10,600,000 10,600,000
Securities available for
sale................... 5,962,500 5,962,500 -- --
Investment in Federal
Home Loan Bank stock... 22,750,000 22,750,000 18,817,300 18,817,300
Capitalized servicing
fees receivable........ 44,031,189 44,031,189 4,319,393 4,319,393
Purchased and originated
servicing rights....... 18,428,520 18,428,520 16,745,522 16,745,522
Retained interest in
loan and lease
securitizations........ 14,241,098 14,241,098 238,990 238,990
Mortgage loans held for
sale................... 1,341,809,910 1,345,509,326 263,807,378 264,506,440
Loans held for invest-
ment, net.............. 668,771,208 672,025,233 1,029,555,671 1,041,999,511
LIABILITIES:
Deposits................ $1,092,988,944 $1,095,286,803 $ 934,621,084 $ 924,574,345
Borrowings from Imperial
Bank................... 5,000,000 5,000,000 -- --
Borrowings from Federal
Home Loan Bank......... 190,000,000 190,000,000 295,000,000 295,000,000
Other Borrowings........ 875,815,309 875,815,309 -- --
Bonds................... 111,995,353 111,995,353 -- --
Senior Notes............ 80,472,360 76,610,000 80,343,905 63,570,000
OFF BALANCE SHEET ITEMS:
Mortgage loan applica-
tions in process....... $ -- $ 1,708,336 $ -- $ 548,045
Mandatory forward com-
mitments............... -- (929,688) -- (2,868)
Options................. 82,600 82,600 -- --
Loan commitments........ 3,641,176 3,641,176 -- --
</TABLE>
F-29
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
25. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ------------ -------------- -------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31,
1995
Gain on sale of
loans................ $ 6,229 $ 8,794 $ 14,929 $ 9,605
Net interest income... 4,834 6,000 7,947 14,973
Gain on sale of ser-
vicing............... 2,426 496 -- 656
Other revenues (net of
amortization)........ 3,081 2,350 2,283 6,156
Provision for loan
losses............... 900 1,700 1,350 1,500
Other expenses........ 12,283 12,808 16,384 19,705
Net income............ 1,958 1,832 4,311 6,092
Income per share:
Primary............. $ 0.12 $ 0.11 $ 0.25 $ 0.35
Fully diluted....... $ 0.12 $ 0.11 $ 0.25 $ 0.35
Year ended December 31,
1994
Gain on sale of
loans................ $ 5,452 $ (4,965) $ 4,508 $ 3,633
Net interest income... 8,608 5,565 4,047 2,889
Gain on sale of ser-
vicing............... -- 14,766 11,510 4,562
Other revenues (net of
amortization)........ 2,679 3,936 3,748 3,840
Provision for loan
losses............... 1,000 2,500 1,250 400
Other expenses........ 15,028 15,519 15,468 12,323
Extraordinary item,
net.................. -- -- -- 919
Net income............ 378 760 4,112 2,274
Income per share:
Income before ex-
traordinary item... $ 0.02 $ 0.05 $ 0.24 $ 0.08
Extraordinary item--
repurchase of Se-
nior Notes......... $ -- $ -- $ -- $ 0.06
Primary............. $ 0.02 $ 0.05 $ 0.24 $ 0.14
Fully diluted....... $ 0.02 $ 0.05 $ 0.24 $ 0.14
</TABLE>
F-30
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
26. SELECTED FINANCIAL INFORMATION OF SUBSIDIARIES
The following represents summarized financial information with respect to the
operations of SPTL, a wholly-owned subsidiary of ICII for which historical
financial information exists.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Total assets................................... $1,432,554 $1,367,130 $1,403,860
Deposits....................................... 1,093,250 946,860 1,005,171
Borrowings from Federal Home Loan Bank......... 190,000 295,000 320,000
Equity......................................... 126,599 108,845 73,311
Interest income................................ 103,112 81,751 50,634
Interest expense............................... 70,819 52,961 27,301
Other income................................... 17,790 10,215 1,779
Other expense.................................. 13,942 15,597 6,386
Provision for loan losses...................... 5,450 5,150 2,350
Income before taxes............................ 30,691 18,259 16,386
Net income..................................... 17,753 10,534 9,826
</TABLE>
F-31
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The following represents summarized consolidating financial information as
of and for the year ended December 31, 1995 with respect to the operations of
ICII and its wholly owned and majority owned subsidiaries. On January 17,
1997, the Company sold $200 million of 9 7/8% senior notes due 2007. The
senior notes are guaranteed by two of the Company's wholly-owned subsidiaries
(the "Other Guarantor Subsidiaries"), IBC and ICAI, and the Company's 66 2/3%
owned subsidiary, FMAC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 8,593 $ 526 $(1,937) $ 32,981 $ (997) $ 39,166
Interest bearing depos-
its.................... -- -- -- 267,776 -- 267,776
Investments in Federal
Home Loan Bank stock... -- -- -- 22,750 -- 22,750
Securities available for
sale, at market........ 5,963 -- -- -- -- 5,963
Loans held for sale..... 180,232 181,254 -- 1,129,576 (149,252) 1,341,810
Loans held for invest-
ment, net.............. 29,196 -- -- 541,390 98,185 668,771
Capitalized excess ser-
vicing fees receivable. 8,679 -- 220 26,129 9,003 44,031
Purchased and originated
servicing rights....... 13,718 -- 743 3,967 -- 18,428
Retained interest in
loan and lease
securitizations........ -- -- -- 36,035 (21,794) 14,241
Accrued interest on
loans.................. 449 -- 19 10,067 (370) 10,165
Premises and equipment,
net.................... 8,573 235 16 2,545 -- 11,369
Other real estate owned. 2,419 -- -- 4,760 -- 7,179
Investment in subsidiar-
ies.................... 135,316 -- -- -- (135,316) --
Goodwill................ -- 4,226 -- 16,024 96 20,346
Other assets............ 19,990 2,807 4,756 11,461 (374) 38,640
-------- -------- ------- ---------- --------- ----------
Total assets.......... $413,128 $189,048 $ 3,817 $2,105,461 $(200,819) $2,510,635
======== ======== ======= ========== ========= ==========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Deposits................ $ -- $ -- $ (450) $1,093,250 $ 189 $1,092,989
Borrowings from Imperial
Bank................... 5,000 -- -- -- -- 5,000
Borrowings from Federal
Home Loan Bank......... -- -- -- 190,000 -- 190,000
Other borrowings........ 206,726 70,082 -- 655,504 (56,497) 875,815
Bonds................... -- 111,995 -- -- -- 111,995
Senior notes............ 80,472 -- -- -- -- 80,472
Other liabilities....... 26,828 3,198 1,996 26,345 1,895 60,262
-------- -------- ------- ---------- --------- ----------
Total liabilities..... 319,026 185,275 1,546 1,965,099 (54,413) 2,416,533
-------- -------- ------- ---------- --------- ----------
Shareholders' equity
Common stock............ 51,981 4,432 1,000 81,251 (86,683) 51,981
Preferred stock......... -- -- -- 1,015 (1,015) --
Retained earnings (accu-
mulated deficit)....... 38,910 (659) 1,271 58,096 (58,708) 38,910
Unrealized gain on secu-
rities available for
sale................... 3,211 -- -- -- -- 3,211
-------- -------- ------- ---------- --------- ----------
Total shareholders'
equity................. 94,102 3,773 2,271 140,362 (146,406) 94,102
-------- -------- ------- ---------- --------- ----------
Total liabilities and
shareholders' equity... $413,128 $189,048 $ 3,817 $2,105,461 $(200,819) $2,510,635
======== ======== ======= ========== ========= ==========
</TABLE>
F-32
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Gain on sale of loans... $ 12,999 $ -- $1,803 $ 37,718 $(12,964) $ 39,556
Interest income......... 15,677 1,929 76 108,666 3,134 129,482
Interest expense........ 20,900 1,690 17 76,018 (2,897) 95,728
-------- ------ ------ -------- -------- --------
Net interest income..... (5,223) 239 59 32,648 6,031 33,754
Provision for loan loss-
es..................... -- -- -- 5,450 -- 5,450
-------- ------ ------ -------- -------- --------
Net interest income
after provision for
loan loss............ (5,223) 239 59 27,198 6,031 28,304
-------- ------ ------ -------- -------- --------
Loan servicing income... 14,007 318 27 6,352 (7,986) 12,718
Gain on sale of servic-
ing rights............. 4,889 31 -- 370 (1,712) 3,578
Other income............ (885) -- 2,465 1,009 (1,437) 1,152
-------- ------ ------ -------- -------- --------
Total other income.... 18,011 349 2,492 7,731 (11,135) 17,448
-------- ------ ------ -------- -------- --------
Total revenues........ 25,787 588 4,354 72,647 (18,068) 85,308
-------- ------ ------ -------- -------- --------
EXPENSES
Personnel expense....... 20,281 356 1,606 12,433 (623) 34,053
Amortization of PMSR's
and OMSR's............. 3,986 -- -- 2,892 (2,892) 3,986
Occupancy expense....... 2,874 94 54 740 142 3,904
Data processing expense. 1,191 -- 1 349 (80) 1,461
Net expense of other
real estate owned...... 191 -- -- 1,706 16 1,913
General and administra-
tive expense........... 9,938 797 493 8,720 (4,086) 15,862
-------- ------ ------ -------- -------- --------
Total expenses........ 38,461 1,247 2,154 26,840 (7,523) 61,179
-------- ------ ------ -------- -------- --------
Income before income
taxes.................. (12,674) (659) 2,200 45,807 (10,545) 24,129
Income taxes............ (5,443) -- 929 19,212 (4,554) 10,144
Minority interest in
loss of consolidated
subsidiaries........... (208) -- -- -- -- (208)
-------- ------ ------ -------- -------- --------
(Loss) income before
deferred inter-company
gains.................. (7,023) (659) 1,271 26,595 (5,991) 14,193
Deferred inter-company
gains, net of income
taxes.................. 1,710 -- -- -- (1,710) --
-------- ------ ------ -------- -------- --------
(Loss) income before eq-
uity in undistributed
income of subsidiaries. (8,733) (659) 1,271 26,595 (4,281) 14,193
Equity of undistributed
income of subsidiaries. 22,926 -- -- -- (22,926) --
-------- ------ ------ -------- -------- --------
Net income (loss)....... $ 14,193 $ (659) $1,271 $ 26,595 $(27,207) $ 14,193
======== ====== ====== ======== ======== ========
</TABLE>
27. REGULATORY MATTERS
In August 1989, the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989, ("FIRREA") was enacted. This legislation was adopted in order to
reform the regulation and supervision of financial institutions. Additionally
legislation was adopted in 1991 with the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). FDICIA provided for increased funding for
FDIC deposit insurance and for expanded regulation of financial institutions.
Specifically, FDICIA requires the federal regulations to take prompt
corrective action with respect to depository institutions which do not meet
the minimum capital requirements. FDICIA established five capital ratio
categories: "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and " critically undercapitalized."
F-33
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
A depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives
an unsatisfactory examination rating and may be reclassified to a lower
category by action based on other supervisory criteria. For an institution to
be well capitalized it must have a total risk-based capital ratio of at least
10%, a Tier 1 risk-based capital ratio of at least 6%, and a leverage ratio of
at least 5% and not be subject to any specific capital order or directive. At
December 31, 1995, SPTL was categorized as well capitalized.
28. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash................................................. $ 8,593,486 $ 12,262,165
Securities available for sale........................ 5,962,500 --
Mortgage loans held for sale......................... 180,231,859 --
Loans held for investment, net....................... 29,195,207 --
Premises and equipment, net.......................... 8,573,429 11,086,937
Other real estate owned, net......................... 2,419,082
Capitalized excess servicing fees receivable......... 8,679,366 654,017
Investment in subsidiaries........................... 135,316,302 109,095,519
Purchased and originated servicing rights............ 13,718,045 16,745,522
Accrued interest on loans............................ 448,844 --
Other assets......................................... 19,990,485 24,519,427
------------ ------------
Total assets....................................... $413,128,605 $174,363,587
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from Imperial Bank........................ $ 5,000,000 $ --
Other borrowings..................................... 206,725,859 --
Senior Notes......................................... 80,472,360 80,343,905
Other liabilities.................................... 26,827,922 18,147,161
------------ ------------
Total liabilities.................................... 319,026,141 98,491,066
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding............................... -- --
Common stock, no par value, authorized 40,000,000
shares; 14,578,481 and 9,620,953 shares issued and
outstanding at December 31, 1995 and 1994, respec-
tively.............................................. 51,981,388 51,155,925
Retained earnings.................................... 38,909,853 24,716,596
Unrealized gain on securities available for sale,
net................................................. 3,211,223 --
------------ ------------
Total shareholders' equity......................... 94,102,464 75,872,521
------------ ------------
Total liabilities and shareholders' equity......... $413,128,605 $174,363,587
============ ============
</TABLE>
F-34
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Gain (loss) on sale of loans......... $ 12,999,024 $ (397,280) $16,843,897
------------ ----------- -----------
Interest income...................... 15,676,610 1,626,187 3,066,784
Interest charges..................... (20,899,938) (9,318,620) (2,642,725)
------------ ----------- -----------
Net interest (expense) income...... (5,223,328) (7,692,433) 424,059
------------ ----------- -----------
Loan servicing income................ 14,006,941 13,155,584 5,954,039
Gain on sale of servicing rights..... 4,889,613 30,027,567 23,655,276
Other (loss) income.................. (885,030) 707,834 1,019,973
------------ ----------- -----------
Total other income................. 18,011,524 43,890,985 30,629,288
------------ ----------- -----------
Total revenue........................ 25,787,220 35,801,272 47,897,244
------------ ----------- -----------
Expenses:
Personnel expense.................... 20,281,783 26,519,397 21,219,095
Occupancy expense.................... 2,873,821 2,883,557 1,984,969
Other................................ 15,305,646 13,367,114 9,605,869
------------ ----------- -----------
38,461,250 42,770,068 32,809,933
------------ ----------- -----------
(Loss) income before income taxes,
minority interest, deferred inter-
company gains and extraordinary
item................................ (12,674,030) (6,968,796) 15,087,311
Income taxes......................... (5,443,007) (3,038,862) 6,495,027
------------ ----------- -----------
(Loss) income before minority
interest, deferred inter-company
gains and extraordinary item........ (7,231,023) (3,929,934) 8,592,284
Minority interest in loss of consoli-
dated subsidiaries.................. (207,763) -- --
Deferred inter-company gains, net of
income taxes........................ 1,709,518 -- --
------------ ----------- -----------
(Loss) income before extraordinary
item................................ (8,732,778) (3,929,934) 8,592,284
Extraordinary item--repurchase of Se-
nior Notes.......................... -- 919,286 --
------------ ----------- -----------
(Loss) income before equity in undis-
tributed income of subsidiaries..... (8,732,778) (3,010,648) 8,592,284
Equity in undistributed income of
subsidiaries........................ 22,926,035 10,534,536 9,826,165
------------ ----------- -----------
Net income......................... $ 14,193,257 $ 7,523,888 $18,418,449
============ =========== ===========
</TABLE>
F-35
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Net cash (used in) provided by operating activi-
ties............................................ $(272,508,922) $ 114,536,618
Cash flows from investing activities:
Proceeds from bulk sale of servicing rights.... 12,815,190 26,898,995
Purchase of servicing rights................... (8,128,031) (14,477,526)
Net change in loans held for investment........ 51,783,301 (131,159)
Investment in subsidiaries..................... -- (25,000,000)
Purchase of premises and equipment............. (181,539) (4,949,270)
------------- -------------
Net cash provided by (used in) investing activi-
ties............................................ 56,288,921 (17,658,960)
------------- -------------
Cash flows from financing activities:
Net change in borrowings from Imperial Bank.... 5,000,000 (20,000,000)
Proceeds from issuance of Senior Notes......... -- 88,593,300
Cash used to repurchase Senior Notes........... -- (6,545,000)
Proceeds from exercise of stock options........ 825,463 96,002
Net change in other borrowings................. 206,725,859 (147,611,302)
------------- -------------
Net cash provided by (used in) financing activi-
ties............................................ 212,551,322 (85,467,000)
------------- -------------
Net change in cash............................... (3,668,679) 11,410,658
Cash at beginning of year........................ 12,262,165 851,507
------------- -------------
Cash at end of year.............................. $ 8,593,486 $ 12,262,165
============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the condensed statements of cash
flows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
----------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest.............................................. $20,897,959 $5,678,568
Significant non-cash activities:
Loans transferred to OREO............................. $ 2,419,082 $ --
Loans transferred from held for sale to held for in-
vestment............................................. 83,397,590 --
Servicing rights transferred from subsidiary.......... 3,773,831 --
Unrealized gain on securities available for sale...... 5,442,750 --
Contribution of fixed assets to ICIFC................. 525,000 --
</TABLE>
29. SUBSEQUENT EVENT
On March 15, 1996, the Company entered into an agreement to sell the
servicing rights on approximately $3.1 billion of mortgage loans. The
transaction is anticipated to close in the first quarter of 1996, and is
expected to result in a gain on sale.
F-36
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash................................................ $ 57,938 $ 39,166
Interest bearing deposits........................... 314,192 267,776
Investment in Federal Home Loan Bank stock.......... 16,900 22,750
Securities available for sale, at market............ 7,937 5,963
Loans held for sale (Fair value of $816,996 and
$1,345,509 at September 30, 1996 and December 31,
1995, respectively)................................ 812,257 1,341,810
Loans held for investment, net...................... 803,205 668,771
Capitalized excess servicing fees receivable........ 30,282 34,396
Retained interest in loan and lease securitizations. 33,196 13,036
Interest-only and residual certificates, at market.. 58,854 10,840
Purchased and originated servicing rights........... 14,038 18,428
Accrued interest on loans........................... 8,880 10,164
Premises and equipment, net......................... 12,388 11,369
Other real estate owned, net........................ 11,303 7,179
Goodwill............................................ 20,988 20,346
Other assets........................................ 43,779 38,641
---------- ----------
Total assets...................................... $2,246,137 $2,510,635
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits............................................ $1,052,352 $1,092,989
Borrowings from Imperial Bank....................... -- 5,000
Borrowings from Federal Home Loan Bank.............. 338,000 190,000
Other borrowings.................................... 400,045 875,815
Bonds............................................... -- 111,995
Senior Notes........................................ 88,169 80,472
Minority interest in consolidated subsidiaries...... 43,678 1,452
Other liabilities................................... 102,544 58,810
---------- ----------
Total liabilities................................. 2,024,788 2,416,533
---------- ----------
Shareholders' equity:
Preferred stock, 8,000 shares authorized; none
issued or outstanding.............................. -- --
Common stock, no par value. Authorized 80,000
shares; 37,903 and 14,579 shares issued and
outstanding at September 30, 1996 and December 31,
1995, respectively................................. 142,943 51,981
Retained earnings................................... 74,082 38,910
Unrealized gain on securities available for sale,
net................................................ 4,324 3,211
---------- ----------
Total shareholders' equity........................ 221,349 94,102
---------- ----------
Total liabilities and shareholders' equity........ $2,246,137 $2,510,635
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-37
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
--------- --------
<S> <C> <C>
REVENUE:
Gain on sale of loans..................................... $ 69,517 $29,953
--------- --------
Interest on loans......................................... 139,284 81,262
Interest on investments................................... 2,831 2,635
Interest on other finance activities...................... 6,957 --
--------- --------
Total interest income................................... 149,072 83,897
Interest expense.......................................... 100,767 65,115
--------- --------
Net interest income..................................... 48,305 18,782
Provision for loan losses................................. 6,142 3,950
--------- --------
Net interest income after provision for loan losses....... 42,163 14,832
--------- --------
Loan servicing income..................................... 2,264 9,813
Gain on sale of servicing rights.......................... 7,808 2,921
Gain on sale of SPFC stock................................ 62,007 --
Other income.............................................. 7,770 537
--------- --------
Total other income...................................... 79,849 13,271
--------- --------
Total revenue........................................... 191,529 58,056
--------- --------
EXPENSES:
Personnel expense......................................... 36,477 24,041
Amortization of PMSR's and OMSR's......................... 1,028 2,637
Occupancy expense......................................... 3,308 2,895
Data processing expense................................... 1,324 1,121
Net expenses of other real estate owned................... 4,853 1,611
Professional services..................................... 5,600 1,682
FDIC insurance premiums (refund).......................... 199 1,114
Telephone and other communications........................ 2,108 1,807
Restructuring provision--exit from mortgage banking
operations............................................... 3,800 --
General and administrative expense........................ 14,047 7,203
--------- --------
Total expenses.......................................... 72,744 44,111
Income before income taxes................................ 118,785 13,945
Income taxes.............................................. 51,322 5,844
Minority interest in income of consolidated subsidiaries.. 6,373 --
--------- --------
Net income................................................ $ 61,090 $ 8,101
========= ========
NET INCOME PER SHARE:
Primary:.................................................. $ 1.60 $ 0.24
========= ========
Fully Diluted:............................................ $ 1.60 $ 0.23
========= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-38
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income............................... $ 61,090 $ 8,101
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses................ 6,142 3,950
Depreciation and amortization............ 4,373 4,106
Restructuring provision.................. 3,800 --
Interest on other finance activities..... (6,957) --
Gain on sale of servicing rights......... (7,808) (2,921)
Gain on sale of loans.................... (69,517) (29,953)
Gain on sale of SPFC stock............... (62,007) --
Stock option compensation expense........ -- 653
Provision for losses on other real estate
owned................................... 2,459 1,105
Net change in loans held for sale........ 599,070 (49,113)
Net change in accrued interest on loans.. 1,284 (301)
Net change in other assets............... (59,513) (47,672)
Net change in other liabilities.......... 83,275 12,195
--------- ---------
Net cash provided by (used in) operating
activities: 555,691 (99,850)
--------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits.. (89,936) (1,000)
Purchase of servicing rights............. (10,389) (6,205)
Proceeds from sale of servicing rights... 31,032 11,798
Proceeds from sale of other real estate
owned................................... 5,534 1,594
Purchase of securities available for
sale.................................... (219,702) (220,547)
Sale of securities available for sale.... 267,098 12,630
Net change in loans held for investment.. (140,320) (68,618)
Purchases of premises and equipment...... (3,853) (842)
--------- ---------
Net cash used in investing activities: (160,536) (271,190)
--------- ---------
Cash flows from financing activities:
Net change in deposits................... (40,637) (27,255)
Advances from Federal Home Loan Bank..... 738,000 502,000
Repayments of advances from Federal Home
Loan Bank............................... (590,000) (527,000)
Net change in other borrowings........... (480,771) 403,836
Sale of bonds............................ (111,995) --
Proceeds from issuance of ICII common
stock................................... 59,228 --
Proceeds from sale of SPFC common stock.. 36,362 --
Proceeds from resale of Senior Notes..... 7,615 --
Proceeds from exercise of stock options.. 5,815 385
--------- ---------
Net cash (used in) provided by financing
activities: (376,383) 351,966
--------- ---------
Net change in cash........................ 18,772 (19,074)
Cash at beginning of year................. 39,166 24,904
--------- ---------
Cash at end of period..................... $ 57,938 $ 5,830
========= =========
Supplemental disclosure of cash flow
information:
Income taxes paid during the period...... $ 16,253 $ 7,429
Interest paid during the period.......... $ 104,427 $ 65,555
</TABLE>
See accompanying notes to consolidated financial statements
F-39
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
The consolidated financial statements include Imperial Credit Industries,
Inc. ("ICII"), its wholly-owned subsidiaries and majority-owned subsidiaries
(collectively the "Company"). The wholly-owned subsidiaries include Southern
Pacific Thrift & Loan Association ("SPTL"), Imperial Business Credit, Inc.
("IBC") and Imperial Credit Advisors, Inc. ("ICAI"). The majority-owned
consolidated subsidiaries include Southern Pacific Funding Corporation
("SPFC"), Franchise Mortgage Acceptance Company, LLC ("FMAC"), and ICI Funding
Corporation ("ICIFC"). The minority interests of these majority owned
subsidiaries are included as "Minority interest in consolidated subsidiaries"
on the Company's consolidated balance sheet. As of September 30, 1996, the
Company owned 58.4% of SPFC, with 41.6% owned by other public investors.
However, since that time, the Company has sold an additional 7.2% of the
outstanding shares of SPFC, reducing its ownership in SPFC to 51.2%. The
Company owns 66 2/3% of FMAC, with 33 1/3% of FMAC owned by the President of
FMAC. The Company owns 100% of the voting common stock of ICIFC which entitles
it to a 1% economic interest. Imperial Credit Mortgage Holdings, Inc.
("ICMH"), an unconsolidated affiliated company, owns all of the ICIFC non-
voting preferred stock which entitles it to a 99% economic interest. All
material intercompany balances and transactions have been eliminated.
ICII was incorporated in 1986 in the State of California and is 24.8% owned
by Imperial Bank.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and with the
instructions to form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996. The accompanying consolidated financial statements should
be read in conjunction with the consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses
for the periods presented. Actual results could differ significantly from
those estimates. Prior year's consolidated financial statements have been
reclassified to conform to the 1996 presentation.
Prior year consolidated financial statements have been reclassified to
conform to the 1996 presentation.
3. NET INCOME PER SHARE INFORMATION
Net income per common share is computed based on the weighted average number
of shares outstanding during the periods presented plus common stock
equivalents deemed to be dilutive. Common stock equivalents deemed to be
dilutive were calculated based on the average price per share during the
periods presented for primary net income per share and based on the ending
stock price per share, if greater than the average stock price per share, for
fully diluted net income per share for the periods presented. The number of
shares used in the computations give retroactive effect to stock dividends and
stock splits for all periods presented, including the Company's most recent 2-
for-1 stock split on October 23, 1996.
F-40
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The weighted average number of shares including common stock equivalents for
the three months ended September 30, 1996 and 1995 was 40,570,264 and
35,058,544 for fully diluted income per share, respectively. The weighted
average number of shares including common stock equivalents for the nine
months ended September 30, 1996 and 1995 was 38,293,874 and 35,004,055 for
fully diluted net income per share, respectively.
The weighted average number of shares including common stock equivalents for
the three months ended September 30, 1996 and 1995 was 40,382,302 and
34,697,623 for primary income per share, respectively. The weighted average
number of shares including common stock equivalents for the nine months ended
September 30, 1996 and 1995 was 38,074,558 and 34,137,402 for primary income
per share, respectively.
4. LOANS HELD FOR SALE
Loans held for sale consisted of the following at September 30, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
1996 1995
---------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4...................... $539,143 $1,083,038
Multi-family........................... 93,666 171,199
-------- ----------
632,809 1,254,237
Leases................................... 3,785 17,787
Commercial loans......................... 175,663 69,786
-------- ----------
$812,257 $1,341,810
======== ==========
</TABLE>
5. SELECTED FINANCIAL STATEMENTS OF SUBSIDIARIES
The following represents summarized consolidating financial information as
of and for the nine months ended September 30, 1996 with respect to the
operations of ICII and its wholly owned and majority owned subsidiaries.
F-41
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 2,138 $ (279) $ 802 $ 55,277 -- $ 57,938
Interest bearing
deposits............... 1,227 50,397 -- 262,568 -- 314,192
Investments in Federal
Home Loan Bank stock... -- -- -- 16,900 -- 16,900
Securities available for
sale, at market........ 7,725 -- 778 -- (566) 7,937
Loans held for sale..... 22,782 26,361 404 762,710 -- 812,257
Loans held for
investment, net........ 30,279 677 -- 772,249 -- 803,205
Capitalized excess
servicing fees
receivable............. 5,816 -- -- 24,047 419 30,282
Purchased and originated
servicing rights....... -- -- 654 13,384 -- 14,038
Retained interest in
loan and lease
securitizations........ 2,856 -- 16,980 13,360 -- 33,196
Interest only and
residual certificates.. -- -- -- 58,854 -- 58,854
Accrued interest on
loans.................. 315 377 8 8,180 -- 8,880
Premises and equipment,
net.................... 6,416 902 369 4,701 -- 12,388
Other real estate owned. 3,797 -- -- 7,506 -- 11,303
Investment in
subsidiaries........... 231,188 -- -- -- (231,188) --
Goodwill................ -- 4,412 997 15,579 -- 20,988
Other assets............ 54,276 (11,072) (3,107) 3,682 -- 43,779
-------- -------- ------- ---------- --------- ----------
Total assets............ $368,815 $ 71,775 $17,885 $2,018,997 $(231,335) $2,246,137
======== ======== ======= ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $(29,367) $ -- $ (236) $1,081,955 -- $1,052,352
Borrowings from Federal
Home Loan Bank......... -- -- -- 338,000 -- 338,000
Other borrowings........ 28,236 59,227 -- 312,582 -- 400,045
Senior notes............ 88,169 -- -- -- -- 88,169
Minority interest in
consolidated
subsidiaries........... 27,725 -- -- -- 15,953 43,678
Other liabilities....... 32,703 1,818 6,813 61,272 (62) 102,544
-------- -------- ------- ---------- --------- ----------
Total liabilities..... 147,466 61,045 6,577 1,793,809 15,891 2,024,788
-------- -------- ------- ---------- --------- ----------
SHAREHOLDERS' EQUITY
Common stock............ 142,943 4,502 8,241 134,552 (147,295) 142,943
Preferred stock......... -- -- -- 9,143 (9,143) --
Retained earnings....... 74,082 6,228 2,945 81,493 (90,666) 74,082
Unrealized gain on
securities available
for sale............... 4,324 -- 122 -- (122) 4,324
-------- -------- ------- ---------- --------- ----------
Total shareholders'
equity................. 221,349 10,730 11,308 225,188 (247,226) 221,349
-------- -------- ------- ---------- --------- ----------
Total liabilities and
shareholders' equity... $368,815 $ 71,775 $17,885 $2,018,997 $(231,335) $2,246,137
======== ======== ======= ========== ========= ==========
</TABLE>
F-42
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Gain on sale of loans... $ 1,297 $13,387 $2,830 $ 50,939 $ 1,064 $ 69,517
Interest income......... 10,625 2,516 835 137,041 (1,945) 149,072
Interest expense........ 13,261 2,281 889 85,026 (690) 100,767
------- ------- ------ -------- -------- --------
Net interest income..... (2,636) 235 (54) 52,015 (1,255) 48,305
Provision for loan
losses................. -- -- -- 6,142 -- 6,142
------- ------- ------ -------- -------- --------
Net interest income
after provision for
loan loss............. (2,636) 235 (54) 45,873 (1,255) 42,163
------- ------- ------ -------- -------- --------
Loan servicing income... (2,002) 1,127 2,281 858 -- 2,264
Gain on sale of
servicing rights....... 6,466 -- -- -- 1,342 7,808
Other income............ 63,196 (64) 2,282 4,929 (566) 69,777
------- ------- ------ -------- -------- --------
Other income........... 67,660 1,063 4,563 5,787 776 79,849
------- ------- ------ -------- -------- --------
Total revenue.......... 66,321 14,685 7,339 102,599 585 191,529
------- ------- ------ -------- -------- --------
Personnel expense....... 7,313 5,078 1,831 22,255 -- 36,477
Amortization of PMSR's
and OMSR's............. 401 -- 89 538 -- 1,028
Occupancy expense....... 1,652 191 135 1,330 -- 3,308
Data processing expense. 744 1 1 578 -- 1,324
Net expense of other
real estate owned...... 3,492 -- -- 1,361 -- 4,853
General and
administrative expense. 10,974 2,458 2,429 9,893 -- 25,754
------- ------- ------ -------- -------- --------
Total expenses......... 24,576 7,728 4,485 35,955 -- 72,744
------- ------- ------ -------- -------- --------
Income before taxes..... 41,745 6,957 2,854 66,644 585 118,785
Income taxes............ 21,452 -- 1,180 28,210 480 51,322
Minority interest in
income of consolidated
subsidiaries........... 6,373 -- -- -- -- 6,373
------- ------- ------ -------- -------- --------
Income before equity in
undistributed income of
subsidiaries........... 13,920 6,957 1,674 38,434 105 61,090
Equity in undistributed
income of subsidiaries. 47,170 -- -- -- (47,170) --
------- ------- ------ -------- -------- --------
Net income.............. $61,090 $ 6,957 $1,674 $ 38,434 $(47,065) $ 61,090
======= ======= ====== ======== ======== ========
</TABLE>
F-43
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information...................................................... 3
Incorporation by Reference................................................. 3
Prospectus Summary......................................................... 4
Risk Factors............................................................... 15
Capitalization............................................................. 26
Selected Consolidated Financial Data....................................... 27
Unaudited Consolidated Pro Forma Financial Statements...................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations ............................................................ 34
Business................................................................... 58
Management................................................................. 91
Security Ownership of Certain Beneficial Owners and Management............. 98
Certain Transactions....................................................... 99
The Exchange Offer......................................................... 106
Description of Notes....................................................... 114
Certain U.S. Federal Income Tax Consequences............................... 138
U.S. Holders............................................................... 138
Non-U.S. Holders........................................................... 140
Plan of Distribution....................................................... 142
Legal Matters.............................................................. 143
Experts.................................................................... 143
Index to Consolidated Financial Statements................................. F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$200,000,000
[LOGO OF IMPERIAL CREDIT INDUSTRIES, INC.]
9 7/8% SERIES B SENIOR NOTES DUE 2007
-----------------
PROSPECTUS
-----------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 317 of the California General Corporation Law (the "CGCL"),
the Registrant is in certain circumstances permitted to indemnify its
directors and officers against certain expenses (including attorneys' fees),
judgements, fines, settlements and other amounts actually and reasonably
incurred in connection with threatened, pending or completed civil, criminal,
administrative or investigative actions, suits or proceedings (other than an
action by or in the right of the Registrant), in which such persons were or
are parties, or are threatened to be made parties, by reason of the fact that
they were or are directors or officers of the Registrant, if such persons
acted in good faith and in a manner they reasonably believed to be in the best
interests of the Registrant, and with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. In
addition, the Registrant is in certain circumstances permitted to indemnify
its directors and officers against certain expenses incurred in connection
with the defense or settlement of a threatened, pending or completed action by
or in the right of the Registrant, and against amounts paid in settlement of
any such action, if such persons acted in good faith and in a manner they
believed to be in the best interests of the Registrant and its shareholders
provided that the specified court approval is obtained.
As permitted by Section 317 of the CGCL, the Articles of Incorporation and
By-Laws of the Registrant provide that the Registrant is authorized to provide
indemnification for its directors and officers for breach of their duty to the
Registrant and its shareholders through bylaw provisions or through agreements
with the directors and officers, or both, in excess of the indemnification
otherwise permitted by Section 317 of the CGCL. The Registrant's By-laws
provide for indemnification of its directors and officers to the maximum
extent permitted by Section 317 of the CGCL. In addition, agreements entered
into by the Registrant with its directors and its executive officers require
the Registrant to indemnify such persons against expenses, judgments, fines
settlements and other amounts reasonably incurred in connection with any
proceeding to which any such person may be made a party by reason of the fact
that such person was an agent of the Registrant (including judgments, fines
and settlements in or of a derivative action, unless indemnification is
otherwise prohibited by law), provided such person acted in good faith and in
a manner he reasonably believed to be in the best interests of the Registrant
and, in the case of a criminal proceeding, had no reason to believe his
conduct was unlawful. The indemnification agreements also set forth certain
procedures that will apply in the event of a claim for indemnification
thereunder.
The Articles of Incorporation of the Registrant provide that the personal
liability of the directors of the Registrant for monetary damages shall be
eliminated to the fullest extent permissible under California law. Under
Section 204(a)(10) of the CGCL, the personal liability of a director for
monetary damages in an action brought by or in the right of the corporation
for breach of the director's duty to the corporation may be eliminated, except
for the liability of a director resulting from (i) acts or omissions involving
intentional misconduct or the absence of good faith, (ii) any transaction from
which a director derived an improper personal benefit, (iii) acts or omissions
showing a reckless disregard for the director's duty, (iv) acts or omissions
constituting an unexcused pattern of inattention to the director's duty or (v)
the making of an illegal distribution to shareholders or an illegal loan or
guaranty.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
3.1* Articles of Incorporation of the Registrant, as amended.
3.2* Restated Bylaws of the Registrant.
4.1 Indenture, by and among the Registrant, Chemical Trust Company of
California, Imperial Business Credit, Inc. Imperial Credit Advisors,
Inc. and Franchise Mortgage Acceptance Company LLC dated as of January
23, 1997, with forms of Senior Notes.
4.2 A/B Exchange Registration Rights Agreement, by and among the
Registrant, Imperial Business Credit, Inc. Imperial Credit Advisors,
Inc. Franchise Mortgage Acceptance Company LLC, Lehman Brothers, Inc.,
Montgomery Securities and Dabney/Resnick/Imperial, LLC, dated as of
January 23, 1997.
5.1** Opinion of Freshman, Marantz, Orlanski, Cooper & Klein regarding
legality.
8.1** Opinion of Freshman, Marantz, Orlanski, Cooper & Klein regarding tax
matters.
21.1** Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2** Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in
Exhibit 5.1).
24.1 Power of Attorney (included on signature page of Registration
Statement).
25.1 Statement of Eligibility of Trustee.
99.1** Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
99.3** Form of Exchange Agent Agreement by and between the Registrant and
Chemical Trust Company of California.
</TABLE>
- --------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-45606) declared effective May 26, 1992.
** To be filed by amendment.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by its is against public policy as expressed in the act
and will be governed by the final adjudication of such issue.
(b) The Registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the Prospectus pursuant to Items 4,
10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means, including information contained in documents filed
subsequent to the effective date of the Registration Statement.
(c) The Registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
Registration statement when it became effective.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF TORRANCE, STATE OF
CALIFORNIA ON FEBRUARY 18, 1997.
IMPERIAL CREDIT INDUSTRIES, INC.
By /s/ H. Wayne Snavely
_________________________________
H. Wayne Snavely
Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each said attorneys-in-fact
and agents or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITY INDICATED ON FEBRUARY 18, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ H. Wayne Snavely Chairman, Chief Executive February 18, 1997
____________________________________ Officer, President
H. Wayne Snavely (Principal Executive
Officer)
/s/ Paul B. Lasiter Senior Vice President and February 18, 1997
____________________________________ Controller (As Principal
Paul B. Lasiter Financial and Accounting
Officer)
/s/ Stephen J. Shugerman Director February 18, 1997
____________________________________
Stephen J. Shugerman
/s/ Joseph R. Tomkinson Director February 18, 1997
____________________________________
Joseph R. Tomkinson
/s/ Robert S. Muehlenbeck Director February 18, 1997
____________________________________
Robert S. Muehlenbeck
Director February , 1997
____________________________________
G. Louis Graziadio, III
/s/ Perry A. Lerner Director February 18, 1997
____________________________________
Perry A. Lerner
/s/ James Clayburn LaForce, Jr. Director February 18, 1997
____________________________________
James Clayburn LaForce, Jr.
</TABLE>
II-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
3.1* Articles of Incorporation, as amended, of the Registrant.
3.2* Bylaws, as amended of the Registrant.
4.1 Indenture, by and among the Registrant, Chemical Trust
Company of California, Imperial Business Credit, Inc.
Imperial Credit Advisors, Inc. and Franchise Mortgage
Acceptance Company LLC dated as of January 23, 1997, with
forms of Senior Notes.
4.2 A/B Exchange Registration Rights Agreement, by and among the
Registrant, Imperial Business Credit, Inc. Imperial Credit
Advisors, Inc. Franchise Mortgage Acceptance Company LLC,
Lehman Brothers, Inc., Montgomery Securities and
Dabney/Resnick/Imperial, LLC, dated as of January 23, 1997.
5.1** Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
regarding legality.
8.1** Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
regarding tax matters.
21.1** Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
23.2** Consent of Freshman, Marantz, Orlanski, Cooper & Klein
(contained in Exhibit 5.1)
24.1 Power of Attorney (included on signature page of Registration
Statement)
25.1 Statement of Eligibility of Trustee.
99.1** Form of Letter of Transmittal.
99.2** Form of Notice of Guaranteed Delivery.
99.3** Form of Exchange Agent Agreement by and between the
Registrant and Chemical Trust Company of California.
</TABLE>
- --------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-45606) declared effective May 26, 1992.
** To be filed by amendment.
<PAGE>
EXHIBIT 4.1
IMPERIAL CREDIT INDUSTRIES, INC.
AND
THE SUBSIDIARY GUARANTORS
NAMED HEREIN
$200,000,000
9-7/8% SENIOR NOTES DUE JANUARY 15, 2007
_____________
INDENTURE
DATED AS OF JANUARY 23, 1997
_____________
CHEMICAL TRUST COMPANY OF CALIFORNIA
TRUSTEE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.01 Definitions.............................................. 1
Section 1.02 Other Definitions........................................ 20
Section 1.03 Incorporation by Reference of Trust Indenture Act........ 20
Section 1.04 Rules of Construction.................................... 21
ARTICLE 2
THE NOTES
Section 2.01 Form and Dating.......................................... 21
Section 2.02 Execution and Authentication............................. 23
Section 2.03 Registrar and Paying Agent............................... 24
Section 2.04 Paying Agent to Hold Money in Trust...................... 25
Section 2.05 Holder Lists............................................. 25
Section 2.06 Transfer and Exchange.................................... 25
Section 2.07 Replacement Notes........................................ 35
Section 2.08 Outstanding Notes........................................ 35
Section 2.09 Treasury Notes........................................... 36
Section 2.10 Temporary Notes.......................................... 36
Section 2.11 Cancellation............................................. 36
Section 2.12 Defaulted Interest....................................... 37
ARTICLE 3
REDEMPTION
Section 3.01 Notices to Trustee....................................... 37
Section 3.02 Selection of Notes to Be Redeemed........................ 37
Section 3.03 Notice of Redemption..................................... 38
Section 3.04 Effect of Notice of Redemption........................... 39
Section 3.05 Deposit of Redemption Price.............................. 39
Section 3.06 Notes Redeemed in Part................................... 39
Section 3.07 Optional Redemption...................................... 39
Section 3.08 Mandatory Redemption..................................... 40
ARTICLE 4
COVENANTS
Section 4.01 Payment of Notes......................................... 40
Section 4.02 Maintenance of Office or Agency.......................... 41
Section 4.03 Compliance Certificate................................... 41
Section 4.04 Taxes.................................................... 42
Section 4.05 Stay, Extension and Usury Laws........................... 42
Section 4.06 Change of Control........................................ 43
Section 4.07 Asset Sales.............................................. 44
Section 4.08 Restricted Payments...................................... 45
Section 4.09 Incurrence of Indebtedness and Issuance of Preferred
Stock.................................................... 48
Section 4.10 Liens.................................................... 50
Section 4.11 Dividend and Other Payment Restrictions Affecting
Subsidiaries............................................. 50
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.12 Transactions with Affiliates............................. 51
Section 4.13 Business Activities...................................... 52
Section 4.14 Reports.................................................. 52
Section 4.15 Additional Subsidiary Guarantees......................... 53
ARTICLE 5
SUCCESSORS
Section 5.01 Limitations on Merger, Consolidation or Sale of
Substantially All Assets................................. 53
Section 5.02 Successor Corporation Substituted........................ 54
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01 Events of Default........................................ 54
Section 6.02 Acceleration............................................. 55
Section 6.03 Other Remedies........................................... 56
Section 6.04 Waiver of Past Defaults.................................. 56
Section 6.05 Control by Majority...................................... 57
Section 6.06 Limitation on Suits...................................... 57
Section 6.07 Rights of Holders to Receive Payment..................... 58
Section 6.08 Collection Suit by Trustee............................... 58
Section 6.09 Trustee May File Proofs of Claim......................... 58
Section 6.10 Priorities............................................... 59
Section 6.11 Undertaking for Costs.................................... 59
ARTICLE 7
TRUSTEE
Section 7.01 Duties of Trustee........................................ 60
Section 7.02 Rights of Trustee........................................ 61
Section 7.03 Individual Rights of Trustee............................. 62
Section 7.04 Trustee's Disclaimer..................................... 62
Section 7.05 Notice of Defaults....................................... 62
Section 7.06 Reports by Trustee to Holders............................ 63
Section 7.07 Compensation and Indemnity............................... 63
Section 7.08 Replacement of Trustee................................... 64
Section 7.09 Successor Trustee by Merger, etc......................... 65
Section 7.10 Eligibility; Disqualification............................ 65
Section 7.11 Preferential Collection of Claims Against the Company.... 65
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01 Option to Effect Legal Defeasance or Covenant
Defeasance............................................... 66
Section 8.02 Legal Defeasance and Discharge........................... 66
Section 8.03 Covenant Defeasance...................................... 66
Section 8.04 Conditions to Legal or Covenant Defeasance............... 67
Section 8.05 Deposited Money and Government Securities to be Held in
Trust; Other Miscellaneous Provisions.................... 69
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 8.06 Repayment to the Company................................. 70
Section 8.07 Reinstatement............................................ 70
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01 Without Consent of Holders............................... 71
Section 9.02 With Consent of Holders.................................. 71
Section 9.03 Compliance with Trust Indenture Act...................... 73
Section 9.04 Revocation and Effect of Consents........................ 73
Section 9.05 Notation on or Exchange of Notes......................... 74
Section 9.06 Trustee to Sign Amendments, etc.......................... 74
ARTICLE 10
SUBSIDIARY GUARANTEES
Section 10.01 Subsidiary Guarantees.................................... 74
Section 10.02 Execution and Delivery of Subsidiary Guarantees.......... 76
Section 10.03 Subsidiary Guarantors May Consolidate, etc.,
on Certain Terms......................................... 77
Section 10.04 Releases Following Sale of Assets........................ 78
Section 10.05 Limitation of Subsidiary Guarantor's Liability........... 78
Section 10.06 Application of Certain Terms and Provisions to the
Subsidiary Guarantors.................................... 79
ARTICLE 11
MISCELLANEOUS
Section 11.01 Trust Indenture Act Controls............................. 80
Section 11.02 Notices.................................................. 80
Section 11.03 Communication by Holders with Other Holders.............. 81
Section 11.04 Certificate and Opinion as to Conditions Precedent....... 81
Section 11.05 Statements Required in Certificate or Opinion............ 81
Section 11.06 Rules by Trustee and Agents.............................. 82
Section 11.07 Legal Holidays........................................... 82
Section 11.08 No Recourse Against Others............................... 82
Section 11.09 Duplicate Originals...................................... 83
Section 11.10 Governing Law............................................ 83
Section 11.11 No Adverse Interpretation of Other Agreements............ 83
Section 11.12 Successors............................................... 83
Section 11.13 Severability............................................. 83
Section 11.14 Counterpart Originals.................................... 83
Section 11.15 Table of Contents, Headings, etc......................... 83
SIGNATURES............................................................... 85
</TABLE>
iii
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Exhibit A-1 Form of Note
Exhibit A-2 Form of Regulation S Temporary Note
Exhibit B-1 Form of Certificate for Exchange or Registration of
Transfer of Rule 144A Global Note to Regulation S
Global Note
Exhibit B-2 Form of Certificate for Exchange or Registration of
Transfer From Regulation S Global Note to Rule 144A
Global Note
Exhibit B-3 Form of Certificate for Exchange or Registration of
Transfer of Certificated Notes
Exhibit B-4 Form of Certificate for Exchange or Registration of
Transfer From Rule 144A Global Note or Regulation S
Permanent Global Note to Certificated Note
Exhibit B-5 Form of Certificate for Exchange or Registration of
Transfer From Certificated Note to Rule 144A Global
Note or Regulation S Permanent Global Note
</TABLE>
iv
<PAGE>
INDENTURE dated as of January 23, 1997, between Imperial Credit Industries,
Inc., a California corporation (the "Company"), the Initial Subsidiary
Guarantors (as defined) and Chemical Trust Company of California, a California
corporation, as trustee ("Trustee").
Each party agrees as follows for the benefit of each other and for the
equal and ratable benefit of the Holders of the 9-7/8% Series A Senior Notes due
2007 of the Company (the "Series A Notes") and the 9-7/8% Series B Senior Notes
due 2007 (the "Series B Notes" and, together with the Series A Notes, the
"Notes"):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.01. Definitions
"Acquired Debt" means, with respect to any specified Person (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, control
(including, with correlative meanings, the terms controlling, controlled by and
under common control with), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. Notwithstanding the foregoing, no Person (other than
the Company or any Restricted Subsidiary of the Company) in whom a Special
Purpose Subsidiary makes an Investment in connection with a Qualified
Securitization Transaction shall be deemed to be an Affiliate of the Company or
any of its Restricted Subsidiaries solely by reason of such Investment.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Agent Members" means any member of, or participant in, the Depositary.
"Applicable Procedures" means, with respect to any transfer or exchange of
beneficial interests in a Global Note, the rules and procedures of the
Depositary that are applicable to such transfer or exchange.
<PAGE>
"Asset Sale" means (a) any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) by the Company or
any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (other than as permitted under Sections
5.01 or 10.03) (each referred to for the purposes of this definition as a
"disposition"), of (i) any shares of Capital Stock of a Restricted Subsidiary
(other than directors' qualifying shares or shares required by applicable law to
be held by a Person other than the Company or a Restricted Subsidiary, as the
case may be), (ii) all or substantially all the assets of any division or line
of business of the Company or any Restricted Subsidiary, (iii) any other assets
of the Company or any Restricted Subsidiary outside of the ordinary course of
business of the Company or such Restricted Subsidiary, as the case may be,
including any sale of the stock of a Restricted Subsidiary, or (iv) any
Securitization Related Asset, or (b) any issuance of Capital Stock (other than
non-convertible preferred stock that is not Disqualified Stock) by any of the
Company's Restricted Subsidiaries, except any such issuance to the Company or
any Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor.
Notwithstanding the foregoing, an "Asset Sale" does not include (a) a
disposition by a Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary or by the Company to a Wholly Owned Restricted Subsidiary, (b) a
disposition that constitutes a Restricted Payment permitted by Section 4.08),
(c) sales of Receivables in Qualified Securitization Transactions for the fair
market value thereof, including cash in an amount at least equal to 75% of the
book value thereof as determined in accordance with GAAP, (d) transfers of
Receivables by a Special Purpose Subsidiary to third parties in a Qualified
Securitization Transaction and (e) any trade or exchange by the Company or any
Restricted Subsidiary of any assets for similar assets of a Related Business
owned or held by another Person; provided that (1) the fair market value of the
assets traded or exchanged by the Company or such Restricted Subsidiary
(including any cash or Cash Equivalents to be delivered by the Company or such
Restricted Subsidiary) is reasonably equivalent to the fair market value of the
asset or assets (together with any cash or Cash Equivalents) to be received by
the Company or such Restricted Subsidiary and (2) such exchange is approved by a
majority of the directors of the Company who are not employees of the Company or
its Restricted Subsidiaries.
"Authentication Order" means an Officers' Certificate ordering the Trustee
to authenticate Notes.
"Board of Directors" means the Board of Directors of the Company or any
authorized committee of the Board of Directors.
"Board Resolution" means a resolution duly adopted by the Board of
Directors of the Company.
"Business Day" means any day other than a Legal Holiday.
2
<PAGE>
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capitalized Excess Servicing Fees Receivables" mean, with respect to the
sale of Receivables in a Qualified Securitization Transaction, the present value
of the excess of the weighted average coupon on the Receivables sold over the
sum of (i) the coupon in the pass-through certificates, (ii) a base servicing
fee paid to the loan or lease servicer and (iii) expected losses to be incurred
on the portfolio of Receivables sold, considering prepayment assumptions.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means: (i) United States dollars; (ii) Government
Securities (except that for purpose of this definition, Government Securities
must have a remaining Weighted Average Life to Maturity of not more than one
year from the date of investment therein); (iii) commercial paper or other
short-term corporate obligation that has received a rating of at least A-1 or AA
from Standard & Poor's Corporation ("S&P"), P-1 or Aa2 from Moody's Investor
Services, Inc. ("Moody's"), F-1 or AA from Fitch Investor Service, Inc.
("Fitch"), or D-1 or AA from Duff & Phelps Credit Rating Co., ("Duff"); (iv)
time deposits, certificates of deposit, bank acceptances or bank notes issued by
any bank having capital surplus and undivided profits aggregating at least
$500,000,000 (or the foreign currency equivalent thereof) and at least a high A
rating (or the equivalent) from any two of the following: S&P, Moody's, Thomson
Bankwatch, Inc. or IBCA, Inc.; (v) money market preferred stocks which, at the
date of acquisition and at all times thereafter, are accorded ratings of at
least mid AA by any two of the following: S&P, Moody's, Fitch or Duff; (vi) tax-
exempt obligations that are accorded ratings at the time of investment therein
of at least mid AA (or equivalent short-term ratings) by any two of the
following; S&P, Moody's, Fitch or Duff; (vii) master repurchase agreements with
foreign or domestic banks having capital and surplus of not less than
$500,000,000 (or the foreign equivalent thereof) or primary dealers so long as
(a) such bank or dealer has a rating of at least mid AA from any two of the
following: S&P, Moody's, Fitch or Duff; (b) such agreements are collateralized
with obligations of the United States government or its agencies at a ratio of
102%, or with other collateral rated at least mid AA from any two of the
following: S&P, Moody's, Fitch or Duff, at a rate of 103% and, in either case
marked to market weekly and (c) such securities shall be held by a third-party
agent; (viii) guaranteed investment contracts and/or agreements
3
<PAGE>
of a bank, insurance company or other institution whose unsecured, uninsured and
unguaranteed obligations (or claims-paying ability) are, at the time of
investment therein, rated AAA by any two of the following: S&P, Moody's, Fitch
or Duff; (ix) money market funds, the portfolio of which is limited to
investments described in clauses (i) through (viii); (x) with respect to Non-
Domestic Persons, instruments that are comparable to those described in clauses
(i), (ii), (iv) and (vii) in the country in which such Non-Domestic Person is
organized or has its principal business operations; and (xii) up to $1,000,000
in the aggregate of other financial assets held by Restricted Subsidiaries. In
no event shall any of the Cash Equivalents described in clauses (iii) through
(viii), (x) and (xi) above have a final maturity more than one year from the
date of investment therein.
"Certificated Notes" means Notes that are in the form of the Notes attached
hereto as Exhibit A-1, that do not include the information called for by
footnotes 1 and 2 thereof.
"Change of Control" means the occurrence of one or more of the following
events: (i) a person or entity or group (as that term is used in Section
13(d)(3) of the Exchange Act) of persons or entities shall have become the
beneficial owner of a majority of the securities of the Company ordinarily
having the right to vote in the election of directors; (ii) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any directors
who are members of such Board of Directors of the Company on the date hereof and
any new directors whose election by such Board of Directors of the Company or
whose nomination for election by the shareholders of the Company was approved by
a vote of 66 2/3% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; (iii) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to any person or entity or
group (as so defined) of persons, or entities (other than to any Wholly Owned
Restricted Subsidiary of the Company); (iv) the merger or consolidation of the
Company with or into another corporation or the merger of another corporation
into the Company with the effect that immediately after such transaction any
person or entity or group (as so defined) of persons or entities shall have
become the beneficial owner of securities of the surviving corporation of such
merger or consolidation representing a majority of the combined voting power of
the outstanding securities of the surviving corporation ordinarily having the
right to vote in the election of directors; or (v) the adoption of a plan
relating to the liquidation or dissolution of the Company.
4
<PAGE>
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all consolidated Indebtedness of the
Company and its Restricted Subsidiaries, excluding Warehouse Indebtedness and
Guarantees thereof permitted to be incurred pursuant to clause (iii) of Section
4.09 to (ii) the Consolidated Net Worth of the Company.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Subsidiary Guarantor, (ii) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
that Net Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its shareholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded, (iv) the cumulative effect of a change in
accounting principles shall be excluded, and (v) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Subsidiaries.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common shareholders of such Person
and its consolidated Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less (x) all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the Issue Date in the book value of any asset
owned by such Person or a consolidated Restricted Subsidiary of such Person, (y)
all investments as of such date in unconsolidated Restricted Subsidiaries and in
Persons that are not Restricted Subsidiaries (except, in each case, Permitted
Investments), and (z) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in accordance
with GAAP.
5
<PAGE>
"Corporate Trust Office of the Trustee" shall be at the address of the
Trustee specified in Section 11.02 or such other address as the Trustee may give
notice to the Company.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Depositary" means, with respect to the Notes issuable or issued in whole
or in part in global form, the Person specified in Section 2.03 hereof as the
Depositary with respect to the Notes, until a successor shall have been
appointed and become such Depositary pursuant to the applicable provision of
this Indenture, and, thereafter, "Depositary" shall mean or include such
successor.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the Stated Maturity of the Notes.
"Dollars" and "$" means lawful money of the United States of America.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means an underwritten primary public offering of Equity
Interests (other then Disqualified Stock) of the Company pursuant to an
effective registration statement under the Securities Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Offer" means the offer that may be made by the Company pursuant
to the Registration Rights Agreement to exchange Series B Notes for Series A
Notes.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other then Indebtedness under the Warehouse Facilities) in
existence on the Issue Date, until such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been
6
<PAGE>
approved by a significant segment of the accounting profession, which are in
effect on the Issue Date.
"Global Notes" means, individually and collectively, the Regulation S
Temporary Global Note, the Regulation S Permanent Global Note and the Rule 144A
Global Note.
"Government Securities" means direct obligations of the United States of
America, or any agency or instrumentality thereof for the payment of which the
full faith and credit of the United States of America is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates, in either case in the ordinary course of business and not for speculative
or investment purposes.
"Holder" means a Person in whose name a Note is registered.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable, (ii) all Capital
Lease Obligations of such Person, (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable and expense accruals
arising in the ordinary course of business), (iv) all obligations of such Person
for the reimbursement of any obligor on any letter of credit, banker's
acceptance or similar credit transaction (other than obligations with respect to
letters of credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth Business
Day following receipt by such Person of a demand for reimbursement following
payment on the letter of credit), (v) the amount of all obligations of such
Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock other than Permitted SPTL Preferred Stock (but excluding any
accrued dividends), (vi) all Warehouse Indebtedness, (vii) all obligations of
the type referred to in clauses (i)
7
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through (vi) of other Persons and all dividends of other Persons for the payment
of which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guaranty, (viii) all obligations of the type referred to in clauses (i) through
(vii) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the amount of
such obligation being deemed to be the lesser of the value of such property or
assets or the amount of the obligation so secured and (ix) to the extent not
otherwise included in this definition, Hedging Obligations of such Person.
Except in the case of Warehouse Indebtedness (the amount of which shall be
determined in accordance with the definition thereof) the amount of Indebtedness
of any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date. Notwithstanding the foregoing, the term "Indebtedness"
does not include deposit liabilities of any Restricted Subsidiary, the deposits
of which are insured by the Federal Deposit Insurance Corporation or any
successor agency or Indebtedness of any Restricted Subsidiary to the Federal
Home Loan Bank of San Francisco or any successor thereto incurred in the
ordinary course of business and secured by qualifying mortgage loans or
mortgage-backed securities.
"Indenture" means this Indenture as amended or supplemented from time to
time.
"Initial Subsidiary Guarantors" means the initial Subsidiary Guarantors as
of the date of this Indenture.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities of the
Company shall not be deemed to be an Investment. If the Company or any
Restricted Subsidiary of the Company sells or otherwise disposes of any Equity
Interests of any Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, such Person is no longer a Subsidiary of
the Company, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value (as determined as
set forth in the last paragraph under Section 4.08) of the Equity Interests of
such Restricted Subsidiary not sold or disposed of; provided, however, that this
requirement shall not apply if (i) the class of Equity Interests of the
Restricted
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Subsidiary owned by the Company is registered under Section 12 of the Exchange
Act and is listed on a national securities exchange or quoted on a national
quotations system and (ii) if the Company has entered into an agreement with the
Restricted Subsidiary that provides the Company with the right to demand
(subject to customary restrictions) registration of all of its Equity Interests
under the Securities Act.
"Issue Date" means the date on which the Series A Notes are originally
issued.
"Lien" means, with respect to any Person, any mortgage, pledge, security
interest, encumbrance, lien or charge of any kind on the assets of such Person,
including (i) any conditional sale or other title retention agreement or lease
in the nature thereof, and (ii) any claim (whether direct or indirect through
subordination or other structural encumbrance against any Securitization Related
Asset sold or otherwise transferred by such Person to a buyer, unless such
Person is not liable for any losses thereon).
"Liquidated Damages" means all of the liquidated damages owing pursuant to
Section 5 of the Registration Rights Agreement.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and after any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Asset
Sale and any reserve for adjustment in respect of the sale price of such asset
or assets established in accordance with GAAP.
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"Non-Recourse Debt" means Indebtedness: (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), or (b) is directly or indirectly liable (as a guarantor or
otherwise); (ii) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness (other than the Notes being offered hereby) of the Company or
any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Note Custodian" means the Trustee, as custodian with respect to the Global
Notes, or any successor entity thereto.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers" means the Chief Executive Officer, the President, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary or any Vice-President of the Company.
"Officers' Certificate" means a certificate signed by two Officers, one of
whom must be the principal executive officer, principal financial officer or
principal accounting officer of the Company.
"Opinion of Counsel" means an opinion from legal counsel who is reasonably
acceptable to the Trustee. Except with respect to any opinion delivered
pursuant to Article 8, the counsel may be an employee of the Company or the
Trustee. The counsel may be counsel to the Company or the Trustee.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary: (i) in a Subsidiary Guarantor or in SPTL or a Person that will, upon
the making of such Investment, become a Subsidiary Guarantor; provided, however,
that the primary business of such Subsidiary Guarantor is a Related Business;
and provided further, that any Investment by the Company in SPTL must be in the
form of Permitted SPTL Preferred Stock or in a security senior to such stock;
(ii) in another Person if as a result of such Investment such other Person is
merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Subsidiary Guarantor;
provided, however, that such Person's primary business is a Related Business;
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(iii) comprised of Cash Equivalents; (iv) comprised of Receivables owing to the
Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; (v) comprised of payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses for accounting purposes and that are made in the ordinary course of
business; (vi) comprised of stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; (vii) in
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Sale as permitted pursuant to Section 4.07;
(viii) comprised of Receivables of the Company or any of its Wholly Owned
Restricted Subsidiaries; or (ix) comprised of Securitization Related Assets
arising in a Qualified Securitization Transaction.
"Permitted Liens" means, with respect to any Person: (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for non-
payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions to,
property of such Person (but excluding Capital Stock of another Person);
provided, however, that the Lien may not extend to any other property owned by
such Person or any of its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness secured by the Lien may not be Incurred more than 180
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days after the latest of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property subject
to the Lien; (g) Liens on Receivables owned by the Company or a Restricted
Subsidiary, as the case may be, to secure Indebtedness permitted under clause
(ii) of Section 4.09; (h) Liens on Securitization Related Assets (or on the
Capital Stock of any Subsidiary of such Person substantially all the assets of
which are Securitization Related Assets); provided, however, that, (x) any such
Liens may only encumber Securitization Related Assets in an amount not to exceed
75% of the excess, if any, of (i) the total amount of Securitization Related
Assets, determined on a consolidated basis in accordance with GAAP, as of the
creation of such Lien over (ii) an amount equal to 150% of all unsecured Senior
Indebtedness of the Company and its Restricted Subsidiaries as of the time of
creation of such Lien, and (y) the balance of Securitization Related Assets, not
permitted to be encumbered by the foregoing proviso (x) shall remain
unencumbered by any Lien; (i) Liens on Receivables and other assets of a Special
Purpose Subsidiary incurred in connection with a Qualified Securitization
Transaction; (j) Liens existing on the Issue Date; (k) Liens on property or
shares of Capital Stock of another Person at the time such other Person becomes
a Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such other
Person becoming such a Subsidiary; provided further, however, that such Lien may
not extend to any other property owned by such Person or any of its
Subsidiaries; (l) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including, any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of such acquisition; provided further,
however, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries; (m) Liens securing Indebtedness or other
obligations of a Subsidiary of such Person owing to such Person or a Restricted
Subsidiary of such Person; (n) Liens (other than on any Securitization Related
Assets) securing Hedging Obligations; (o) Liens on cash or other assets (other
than Securitization Related Assets) securing Warehouse Indebtedness of the
Company or its Restricted Subsidiaries; (p) Liens to secure any Permitted
Refinancing Indebtedness as a whole, or in part, with any Indebtedness permitted
under this Indenture to be Incurred and secured by any Lien referred to in the
foregoing clauses (f), (j), (k) and (l); provided, however, that (x) such new
Lien shall be limited to all or part of the same property that secured the
original Lien (plus improvements to or on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding, principal amount or, if greater,
committed amount of the Indebtedness described under clauses (f), (j), (k) or
(l), as the case may be, at the time the original Lien became a Permitted Lien
and (B) an amount necessary to pay any fees and expenses, including premiums,
related to such refinancing, refunding, extension, renewal or replacement; (q)
Liens securing deposit liabilities of any Restricted Subsidiary, the deposits of
which are insured by the Federal Deposit Insurance Corporation or any
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successor agency or Indebtedness of any Restricted Subsidiary to the Federal
Home Loan Bank of San Francisco or any successor thereto incurred in the
ordinary course of business and secured by qualifying mortgage loans or
mortgage-backed securities; and (r) Liens on assets of Unrestricted Subsidiaries
that secure Non-Recourse Debt of Unrestricted Subsidiaries. Notwithstanding the
foregoing, "Permitted Liens" will not include any Lien described in clauses (f),
(j) or (k) above to the extent such Lien applies to any Additional Assets
acquired directly or indirectly from Net Proceeds pursuant to Section 4.07.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or accreted value, if applicable) of
such Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (v) such Indebtedness may not include a
Guaranty of Indebtedness of a Person that is not a Subsidiary of the Company.
"Permitted SPTL Preferred Stock" means nonvoting (except as provided in the
second proviso below), noncumulative, perpetual preferred stock of SPTL which
would qualify as Tier 1 capital or the equivalent thereof on an unrestricted
basis for purposes of the capital requirements contained in 12 C.F.R. Part 325,
Subpart A, or any successor provision; provided that the total liquidation
preference of such preferred stock outstanding at any time shall not exceed 20%
of the Consolidated Net Worth of SPTL (after giving effect to the issuance of
such preferred stock); and provided further, that the holders of such stock may
be granted the right to elect directors constituting less than a majority of the
board of directors of SPTL if dividends on such have not been paid for six
dividend periods, whether consecutive or not, and until such time as SPTL has
paid or declared and set apart for payment dividends for four consecutive
dividend periods.
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"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets as
to which such Warehouse Indebtedness relates are or, prior to any funding under
the related Warehouse Facility with respect to such assets, were eligible to be
recorded as held for sale on the consolidated balance sheet of the Company in
accordance with GAAP, (ii) such Warehouse Indebtedness will be deemed to be
Permitted Warehouse Indebtedness (a) in the case of a Purchase Facility, only to
the extent the holder of such Warehouse Indebtedness has no contractual recourse
to the Company and its Restricted Subsidiaries to satisfy claims in respect of
such Permitted Warehouse Indebtedness in excess of the realizable value of the
Receivables financed thereby, and (b) in the case of any other Warehouse
Facility, only to the extent of the lesser of (A) the amount advanced by the
lender with respect to the Receivables financed under such Warehouse Facility,
and (B) the principal amount of such Receivables and (iii) any such Indebtedness
has not been outstanding in excess of 364 days.
"Person" means any individual, corporation, limited liability company,
partnership, association, joint stock company, trust or trustee thereof, estate
or executor thereof, unincorporated organization or joint venture.
"Purchase Facility" means any Warehouse Facility in the form of a purchase
and sale facility pursuant to which the Company or a Restricted Subsidiary of
the Company sells Receivables to a financial institution and retains a right of
first refusal upon the subsequent resale of such Receivables by such financial
institution.
"Qualified Securitization Transaction" means any transaction or series of
transactions pursuant to which (i) the Company or any of its Restricted
Subsidiaries (other than a Special Purpose Subsidiary) sells, conveys or
otherwise transfers to a Special Purpose Subsidiary or (ii) the Company, any of
its Restricted Subsidiaries or a Special Purpose Subsidiary sells, conveys or
otherwise transfers to a special purpose owner trust or other Person Receivables
(together with any assets related to such Receivables, including, without
limitation, all collateral securing such Receivables, all contracts and all
guarantees or other obligations in respect of such Receivables, proceeds of such
Receivables and other assets which are customarily transferred in connection
with asset securitization transactions involving Receivables) of the Company or
any of its Restricted Subsidiaries in transactions constituting "true sales"
under the Bankruptcy Laws and as "sales" under GAAP, as evidenced by an Opinion
of Counsel to such effect.
"Receivables" means consumer, mortgage and commercial loans, equipment or
other lease receivables and receivables purchased or originated by the Company
or any Restricted Subsidiary in the ordinary course of business; provided,
however, that for purposes of determining the amount of a Receivable at any
time, such amount shall be
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determined in accordance with GAAP, consistently applied, as of the most recent
practicable date.
"Registration Rights Agreement" means the A/B Exchange Registration Rights
Agreement, dated as of the date of this Indenture, by and among the Company and
the other parties named on the signature pages thereof, as such agreement may be
amended, modified or supplemented from time to time.
"Regulation S" means Regulation S promulgated under the Securities Act.
"Regulation S Global Note" means a Regulation S Temporary Global Note or
Regulation S Permanent Global Note, as appropriate.
"Regulation S Permanent Global Note" means a permanent global note that
contains the paragraph referred to in footnote 1 and the additional schedule
referred to in footnote 2 to the form of the Note attached hereto as Exhibit A-
1, and that is deposited with and registered in the name of the Depositary,
representing the Notes sold in reliance on Regulation S.
"Regulation S Temporary Global Note" means a single temporary global note
in the form of the Note attached hereto as Exhibit A-2 that is deposited with
and registered in the name of the Depositary, representing Notes sold in
reliance on Regulation S.
"Related Business" means any consumer or commercial finance business or any
financial advisory or financial service business.
"Residual Certificates" means, with respect to the sale of Receivables in a
Qualified Securitization Transaction, any certificates representing Receivables
not sold or transferred in such transaction or otherwise retained by or returned
to the Person transferring such Receivables.
"Responsible Officer" when used with respect to the Trustee, means any
officer within the Corporate Trust Office (or any successor group of the
Trustee) assigned by the Trustee to administer its corporate trust matters.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Retained Interest" means, with respect to the sale of Receivables in a
Qualified Securitization Transaction, the interest and rights retained by the
Person in the
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Receivables transferred or sold in a Qualified Securitization Transaction,
including any rights to receive cash flow attributable to such Receivables.
"Rule 144A" means Rule 144A promulgated under the Securities Act.
"Rule 144A Global Note" means a permanent global note that contains the
paragraph referred to in footnote 1 and the additional schedule referred to in
footnote 2 to the form of the Note attached hereto as Exhibit A-1, and that is
deposited with and registered in the name of the Depositary, representing Notes
sold in reliance on Rule 144A.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securitization Related Assets" means, with respect to a Qualified
Securitization Transaction: (i) the Capitalized Excess Servicing Fees Receivable
retained by the Person who transfers or sells Receivables in such a transaction;
(ii) the Retained Interest held by such Person in the Receivables sold or
transferred in such transaction; and (iii) Residual Certificates retained by
such Person in such transaction.
"Senior Indebtedness" means all Indebtedness of the Company or the
Subsidiary Guarantors that is not, by its terms, subordinated in right of
payment to the Notes.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Special Purpose Subsidiary" means a Wholly Owned Restricted Subsidiary of
the Company (a) that is designated (as set forth below) as a "Special Purpose
Subsidiary" by the Board of Directors of the Company, (b) that does not engage
in, and whose charter prohibits it from engaging in, any activities other than
Qualified Securitization Transactions, (c) no portion of the Indebtedness or any
other Obligations (contingent or otherwise) of which (i) is guaranteed by the
Company or any other Restricted Subsidiary of the Company, (ii) is recourse to
or obligates the Company or any other Restricted Subsidiary of the Company in
any way other than pursuant to representations, warranties, covenants and
indemnities entered into in the ordinary course of business in connection with a
Qualified Securitization Transaction or (iii) subjects any property or asset of
the Company or any other Restricted Subsidiary of the Company, directly or
indirectly, contingently or otherwise, to the satisfaction thereof, other than
pursuant to representations, warranties, covenants and indemnities entered into
in the ordinary course of business in connection with a Qualified Securitization
Transaction, (d) with which
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neither the Company nor any other Restricted Subsidiary of the Company has any
material contract, agreement, arrangement or understanding other than on terms
no less favorable to the Company or such Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company and (e)
with which neither the Company nor any other Restricted Subsidiary of the
Company has any obligation to maintain or preserve such Restricted Subsidiary's
financial condition or cause such Restricted Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
the Company shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the resolution of the Board of Directors of the Company giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions.
"SPFC" means Southern Pacific Funding Corporation, a California corporation
and a partially owned Subsidiary of the Company.
"SPTL" means Southern Pacific Thrift & Loan Association, a California
thrift and loan association and a Subsidiary of the Company.
"Stated Maturity" means, with respect to any installment of principal or
interest on any series of Indebtedness, the date on which such payment of
principal or interest was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such principal or interest prior to the date
originally scheduled for the payment thereof.
"Strategic Investor Repurchase Transaction" means the repurchase,
redemption or other retirement for value of any Equity Interests of any
Restricted Subsidiary (a) from a strategic partner or investor owning such
Equity Interests that, except for such Investment, would not be an Affiliate of
the Company or its Restricted Subsidiaries and (b) in a transaction whose terms
comply with the provisions of Section 4.12 hereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof); provided that SPFC and
ICIFC shall not be considered Subsidiaries of the Company unless the Company
owns more than 50% of the total voting power of shares of Capital Stock on or
after March 31, 1997.
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"Subsidiary Guarantors" means each of (i) the Restricted Subsidiaries of
the Company other than SPTL and the Special Purpose Subsidiaries and (ii) any
other Subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of this Indenture, and their respective successors and assigns.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. (S)(S) 77aaa-77bbbb)
as in effect on the date on which this Indenture is qualified under the TIA.
"Transfer Restricted Securities" means securities that bear or are required
to bear the legend set forth in Section 2.06 hereof.
"Treasury Rate" means, on any date of determination, a per annum rate equal
to the semiannual equivalent yield to maturity for United States Treasury
securities maturing on the maturity date of the Notes, as determined by
interpolation between the most recent weekly average yields to maturity for two
series of United States Treasury securities, (i) one maturing as close as
possible to, but earlier than, the maturity date of the Notes and (ii) the other
maturing as close as possible to, but later than, the maturity date of the
Notes, in each case as most recently published by the Board of Governors of the
Federal Reserve System in its Statistical Release H.15(519), or any successor
publication ("H.15(519)") (or, if a weekly average yield to maturity for United
States Treasury securities maturing on the maturity date of the Notes is
reported in the most recent H.15(519), as published in H.15(519)).
"Trustee" means the party named as such above until a successor replaces it
in accordance with the applicable provisions of this Indenture and thereafter
means the successor serving hereunder.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; (b) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (c) has not guaranteed or
otherwise directly or indirectly provided credit support for any Indebtedness of
the Company or any of its Restricted Subsidiaries; and (d) has at least one
director on its board of directors that is not a director or executive officer
of the Company or any of its Restricted Subsidiaries and has at least one
executive officer that is not a director or executive officer of the
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Company or any of its Restricted Subsidiaries. Any such designation by the Board
of Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by Section 4.08. If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of this Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under Section 4.09, the Company shall be in default of
such covenant). The Board of Directors of the Company may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under Section 4.09, (ii) such Subsidiary becomes a Subsidiary
Guarantor and (iii) no Default or Event of Default would be in existence
following such designation.
"Warehouse Facility" means any funding arrangement, including a Purchase
Facility, with a financial institution or other lender or purchaser, to the
extent (and only to the extent) funding thereunder is used exclusively to
finance or refinance the purchase or origination of Receivables by the Company
or a Restricted Subsidiary of the Company for the purpose of (i) pooling such
Receivables prior to securitization or (ii) sale, in each case in the ordinary
course of business.
"Warehouse Indebtedness" means the greater of (x) the consideration
received by the Company or its Restricted Subsidiaries under a Warehouse
Facility and (y) in the case of a Purchase Facility, the book value of the
Receivables financed under such Warehouse Facility until such time as such
Receivables are (i) securitized, (ii) repurchased by the Company or its
Restricted Subsidiaries or (iii) sold by the counterparty under the Warehouse
Facility to a Person who is not an Affiliate of the Company.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
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"Wholly Owned Restricted Subsidiary" of any Person means a Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Restricted Subsidiaries of such
Person and one or more Wholly Owned Subsidiaries of such Person.
Section 1.02 Other Definitions
<TABLE>
<CAPTION>
Defined in
Term Section
- ---- ----------
<S> <C>
"Accredited Investor"............... 2.01
"Affiliate Transaction"............. 4.12
"Asset Sale Offer".................. 4.07
"Asset Sale Offer Period"........... 4.07
"Asset Sale Offer Purchase Date".... 4.07
"Bankruptcy Law".................... 6.01
"Benefitted Party".................. 10.01
"Change of Control Offer"........... 4.06
"Change Of Control Offer Period".... 4.06
"Change of Control Payment"......... 4.06
"Change of Control Purchase Date"... 4.06
"Custodian"......................... 6.01
"DTC"............................... 2.03
"Event of Default".................. 6.01
"Legal Holiday"..................... 11.07
"Paying Agent"...................... 2.03
"QIB"............................... 2.01
"Registrar"......................... 2.03
"Restricted Payments"............... 4.08
"Transfer Restricted Security"...... 2.06
</TABLE>
Section 1.03 Incorporation by Reference of Trust Indenture Act
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following meanings:
"indenture securities" means the Notes;
"indenture security holder" means a Holder;
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"indenture to be qualified" means this Indenture;
"indenture trustee" or" institutional trustee" means the Trustee;
"obligor" on the Notes means the Company or any successor obligor
upon the Notes.
All other terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule under the TIA have
the meanings so assigned to them.
Section 1.04 Rules of Construction
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular; and
(5) provisions apply to successive events and transactions.
ARTICLE 2
THE NOTES
Section 2.01 Form and Dating
The Notes and Subsidiary Guarantees and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A-1, which is part
of this Indenture. The Notes may have notations, legends or endorsements
required by law, stock exchange rule or usage. Each Note shall be dated the
date of its authentication. The Notes shall be issued initially in
denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the Notes shall constitute, and are
hereby expressly made, a part of this Indenture, and the Company and the
Trustee, by their
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execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
(a) Rule 144A Global Notes. Notes offered and sold within the United
States to qualified institutional buyers as defined in Rule 144A ("QIBs") in
reliance on Rule 144A shall be issued initially in the form of Rule 144A Global
Notes, which shall be deposited on behalf of the purchasers of the Notes
represented thereby with the Depositary at its New York office, and registered
in the name of the Depositary or a nominee of the Depositary, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. The
aggregate principal amount of the Rule 144A Global Notes may from time to time
be increased or decreased by adjustments made on the records of the Trustee and
the Depositary or its nominee as hereinafter provided.
(b) Regulation S Global Notes. Notes offered and sold in reliance on
Regulation S shall be issued initially in the form of the Regulation S Temporary
Global Note, which shall be deposited on behalf of the purchasers of the Notes
represented thereby with the Trustee, at its New York office, as custodian for
the Depositary, and registered in the name of the Depositary or the nominee of
the Depositary, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. The "40-day restricted period" (as defined in Regulation
S) shall be terminated upon the receipt by the Trustee of (i) a written
certificate from the Depositary certifying that it has received certification of
non-United States beneficial ownership of 100% of the aggregate principal amount
of the Regulation S Temporary Global Note (except to the extent of any
beneficial owners thereof who acquired an interest therein pursuant to another
exemption from registration under the Securities Act and who will take delivery
of a beneficial ownership interest in a Rule 144A Global Note, all as
contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate
from the Company. Following the termination of the 40-day restricted period,
beneficial interests in the Regulation S Temporary Global Note shall be
exchanged for beneficial interests in Regulation S Permanent Global Notes
pursuant to the Applicable Procedures. Simultaneously with the authentication
of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation
S Temporary Global Note. The aggregate principal amount of the Regulation S
Temporary Global Note and the Regulation S Permanent Global Notes may from time
to time be increased or decreased by adjustments made on the records of the
Trustee and the Depositary or its nominee, as the case may be, in connection
with transfers of interest as hereinafter provided.
(c) Global Notes in General. Each Global Note shall represent such of the
outstanding Notes as shall be specified therein and each shall provide that it
shall represent the aggregate amount of outstanding Notes from time to time
endorsed thereon and that the aggregate amount of outstanding Notes represented
thereby may from time to time be reduced or increased, as appropriate, to
reflect exchanges and redemptions.
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<PAGE>
Any endorsement of a Global Note to reflect the amount of any increase or
decrease in the amount of outstanding Notes represented thereby shall be made by
the Trustee or the Note Custodian, at the direction of the Trustee, in
accordance with instructions given by the Holder thereof as required by Section
2.06 hereof.
Except as set forth in Section 2.06 hereof, the Global Notes may be
transferred, in whole and not in part, only to another nominee of the Depositary
or to a successor of the Depositary or its nominee.
(d) Book-Entry Provisions. This Section 2.01(d) shall apply only to Rule
144A Global Notes and the Regulation S Permanent Global Notes deposited with or
on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with this
Section 2.01(d) and Section 2.02, authenticate and deliver the Global Notes that
(i) shall be registered in the name of the Depositary or the nominee of the
Depositary and (ii) shall be delivered by the Trustee to the Depositary or
pursuant to the Depositary's instructions or held by the Trustee as custodian
for the Depositary.
Agent Members shall have no rights either under this Indenture with respect
to any Global Note held on their behalf by the Depositary or by the Trustee as
custodian for the Depositary or under such Global Note, and the Depositary may
be treated by the Company, the Trustee and any agent of the Company or the
Trustee as the absolute owner of such Global Note for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary
or impair, as between the Depositary and its Agent Members, the operation of
customary practices of such Depositary governing the exercise of the rights of
an owner of a beneficial interest in any Global Note.
(e) Certificated Notes. Notes issued to accredited investors as defined in
Rule 501(a)(1), (2), (3), (4) or (7) under the Securities Act ("Accredited
Investors") who are not QIBs and other Notes not issued as interests in the
Global Notes will be issued in certificated form substantially in the form of
Exhibit A-1 attached hereto (but without including the text referred to in
footnotes 1 and 2 thereto).
Section 2.02 Execution and Authentication
Two Officers shall sign the Notes for the Company by manual or facsimile
signature. The Company's seal shall be reproduced on the Notes and may be in
facsimile form.
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If an Officer whose signature is on a Note no longer holds that office at
the time a Note is authenticated, the Note shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature of
the Trustee. The signature shall be conclusive evidence that the Note has been
authenticated under this Indenture.
The Trustee shall, upon delivery of an Authentication Order, authenticate
Notes for original issue up to the aggregate principal amount stated in
paragraph 4 of the Notes. The aggregate principal amount of Notes outstanding
at any time may not exceed such amount except as provided in Section 2.07
hereof.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Notes. An authenticating agent may authenticate Notes whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such agent. An authenticating agent has
the same rights as an Agent to deal with the Company or an Affiliate of the
Company.
Neither the Company nor the Trustee shall have any responsibility for any
defect in the CUSIP number that appears on any Note, check, advice of payment or
redemption notice, and any such document may contain a statement to the effect
that CUSIP numbers have been assigned by an independent service for convenience
of reference and that neither the Company nor the Trustee shall be liable for
any inaccuracy in such numbers.
Section 2.03 Registrar and Paying Agent
The Company shall maintain in the Borough of Manhattan, the City of New
York, State of New York, and in such other locations as it shall determine, (i)
an office or agency where Notes may be presented for registration of transfer or
for exchange ("Registrar") and (ii) an office or agency where Notes may be
presented for payment ("Paying Agent"). The Registrar shall keep a register of
the Notes and of their transfer and exchange. The Company may appoint one or
more co-registrars and one or more additional paying agents. The term
"Registrar" includes any co-registrar and the term "Paying Agent" includes any
additional paying agent. The Company may change any Paying Agent or Registrar
without notice to any Holder. The Company shall notify the Trustee in writing
of the name and address of any Agent not a party to this Indenture. If the
Company fails to appoint or maintain another entity as Registrar or Paying
Agent, the Trustee shall act as such. The Company or any of its Subsidiaries
may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC") to act
as Depositary with respect to the Global Notes.
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<PAGE>
The Company initially appoints the Trustee to act as the Registrar and
Paying Agent and to act as Note Custodian with respect to the Global Notes. The
Company initially appoints the Trustee to act as the Registrar and Paying Agent
with respect to the Certificated Notes.
Section 2.04 Paying Agent to Hold Money in Trust
The Company shall require each Paying Agent other than the Trustee to agree
in writing that the Paying Agent will hold in trust for the benefit of Holders
or the Trustee all money held by the Paying Agent for the payment of principal,
premium, if any, interest and Liquidated Damages, if any, on the Notes, and
shall notify the Trustee of any default by the Company in making any such
payment. While any such default continues, the Trustee may require a Paying
Agent to pay all money held by it to the Trustee. The Company at any time may
require a Paying Agent to pay all money held by it to the Trustee. Upon payment
over to the Trustee, the Paying Agent (if other than the Company or a
Subsidiary) shall have no further liability for the money. If the Company or a
Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust
fund for the benefit of the Holders all money held by it as Paying Agent. Upon
any bankruptcy or reorganization proceedings relating to the Company, the
Trustee shall serve as Paying Agent for the Notes.
Section 2.05 Holder Lists
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Holders of
Notes, and the Company shall otherwise comply with TIA (S) 312(a).
Section 2.06 Transfer and Exchange
(a) Transfer and Exchange of Global Notes. The transfer and exchange of
Global Notes or beneficial interests therein shall be effected through the
Depositary, in accordance with this Indenture and the procedures of the
Depositary therefor, which shall include restrictions on transfer comparable to
those set forth herein to the extent required by the Securities Act. Beneficial
interests in a Global Note may be transferred to Persons who take delivery
thereof in the form of a beneficial interest in the same Global Note in
accordance with the transfer restrictions set forth in the legend in subsection
(g) of this Section 2.06. Transfers of beneficial interests in the Global Notes
to Persons required
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<PAGE>
to take delivery thereof in the form of an interest in another Global Note shall
be permitted as follows:
(i) Rule 144A Global Note to Regulation S Global Note. If, at any
time, an owner of a beneficial interest in a Rule 144A Global Note
deposited with the Depositary (or the Trustee as custodian for the
Depositary) wishes to transfer its interest in such Rule 144A Global Note
to a Person who is required or permitted to take delivery thereof in the
form of an interest in a Regulation S Global Note, such owner shall,
subject to the Applicable Procedures, exchange or cause the exchange of
such interest for an equivalent beneficial interest in a Regulation S
Global Note as provided in this Section 2.06(a)(i). Upon receipt by the
Trustee of (1) instructions given in accordance with the Applicable
Procedures from an Agent Member directing the Trustee to credit or cause to
be credited a beneficial interest in the Regulation S Global Note in an
amount equal to the beneficial interest in the Rule 144A Global Note to be
exchanged, (2) a written order given in accordance with the Applicable
Procedures containing information regarding the participant account of the
Depositary to be credited with such increase and (3) a certificate in the
form of Exhibit B-1 hereto given by the owner of such beneficial interest
stating that the transfer of such interest has been made in compliance with
the transfer restrictions applicable to the Global Notes and pursuant to
and in accordance with Rule 903 or Rule 904 of Regulation S, then the
Trustee, as Registrar, shall instruct the Depositary to reduce or cause to
be reduced the aggregate principal amount at maturity of the applicable
Rule 144A Global Note and to increase or cause to be increased the
aggregate principal amount at maturity of the applicable Regulation S
Global Note by the principal amount at maturity of the beneficial interest
in the Rule 144A Global Note to be exchanged, to credit or cause to be
credited to the account of the Person specified in such instructions a
beneficial interest in the Regulation S Global Note equal to the reduction
in the aggregate principal amount at maturity of the Rule 144A Global Note,
and to debit, or cause to be debited, from the account of the Person making
such exchange or transfer the beneficial interest in the Rule 144A Global
Note that is being exchanged or transferred.
(ii) Regulation S Global Note to Rule 144A Global Note. If, at any
time, an owner of a beneficial interest in a Regulation S Global Note
deposited with the Depositary (or with the Trustee as custodian for the
Depositary) wishes to transfer its interest in such Regulation S Global
Note to a Person who is required or permitted to take delivery thereof in
the form of an interest in a Rule 144A Global Note, such owner shall,
subject to the Applicable Procedures, exchange or cause the exchange of
such interest for an equivalent beneficial interest in a Rule 144A Global
Note as provided in this Section 2.06(a)(ii).
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<PAGE>
Upon receipt by the Trustee of (1) written instructions from the
Depositary, directing the Trustee, as Registrar, to credit or cause to be
credited a beneficial interest in the Rule 144A Global Note equal to the
beneficial interest in the Regulation S Global Note to be exchanged, such
instructions to contain information regarding the participant account with
the Depositary to be credited with such increase, (2) a written order given
in accordance with the Applicable Procedures containing information
regarding the participant account of the Depositary and (3) a certificate
in the form of Exhibit B-2 attached hereto given by the owner of such
beneficial interest stating (A) if the transfer is pursuant to Rule 144A,
that the Person transferring such interest in a Regulation S Global Note
reasonably believes that the Person acquiring such interest in a Rule 144A
Global Note is a QIB and is obtaining such beneficial interest in a
transaction meeting the requirements of Rule 144A and any applicable blue
sky or securities laws of any state of the United States, (B) that the
transfer complies with the requirements of Rule 144 under the Securities
Act and any applicable blue sky or securities laws of any state of the
United States or (C) if the transfer is pursuant to any other exemption
from the registration requirements of the Securities Act, that the transfer
of such interest has been made in compliance with the transfer restrictions
applicable to the Global Notes and pursuant to and in accordance with the
requirements of the exemption claimed, such statement to be supported by an
Opinion of Counsel from the transferee or the transferor in form reasonably
acceptable to the Company and to the Registrar, then the Trustee, as
Registrar, shall instruct the Depositary to reduce or cause to be reduced
the aggregate principal amount at maturity of such Regulation S Global Note
and to increase or cause to be increased the aggregate principal amount at
maturity of the applicable Rule 144A Global Note by the principal amount at
maturity of the beneficial interest in the Regulation S Global Note to be
exchanged, and the Trustee, as Registrar, shall instruct the Depositary,
concurrently with such reduction, to credit or cause to be credited to the
account of the Person specified in such instructions a beneficial interest
in the applicable Rule 144A Global Note equal to the reduction in the
aggregate principal amount at maturity of such Regulation S Global Note and
to debit or cause to be debited from the account of the Person making such
transfer the beneficial interest in the Regulation S Global Note that is
being transferred.
(b) Transfer and Exchange of Certificated Notes. When Certificated Notes
are presented by a Holder to the Registrar with a request:
(x) to register the transfer of the Certificated Notes; or
(y) to exchange such Certificated Notes for an equal principal amount
of Certificated Notes of other authorized denominations,
27
<PAGE>
the Registrar shall register the transfer or make the exchange as requested;
provided, however, that the Certificated Notes presented or surrendered for
register of transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Registrar duly executed by such Holder
or by his attorney, duly authorized in writing; and
(ii) in the case of a Certificated Note that is a Transfer Restricted
Security, such request shall be accompanied by the following additional
information and documents, as applicable:
(A) if such Transfer Restricted Security is being delivered to
the Registrar by a Holder for registration in the name of such Holder,
without transfer, or such Transfer Restricted Security is being
transferred to the Company, a certification to that effect from such
Holder (in substantially the form of Exhibit B-3 hereto);
(B) if such Transfer Restricted Security is being transferred to
a QIB in accordance with Rule 144A under the Securities Act or
pursuant to an exemption from registration in accordance with Rule 144
under the Securities Act or pursuant to an effective registration
statement under the Securities Act, a certification to that effect
from such Holder (in substantially the form of Exhibit B-3 hereto); or
(C) if such Transfer Restricted Security is being transferred in
reliance on any other exemption from the registration requirements of
the Securities Act (including Rule 904 thereunder), a certification to
that effect from such Holder (in substantially the form of Exhibit B-3
hereto) and an Opinion of Counsel from such Holder or the transferee
reasonably acceptable to the Company and to the Registrar to the
effect that such transfer is in compliance with the Securities Act.
(c) Transfer of a Beneficial Interest in a Rule 144A Global Note or
Regulation S Permanent Global Note for a Certificated Note
(i) Any Person having a beneficial interest in a Rule 144A Global Note
or Regulation S Permanent Global Note may upon request, subject to the
Applicable Procedures, exchange such beneficial interest for a Certificated
Note. Upon receipt by the Trustee of written instructions or such other
form of instructions as is customary for the Depositary, from the
Depositary or its nominee on behalf of any Person having a beneficial
interest in a Rule 144A
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Global Note or Regulation S Permanent Global Note, and, in the case of a
Transfer Restricted Security, the following additional information and
documents (all of which may be submitted by facsimile):
(A) if such beneficial interest is being transferred to the
Person designated by the Depositary as being the beneficial owner, a
certification to that effect from such Person (in substantially the
form of Exhibit B-4 hereto);
(B) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act or pursuant to an
exemption from registration in accordance with Rule 144 under the
Securities Act or pursuant to an effective registration statement
under the Securities Act, a certification to that effect from the
transferor (in substantially the form of Exhibit B-4 hereto); or
(C) if such beneficial interest is being transferred in reliance
on any other exemption from the registration requirements of the
Securities Act (including Rule 904 thereunder), a certification to
that effect from the transferor (in substantially the form of Exhibit
B-4 hereto) and an Opinion of Counsel from the transferee or the
transferor reasonably acceptable to the Company and to the Registrar
to the effect that such transfer is in compliance with the Securities
Act,
in which case the Trustee or the Note Custodian, at the direction of the
Trustee, shall, in accordance with the standing instructions and procedures
existing between the Depositary and the Note Custodian, cause the aggregate
principal amount of Rule 144A Global Notes or Regulation S Permanent Global
Notes, as applicable, to be reduced accordingly and, following such reduction,
the Company shall execute and the Trustee shall authenticate and deliver to the
transferee a Certificated Note in the appropriate principal amount.
(ii) Certificated Notes issued in exchange for a beneficial interest
in a Rule 144A Global Note or Regulation S Permanent Global Note, as
applicable, pursuant to this Section 2.06(c) shall be registered in such
names and in such authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. The Trustee shall deliver such Certificated Notes to
the Persons in whose names such Notes are so registered. Following any
such issuance of Certificated Notes, the Trustee, as Registrar, shall
instruct the Depositary to reduce or cause to be reduced the aggregate
principal amount at maturity of the applicable Global Note to reflect the
transfer.
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(d) Restrictions on Transfer and Exchange of Global Notes. Notwithstanding
any other provision of this Indenture (other than the provisions set forth in
subsection (f) of this Section 2.06), a Global Note may not be transferred as a
whole except by the Depositary to a nominee of the Depositary, or by a nominee
of the Depositary to the Depositary or another nominee of the Depositary, or by
the Depositary or any such nominee to a successor Depositary or a nominee of
such successor Depositary.
(e) Transfer and Exchange of a Certificated Note for a Beneficial Interest
in a Global Note. Holders of Certificated Notes may offer, resell, pledge or
otherwise transfer such Notes only pursuant to an effective registration
statement under the Securities Act, inside the United States to a QIB in a
transaction meeting the requirements of Rule 144A, in a transaction meeting the
requirements of Rule 144 under the Securities Act, outside the United States in
a transaction meeting the requirements of Rule 904 under the Securities Act or
to the Company, in each case in compliance with any applicable securities laws
of any State of the United States or any other applicable jurisdiction.
When Certificated Notes are presented by a Holder to the Registrar with a
request (x) to register the transfer of the Certificated Notes or (y) to
exchange such Certificated Notes for an equal principal amount of Certificated
Notes of other authorized denominations, the Registrar shall register the
transfer or make the exchange as requested if its requirements for such
transactions are met; provided, however, that the Certificated Notes presented
or surrendered for register of transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Registrar duly executed by such Holder
or by his attorney, duly authorized in writing, which instructions, if
applicable, shall direct the Trustee (A) to cancel any Certificated Note
being exchanged for another Certificated Note or a beneficial interest in a
Global Note in accordance with Section 2.11 hereof, and (B) to make, or to
direct the Registrar to make, an endorsement on the appropriate Global Note
to reflect an increase in the aggregate principal amount of the Notes
represented by such Global Note; and
(ii) such request shall be accompanied by the following additional
information and documents, as applicable:
(A) if such Certificated Note is being delivered to the Registrar by a
Holder for registration in the name of such Holder, without transfer,
a certification to that effect from such Holder (in substantially the
form of Exhibit B-5 hereto); or
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(B) if such Certificated Note is being transferred to a QIB in
accordance with Rule 144A, pursuant to Rule 144 under the Securities
Act or pursuant to an exemption from registration in accordance with
Rule 904 under the Securities Act or pursuant to an effective
registration statement under the Securities Act, a certification to
that effect from such Holder (in substantially the form of Exhibit B-5
hereto).
(f) Authentication of Certificated Notes in Absence of Depositary. If at
any time:
(i) the Depositary for the Notes notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the Global
Notes and a successor Depositary for the Global Notes is not appointed by
the Company within 90 days after delivery of such notice; or
(ii) the Company delivers to the Trustee an Officers' Certificate or
an order signed by two Officers of the Company notifying the Trustee that
it elects to cause the issuance of Certificated Notes under this Indenture,
then the Company shall execute, and the Trustee shall, upon receipt of an
Authentication Order in accordance with Section 2.02 hereof, authenticate and
deliver, Certificated Notes in an aggregate principal amount equal to the
principal amount of the Global Notes in exchange for such Global Notes.
(g) Legends
(i) Except as permitted by the following paragraphs (ii), (iii) and
(iv), each Note certificate evidencing Global Notes and Certificated Notes
(and all Notes issued in exchange therefor or substitution thereof) shall
bear a legend in substantially the following form (each a "Transfer
Restricted Security"):
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED
IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED
STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE
RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES
ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER
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OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT
(A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY
(1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE
THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
(AND BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO
THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN
EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE
OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE
HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN (A) ABOVE."
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global Note)
pursuant to Rule 144 under the Securities Act or pursuant to an effective
registration statement under the Securities Act:
(A) in the case of any Transfer Restricted Security that is a
Certificated Note, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Certificated Note
that does not bear the legend set forth in (i) above and rescind any
restriction on the transfer of such Transfer Restricted Security upon
receipt of a certification from the transferring Holder substantially
in the form of Exhibit B-3 hereto; and
(B) in the case of any Transfer Restricted Security represented
by a Global Note, such Transfer Restricted Security shall not be
required to bear the legend set forth in (i) above, but shall continue
to be subject to the provisions of Section 2.06(a) and (b) hereof;
provided, however, that with respect to any request for an exchange of
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a Transfer Restricted Security that is represented by a Global Note
for a Certificated Note that does not bear the legend set forth in (i)
above, which request is made in reliance upon Rule 144, the Holder
thereof shall certify in writing to the Registrar that such request is
being made pursuant to Rule 144 (such certification to be
substantially in the form of Exhibit B-4 hereto).
(iii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global Note)
in reliance on any exemption from the registration requirements of the
Securities Act (other than exemptions pursuant to Rule 144A or Rule 144
under the Securities Act) in which the Holder or the transferee provides an
Opinion of Counsel to the Company and the Registrar in form and substance
reasonably acceptable to the Company and the Registrar (which Opinion of
Counsel shall also state that the transfer restrictions contained in the
legend are no longer applicable):
(A) in the case of any Transfer Restricted Security that is a
Certificated Note, the Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Certificated Note
that does not bear the legend set forth in (i) above and rescind any
restriction on the transfer of such Transfer Restricted Security; and
(B) in the case of any Transfer Restricted Security represented
by a Global Note, such Transfer Restricted Security shall not be
required to bear the legend set forth in (i) above, but shall continue
to be subject to the provisions of Section 2.06(a) and (b) hereof.
(iv) Notwithstanding the foregoing, upon consummation of the Exchange
Offer in accordance with the Registration Rights Agreement, the Company
shall issue and, upon receipt of an Authentication Order in accordance with
Section 2.02 hereof, the Trustee shall authenticate Series B Notes in
exchange for Series A Notes accepted for exchange in the Exchange Offer,
which Series B Notes shall not bear the legend set forth in (i) above, and
the Registrar shall rescind any restriction on the transfer of such Series
B Notes, in each case unless the Holder of such Series A Notes is either
(A) a broker-dealer, (B) a Person participating in the distribution of the
Series A Notes or (C) a Person who is an affiliate (as defined in Rule
144A) of the Company.
(h) Cancellation and/or Adjustment of Global Notes. At such time as all
beneficial interests in Global Notes have been exchanged for Certificated Notes,
redeemed, repurchased or cancelled, all Global Notes shall be returned to or
retained and
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cancelled by the Trustee in accordance with Section 2.11 hereof. At any time
prior to such cancellation, if any beneficial interest in a Global Note is
exchanged for an interest in another Global Note or for Certificated Notes,
redeemed, repurchased or cancelled, the principal amount of Notes represented by
such Global Note shall be reduced accordingly and an endorsement shall be made
on such Global Note, by the Trustee or the Note Custodian, at the direction of
the Trustee, to reflect such reduction.
(i) General Provisions Relating to Transfers and Exchanges
(i) To permit registrations of transfers and exchanges, the Company
shall execute and the Trustee shall authenticate Certificated Notes and
Global Notes at the Registrar's request.
(ii) No service charge shall be made to a Holder for any registration
of transfer or exchange, but the Company may require payment of a sum
sufficient to cover any transfer tax or similar governmental charge payable
in connection therewith (other than any such transfer taxes or similar
governmental charge payable upon exchange or transfer pursuant to Sections
3.07, 4.06, 4.07 and 9.05 hereof).
(iii) The Registrar shall not be required to register the transfer of
or exchange any Note selected for redemption in whole or in part, except
the unredeemed portion of any Note being redeemed in part.
(iv) All Certificated Notes and Global Notes issued upon any
registration of transfer or exchange of Certificated Notes or Global Notes
shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Certificated
Notes or Global Notes surrendered upon such registration of transfer or
exchange.
(v) The Company shall not be required:
(A) to issue, to register the transfer of or to exchange Notes
during a period beginning at the opening of business 15 days before
the day of any selection of Notes for redemption under Section 3.02
hereof and ending at the close of business on the day of selection; or
(B) to register the transfer of or to exchange any Note so
selected for redemption in whole or in part, except the unredeemed
portion of any Note being redeemed in part; or
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(C) to register the transfer of or to exchange a Note between a
record date and the next succeeding interest payment date.
(vi) Prior to due presentment for the registration of a transfer of
any Note, the Trustee, any Agent and the Company may deem and treat the
Person in whose name any Note is registered as the absolute owner of such
Note for the purpose of receiving payment of principal of and interest and
Liquidated Damages, if any, on such Notes, and neither the Trustee, any
Agent nor the Company shall be affected by notice to the contrary.
(vii) The Trustee shall authenticate Certificated Notes and Global
Notes in accordance with the provisions of Section 2.02 hereof.
The Registrar may rely on information set forth in a certificate
substantially in the form of Exhibit B-1, B-2, B-3, B-4 or B-5 hereto, and other
certificates and opinions received pursuant to this Section 2.06 and, in the
absence of receipt of such a certificate or opinion, shall not be deemed to have
knowledge of a transfer of an interest in a Global Security absent actual
knowledge of such transfer.
Section 2.07 Replacement Notes
If any mutilated Note is surrendered to the Trustee, or the Company and the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Note, the Company shall issue and the Trustee, upon the written order of
the Company signed by two Officers of the Company, shall authenticate a
replacement Note if the Trustee's requirements are met. If required by the
Trustee or the Company, an indemnity bond must be supplied by the Holder that is
sufficient in the judgment of the Trustee and the Company to protect the
Company, the Trustee, any Agent and any authenticating agent from any loss that
any of them may suffer if a Note is replaced. The Company may charge for its
expenses in replacing a Note.
Every replacement Note is an additional obligation of the Company and shall
be entitled to all of the benefits of this Indenture equally and proportionately
with all other Notes duly issued hereunder.
Section 2.08 Outstanding Notes
The Notes outstanding at any time are all the Notes authenticated by the
Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section as not outstanding. Except as set forth in
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Section 2.09 hereof, a Note does not cease to be outstanding because the Company
or an Affiliate of the Company holds the Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under Section 4.01
hereof, it ceases to be outstanding and interest on it ceases to accrue.
If the Paying Agent (other than the Company, a Subsidiary or an Affiliate
of any thereof) holds, on a redemption date or maturity date, money sufficient
to pay the principal amount of any Notes due and payable on that date, then on
and after that date such Notes shall be deemed to be no longer outstanding and
shall cease to accrue interest.
Section 2.09 Treasury Notes
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by the
Company, or by any Person directly or indirectly controlling or controlled by or
under direct or indirect common control with the Company, shall be considered as
though not outstanding, except that for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, waiver or consent,
only Notes that the Trustee knows are so owned shall be so disregarded.
Section 2.10 Temporary Notes
Until Certificated Notes are ready for delivery, the Company may prepare
and the Trustee shall authenticate temporary Notes upon a written order of the
Company signed by two Officers of the Company. Temporary Notes shall be
substantially in the form of Certificated Notes but may have variations that the
Company considers appropriate for temporary Notes and as shall be reasonably
acceptable to the Trustee. Without unreasonable delay, the Company shall
prepare and the Trustee shall authenticate Certificated Notes in exchange for
temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits of this
Indenture.
Section 2.11 Cancellation
The Company at any time may deliver Notes to the Trustee for cancellation.
The Registrar and Paying Agent shall forward to the Trustee any Notes
surrendered to them
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for registration of transfer, exchange or payment. The Trustee and no one else
shall cancel all Notes surrendered for registration of transfer, exchange,
payment, replacement or cancellation and shall destroy cancelled Notes (subject
to the record retention requirement of the Exchange Act). Certification of the
destruction of all cancelled Notes shall be delivered to the Company. The
Company may not issue new Notes to replace Notes that it has paid or that have
been delivered to the Trustee for cancellation.
Section 2.12 Defaulted Interest
If the Company defaults in a payment of interest on the Notes, it shall pay
the defaulted interest in any lawful manner plus, to the extent lawful, interest
payable on the defaulted interest, to the Persons who are Holders on a
subsequent special record date, in each case at the rate provided in the Notes
and in Section 4.01 hereof. The Company shall notify the Trustee in writing of
the amount of defaulted interest proposed to be paid on each Note and the date
of the proposed payment. The Company shall fix or cause to be fixed each such
special record date and payment date; provided that no such special record date
shall be less than 10 days prior to the related payment date for such defaulted
interest. At least 15 days before the special record date, the Company (or,
upon the written request of the Company, the Trustee in the name and at the
expense of the Company) shall mail or cause to be mailed to Holders a notice
that states the special record date, the related payment date and the amount of
such interest to be paid.
ARTICLE 3
REDEMPTION
Section 3.01 Notices to Trustee
If the Company elects to redeem Notes pursuant to the optional redemption
provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 45
days but not more than 60 days before a redemption date (unless a shorter notice
shall be satisfactory to the Trustee), an Officers' Certificate setting forth
the Section of this Indenture pursuant to which the redemption shall occur, the
redemption date, the principal amount of Notes to be redeemed and the redemption
price.
Section 3.02 Selection of Notes to Be Redeemed
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes to be redeemed among the Holders of the Notes in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed or, if the Notes are not so listed, on a pro rata basis, by lot
or by such other method as the Trustee shall deem fair and appropriate. In the
event of partial redemption by lot, the Trustee
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shall make the selection not less than 30 nor more than 60 days prior to the
redemption date from the outstanding Notes not previously called for redemption.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the portion of the principal amount thereof to be redeemed. Notes
and portions of them selected to be redeemed shall be in principal amounts of
$1,000 or whole multiples of $1,000; except that if all of the Notes of a Holder
are to be redeemed, the entire outstanding amount of Notes held by such Holder,
even if not a multiple of $1,000, shall be redeemed. Except as provided in the
preceding sentence, provisions of this Indenture that apply to Notes called for
redemption also apply to portions of Notes called for redemption.
Section 3.03 Notice of Redemption
At least 30 days but not more than 60 days before a redemption date, the
Company shall mail, by first class mail, a notice of redemption to each Holder
whose Notes are to be redeemed at its registered address.
The notice shall identify the Notes to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the redemption
date, upon surrender of such Note, a new Note or Notes in principal amount
equal to the unredeemed portion will be issued;
(4) the name and address of the Paying Agent;
(5) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
(6) that, unless the Company defaults in making such redemption
payment, interest on Notes called for redemption ceases to accrue on and
after the redemption date;
(7) the paragraph of the Notes pursuant to which the Notes called for
redemption are being redeemed; and
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(8) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the Notes.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at its expense.
Section 3.04 Effect of Notice of Redemption
Once notice of redemption is mailed, Notes called for redemption become
irrevocably due and payable on the redemption date at the price set forth in the
Note.
Section 3.05 Deposit of Redemption Price
On or before the redemption date, the Company shall deposit with the
Trustee or with the Paying Agent money sufficient to pay the redemption price of
and accrued interest and Liquidated Damages, if any, on all Notes to be redeemed
on that date. The Trustee or the Paying Agent shall return to the Company any
money deposited with the Trustee or the Paying Agent by the Company in excess of
the amounts necessary to pay the redemption price of, and accrued interest and
Liquidated Damages, if any, on all Notes to be redeemed.
Interest on the Notes to be redeemed will cease to accrue on the applicable
redemption date, whether or not such Notes are presented for payment, if the
Company makes the redemption payment. If any Note called for redemption shall
not be so paid upon surrender for redemption because of the failure of the
Company to comply with the preceding paragraph, interest will be paid on the
unpaid principal, from the redemption date until such principal is paid, and to
the extent lawful on any interest not paid on such unpaid principal, in each
case at the rate provided in the Notes and in Section 4.01 hereof. Section 8.06
shall apply to any Notes not redeemed within 2 years from the redemption date.
Section 3.06 Notes Redeemed in Part
Upon surrender of a Note that is redeemed in part, the Company shall issue
and the Trustee shall authenticate for the Holder at the expense of the Company
a new Note equal in principal amount to the unredeemed portion of the Note
surrendered.
Section 3.07 Optional Redemption
The Notes are not redeemable at the Company's option prior to January 15,
2002. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the
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redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest and Liquidated Damages, if any, thereon
to the applicable redemption date, if redeemed during the twelve-month period
beginning on January 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
- ---- -----------
<S> <C>
2002.................. 104.938%
2003.................. 103.292%
2004.................. 101.645%
2005 and thereafter... 100.000%
</TABLE>
Notwithstanding the foregoing, during the first three years after the Issue
Date, the Company may redeem up to an aggregate of 35% of the aggregate
principal amount of Notes originally issued in the Offering at a redemption
price of 109.875% of the principal amount thereof, in each case plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption date,
with the net proceeds of an Equity Offering; provided however, that at least 65%
of the aggregate principal amount of Notes initially issued remains outstanding
immediately after the occurrence of such redemption.
Any redemption pursuant to this Section 3.07 shall be made pursuant to the
provisions of Sections 3.01 through 3.06 hereof.
Section 3.08 Mandatory Redemption
Subject to the Company's obligation to make an offer to repurchase Notes
under certain circumstances pursuant to Sections 4.06 and 4.07 hereof, the
Company shall have no mandatory redemption or sinking fund obligations with
respect to the Notes.
ARTICLE 4
COVENANTS
Section 4.01 Payment of Notes
The Company shall pay or cause to be paid the principal of, premium, if
any, and interest and Liquidated Damages, if any, on the Notes on the dates and
in the manner provided in the Notes. Principal, premium, if any, and interest
and Liquidated Damages, if any, shall be considered paid on the date due if the
Paying Agent (other than the Company or a Subsidiary), holds at least one
Business Day before that date money deposited by the Company in immediately
available funds and designated for and sufficient to pay all principal, premium,
if any, and interest and Liquidated Damages, if any, then due. Such Paying
Agent shall return to the Company, no later than five Business Days following
the due date for payment, any money (including accrued
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interest, if any) that exceeds such amount of principal, premium, if any, and
interest and Liquidated Damages, if any, required for payment on the Notes.
The Company shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the applicable
interest rate on the Notes to the extent lawful; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace period)
at the same rate to the extent lawful.
Section 4.02 Maintenance of Office or Agency
The Company shall maintain in the Borough of Manhattan, The City of New
York, an office or agency (which may be an office of the Trustee or Registrar)
where Notes may be surrendered for registration of transfer or exchange and
where notices and demands to or upon the Company in respect of the Notes and
this Indenture may be served. The Company shall give prompt written notice to
the Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other offices
or agencies where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind such designations; provided, however,
that no such designation or rescission shall in any manner relieve the Company
of its obligation to maintain an office or agency in the Borough of Manhattan,
The City of New York for such purposes. The Company shall give prompt written
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the Trustee as
one such office or agency of the Company in accordance with Section 2.03.
Section 4.03 Compliance Certificate
(a) The Company shall deliver to the Trustee, within 120 days after the
end of each fiscal year, an Officers' Certificate stating that a review of the
activities of the Company and its subsidiaries during the preceding fiscal year
has been made under the supervision of the signing Officers with a view to
determining whether each has kept, observed, performed and fulfilled in all
respects its obligations under this Indenture and further stating, as to each
such Officer signing such certificate, that to the best of his knowledge each
has kept, observed, performed and fulfilled each and every covenant
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contained in this Indenture and is not in any respect in default in the
performance or observance of any of the terms, provisions and conditions hereof
or thereof (or, if such Default or Event of Default shall have occurred,
describing all such Defaults or Events of Default of which he may have knowledge
and what action each is taking or proposes to take with respect thereto).
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.03 above shall be accompanied by a
written statement of the Company's independent public accountants (who shall be
a firm of established national reputation reasonably satisfactory to the
Trustee) that in making the examination necessary for certification of such
financial statements nothing has come to their attention which would lead them
to believe that either the Company or any of its Subsidiaries has violated any
provisions of Article 4 or Article 5 of this Indenture or, if any such violation
has occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any person for any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon becoming aware of (i) any Default or
Event of Default or (ii) any event of default under any other mortgage,
indenture or instrument as that term is used in Section 6.01(v) which permits an
acceleration that could become an Event of Default, an Officers' Certificate
specifying such Default, Event of Default or event of default and what action
the Company is taking or proposes to take with respect thereto.
Section 4.04 Taxes
The Company shall, and shall cause each of its Subsidiaries to, pay prior
to delinquency all material taxes, assessments, and governmental levies except
as contested in good faith and by appropriate proceedings.
Section 4.05 Stay, Extension and Usury Laws
The Company covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it shall not, by resort to any such law, hinder, delay
or impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law has
been enacted.
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Section 4.06 Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes shall have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment").
Within 10 days following any Change of Control, the Company shall mail a
notice to each Holder describing the transaction or transactions that constitute
the Change of Control and offering to repurchase Notes pursuant to the
procedures required by this Indenture and described in such notice. The Company
shall comply with the requirements of Rule 14e-1 under the Exchange Act and any
other securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
The Change of Control Offer shall remain open for a period of 20 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), the Company
shall purchase all Notes tendered in response to the Change of Control Offer.
Payment for any Notes so purchased shall be made in the same manner as interest
payments are made.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be
payable to Holders who tender Notes pursuant to the Change of Control Offer.
On the Change of Control Payment Date, the Company shall, to the extent
lawful, (a) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (b) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (c) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent shall promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee shall
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note shall be in a
principal
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amount of $1,000 or an integral multiple thereof. The Company shall publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
Section 4.07 Asset Sales
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale in excess of $1,000,000 unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors, except for sales of
Securitization Related Assets, which require no such resolution) of the assets
or Equity Interests issued or sold or otherwise disposed of and (ii) at least
75% of the consideration therefor received by the Company or such Restricted
Subsidiary is in the form of cash or Cash Equivalents; provided that the amount
of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet, excluding contingent liabilities and
trade payables), of the Company or any such Restricted Subsidiary that are
assumed by the transferee of any such assets pursuant to a customary novation
agreement that releases the Company or such Restricted Subsidiary from further
liability and (y) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
promptly, but in no event more than 30 days after receipt, converted by the
Company or such Restricted Subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the Restricted Subsidiary may apply such Net Proceeds, (a) to
permanently reduce Senior Indebtedness (other than the Notes or the Subsidiary
Guarantees) of the Company or of the Subsidiary Guarantors, or (b) to an
Investment (excluding Guarantees of Indebtedness or other obligations), the
making of a capital expenditure or the acquisition of other tangible assets, in
each case in or with respect to a Related Business. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of this
paragraph shall be deemed to constitute "Excess Proceeds." When the aggregate
amount of Excess Proceeds exceeds $5,000,000, the Company shall be required to
make an offer to all Holders of Notes (an "Asset Sale Offer") to purchase the
maximum principal amount of Notes that may be purchased out of the Excess
Proceeds, at an offer price in cash in an amount equal to 100% of the principal
amount thereof plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase, in accordance with the procedures set forth in
this Indenture. To the extent that the aggregate amount of Notes tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Company
may use any remaining Excess Proceeds for general corporate purposes. Upon
completion of such offer to purchase, the amount of Excess Proceeds shall be
reset at zero.
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An Asset Sale Offer shall remain open for a period of 20 Business Days
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "Asset Sale Offer Period"). No later
than five Business Days after the termination of the Asset Sale Offer Period
(the "Asset Sale Purchase Date"), the Company shall purchase the principal
amount of Notes required to be purchased pursuant to this covenant (the "Asset
Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been
tendered, all Notes tendered in response to the Asset Sale Offer. Payment for
any Notes so purchased shall be made in the same manner as interest payments are
made.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
shall be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
On or before the Asset Sale Purchase Date, the Company shall, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Notes or portions thereof tendered pursuant to the
Asset Sale Offer, or if less than the Asset Sale Offer Amount has been tendered,
all Notes tendered, and shall deliver to the Trustee an Officers' Certificate
stating that such Notes or portions thereof were accepted for payment by the
Company in accordance with the terms of this covenant. The Company, the
Depository or the Paying Agent, as the case may be, shall promptly (but in any
case not later than five days after the Asset Sale Purchase Date) mail or
deliver to each tendering Holder an amount equal to the purchase price of the
Notes tendered by such Holder and accepted by the Company for purchase, and the
Company shall promptly issue a new Note, and the Trustee, upon written request
from the Company shall authenticate and mail or deliver such new Note to such
Holder, in a principal amount equal to any unpurchased portion of the Note
surrendered. Any Note not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company shall publicly announce the
results of the Asset Sale Offer on the Asset Sale Purchase Date.
Section 4.08 Restricted Payments
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any other payment or distribution on account of the Company's or any of its
Restricted Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving the Company) or
to the direct or indirect holders of the Company's or any of its Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock)
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of the Company or dividends or distributions payable to the Company or any
Restricted Subsidiary that is a Subsidiary Guarantor or to SPTL); (ii) purchase,
redeem or otherwise acquire or retire for value (including without limitation in
connection with any merger or consolidation involving the Company) any Equity
Interests of the Company or any direct or indirect parent of the Company or
other Affiliate of the Company (other than any such Equity Interests owned by
the Company or any Restricted Subsidiary of the Company that is a Subsidiary
Guarantor or by SPTL); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated to the Notes (other than Notes), except a
payment of interest or principal at Stated Maturity; or (iv) make any Restricted
Investment (all such payments and other actions set forth in clauses (i) through
(iv) above being collectively referred to as "Restricted Payments"), unless, at
the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
(b) at the time of and immediately after giving effect to such Restricted
Payment, the Company would be able to incur at least $1.00 of additional
Indebtedness pursuant to the test in the first sentence of Section 4.09; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the Issue
Date (excluding Restricted Payments permitted by clauses (x) and (y) of the next
succeeding paragraph), is less than the sum of (i) 25% of the Consolidated Net
Income of the Company for the period (taken as one accounting period) from the
beginning of the first fiscal quarter commencing after the Issue Date to the end
of the Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (ii) 100% of the aggregate net cash proceeds received by the
Company from the issue or sale since the Issue Date of Equity Interests (other
than Disqualified Stock) of the Company or of debt securities of the Company
that have been converted into such Equity Interests (other than Equity Interests
(or convertible debt securities) sold to a Subsidiary of the Company and other
than Disqualified Stock or debt securities that have been converted into
Disqualified Stock), (iii) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise liquidated or repaid for
cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the initial
amount of such Restricted Investment, (iv) 25% of any dividends received by the
Company or a Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor
or by SPTL after the Issue Date from an Unrestricted Subsidiary of the Company,
plus (v) $15,000,000.
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The foregoing provisions shall not prohibit: (v) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of this
Indenture; (w) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary in exchange
for, or out of the proceeds of, the substantially concurrent sale (other than to
a Subsidiary of the Company) of other Equity Interests of the Company (other
than any Disqualified Stock); provided that the amount of any such net cash
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (x) the defeasance, redemption or repurchase of subordinated
Indebtedness with the net cash proceeds from an incurrence of Permitted
Refinancing Indebtedness or the substantially concurrent sale (other than to a
Subsidiary of the Company) of Equity Interests of the Company (other than
Disqualified Stock); provided that the amount of any such net cash proceeds that
are utilized for any such redemption, repurchase, retirement or other
acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;
(y) the repurchase, redemption or other acquisition or retirement for value of
any Equity Interests of the Company or any Subsidiary of the Company held by any
member of the Company's (or any of its Subsidiaries') management pursuant to any
management equity subscription agreement or stock option agreement or other
management agreement or plan; provided that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $500,000 in any twelve-month period plus the aggregate cash proceeds
received by the Company during such twelve-month period from any reissuance of
Equity Interests by the Company to members of management of the Company and its
Subsidiaries; and (z) the repurchase, redemption or other retirement for value
of any Equity Interests of any Restricted Subsidiary in a Strategic Investor
Repurchase Transaction; and no Default or Event of Default shall have occurred
and be continuing immediately after such transaction.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated shall be deemed to be Restricted Payments at the
time of such designation and shall reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments shall be deemed to constitute Investments in an amount equal to the
greatest of (x) the net book value of such Investments at the time of such
designation, (y) the fair market value of such Investments at the time of such
designation and (z) the original fair market value of such Investments at the
time they were made. Such designation shall only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
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The amount of all Restricted Payments (other than cash) shall be the fair
market value (evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee) on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. Not later
than the date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
Section 4.08 were computed, which calculations may be based upon the Company's
latest available financial statements.
Section 4.09 Incurrence of Indebtedness and Issuance of Preferred Stock
The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume, guaranty or otherwise become
directly or indirectly liable with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and the Company shall not permit any of
its Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that the Company or any Subsidiary Guarantor may incur Indebtedness
(including Acquired Debt) or any Subsidiary Guarantor may issue preferred stock
or SPTL may incur Permitted SPTL Preferred Stock if, on the date of such
incurrence and after giving effect thereto, the Company's Consolidated Leverage
Ratio does not exceed 2.0 to 1.0.
The foregoing provisions shall not apply to:
(i) Indebtedness of the Company existing on the Issue Date;
(ii) the incurrence by the Company of Indebtedness represented by the Notes
or by the Subsidiary Guarantors of Indebtedness represented by the Subsidiary
Guarantees;
(iii) the incurrence of Permitted Warehouse Indebtedness by the Company or
any of its Restricted Subsidiaries, and any Guarantee by the Company of such
Indebtedness incurred by a Restricted Subsidiary, provided, however, that to the
extent any such Indebtedness of the Company or a Subsidiary Guarantor ceases to
constitute Permitted Warehouse Indebtedness, such Indebtedness shall be deemed
to be incurred at such time by the Company or such Subsidiary Guarantor, as the
case may be;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund, Indebtedness
that was permitted by this Indenture to be incurred or that was outstanding at
the Issue Date;
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(v) the incurrence by the Company or a Restricted Subsidiary of Hedging
Obligations directly related to (A) Indebtedness of the Company or a Restricted
Subsidiary incurred in conformity with the provisions of this Indenture, (B)
Receivables held by the Company or its Restricted Subsidiaries pending sale in a
Qualified Securitization Transaction, (C) Receivables of the Company or its
Restricted Subsidiaries that have been sold pursuant to a Warehouse Facility,
(D) Receivables that the Company or the Restricted Subsidiary reasonably expects
to purchase or commit to purchase, finance or accept as collateral, or (E)
Securitization Related Assets and other assets owned or financed by the Company
or its Restricted Subsidiaries in the ordinary course of business; provided,
however, that, in the case of each of the foregoing clauses (A) through (E),
such Hedging Obligations are eligible to receive hedge accounting treatment in
accordance with GAAP as applied by the Company and its Restricted Subsidiaries
on the Issue Date; and
(vi) Indebtedness of the Subsidiary Guarantors or of SPTL to the Company or
Permitted SPTL Preferred Stock issued to the Company to the extent that such
Indebtedness or such Permitted SPTL Preferred Stock constitutes a Permitted
Investment of the Company of the type permitted under the definition of
Permitted Investments;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
other than a Special Purpose Subsidiary of intercompany Indebtedness owing to
the Company or any of its Restricted Subsidiaries other than a Special Purpose
Subsidiary; provided, however, that (i) any subsequent issuance or transfer of
any Capital Stock which results in any such Indebtedness being held by a Person
other than a Restricted Subsidiary and (ii) any sale or transfer of any such
Indebtedness to a Person that is not either the Company or a Restricted
Subsidiary (other than a Special Purpose Subsidiary) shall be deemed, in each
case, to constitute the incurrence of such Indebtedness by the Company or such
Subsidiary, as the case may be;
(viii) the incurrence by a Special Purpose Subsidiary of Non-Recourse Debt
in a Qualified Securitization Transaction and the incurrence by the Company's
Unrestricted Subsidiaries of Non-Recourse Debt; provided, however, that if any
such Indebtedness ceases to be Non-Recourse Debt of the Special Purpose
Subsidiary or other Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company; and
(ix) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness in an aggregate principal amount which, together with the principal
amount of all Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the date of Incurrence (other than Indebtedness permitted by
clauses (ii) through (vii) above, or the first paragraph of this covenant), does
not exceed $10,000,000.
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Section 4.10 Liens
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create, incur or otherwise cause or suffer to exist or become
effective any Lien for the benefit of any Indebtedness ranking pari passu with
or junior to the Notes, other than Permitted Liens, upon any property or assets
of the Company or any Restricted Subsidiary of the Company or any shares of
stock or debt of any Restricted Subsidiary of the Company which owns property or
assets, now owned or hereafter acquired, unless (i) if such lien secures
Indebtedness which is pari passu with the Notes, then the Notes are secured on
an equal and ratable basis or (ii) if such lien secures Indebtedness which is
junior to the Notes, any such lien shall be junior to a lien granted to the
holders of the Notes. The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens.
Section 4.11 Dividend and Other Payment Restrictions Affecting Subsidiaries
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except for such encumbrances
or restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the Issue Date, (b) the Warehouse Facilities as in effect as of the
Issue Date, and any amendments, modifications, restatements, renewals,
increases, supplements, refundings, additions, replacements or refinancings
thereof; provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, additions, replacements or refinancings are
no more restrictive with respect to such dividend and other payment restrictions
than those contained in the Warehouse Facilities as in effect on the Issue Date,
(c) Indebtedness or other contractual requirements of a Special Purpose
Subsidiary in connection with a Qualified Securitization Transaction; provided
that such restrictions apply only to such Special Purpose Subsidiary, (d) this
Indenture and the Notes, (e) applicable law, (f) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or
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restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired; provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of this Indenture to be incurred, (g) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (h) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, or (i) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced.
Section 4.12 Transactions with Affiliates
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $2,000,000, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10,000,000, in addition to such Officers' Certificate, an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point of
view issued by an investment banking firm of national standing which is not an
Affiliate of the Company; provided, however, that such fairness opinion shall
not be required with respect to a Qualified Securitization Transaction or other
transaction that is made in the ordinary course of business of the Company or
such Restricted Subsidiary, as the case may be, and is consistent with the past
business practice of the Company or such Restricted Subsidiary. Notwithstanding
the foregoing, the following shall not be deemed Affiliate Transactions: (i) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Restricted Subsidiary, (ii) any issuance of
securities, or other payments, compensation, benefits, awards or grants in cash,
securities or otherwise pursuant to, or the funding of, employment arrangements,
stock options and stock ownership plans approved by the Board of Directors in
the ordinary course of business and consistent with the past practice
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of the Company or such Restricted Subsidiary, (iii) the grant of stock options
or similar rights to employees and directors of the Company pursuant to plans
approved by the Board of Directors in the ordinary course of business and
consistent with the past practice of the Company or such Restricted Subsidiary,
(iv) loans or advances to employees in the ordinary course of business in
accordance with the past practices of the Company or its Restricted
Subsidiaries, but in any event not to exceed $500,000 in aggregate principal
amount outstanding at any one time, (v) the payment of reasonable fees to
directors of the Company and its Restricted Subsidiaries who are not employees
of the Company or its Restricted Subsidiaries, (vi) transactions between or
among the Company and/or its Restricted Subsidiaries, (vii) Restricted Payments
and Permitted Investments (other than Strategic Investor Repurchase
Transactions) that are permitted by Section 4.08, and (viii) transactions
between a Special Purpose Subsidiary and any Person in which the Special Purpose
Subsidiary has an Investment.
Section 4.13 Business Activities
The Company shall not, and shall not permit any Restricted Subsidiary to,
engage in any line of business that is not a Related Business (except as a
result of Investments in other businesses made or acquired in connection with
the activities or conduct of the Related Businesses in the ordinary course of
business by the Company and its Restricted Subsidiaries, including Investments
obtained as a result of the foreclosure of Liens securing amounts lent by the
Company or any of its Restricted Subsidiaries).
Section 4.14 Reports
Whether or not required by the rules and regulations of the SEC, so long as
any Notes are outstanding, the Company shall furnish to the Holders of Notes (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K even if the Company
were not required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the SEC on Form 8-K even if the Company were not required to file
such reports. In addition, whether or not required by the rules and regulations
of the SEC, the Company shall file a copy of all such information and reports
with the SEC for public availability (unless the SEC shall not accept such a
filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the Subsidiary
Guarantors have agreed that, for so long as any Notes remain outstanding, they
shall furnish to the Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
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Section 4.15 Additional Subsidiary Guarantees
The Company shall not, and shall not permit any of the Subsidiary
Guarantors to, make any Investment in any Subsidiary that is not a Subsidiary
Guarantor unless either (i) such Investment is permitted by the Section 4.08, or
(ii) such Subsidiary executes a Subsidiary Guarantee and delivers an opinion of
counsel in accordance with the provisions of this Indenture.
ARTICLE 5
SUCCESSORS
Section 5.01 Limitations on Merger, Consolidation or Sale of Substantially All
Assets
The Company shall not consolidate or merge with or into (whether or not the
Company is the surviving corporation), or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its properties or assets in
one or more related transactions, to another Person unless: (i) the Company is
the surviving corporation or the entity or the Person formed by or surviving any
such consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the entity or Person formed
by or surviving any such consolidation or merger (if other than the Company) or
the entity or Person to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made assumes all the obligations of the
Company under the Notes and this Indenture pursuant to a supplemental Indenture
in a form reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of the Company with or into a Wholly Owned Restricted Subsidiary of
the Company, the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the test described in the first
sentence of Section 4.09.
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The Company shall deliver to the Trustee prior to the consummation of the
proposed transaction an Officers' Certificate to the foregoing effect and an
Opinion of Counsel stating that the proposed transaction and such supplemental
indenture if applicable comply with this Indenture. The Trustee shall be
entitled to conclusively rely upon such Officers' Certificate and Opinion of
Counsel.
Section 5.02 Successor Corporation Substituted
Upon any consolidation or merger, or any sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company in
accordance with Section 5.01, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such sale,
lease, conveyance or other disposition is made shall succeed to, and be
substituted for (so that from and after the date of such consolidation, merger,
sale, lease, conveyance or other disposition, the provisions of this Indenture
referring to the "Company" shall refer instead to the successor corporation and
not to the Company), and may exercise every right and power of the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company herein; provided, however, that the Company shall not be released
or discharged from the obligation to pay the principal of or interest on the
Notes.
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01 Events of Default
An "Event of Default" occurs if: (i) default for 30 days in the payment
when due of interest on any Note; (ii) default in payment when due of the
principal of or premium, if any, on any Note; (iii) failure by the Company for
30 days to comply with any of Sections 4.06, 4.07, 4.08 or 4.09 of this
Indenture; (iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in this Indenture or the Notes; (v) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or guarantee now exists, or is created after the date of this
Indenture, which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the expiration of any
grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any
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other such Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $5,000,000 or more; (vi)
failure by the Company or any of its Significant Subsidiaries to pay final
judgments aggregating in excess of $5,000,000, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) except as permitted by the
Indenture or if, at the time thereof, any Subsidiary Guarantee of a Subsidiary
Guarantor that is a Significant Subsidiary shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to be in
full force and effect, or any Subsidiary Guarantor, or any Person acting on
behalf of any such Subsidiary Guarantor, shall deny or disaffirm, in writing,
its obligation under its Subsidiary Guarantee; (viii) the Company or any of its
Significant Subsidiaries pursuant to or within the meaning of any Bankruptcy Law
(a) commences a voluntary case, (b) consents to the entry of an order for relief
against it in an involuntary case, (c) consents to the appointment of a
Custodian of it or for all or substantially all of its property, (d) makes a
general assignment for the benefit of its creditors, (e) generally is unable to
pay its debts as the same become due; or (ix) a court of competent jurisdiction
enters an order or decree under any Bankruptcy Law that (a) is for relief
against the Company or any of its Significant Subsidiaries in an involuntary
case, (b) appoints a Custodian of the Company or any of its Significant
Subsidiaries or for all or substantially all of their property, (c) orders the
liquidation of the Company or any of its Significant Subsidiaries, and the order
or decree remains unstayed and in effect for 60 days.
The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal
or state law for the relief of debtors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
Section 6.02 Acceleration
If an Event of Default (other than an Event of Default specified in clauses
(viii) and (ix) of Section 6.01, with respect to the Company or any Restricted
Subsidiary) occurs and is continuing, the Trustee by notice to the Company, or
the Holders of at least 25% in principal amount of the then outstanding Notes by
written notice to the Company and the Trustee may declare the unpaid principal
of and any accrued interest on all the Notes to be due and payable immediately.
Upon such declaration the principal and interest shall be due and payable
immediately. If an Event of Default specified in clause (viii) or (ix) of
Section 6.01 occurs with respect to the Company or any Restricted Subsidiary,
such an amount shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder.
In the event of a declaration of acceleration of the Notes because an Event of
Default in Section 6.01(v) hereof has occurred and is continuing, such
declaration of acceleration shall be automatically annulled if the holders of
the Indebtedness described in Section 6.01(v) hereof have rescinded the
declaration of acceleration in respect of such
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Indebtedness within 15 Business Days thereof and if (i) the annulment of such
acceleration would not conflict with any judgment or decree of a court of
competent jurisdiction, (ii) all existing Events of Default, except non-payment
of principal or interest which shall have become due solely because of the
acceleration, have been cured or waived and (iii) the Company has delivered an
Officers' Certificate to the Trustee to the effect of clauses (i) and (ii)
above. In accordance with the provisions of Section 6.04, the Holders of a
majority in principal amount of the then outstanding Notes by written notice to
the Trustee may rescind an acceleration and its consequences if the rescission
would not conflict with any judgment or decree and if all existing Events of
Default (except nonpayment of principal or interest that has become due solely
because of the acceleration) have been cured or waived.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of Section 3.07 of this Indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the Notes. If an Event of Default
occurs prior to January 15, 2000 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding the prohibition on redemption of the Notes prior to such date, then the
premium specified in Section 3.07 for optional redemptions shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the Notes.
Section 6.03 Other Remedies
If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy to collect the payment of principal or interest on the Notes or
to enforce the performance of any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies are cumulative
to the extent permitted by law.
Section 6.04 Waiver of Past Defaults
(1) Holders of a majority in aggregate principal amount of the Notes then
outstanding by written notice to the Trustee may on behalf of the Holders of all
of the Notes waive any existing Default or Event of Default and its consequences
under this
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Indenture (except a continuing Default or Event of Default in the payment of
interest or premium or Liquidated Damages on, or the principal of, any Note held
by a non-consenting Holder). Upon any such waiver, such Default shall cease to
exist, and any Event of Default arising therefrom shall be deemed to have been
cured for every purpose of this Indenture; but no such waiver shall extend to
any subsequent or other Default or impair any right consequent thereon.
(2) The Trustee may, without the consent of any Holders of the Notes, waive
any Event of Default that relates to untimely or incomplete reports or
information if the legal rights of the Holders would not be materially adversely
affected thereby and may waive any other defaults the effect of which would not
materially adversely affect the rights of the Holders under this Indenture.
Section 6.05 Control by Majority
The Holders of a majority in principal amount of the then outstanding Notes
may direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
it. However, the Trustee may refuse to follow any direction that conflicts with
law or this Indenture, that the Trustee determines may be unduly prejudicial to
the rights of other Holders, or that may involve the Trustee in personal
liability.
Section 6.06 Limitation on Suits
A Holder may pursue a remedy with respect to this Indenture or the Notes
only if:
(1) the Holder gives to the Trustee written notice of a continuing
Event of Default;
(2) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer and, if requested, provide to the
Trustee indemnity satisfactory to the Trustee against any loss, liability
or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
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(5) during such 60-day period the Holders of a majority in aggregate
principal amount of the then outstanding Notes do not give the Trustee a
direction inconsistent with the request.
A Holder may not use this Indenture to prejudice the rights of another Holder or
to obtain a preference or priority over another Holder.
Section 6.07 Rights of Holders to Receive Payment
Notwithstanding any other provision of this Indenture, the right of any
Holder of a Note to receive payment of principal, premium, if any, and interest
on the Note, on or after the respective due dates expressed in the Note, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or adversely affected without the consent of the
Holder.
Section 6.08 Collection Suit by Trustee
If an Event of Default specified in Section 6.01(i) or (ii) occurs and is
continuing, the Trustee is authorized to recover judgment in its own name and as
trustee of an express trust against the Company for the whole amount of
principal and interest remaining unpaid on the Notes and interest on overdue
principal and, to the extent lawful, interest and such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel.
Section 6.09 Trustee May File Proofs of Claim
The Trustee is authorized to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders allowed in any judicial proceedings relative to the Company (or any
other obligor upon the Notes), its creditors or its property and shall be
entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.07 hereof out of the estate in
any such proceeding, shall be denied for any
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reason, payment of the same shall be secured by a Lien on, and shall be paid out
of, any and all distributions, dividends, money, securities and other properties
which the Holders of the Notes may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
Section 6.10 Priorities
If the Trustee collects any money pursuant to this Article, it shall pay
out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.07, including payment of all compensation, expense and liabilities
incurred, and all advances made, by the Trustee and the costs and expenses of
collection;
Second: to Holders for amounts due and unpaid on the Notes for principal,
premium, if any, and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for principal,
premium and interest, respectively;
Third: without duplication, to Holders of Notes for any other Obligations
owing to the Holders of Notes under the Notes or this Indenture; and
Fourth: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders.
Section 6.11 Undertaking for Costs
In any suit for the enforcement of any right or remedy under this Indenture
or in any suit against the Trustee for any action taken or omitted by it as a
Trustee, a court in its discretion may require the filing by any party litigant
in the suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in the suit, having due regard to the merits and good
faith of the claims or defenses made by the party litigant. This Section does
not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07,
or a suit by Holders of more than 10% in principal amount of the then
outstanding Notes.
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ARTICLE 7
TRUSTEE
Section 7.01 Duties of Trustee
(1) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(2) Except during the continuance of an Event of Default:
(a) The duties of the Trustee shall be determined solely by the
express provisions of this Indenture and the Trustee need perform only
those duties that are specifically set forth in this Indenture and no
others, and no implied covenants or obligations shall be read into this
Indenture against the Trustee.
(b) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture. However,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(3) The Trustee may not be relieved from liabilities for its own negligent
action, its own negligent failure to act, or its own willful misconduct, except
that:
(a) This paragraph does not limit the effect of paragraph (2) of this
Section.
(b) The Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it is proved that the Trustee
was negligent in ascertaining the pertinent facts.
(c) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
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(4) Whether or not therein expressly so provided, every provision of this
Indenture that in any way relates to the Trustee is subject to paragraphs (1),
(2) and (3) of this Section.
(5) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or incur any liability. The Trustee may refuse to perform
any duty or exercise any right or power unless it receives indemnity
satisfactory to it against any loss, liability or expense.
(6) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
(7) All indemnifications and releases from liability granted herein to the
Trustee shall extend to the directors, officers, employees and agents of the
Trustee and to the Paying Agent and Registrar.
Section 7.02 Rights of Trustee
(1) The Trustee may conclusively rely upon any document believed by it to
be genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document, but the
Trustee may, in its discretion, make such further inquiry or investigation into
such facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney.
(2) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
(3) The Trustee may act through agents and shall not be responsible for the
misconduct or negligence of any agent appointed with due care.
(4) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers conferred upon it by this Indenture.
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(5) Unless otherwise specifically provided in this Indenture, any demand,
request, direction or notice from the Company shall be sufficient if signed by
an Officer of the Company.
(6) The permissive rights of the Trustee to do things enumerated in this
Indenture shall not be construed as a duty unless so specified herein.
Section 7.03 Individual Rights of Trustee
The Trustee in its individual or any other capacity may become the owner or
pledgee of Notes and may otherwise deal with the Company or an Affiliate with
the same rights it would have if it were not Trustee. Any Agent may do the same
with like rights. However, the Trustee is subject to Sections 7.10 and 7.11.
Subject to the provisions of Section 310(b) of the TIA, the Trustee shall be
permitted to engage in transactions with the Company and its Subsidiaries other
than those contemplated by this Indenture.
Section 7.04 Trustee's Disclaimer
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Company's use of the proceeds from the Notes or any money
paid to the Company or upon the Company or upon the Company's direction under
any provision hereof. The Trustee shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee and
it shall not be responsible for any statement or recital herein or any statement
in the Notes or any other document in connection with the sale of the Notes or
pursuant to this Indenture other than its certificate of authentication.
Section 7.05 Notice of Defaults
The Trustee shall not be deemed to have notice of a Default or an Event of
Default unless (i) the Trustee has received written notice thereof from the
Company or any Holder or (ii) a Responsible Officer of the Trustee shall have
actual knowledge thereof. Except as otherwise expressly provided herein, the
Trustee shall not be bound to ascertain or inquire as to the performance or
observance of any of the terms, conditions, covenants or agreements herein, or
of any of the documents executed in connection with the Notes, or as to the
existence of a Default or Event of Default hereunder.
Subject to Section 6.04(2), if a Default or Event of Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to Holders
a notice of the Default or Event of Default within 90 days after it obtains
knowledge of the existence of such Event of Default. Except in the case of a
Default or Event of Default
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in payment of principal, premium or interest on any Note, the Trustee may
withhold the notice if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of
Holders.
Section 7.06 Reports by Trustee to Holders
Within 60 days after each October 15 beginning with the October 15
following the date of this Indenture, the Trustee shall mail to Holders a brief
report dated as of such reporting date that complies with TIA (S) 313(a) (but if
no event described in TIA (S) 313(a) has occurred within the twelve months
preceding the reporting date, no report need be transmitted). The Trustee also
shall comply with TIA (S) 313(b). The Trustee shall also transmit by mail all
reports as required by TIA (S) 313(c).
Commencing at the time this Indenture is qualified under the TIA, a copy of
each report at the time of its mailing to Holders shall be filed with the SEC
and each stock exchange on which the Notes are listed. The Company shall
promptly notify the Trustee when the Notes are listed on any stock exchange.
Section 7.07 Compensation and Indemnity
The Company shall pay to the Trustee from time to time reasonable
compensation for its acceptance of this Indenture and services hereunder. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee promptly
upon request for all reasonable disbursements, advances and expenses incurred or
made by it in addition to the compensation for its services. Such expenses
shall include the reasonable compensation, disbursements and expenses of the
Trustee's agents and counsel.
The Company shall indemnify the Trustee and its agents, employees, officers
and directors against any and all losses, liabilities or expenses incurred by it
arising out of or in connection with the acceptance or administration of its
duties under this Indenture, except as set forth in the next paragraph. The
Trustee shall notify the Company promptly of any claim for which it may seek
indemnity. Failure by the Trustee to so notify the Company shall not relieve
the Company of its obligations hereunder. The Company shall defend the claim
and the Trustee shall cooperate in the defense. The Trustee may have separate
counsel and the Company shall pay the reasonable fees and expenses of such
counsel. The Company need not pay for any settlement made without its consent,
which consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any loss or
liability incurred by the Trustee through its own negligence or bad faith.
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The obligations of the Company under this Section 7.07 shall survive the
satisfaction and discharge of this Indenture.
To secure the Company's payment obligations in this Section, the Trustee
shall have a Lien prior to the Notes on all money or property held or collected
by the Trustee, except that held in trust to pay principal and interest on
particular Notes. Such Lien shall survive the satisfaction and discharge of
this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(viii) or (ix) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
Section 7.08 Replacement of Trustee
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
The Trustee may resign at any time and be discharged from the trust hereby
created by so notifying the Company. The Holders of a majority in principal
amount of the then outstanding Notes may remove the Trustee by so notifying the
Trustee and the Company. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(3) a Custodian or public officer takes charge of the Trustee or its
property; or
(4) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in principal amount of the then outstanding Notes may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
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If the Trustee after written request by any Holder who has been a Holder
for at least six months fails to comply with Section 7.10, such Holder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Holders. The retiring Trustee shall promptly transfer all property held by it
as Trustee to the successor Trustee, provided all sums owing to the Trustee
hereunder have been paid and subject to the Lien provided for in Section 7.07.
Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the
Company's obligations under Section 7.07 hereof shall continue for the benefit
of the retiring Trustee.
Section 7.09 Successor Trustee by Merger, etc.
If the Trustee consolidates, merges or converts into, or transfers all or
substantially all of its corporate trust business to, another corporation, the
successor corporation without any further act shall be the successor Trustee.
Section 7.10 Eligibility; Disqualification
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America or of any state thereof authorized under such laws to exercise corporate
trustee power, shall be subject to supervision or examination by Federal or
state authority and shall have (or in the case of a corporation included in a
bank holding company system, the related bank holding company shall have) a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the requirements
of TIA (S) 310(a)(1) and 310(a)(5). The Trustee is subject to TIA (S) 310(b).
Section 7.11 Preferential Collection of Claims Against the Company
The Trustee is subject to TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated therein.
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ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01 Option to Effect Legal Defeasance or Covenant Defeasance
The Company may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, with respect to
the Notes, elect to have either Section 8.02 or 8.03 be applied to all
outstanding Notes upon compliance with the conditions set forth below in this
Article Eight.
Section 8.02. Legal Defeasance and Discharge
Upon the Company's exercise under Section 8.01 of the option applicable to
this Section 8.02, the Company shall be deemed to have been discharged from its
obligations with respect to all outstanding Notes on the date the conditions set
forth below are satisfied (hereinafter, "Legal Defeasance"). For this purpose,
such Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding Notes, which
shall thereafter be deemed to be "outstanding" only for the purposes of Section
8.05 and the other Sections of this Indenture referred to in (a) and (b) below,
and to have satisfied all its other obligations under such Notes and this
Indenture (and the Trustee, on demand of and at the expense of the Company,
shall execute proper instruments acknowledging the same), except for the
following which shall survive until otherwise terminated or discharged
hereunder: (a) the rights of Holders of outstanding Notes to receive solely
from the trust fund described in Section 8.04, and as more fully set forth in
such Section, payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages, if any, on such Notes when such payments are
due, (b) the Company's obligations with respect to such Notes under Sections
2.03, 2.05, 2.06, 2.07, 2.10 and 4.02, (c) the rights, powers, trusts, duties
and immunities of the Trustee hereunder and the Company's obligations in
connection therewith and (d) this Article Eight. Subject to compliance with
this Article Eight, the Company may exercise its option under this Section 8.02
notwithstanding the prior exercise of its option under Section 8.03 with respect
to the Notes.
Section 8.03 Covenant Defeasance
Upon the Company's exercise under Section 8.01 of the option applicable to
this Section 8.03, the Company shall be released from its obligations under the
covenants contained in Sections 4.03, 4.04, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11,
4.12, 4.14 and 4.15 and Article Five with respect to the outstanding Notes on
and after the date the conditions set forth below are satisfied (hereinafter,
"Covenant Defeasance"), and the Notes shall thereafter be deemed not
"outstanding" for the purposes of any direction, waiver, consent
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or declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder (it being understood that such Notes shall not
be deemed outstanding for accounting purposes). For this purpose, such Covenant
Defeasance means that, with respect to the outstanding Notes, the Company may
omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document and such omission to comply shall not constitute a Default
or an Event of Default under Section 6.01(iii) or (iv), but, except as specified
above, the remainder of this Indenture and such Notes shall be unaffected
thereby. In addition, upon the Company's exercise under Section 8.01 of the
option applicable to this Section 8.03, Sections 6.01(iii) through 6.01(vii)
shall not constitute Events of Default.
Section 8.04 Conditions to Legal or Covenant Defeasance
The following shall be the conditions to the application of either Section
8.02 or Section 8.03 to the outstanding Notes:
(1) the Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 7.10 who shall agree to comply with the provisions of this
Article Eight applicable to it) as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Notes, (a) cash in
U.S. Dollars in an amount, or (b) non-callable Government Securities which
through the scheduled payment of principal and interest and Liquidated
Damages, if any, in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment, cash in
U.S. Dollars in an amount, or (c) a combination thereof, in such amounts,
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay and discharge and which shall be applied
by the Trustee (or other qualifying trustee) to pay and discharge the
principal of, premium, if any, and interest and Liquidated Damages, if any,
on the outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, and the Company must specify whether
the Notes are being defeased to maturity or to a particular redemption date
of such principal or installment of principal, premium, if any, or
interest; provided that the Trustee shall have been irrevocably instructed
to apply such money or the proceeds of such non-callable Government
Securities to said payments with respect to the Notes;
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(2) In the case of an election under Section 8.02, either (i) (A) the
Notes will become due and payable at their stated maturity within one year
after the date of such election pursuant to Section 8.02 or, within one
year after the date of such election, the Notes will be redeemable at the
option of the Company and will be redeemed by the Company pursuant to
irrevocable instructions issued to the Trustee at the time of such election
for the giving of a notice of redemption by the Trustee for such redemption
and (B) the Company shall have delivered to the Trustee an Opinion of
Counsel in the United States reasonably satisfactory to the Trustee to the
effect that the Holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to Federal income tax in the same amount, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred or (ii) the Company shall have delivered
to the Trustee an Opinion of Counsel in the United States reasonably
satisfactory to the Trustee confirming that (A) the Company has received
from, or there has been published by, the Internal Revenue Service a ruling
or (B) since the date hereof, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based
thereon such opinion shall confirm that, the Holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance has not
occurred;
(3) In the case of an election under Section 8.03, the Company shall
have delivered to the Trustee an Opinion of Counsel in the United States
reasonably satisfactory to the Trustee to the effect that the Holders of
the outstanding Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to Federal income tax in the same amount, in the same manner and at
the same times as would have been the case if such Covenant Defeasance had
not occurred;
(4) No Default or Event of Default with respect to the Notes shall
have occurred and be continuing on the date of such deposit or, in so far
as Section 6.01(viii) or (ix) is concerned, at any time in the period
ending on the 91st day after the date of such deposit (it being understood
that this condition shall not be deemed satisfied until the expiration of
such period);
(5) Such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or
any other material agreement or instrument to which the Company or any of
its
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Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound;
(6) In the case of an election under either Section 8.02 or 8.03, the
Company shall have delivered to the Trustee an Officers' Certificate
stating that the deposit made by the Company pursuant to its election under
Section 8.02 or 8.03 was not made by the Company with the intent of
preferring the Holders over other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(7) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel in the United States, each stating
that all conditions precedent provided for relating to either the Legal
Defeasance under Section 8.02 or the Covenant Defeasance under Section 8.03
(as the case may be) have been complied with as contemplated by this
Section 8.04.
Section 8.05 Deposited Money and Government Securities to be Held in Trust;
Other Miscellaneous Provisions
Subject to Section 8.06, all money and Government Securities (including the
proceeds thereof) deposited with the Trustee (or other qualifying trustee,
collectively for purposes of this Section 8.05, the "Trustee") pursuant to
Section 8.04 in respect of the outstanding Notes shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as Paying Agent) as the Trustee may determine, to
the Holders of such Notes of all sums due and to become due thereon in respect
of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or Government Securities
deposited pursuant to Section 8.04 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the outstanding Notes.
Anything in this Article Eight to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon the request of the
Company any money or Government Securities held by it as provided in Section
8.04 which, in the opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered to the
Trustee (which may be the opinion delivered under Section 8.04(1)), are in
excess of the amount thereof which would then
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be required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
Section 8.06 Repayment to the Company
Any money deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of the principal of, premium, if any, or
interest on any Note and remaining unclaimed for two years after such principal,
and premium, if any, or interest has become due and payable shall be paid to the
Company on its request or (if then held by the Company) shall be discharged from
such trust; and the Holder of such Note shall thereafter, as a creditor, look
only to the Company for payment thereof, and all liability of the Trustee or
such Paying Agent with respect to such trust money, and all liability of the
Company as trustee thereof, shall thereupon cease; provided, however, that the
Trustee or such Paying Agent, before being required to make any such repayment,
may at the expense of the Company cause to be published once, in the New York
Times and The Wall Street Journal (national edition), notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such notification or publication, any
unclaimed balance of such money then remaining will be repaid to the Company.
Section 8.07 Reinstatement
If the Trustee or Paying Agent is unable to apply any United States Dollars
or Government Securities in accordance with Section 8.02 or 8.03, as the case
may be, by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, then
the Company's obligations under this Indenture and the Notes shall be revived
and reinstated as though no deposit had occurred pursuant to Section 8.02 or
8.03 until such time as the Trustee or Paying Agent is permitted to apply all
such money in accordance with Section 8.02 or 8.03, as the case may be;
provided, however, that, if the Company makes any payment of principal of,
premium, if any, or interest on any Note following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Notes to receive such payment from the money held by the Trustee or Paying
Agent and provided further that if such order or judgment is issued in
connection with the insolvency, receivership or other similar occurrence with
respect to the Trustee, upon the reinstatement of such obligations the Company
shall be released from its obligations under Sections 4.03, 4.04, 4.06, 4.07,
4.08, 4.09, 4.10, 4.11, 4.12, 4.14 and 4.15 and Article 5.
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ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01 Without Consent of Holders
Notwithstanding Section 9.02 of this Indenture, the Company and the
Trustee may amend or supplement this Indenture or the Notes without the consent
of any Holder of a Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to provide for the assumption of the Company's obligations to the
Holders of the Notes in the case of a merger or consolidation pursuant to
Article Five hereof;
(d) to provide for additional Subsidiary Guarantors as set forth in
Section 4.15;
(e) to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not adversely affect the
legal rights hereunder of any Holder of the Note; or
(f) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA.
Upon the request of the Company, accompanied by a resolution of its Board
of Directors authorizing the execution of any such supplemental indenture, and
upon receipt by the Trustee of the documents described in Section 9.06 hereof,
the Trustee shall join with the Company in the execution of any supplemental
indenture authorized or permitted by the terms of this Indenture and to make any
further appropriate agreements and stipulations which may be therein contained,
but the Trustee shall not be obligated to enter into such supplemental indenture
which affects its own rights, duties or immunities under this Indenture or
otherwise.
Section 9.02 With Consent of Holders
The Company and the Trustee may amend or supplement this Indenture or the
Notes with the written consent of the Holders of at least a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender
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offer or exchange offer for the Notes) and any existing Default (including,
without limitation, an acceleration of the Notes) or compliance with any
provision of this Indenture or the Notes may be waived with the written consent
of the Holders of at least a majority in principal amount of the then
outstanding Notes (including consents obtained in connection with a tender offer
or exchange offer for the Notes).
Upon the request of the Company, accompanied by a resolution of its Board
of Directors authorizing the execution of any such supplemental indenture, and
upon the filing with the Trustee of evidence satisfactory to the Trustee of the
consent of the Holders as aforesaid, and upon receipt by the Trustee of the
documents described in Section 9.06 hereof, the Trustee shall join with the
Company in the execution of such supplemental indenture unless such supplemental
indenture affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise, in which case the Trustee may in its discretion, but
shall not be obligated to, enter into such supplemental indenture.
It shall not be necessary for the consent of the Holders under this Section
to approve the particular form of any proposed amendment or waiver, but it shall
be sufficient if such consent approves the substance thereof.
After a supplement, amendment or waiver under this Section becomes
effective, the Company shall mail to the Holders of each Note affected thereby a
notice briefly describing the supplement, amendment or waiver. Any failure of
the Company to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such supplemental indenture,
amendment or waiver. Subject to Sections 6.04(1) and 6.07 hereof, the Holders
of a majority in principal amount of the Notes then outstanding may waive
compliance in a particular instance by the Company with any provision of this
Indenture or the Notes. However, without the consent of each Holder affected, a
supplement, amendment or waiver under this Section may not (with respect to any
Notes held by a non-consenting Holder):
(1) reduce the principal amount of Notes whose Holders must consent
to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to redemption of the Notes other than
pursuant to Sections 4.06 and 4.07 hereof;
(3) reduce the rate of or change the time for payment of interest,
including default interest, or Liquidated Damages on any Note;
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(4) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest or Liquidated Damages on any Note
(except a recision of acceleration of the Notes by the Holders of at least
a majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any Note payable in money other than that stated in the
Note;
(6) make any change in Section 6.04(1) or 6.07 hereof or in this
sentence of this Section 9.02 or the rights of Holders of Notes to receive
payments of principal of or premium, if any, or interest or Liquidated
Damages on the Notes;
(7) waive a redemption payment with respect to any Note (other than a
payment required by the provisions of Sections 4.06 or 4.07 hereof); or
(8) make any change in the foregoing amendment and waiver provisions.
Section 9.03 Compliance with Trust Indenture Act
Every amendment to this Indenture or the Notes shall be set forth in a
supplemental indenture that complies with the TIA as then in effect.
Section 9.04 Revocation and Effect of Consents
Until a supplement, amendment or waiver becomes effective, a consent to it
by a Holder is a continuing consent by the Holder and every subsequent Holder or
portion of a Note that evidences the same debt as the consenting Holder's Note,
even if notation of the consent is not made on any Note. However, any such
Holder or subsequent Holder may revoke the consent as to its Note if the Trustee
receives written notice of revocation before the date the waiver or amendment
becomes effective. An amendment or waiver becomes effective in accordance with
its terms and thereafter binds every Holder.
The Company may fix a record date for determining which Holders must
consent to such amendment or waiver. If the Company fixes a record date, the
record date shall be fixed at (i) the later of 30 days prior to the first
solicitation of such consent or the date of the most recent list of Holders
furnished to the Trustee prior to such solicitation pursuant to Section 2.05, or
(ii) such other date as the Company shall designate.
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Section 9.05 Notation on or Exchange of Notes
The Trustee may place an appropriate notation about a supplement, amendment
or waiver on any Note thereafter authenticated. The Company in exchange for all
Notes may issue and the Trustee shall authenticate new Notes that reflect the
supplement, amendment or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such supplement, amendment or waiver.
Section 9.06 Trustee to Sign Amendments, etc.
The Trustee shall sign any amendment or supplemental indenture authorized
pursuant to this Article 9 if the amendment does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may, but need not, sign it. In signing or refusing to sign such
amendment or supplemental indenture, the Trustee shall be entitled to receive,
if requested, an indemnity reasonably satisfactory to it and to receive and,
subject to Section 7.01, shall be fully protected in relying upon, an Officers'
Certificate and an Opinion of Counsel as conclusive evidence that such amendment
or supplemental indenture is authorized or permitted by this Indenture, that it
is not inconsistent herewith, and that it will be valid and binding upon the
Company in accordance with its terms. The Company may not sign an amendment or
supplemental indenture until the Board of Directors approves it.
ARTICLE 10
SUBSIDIARY GUARANTEES
Section 10.01 Subsidiary Guarantees
Subject to the provisions of this Article 10, each Subsidiary Guarantor,
jointly and severally, hereby unconditionally guarantees to each Holder of a
Note authenticated and delivered by the Trustee and to the Trustee and its
successors and assigns, that: (a) the principal of, and premium, if any, and
interest on the Notes shall be duly and punctually paid in full when due,
whether at maturity, by acceleration or otherwise, and interest on overdue
principal, and premium, if any, and (to the extent permitted by law) interest on
any interest, if any, on the Notes and all other obligations of the Company to
the Holders or the Trustee hereunder or under the Notes (including fees,
expenses or other) shall be promptly paid in full or performed, all in
accordance with the terms hereof; and (b) in case of any extension of time of
payment or renewal of any Notes or any of such other obligations, the same shall
be promptly paid in full when due or performed in accordance with the terms of
the extension or renewal, whether at stated
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maturity, by acceleration or otherwise. Failing payment when due of any amount
so guaranteed or failing performance of any other obligation of the Company to
the Holders, for whatever reason, each Subsidiary Guarantor shall be obligated
to pay, or to perform or to cause the performance of, the same immediately. An
Event of Default under this Indenture or the Notes shall constitute an event of
default under this Subsidiary Guarantee, and shall entitle the Trustee or the
Holders of Notes to accelerate the obligations of each Subsidiary Guarantor
hereunder in the same manner and to the same extent as the obligations of the
Company. Each Subsidiary Guarantor hereby agrees that its obligations hereunder
shall be unconditional, irrespective of the validity, regularity or
enforceability of the Notes or this Indenture, the absence of any action to
enforce the same, any waiver or consent by any Holder of the Notes with respect
to any thereof, the entry of any judgment against the Company, any action to
enforce the same or any other circumstance which might otherwise constitute a
legal or equitable discharge or defense of a Guarantor. Each Subsidiary
Guarantor hereby waives and relinquishes: (a) any right to require the Trustee,
the Holders or the Company (each, a "Benefitted Party") to proceed against the
Company, the Subsidiaries or any other Person or to proceed against or exhaust
any security held by a Benefitted Party at any time or to pursue any other
remedy in any secured party's power before proceeding against the Subsidiary
Guarantors; (b) any defense that may arise by reason of the incapacity, lack of
authority, death or disability of any other Person or Persons or the failure of
a Benefitted Party to file or enforce a claim against the estate (in
administration, bankruptcy or any other proceeding) of any other Person or
Persons; (c) demand, protest and notice of any kind (except as expressly
required by this Indenture), including but not limited to notice of the
existence, creation or incurring of any new or additional Indebtedness or
obligation or of any action or non-action on the part of the Subsidiary
Guarantors, the Company, the Subsidiaries, any Benefitted Party, any creditor of
the Subsidiary Guarantors, the Company or the Subsidiaries or on the part of any
other Person whomsoever in connection with any obligations the performance of
which are hereby guaranteed; (d) any defense based upon an election of remedies
by a Benefitted Party, including but not limited to an election to proceed
against the Subsidiary Guarantors for reimbursement; (e) any defense based upon
any statute or rule of law which provides that the obligation of a surety must
be neither larger in amount nor in other respects more burdensome than that of
the principal; (f) any defense arising because of a Benefitted Party's election,
in any proceeding instituted under the Bankruptcy Law, of the application of
Section 1111(b)(2) of the Bankruptcy Code; and (g) any defense based on any
borrowing or grant of a security interest under Section 364 of the Bankruptcy
Code. The Subsidiary Guarantors hereby covenant that the Subsidiary Guarantees
shall not be discharged except by payment in full of all principal, premium, if
any, and interest on the Notes and all other costs provided for under this
Indenture, or as provided in Section 8.01.
If any Holder or the Trustee is required by any court or otherwise to
return to either the Company or the Subsidiary Guarantors, or any trustee or
similar official acting
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in relation to either the Company or the Subsidiary Guarantors, any amount paid
by the Company or the Subsidiary Guarantors to the Trustee or such Holder, the
Subsidiary Guarantees, to the extent theretofore discharged, shall be reinstated
in full force and effect. Each of the Subsidiary Guarantors agrees that it
shall not be entitled to any right of subrogation in relation to the Holders in
respect of any obligations guaranteed hereby until payment in full of all
obligations guaranteed hereby. Each Subsidiary Guarantor agrees that, as
between it, on the one hand, and the Holders of Notes and the Trustee, on the
other hand, (x) the maturity of the obligations guaranteed hereby may be
accelerated as provided in Article 6 hereof for the purposes hereof,
notwithstanding any stay, injunction or other prohibition preventing such
acceleration in respect of the obligations guaranteed hereby, and (y) in the
event of any acceleration of such obligations as provided in Article 6 hereof,
such obligations (whether or not due and payable) shall forthwith become due and
payable by such Subsidiary Guarantor for the purpose of the Subsidiary
Guarantee.
Section 10.02 Execution and Delivery of Subsidiary Guarantees
To evidence the Subsidiary Guarantees set forth in Section 10.01 hereof,
each of the Subsidiary Guarantors agrees that a notation of the Subsidiary
Guarantees substantially in the form included in Exhibit A-1 hereto shall be
endorsed on each Note authenticated and delivered by the Trustee and that this
Indenture shall be executed on behalf of the Subsidiary Guarantors by the
Chairman of the Board, any Vice Chairman, the President or one of the Vice
Presidents or Manager-Members, as applicable, of the Subsidiary Guarantors,
under a facsimile of its seal reproduced on this Indenture and attested to by an
Officer other than the Officer executing this Indenture.
Each of the Subsidiary Guarantors agree that the Subsidiary Guarantees set
forth in this Article 10 will remain in full force and effect and apply to all
the Notes notwithstanding any failure to endorse on each Note a notation of the
Subsidiary Guarantees.
If an Officer whose facsimile signature is on a Note no longer holds that
office at the time the Trustee authenticates the Note on which the Subsidiary
Guarantees are endorsed, the Subsidiary Guarantees shall be valid nevertheless.
The delivery of any Note by the Trustee, after the authentication thereof
hereunder, shall constitute due delivery of the Subsidiary Guarantees set forth
in this Indenture on behalf of the Subsidiary Guarantors.
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Section 10.03 Subsidiary Guarantors May Consolidate, etc., on Certain Terms
(a) Nothing contained in this Indenture or in the Notes shall prevent any
consolidation or merger of a Subsidiary Guarantor with or into the Company or
another Subsidiary Guarantor, or shall prevent the transfer of all or
substantially all of the assets of a Subsidiary Guarantor to the Company or
another Subsidiary Guarantor. Upon any such consolidation, merger, transfer or
sale, the Subsidiary Guarantee of such Subsidiary Guarantor shall no longer have
any force or effect.
(b) Each Subsidiary Guarantor shall not, in a single transaction or series
of related transactions, consolidate or merge with or into (whether or not such
Subsidiary Guarantor is the surviving corporation), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions, to another corporation, Person or
entity other than the Company or another Subsidiary Guarantor unless (i) subject
to the provisions of Section 10.04 hereof, the entity or Person formed by or
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of such Subsidiary Guarantor under its Guarantee and this Indenture
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee; (ii) immediately after such transaction no Default or Event of Default
exists; (iii) such Subsidiary Guarantor or the entity or Person formed by or
surviving any such consolidation or merger (if other than Subsidiary Guarantor),
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (A) shall have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of such Subsidiary Guarantor immediately preceding the transaction and (B)
shall, at the time of such transaction and after giving pro forma effect thereto
as if such transaction had occurred at the beginning of the applicable four-
quarter period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of Section 4.10; and (iv) such Subsidiary Guarantor shall have
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel
addressed to the Trustee, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or disposition and such supplemental
indenture, if any, comply with this Indenture and that such supplemental
indenture is enforceable. In case of any such consolidation, merger or transfer
of assets and upon the assumption by the successor corporation, by supplemental
indenture, executed and delivered to the Trustee and satisfactory in form to the
Trustee, of the Subsidiary Guarantees endorsed upon the Notes and the due and
punctual performance of all of the covenants and conditions of this Indenture to
be performed by such Guarantor, such successor corporation shall succeed to and
be substituted for such Subsidiary Guarantor with the same effect as if it had
been named herein as a Subsidiary
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Guarantor. Such successor corporation thereupon may cause to be signed any or
all of the Subsidiary Guarantees to be endorsed upon all of the Notes issuable
hereunder which theretofore shall not have been signed by the Company and
delivered to the Trustee. All the Subsidiary Guarantees so issued shall in all
respects have the same legal rank and benefit under this Indenture as the
Subsidiary Guarantees theretofore and thereafter issued in accordance with the
terms of this Indenture as though all of such Subsidiary Guarantees had been
issued at the date of the execution hereof.
(c) The Trustee, subject to the provisions of Section 10.04 hereof, shall
be entitled to receive an Officers' Certificate and an Opinion of Counsel as
conclusive evidence that any such consolidation, merger, sale or conveyance, and
any such assumption of Obligations, comply with the provisions of this Section
10.03. Such Officers' Certificate and Opinion of Counsel shall comply with the
provisions of Section 11.05.
Section 10.04 Releases Following Sale of Assets
In the event of a sale or other disposition of all or substantially all of
the assets of any Subsidiary Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all (or substantially all) of the
Capital Stock of any Subsidiary Guarantor, which sale or other disposition
otherwise complies with the terms of this Indenture, then such Subsidiary
Guarantor (in the event of a sale or other disposition, by way of such a merger,
consolidation or otherwise, of all or substantially all of the Capital Stock of
such Subsidiary Guarantor) or the corporation acquiring the property (in the
event of a sale or other disposition of all or substantially all of the assets
of such Subsidiary Guarantor) shall be released from and relieved of any
obligations under its Subsidiary Guarantee; provided that the Net Proceeds from
such sale or other disposition are treated in accordance with the provisions of
Section 4.08 hereof. Upon delivery by the Company to the Trustee of an
Officer's Certificate and Opinion of Counsel, to the effect that such sale or
other disposition was made by the Company in accordance with the provisions of
this Indenture, including without limitation Section 4.08 hereof, the Trustee
shall execute any documents reasonably required in order to evidence the release
of any such Subsidiary Guarantor from its obligations under its Subsidiary
Guarantee. Any Subsidiary Guarantor not released from its obligations under its
Subsidiary Guarantee shall remain liable for the full amount of principal of and
interest on the Notes and for the other obligations of any Subsidiary Guarantor
under this Indenture as provided in this Article 10.
Section 10.05 Limitation of Subsidiary Guarantor's Liability
Each Subsidiary Guarantor, and by its acceptance hereof each Holder, hereby
confirms that it is the intention of all such parties that the guarantee by such
Subsidiary
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Guarantor pursuant to its Subsidiary Guarantee not constitute a fraudulent
transfer or conveyance for purposes of the Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar
federal or state law. To effectuate the foregoing intention, the Holders and
such Subsidiary Guarantor hereby irrevocably agree that the obligations of such
Subsidiary Guarantor under this Article 10 shall be limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
this Article 10, result in the obligations of such Subsidiary Guarantor under
the Subsidiary Guarantee of such Subsidiary Guarantor not constituting a
fraudulent transfer or conveyance.
Section 10.06 Application of Certain Terms and Provisions to the Subsidiary
Guarantors
(a) For purposes of any provision of this Indenture which provides for the
delivery by any Subsidiary Guarantor of an Officers' Certificate and/or an
Opinion of Counsel, the definitions of such terms in Section 1.01 shall apply to
such Subsidiary Guarantor as if references therein to the Company were
references to such Subsidiary Guarantor.
(b) Any request, direction, order or demand which by any provision of this
Indenture is to be made by any Guarantor, shall be sufficient if evidenced as
described in Section 12.02 as if references therein to the Company were
references to such Subsidiary Guarantor.
(c) Any notice or demand which by any provision of this Indenture is
required or permitted to be given or served by the Trustee or by the holders of
Notes to or on any Subsidiary Guarantor may be given or served as described in
Section 11.02 as if references therein to the Company were references to such
Subsidiary Guarantor.
(d) Upon any demand, request or application by any Subsidiary Guarantor to
the Trustee to take any action under this Indenture, such Subsidiary Guarantor
shall furnish to the Trustee such certificates and opinions as are required in
Section 11.04 hereof as if all references therein to the Company were references
to such Subsidiary Guarantor.
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ARTICLE 11
MISCELLANEOUS
Section 11.01 Trust Indenture Act Controls
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA (S) 318(c), the duties imposed by TIA (S) 318(c) shall
control.
Section 11.02 Notices
Any notice or communication by the Company, any Subsidiary Guarantor
or the Trustee to the other is duly given if in writing and delivered in Person
or mailed by first-class mail (registered or certified, return receipt
requested), telex, telecopier or overnight air courier guaranteeing next day
delivery, to the other's address:
If to the Company or a Subsidiary Guarantor:
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard
Building 1, Suite 210
Torrance, CA 90505
Attention: General Counsel
Telecopier No.: (310) 791-8230
If to the Trustee:
Chemical Trust Company of California
101 California Street
Suite 2725
San Francisco, CA 94111
Attention: Corporate Trust Department
Telecopier No.: (415) 693-8850
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders) shall be
deemed to have been duly given: at the time delivered by hand, if personally
delivered; five days after being deposited in the mail, postage prepaid, if
mailed; when answered back, if telexed; when receipt acknowledged, if
telecopied; and the next Business Day after timely delivery to the courier, if
sent by overnight air courier guaranteeing next day delivery.
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Any notice or communication to a Holder shall be mailed by first-class
mail, certified or registered, return receipt requested, or by overnight air
courier guaranteeing next day delivery to its address shown on the register kept
by the Registrar. Any notice or communication shall also be so mailed to any
Person described in TIA (S) 313(c), to the extent required by the TIA. Failure
to mail a notice or communication to a Holder or any defect in it shall not
affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives it.
If the Company mails a notice or communication to Holders, it shall mail a
copy to the Trustee and each Agent at the same time.
Section 11.03 Communication by Holders with Other Holders
Holders may communicate pursuant to TIA (S) 312(b) with other Holders with
respect to their rights under this Indenture or the Notes. The Company, the
Trustee, the Registrar and anyone else shall have the protection of TIA (S)
312(c).
Section 11.04 Certificate and Opinion as to Conditions Precedent
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 11.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 11.05 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been complied with.
Section 11.05 Statements Required in Certificate or Opinion
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA (S) 314(a)(4)) shall include:
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(1) a statement that the Person making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such Person,
such condition or covenant has been complied with.
Section 11.06 Rules by Trustee and Agents
The Trustee may make reasonable rules for action by or at a meeting of
Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
Section 11.07 Legal Holidays
A "Legal Holiday" is a Saturday, a Sunday or a day on which banking
institutions in The City of New York or at a place of payment are authorized or
obligated by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is not a Legal Holiday, and no interest shall
accrue for the intervening period.
Section 11.08 No Recourse Against Others
No director, officer, manager, member, organizer, employee, incorporator or
shareholder of the Company or any Subsidiary Guarantor, as such, shall have any
liability for any Obligations of the Company or any Subsidiary Guarantor under
the Notes, this Indenture or any Subsidiary Guarantee or for any claim based on,
in respect of or by reason of such obligations or their creation. Each Holder
by accepting a Note waives and releases all such liability. This waiver and
release are part of the consideration for issuance of the Notes.
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Section 11.09 Duplicate Originals
The parties may sign any number of copies of this Indenture. One signed
copy is enough to prove this Indenture.
Section 11.10 Governing Law
The internal law of the State of New York shall govern and be used to
construe this Indenture and the Notes (without regard to conflicts of law
provisions). Each party hereto irrevocably submits itself to the non-exclusive
jurisdiction of the state and federal courts of New York for purposes of this
Indenture and agrees and consents that service of process may be made upon it in
any legal proceeding relating to this Indenture by any means allowed under
federal or New York law. The parties hereto hereby waive and agree not to
assert, by way of motion, as a defense or otherwise, that any such proceeding is
brought in an inconvenient forum or that the venue thereof is improper.
Section 11.11 No Adverse Interpretation of Other Agreements
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or its Subsidiaries. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
Section 11.12 Successors
All agreements of the Company in this Indenture, and the Notes shall bind
its successors. All agreements of the Trustee in this Indenture shall bind its
successor.
Section 11.13 Severability
In case any provision in this Indenture or the Notes shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
Section 11.14 Counterpart Originals
The parties may sign any number of copies of this Indenture. Each signed
copy shall be an original, but all of them together represent the same
agreement.
Section 11.15 Table of Contents, Headings, etc.
The Table of Contents, Cross-Reference Table and Headings of the Articles
and Sections of this Indenture have been inserted for convenience of reference
only, are not
83
<PAGE>
to be considered a part hereof and shall in no way modify or restrict any of the
terms or provisions hereof.
84
<PAGE>
SIGNATURES
IMPERIAL CREDIT INDUSTRIES, INC.
By: /s/ H. Wayne Snavely
-----------------------------
Name: H. Wayne Snavely
Title: Chairman
Dated as of January 23, 1997
Attest: /s/ Irv Gubman
-------------------------
IMPERIAL BUSINESS CREDIT, INC.
By: /s/ H. Wayne Snavely
-----------------------------
Name: H. Wayne Snavely
Title: Chairman
Dated as of January 23, 1997
Attest: /s/ Irv Gubman
-------------------------
IMPERIAL CREDIT ADVISORS, INC.
By: /s/ H. Wayne Snavely
-----------------------------
Name: H. Wayne Snavely
Title: Chairman
Dated as of January 23, 1997
Attest: /s/ Irv Gubman
-------------------------
FRANCHISE MORTGAGE ACCEPTANCE CO. LLC
By: /s/ H. Wayne Snavely
-----------------------------
Name: H. Wayne Snavely
Title: Chairman
Dated as of January 23, 1997
Attest: /s/ Irv Gubman
-------------------------
85
<PAGE>
CHEMICAL TRUST COMPANY OF
CALIFORNIA, as Trustee
By: /s/ Hans H. Helley
-----------------------------
Name: Hans H. Helley
Title: Assistant Vice President
Dated as of: January 23, 1997
Attest: Cecelia ???????
-------------------------
86
<PAGE>
Exhibit A-1
(Face of Security)
9-7/8% [Series A] [Series B] Senior Notes due 2007
No. $__________
IMPERIAL CREDIT INDUSTRIES, INC.
promises to pay to _______________________________________
or registered assigns, the principal sum of ___________________
Dollars on January 15, 2007.
Interest Payment Dates: January 15 and July 15, commencing July 15, 1997
Record Dates: January 1 and July 1 (whether or not a Business Day)
IMPERIAL CREDIT INDUSTRIES, INC.
By:
Name:
Title:
By:
Name:
Title:
TRUSTEE CERTIFICATE OF AUTHENTICATION
Dated: _________________
This is one of the Notes
referred to in the within-mentioned
Indenture
CHEMICAL TRUST COMPANY OF CALIFORNIA,
as Trustee
By:
(Authorized Signature)
A1-1
<PAGE>
(Back of Security)
9-7/8% [Series A] [Series B] Senior Notes due 2007
[Unless and until it is exchanged in whole or in part for Notes in
definitive form, this Note may not be transferred except as a whole by the
Depositary to a nominee of the Depositary or by a nominee of the Depositary to
the Depositary or another nominee of the Depositary or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary. Unless this certificate is presented by an authorized
representative of The Depository Trust Company (55 Water Street, New York, New
York) ("DTC"), to the issuer or its agent for registration of transfer, exchange
or payment, and any certificate issued is registered in the name of Cede & Co.
or such other name as may be requested by an authorized representative of DTC
(and any payment is made to Cede & Co. or such other entity as may be requested
by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the
registered owner hereof, Cede & Co., has an interest herein.]/1/
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN
A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS
SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM
THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT
OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE
UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN
OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY
OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT
HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED
HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
- ----------------
1. This paragraph should be included only if the Note is issued in global form.
A1-2
<PAGE>
Capitalized terms used herein shall have the meanings assigned to them in
the Indenture referred to below unless otherwise indicated.
1. Interest. Imperial Credit Industries, Inc., a California corporation
(the "Company"), promises to pay interest on the principal amount of this Note
at the rate and in the manner specified below and shall pay the Liquidated
Damages, if any, payable pursuant to Section 5 of the Registration Rights
Agreement referred to below. Interest on the Notes will accrue at the rate of
9-7/8% per annum and will be payable semi-annually in arrears on January 15 and
July 15, commencing on July 15, 1997, or if any such day is not a Business Day,
on the next succeeding Business Day (each an "Interest Payment Date"), to
Holders of record on the immediately preceding January 1 and July 1,
respectively.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. Interest on the Notes will accrue from the most recent date to which
interest has been paid or duly provided for or, if no interest has been paid or
duly provided for, from the date of original issuance of the Notes. To the
extent lawful, the Company shall pay interest (including post-petition interest
in any proceeding under any Bankruptcy Law) on overdue principal at the
applicable interest rate on the Notes; it shall pay interest on overdue
installments of interest (without regard to applicable grace periods) at the
same rate, to the extent lawful, (i) if payment is made during the period of
five Business Days following the date on which such interest was due, to the
Persons who were to receive payment on the date such interest was due or (ii) if
payment is made after such period, to the Persons who are Holders on a
subsequent special record date, which date shall be at the earliest practicable
date but in all events at least five Business Days prior to the payment date.
2. Method of Payment. The Company will pay interest on the Notes (except
defaulted interest) and Liquidated Damages, if any, to the Persons who are
registered Holders of Notes at the close of business on the record date next
preceding the Interest Payment Date, even if such Notes are cancelled after such
record date and on or before such Interest Payment Date. Principal, premium, if
any, interest and Liquidated Damages, if any, on the Notes will be payable at
the office or agency of the Company maintained for such purpose within the City
and State of New York, or at the option of the Company, payment of interest and
Liquidated Damages, if any, may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments with respect to Notes the Holders of which
have given wire transfer instructions to the Company and the Trustee will be
required to be made by wire transfer of immediately available funds to the
accounts specified by the Holders thereof. The Company will pay principal,
premium, if any, and interest in money of the United States that at the time of
payment is legal tender for payment of public and private debts.
3. Paying Agent and Registrar. Initially the Trustee under the Indenture
will act as Paying Agent and Registrar. The Company may change any Paying Agent
or Registrar without notice to any Holder. The Company or any of its
Subsidiaries may act as Paying Agent or Registrar.
4. Indenture. The Company issued the Notes under an Indenture dated as of
January 23, 1997 ("Indenture") among the Company, the Subsidiary Guarantors and
A1-3
<PAGE>
the Trustee. The terms of the Notes include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of 1939
(15 U.S. Code (S)(S) 77aaa-77bbbb) as in effect on the date of the Indenture.
The Notes are subject to all such terms, and Holders are referred to the
Indenture and such Act for a statement of such terms. The terms of the
Indenture shall govern any inconsistencies between the Indenture and the Notes.
Terms not otherwise defined herein shall have the meanings assigned in the
Indenture. The Notes are general unsecured obligations of the Company limited
to $200,000,000 in aggregate principal amount.
5. Optional Redemption.
The Notes are not redeemable at the Company's option prior to January 15,
2002. Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest and Liquidated Damages, if
any, thereon to the applicable redemption date, if redeemed during the twelve-
month period beginning on January 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2002................................. 104.938%
2003................................. 103.292%
2004................................. 101.645%
2005 and thereafter.................. 100.000%
</TABLE>
Notwithstanding the foregoing, during the first three years after the Issue
Date, the Company may redeem up to an aggregate of 35% of the aggregate
principal amount of Notes originally issued in the Offering at a redemption
price of 109.875% of the principal amount thereof, in each case plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption date,
with the net proceeds of an Equity Offering; provided however, that at least 65%
of the aggregate principal amount of Notes initially issued remains outstanding
immediately after the occurrence of such redemption.
6. Mandatory Redemption.
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
7. Repurchase at Option of Holder.
(a) If there is a Change of Control, the Company shall be required to offer
to purchase all or any part (equal to $1,000 or an integral multiple thereof) of
each Holder's Notes at a purchase price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase. Holders of Notes that are subject to an offer to purchase will
receive an offer to purchase from the Company prior to any related purchase
date, and may elect to have such Notes purchased by completing the form entitled
"Option of Holder to Elect Purchase" appearing below.
A1-4
<PAGE>
(b) If the Company consummates any Asset Sale, the Company will be
required, under certain circumstances, to apply the Excess Proceeds thereof to
an offer to all Holders of Notes to purchase the maximum principal amount of
Notes that may be purchased out of the Excess Proceeds at an offer price in cash
equal to 100% of the principal amount of the Notes plus accrued and unpaid
interest, if any, to the date of purchase, in accordance with the procedures set
forth in the Indenture. Holders of Notes that are subject to an offer to
purchase will receive an offer to purchase from the Company prior to any related
purchase date, and may elect to have such Notes purchased by completing the form
entitled "Option of Holder to Elect Purchase" appearing below.
8. Denominations, Transfer, Exchange. The Notes are in face denominations
of $1,000 and integral multiples of $1,000. The Notes may be transferred and
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture. The Company need not
exchange or register the transfer of any Note or portion of a Note selected for
redemption. Also, it need not (i) register the transfer of or exchange any
Notes during any period (a) beginning at the opening of business on a Business
Day 15 days before the day of any selection of Notes for redemption and ending
at the close of business on the day of selection or (b) beginning at the opening
of business on a Business Day 15 days before an interest payment date and ending
on the close of business on such interest payment date or (ii) register the
transfer or exchange of any Note selected for redemption in whole or in part,
except the unredeemed portion of any Note being redeemed in part.
9. Persons Deemed Owners. Prior to due presentment to the Trustee for
registration of the transfer of this Note, the Trustee, any Agent and the
Company may deem and treat the Person in whose name this Note is registered as
its absolute owner for the purpose of receiving payment of principal of and
interest on this Note and for all other purposes whatsoever, whether or not this
Note is overdue, and neither the Trustee, any Agent nor the Company shall be
affected by notice to the contrary. The registered holder of a Note shall be
treated as its owner for all purposes.
10. Amendment, Supplement and Waiver. Subject to certain exceptions, the
Indenture and the Notes may be amended or supplemented with the written consent
of the Holders of at least a majority in principal amount of the then
outstanding Notes, and any existing Default (except a Default or Event of
Default relating to the payment of principal, premium or interest) or compliance
with any provision of the Indenture or the Notes may be waived with the written
consent of the Holders of at least a majority in principal amount of the then
outstanding Notes. Without the consent of any Holder, the Indenture or the
Notes may be amended or supplemented to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Notes in addition to or in place of
certificated Notes, to provide for the assumption of the Company's obligations
to Holders of the Notes in case of a merger or consolidation, to provide for
additional Subsidiary Guarantors, to make any change that would provide any
additional rights or benefits to the Holders of the Notes or that does not
materially adversely affect the legal rights of any such Holder under the
Indenture, or to comply with the requirements of the Securities and Exchange
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
A1-5
<PAGE>
11. Defaults and Remedies. Events of Default include: (i) a default for
30 days in the payment when due of interest on any Note; (ii) a default in
payment when due of the principal of or premium, if any, on any Note; (iii)
failure by the Company for 30 days to comply with any of Sections 4.06, 4.07,
4.08 or 4.09 of the Indenture; (iv) failure by the Company for 60 days after
notice to comply with any of its other agreements in the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Restricted Subsidiaries (or the payment of
which is guaranteed by the Company or any of its Restricted Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the Indenture, which default (a) is caused by a failure to pay principal of
or premium, if any, or interest on such Indebtedness prior to the expiration of
any grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default or the maturity of which has been
so accelerated, aggregates $5,000,000 or more; (vi) failure by the Company or
any of its Significant Subsidiaries to pay final judgments aggregating in excess
of $5,000,000, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) except as permitted by the Indenture or if, at the time
thereof, any Subsidiary Guarantee of a Subsidiary Guarantor that is a
Significant Subsidiary shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Subsidiary Guarantor that is a Significant Subsidiary, or any
Person acting on behalf of any such Subsidiary Guarantor, shall deny or
disaffirm, in writing, its obligation under its Subsidiary Guarantee; or (viii)
certain events of bankruptcy or insolvency with respect to the Company or any
Restricted Subsidiary. If any Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, with respect to the Company or any
Restricted Subsidiary, all outstanding Notes will become due and payable without
further action or notice. Holders may not enforce the Indenture or the Notes
except as provided in the Indenture. The Trustee may require indemnity
satisfactory to it before it enforces the Indenture or the Notes. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, premium or interest) if it determines that withholding
notice is in their interest. The Company is required to deliver to the Trustee
annually a statement regarding compliance with the Indenture, and the Company is
required upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default.
12. Trustee Dealings with the Company. Subject to the provisions of the
Indenture, the Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with the Company or an
Affiliate with the same rights it would have if it were not Trustee. Subject to
the provisions of Section 310(b) of the Trust Indenture Act, the Trustee shall
be permitted to engage in transactions with the Company and its Subsidiaries
other than those contemplated by the Indenture.
A1-6
<PAGE>
13. No Recourse Against Others. No director, officer, employee,
incorporator, organizer, manager, member or shareholder of the Company or any
Subsidiary Guarantor, as such, shall have any liability for any obligations of
the Company or any Subsidiary Guarantor under the Notes, the Indenture or any
Subsidiary Guarantee or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder of Notes, by accepting a Note
waives and releases all such liability. The waiver and release are part of the
consideration for the issuance of the Notes.
14. Authentication. This Note shall not be valid until authenticated by
the manual signature of the Trustee or an authenticating agent.
15. Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
16. Additional Rights of Holders of Transfer Restricted Securities. In
addition to the rights provided to Holders of Notes under the Indenture, Holders
of Transferred Restricted Securities shall have all the rights set forth in the
Registration Rights Agreement dated as of the date of the Indenture, between the
Company and the parties named on the signature pages thereof (the "Registration
Rights Agreement").
17. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers
in notices of redemption as a convenience to Holders. No representation is made
as to the accuracy of such numbers either as printed on the Notes or as
contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard
Building 1, Suite 210
Torrance, CA 90505
Attention: General Counsel
Telecopier No.: (310) 791-8230
A1-7
<PAGE>
SUBSIDIARY GUARANTEE
The Subsidiary Guarantors listed below (hereinafter referred to as the
"Subsidiary Guarantors," which term includes any successors or assigns under the
Indenture (the "Indenture") and any additional Subsidiary Guarantors), have
irrevocably and unconditionally guaranteed (i) the due and punctual payment of
the principal of, premium, if any, and interest on the 9-7/8% Senior Notes due
January 15, 2007 (the "Notes") of Imperial Credit Industries, Inc., a California
corporation (the "Company"), whether at stated maturity, by acceleration or
otherwise, the due and punctual payment of interest on the overdue principal,
and premium if any, and (to the extent permitted by law) interest on any
interest, if any, on the Notes, and the due and punctual performance of all
other obligations of the Company, to the Holders or the Trustee all in
accordance with the terms set forth in Article 10 of the Indenture, (ii) in case
of any extension of time of payment or renewal of any Notes or any such other
obligations, that the same will be promptly paid in full when due or performed
in accordance with the terms of the extension or renewal, whether at stated
maturity, by acceleration or otherwise, and (iii) the payment of any and all
costs and expenses (including reasonable attorneys' fees) incurred by the
Trustee or any Holder in enforcing any rights under this Subsidiary Guarantee.
The obligations of each Subsidiary Guarantor to the Holder and to the
Trustee pursuant to this Subsidiary Guarantee and the Indenture are expressly
set forth in Article 10 of the Indenture and reference is hereby made to such
Indenture for the precise terms of this Guarantee.
No shareholder, officer, director, manager, member, organizer or
incorporator, as such, past, present or future of each Subsidiary Guarantor
shall have any liability under this Subsidiary Guarantee by reason of his or its
status as such shareholder, officer, director, member, manager, organizer or
incorporator.
This is a continuing Guarantee and shall remain in full force and
effect and shall be binding upon each Subsidiary Guarantor and its successors
and assigns until full and final payment of all of the Company's obligations
under the Notes and Indenture and shall inure to the benefit of the successors
and assigns of the Trustee and the Holders, and, in the event of any transfer or
assignment of rights by any Holder or the Trustee, the rights and privileges
herein conferred upon that party shall automatically extend to and be vested in
such transferee or assignee, all subject to the terms and conditions hereof.
This is a Guarantee of payment and not of collectibility.
This Subsidiary Guarantee shall not be valid or obligatory for any
purpose until the certificate of authentication on the Note upon which this
Subsidiary Guarantee is noted shall have been executed by the Trustee under the
Indenture by the manual signature of one of its authorized officers.
The Obligations of each Subsidiary Guarantor under its Subsidiary
Guarantee shall be limited to the extent necessary to insure that it does not
constitute a fraudulent conveyance under applicable law.
THE TERMS OF ARTICLE 10 OF THE INDENTURE ARE INCORPORATED HEREIN BY
REFERENCE.
A1-8
<PAGE>
Capitalized terms used herein have the same meanings given in the
Indenture unless otherwise indicated.
IMPERIAL BUSINESS CREDIT, INC.
By:________________________
Name:
Title:
Dated as of _______________, 1997
Attest:____________________
IMPERIAL CREDIT ADVISORS, INC.
By:________________________
Name:
Title:
Dated as of _______________, 1997
Attest:____________________
FRANCHISE MORTGAGE ACCEPTANCE CO. LLC
By:________________________
Name:
Title:
Dated as of _______________, 1997
Attest:____________________
A1-9
<PAGE>
Assignment Form
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
_______________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint ______________________________________________________
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for him.
Date: ____________________
Your Signature: _______________________
(Sign exactly as your name appears on
the face of this Note)
Signature Guarantee.**
- ---------------
** Signature(s) must be guaranteed by an eligible guarantor institution
(banks, stock brokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program) pursuant to
Securities and Exchange Commission Rule 17 Ad-15.
A1-10
<PAGE>
Option of Holder to Elect Purchase
If you want to elect to have all or any part of this Note purchased by the
Company pursuant to Section 4.06 or 4.07 of the Indenture, check the box below:
[_] Section 4.06 [_] Section 4.07
If you want to elect to have only part of the Note purchased by the Company
pursuant to Section 4.06 or 4.07 of the Indenture, state the amount you elect to
have purchased (if all, write "ALL"): $___________
Date: _________________________ Your Signature: ________________________
(Sign exactly as your name appears on
the face of this Note)
Tax Identification No.: ________________
Signature Guarantee.*
- --------------------
* Signature(s) must be guaranteed by an eligible guarantor institution (banks,
stock brokers, savings and loan associations and credit unions with membership
in an approved signature guarantee medallion program) pursuant to Securities and
Exchange Commission Rule 17 Ad-15.
A1-11
<PAGE>
SCHEDULE OF EXCHANGES FOR CERTIFICATED NOTES/2/
The following exchanges of a part of this Global Note for Certificated Notes
have been made:
<TABLE>
<CAPTION>
Principal Amount of this Signature of
Amount of decrease in Amount of increase in Global Note following authorized officer of
Principal Amount of Principal Amount of such decrease (or Trustee or Note
Date of Exchange this Global Note this Global Note increase) Custodian
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
- -----------------
2. To be included only if the Note is issued in global form.
A1-12
<PAGE>
Exhibit A-2
(Face of Regulation S Temporary Global Security)
9-7/8% Series A Senior Notes due 2007
No. $__________
IMPERIAL CREDIT INDUSTRIES, INC.
promises to pay to _______________________________________
or registered assigns, the principal sum of ___________________
Dollars on January 15, 2007.
Interest Payment Dates: January 15 and July 15, commencing July 15, 1997
Record Dates: January 1 and July 1 (whether or not a Business Day)
IMPERIAL CREDIT INDUSTRIES, INC.
By:
----------------------------
Name:
Title:
By:
----------------------------
Name:
Title:
TRUSTEE CERTIFICATE OF AUTHENTICATION
Dated: _________________
This is one of the Notes
referred to in the within-mentioned
Indenture
CHEMICAL TRUST COMPANY OF CALIFORNIA,
as Trustee
By: ___________________________________
(Authorized Signature)
A2-1
<PAGE>
(Back of Security)
9-7/8% Series A Senior Notes due 2007
Unless and until it is exchanged in whole or in part for Notes in definitive
form, this Note may not be transferred except as a whole by the Depositary to a
nominee of the Depositary or by a nominee of the Depositary to the Depositary or
another nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary. Unless this
certificate is presented by an authorized representative of The Depository Trust
Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its
agent for registration of transfer, exchange or payment, and any certificate
issued is registered in the name of Cede & Co. or such other name as may be
requested by an authorized representative of DTC (and any payment is made to
Cede & Co. or such other entity as may be requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THIS
SECURITY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM
THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT
OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED, ONLY (1)(a) TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A
QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE
UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 904 UNDER THE SECURITIES ACT OR (d) IN ACCORDANCE WITH ANOTHER EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN
OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE
WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY
OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT
HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED
HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.
THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE
CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR CERTIFICATED NOTES, ARE AS
SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN).
NEITHER THE HOLDER NOR THE BENEFICIAL OWNERS OF THIS REGULATION S TEMPORARY
GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF INTEREST THEREON.
A2-2
<PAGE>
Subject to the provisions hereof, Imperial Credit Industries, Inc., a
California corporation (the "Company"), promises to pay to ______ the principal
sum of ______________ UNITED STATES DOLLARS (U.S. $_________) on January 15,
2007, and to pay interest on the principal amount of this Note at the rate of
9-7/8% per annum. Interest on the Notes will be payable semi-annually in arrears
on January 15 and July 15, commencing on July 15, 1997, or if any such day is
not a Business Day, on the next succeeding Business Day (each an "Interest
Payment Date"). Interest will be computed on the basis of a 360-day year of
twelve 30-day months. Interest on the Notes will accrue from the most recent
date to which interest has been paid or duly provided for or, if no interest has
been paid or duly provided for, from the date of original issuance of this Note.
This Regulation S Temporary Global Note is issued in respect of an issue of
9-7/8% Senior Notes due 2007 (the "Notes") of the Company, limited to the
aggregate principal amount of U.S. $200,000,000 issued pursuant to an Indenture
(the "Indenture") dated as of January 23, 1997, among the Company and Chemical
Trust Company of California, as trustee (the "Trustee"), and is governed by the
terms and conditions of the Indenture, which terms and conditions are
incorporated herein by reference and, except as otherwise provided herein, shall
be binding on the Company and the Holder hereof as if fully set forth herein.
Unless the context otherwise requires, the terms used herein shall have the
meanings specified in the Indenture.
Until this Regulation S Temporary Global Note is exchanged for Regulation S
Permanent Global Notes, the Holder hereof shall not be entitled to receive
payments of interest hereon; until so exchanged in full, this Regulation S
Temporary Global Note shall in all other respects be entitled to the same
benefits as other Notes under the Indenture.
This Regulation S Temporary Global Note is exchangeable in whole or in part
for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes
only (i) on or after the termination of the 40-day restricted period (as defined
in Regulation S) and (ii) upon presentation of certificates (accompanied by an
Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon
exchange of all interest in this Regulation S Temporary Global Note for one or
more Regulation S Permanent Global Notes or Rule 144A Global Notes, the Trustee
shall cancel this Regulation S Temporary Global Note.
This Regulation S Temporary Global Note shall not become valid or
obligatory until the certificate of authentication hereon shall have been duly
manually signed by the Trustee in accordance with the Indenture. This
Regulation S Temporary Global Note shall be governed by and construed in
accordance with the laws of the State of the New York. All references to "$,"
"Dollars," "dollars" or "U.S. $" are to such coin or currency of the United
States of America as at the time shall be legal tender for the payment of public
and private debts therein.
A2-3
<PAGE>
SCHEDULE OF EXCHANGES FOR GLOBAL NOTES
The following exchanges of a part of this Regulation S Temporary
Global Note for other Global Notes have been made:
<TABLE>
<CAPTION>
Principal Amount of this Signature of
Amount of decrease in Amount of increase in Global Note following authorized officer of
Principal Amount of Principal Amount of such decrease (or Trustee or Note
Date of Exchange this Global Note this Global Note increase) Custodian
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
A2-4
<PAGE>
Exhibit B-1
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
FROM RULE 144A GLOBAL NOTE TO REGULATION S GLOBAL NOTE
(Pursuant to Section 2.06(a)(i) of the Indenture)
Chemical Trust Company of California
101 California Street
Suite 2725
San Francisco, CA 94111
Attention: Corporate Trust Department
Re: 9-7/8% Senior Notes due 2007 of Imperial Credit Industries, Inc.
Reference is hereby made to the Indenture, dated as of January 23, 1997 (the
"Indenture"), among Imperial Credit Industries, Inc., as issuer (the "Company"),
the Subsidiary Guarantors and Chemical Trust Company of California, as trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.
This letter relates to $_______ principal amount of Notes which are evidenced
by one or more Rule 144A Global Notes (CUSIP No. 452729AB2) and held with the
Depositary in the name of ____________________________ (the "Transferor"). The
Transferor has requested a transfer of such beneficial interest in the Notes to
a Person who will take delivery thereof in the form of an equal principal amount
of Notes evidenced by one or more Regulation S Global Notes (CUSIP No.
U45021AA7), which amount, immediately after such transfer, is to be held with
the Depositary.
In connection with such request and in respect of such Notes, the Transferor
hereby certifies that such transfer has been effected in compliance with the
transfer restrictions applicable to the Global Notes and pursuant to and in
accordance with Rule 903 or Rule 904 under the United States Securities Act of
1933, as amended (the "Securities Act"), and accordingly the Transferor hereby
further certifies that:
(1) The offer of the Notes was not made to a person in the United States;
(2) either:
(a) at the time the buy order was originated, the transferee was outside
the United States or the Transferor and any person acting on its behalf
reasonably believed and believes that the transferee was outside the
United States; or
(b) the transaction was executed in, on or through the facilities of a
designated offshore securities market and neither the Transferor nor
any person acting on its behalf knows that the transaction was
prearranged with a buyer in the United States;
(3) no directed selling efforts have been made in contravention of the
requirements of Rule 904(b) of Regulation S;
(4) the transaction is not part of a plan or scheme to evade the registration
requirements of the Securities Act; and
B1-1
<PAGE>
(5) upon completion of the transaction, the beneficial interest being
transferred as described above is to be held with the Depositary.
Upon giving effect to this request to exchange a beneficial interest in a
Rule 144A Global Note for a beneficial interest in a Regulation S Global Note,
the resulting beneficial interest shall be subject to the restrictions on
transfer applicable to Regulation S Global Notes pursuant to the Indenture and
the Securities Act and, if such transfer occurs prior to the end of the 40-day
restricted period associated with the initial offering of Notes, the additional
restrictions applicable to transfers of interest in the Regulation S Temporary
Global Note.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and Lehman Brothers Inc., Montgomery
Securities and Dabney/Resnick/Imperial, LLC, the initial purchasers of such
Notes being transferred. Terms used in this certificate and not otherwise
defined in the Indenture have the meanings set forth in Regulation S under the
Securities Act.
__________________________
[Insert Name of Transferor]
By: ______________________
Name:
Title:
Dated: ____________________, ____
cc: Imperial Credit Industries, Inc.
B1-2
<PAGE>
Exhibit B-2
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
FROM REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE
(Pursuant to Section 2.06(a)(ii) of the Indenture)
Chemical Trust Company of California
101 California Street
Suite 2725
San Francisco, CA 94111
Attention: Corporate Trust Department
Re: 9-7/8% Senior Notes due 2007 of Imperial Credit Industries, Inc.
Reference is hereby made to the Indenture, dated as of January 23, 1997
(the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the
"Company"), the Subsidiary Guarantors and Chemical Trust Company of California,
as trustee. Capitalized terms used but not defined herein shall have the
meanings given to them in the Indenture.
This letter relates to $_______ principal amount of Notes which are
evidenced by one or more Regulation S Global Notes (CUSIP No. U45021AA7) and
held with the Depositary in the name of ____________________________ (the
"Transferor"). The Transferor has requested a transfer of such beneficial
interest in the Notes to a Person who will take delivery thereof in the form of
an equal principal amount of Notes evidenced by one or more Rule 144A Global
Notes (CUSIP No. 452729AB2), to be held with the Depositary.
In connection with such request and in respect of such Notes, the
Transferor hereby certifies that:
[CHECK ONE]
[_] such transfer is being effected pursuant to and in accordance with Rule
144A under the United States Securities Act of 1933, as amended (the
"Securities Act"), and, accordingly, the Transferor hereby further
certifies that the Notes are being transferred to a Person that the
Transferor reasonably believes is purchasing the Notes for its own account,
or for one or more accounts with respect to which such Person exercises
sole investment discretion, and such Person and each such account is a
"qualified institutional buyer" within the meaning of Rule 144A in a
transaction meeting the requirements of Rule 144A;
or
[_] such transfer is being effected pursuant to and in accordance with Rule 144
under the Securities Act;
or
[_] such transfer is being effected pursuant to an effective registration
statement under the Securities Act;
B2-1
<PAGE>
or
[_] such transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A or
Rule 144, and the Transferor hereby further certifies that the Notes are
being transferred in compliance with the transfer restrictions applicable
to the Global Notes and in accordance with the requirements of the
exemption claimed, which certification is supported by an Opinion of
Counsel, provided by the transferor or the transferee (a copy of which the
Transferor has attached to this certification) in form reasonably
acceptable to the Company and to the Registrar, to the effect that such
transfer is in compliance with the Securities Act;
and such Notes are being transferred in compliance with any applicable blue sky
securities laws of any state of the United States.
Upon giving effect to this request to exchange a beneficial interest in
Regulation S Global Notes for a beneficial interest in Rule 144A Global Notes,
the resulting beneficial interest shall be subject to the restrictions on
transfer applicable to Rule 144A Global Notes pursuant to the Indenture and the
Securities Act.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and Lehman Brothers Inc., Montgomery
Securities and Dabney/Resnick/Imperial, LLC, the initial purchasers of such
Notes being transferred. Terms used in this certificate and not otherwise
defined in the Indenture have the meanings set forth in Regulation S under the
Securities Act.
___________________________
[Insert Name of Transferor]
By:
-----------------------
Name:
Title:
Dated: _____________, _____
cc: Imperial Credit Industries, Inc.
B2-2
<PAGE>
Exhibit B-3
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
OF CERTIFICATED NOTES
(Pursuant to Section 2.06(b) of the Indenture)
Chemical Trust Company of California
101 California Street
Suite 2725
San Francisco, CA 94111
Attention: Corporate Trust Department
Re: 9-7/8% Senior Notes due 2007 of Imperial Credit Industries, Inc.
Reference is hereby made to the Indenture, dated as of January 23, 1997
(the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the
"Company"), the Subsidiary Guarantors and Chemical Trust Company of California,
as trustee. Capitalized terms used but not defined herein shall have the
meanings given to them in the Indenture.
In connection with such request and in respect of the Notes surrendered to
the Trustee herewith for exchange (the "Surrendered Notes"), the Holder of such
Surrendered Notes hereby certifies that:
[CHECK ONE]
[_] the Surrendered Notes are being acquired for the Transferor's own account,
without transfer;
or
[_] the Surrendered Notes are being transferred to the Company;
or
[_] the Surrendered Notes are being transferred pursuant to and in accordance
with Rule 144A under the United States Securities Act of 1933, as amended
(the "Securities Act"), and, accordingly, the Transferor hereby further
certifies that the Surrendered Notes are being transferred to a Person that
the Transferor reasonably believes is purchasing the Surrendered Notes for
its own account, or for one or more accounts with respect to which such
Person exercises sole investment discretion, and such Person and each such
account is a "qualified institutional buyer" within the meaning of Rule
144A, in each case in a transaction meeting the requirements of Rule 144A;
or
[_] the Surrendered Notes are being transferred in a transaction permitted by
Rule 144 under the Securities Act;
or
B3-1
<PAGE>
[_] the Surrendered Notes are being transferred pursuant to an effective
registration statement under the Securities Act;
or
[_] such transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A or
Rule 144, and the Transferor hereby further certifies that the Notes are
being transferred in compliance with the transfer restrictions applicable
to the Global Notes and in accordance with the requirements of the
exemption claimed, which certification is supported by an Opinion of
Counsel, provided by the transferor or the transferee (a copy of which the
Transferor has attached to this certification) in form reasonably
acceptable to the Company and to the Registrar, to the effect that such
transfer is in compliance with the Securities Act;
and the Surrendered Notes are being transferred in compliance with any
applicable blue sky securities laws of any state of the United States.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and Lehman Brothers Inc., Montgomery
Securities and Dabney/Resnick/Imperial, LLC, the initial purchasers of such
Notes being transferred. Terms used in this certificate and not otherwise
defined in the Indenture have the meanings set forth in Regulation S under the
Securities Act.
___________________________
[Insert Name of Transferor]
By:
-----------------------
Name:
Title:
Dated: _____________, _____
cc: Imperial Credit Industries, Inc.
B3-2
<PAGE>
Exhibit B-4
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
FROM RULE 144A GLOBAL NOTE OR REGULATION S PERMANENT GLOBAL NOTE
TO CERTIFICATED NOTE
(Pursuant to Section 2.06(c) of the Indenture)
Chemical Trust Company of California
101 California Street
Suite 2725
San Francisco, CA 94111
Attention: Corporate Trust Department
Re: 9-7/8% Senior Notes due 2007 of Imperial Credit Industries, Inc.
Reference is hereby made to the Indenture, dated as of January 23, 1997
(the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the
"Company"), the Subsidiary Guarantors and Chemical Trust Company of California,
as trustee. Capitalized terms used but not defined herein shall have the
meanings given to them in the Indenture.
This letter relates to $_______ principal amount of Notes which are
evidenced by one or more [Rule 144A Global Notes (CUSIP No. 452729AB2)]
[Regulation S Permanent Global Note (CUSIP No. U45021AA7)] and held with the
Depositary in the name of ____________________________ (the "Transferor"). The
Transferor has requested a transfer of such beneficial interest in the Notes to
a Person who will take delivery thereof in the form of an equal principal amount
of Notes evidenced by one or more Certificated Notes (CUSIP No. 452729AC0),
which Notes, immediately after such transfer, are to be delivered to the
transferor at the address set forth below.
In connection with such request and in respect of the Notes surrendered to
the Trustee herewith for exchange (the "Surrendered Notes"), the Holder of such
Surrendered Notes hereby certifies that:
[CHECK ONE]
[_] the Surrendered Notes are being transferred to the beneficial owner of such
Notes;
or
[_] the Surrendered Notes are being transferred pursuant to and in accordance
with Rule 144A under the United States Securities Act of 1933, as amended
(the "Securities Act"), and, accordingly, the Transferor hereby further
certifies that the Surrendered Notes are being transferred to a Person that
the Transferor reasonably believes is purchasing the Surrendered Notes for
its own account, or for one or more accounts with respect to which such
Person exercises sole investment discretion, and such Person and each such
account is a "qualified institutional buyer" within the meaning of Rule
144A, in each case in a transaction meeting the requirements of Rule 144A;
or
B4-1
<PAGE>
[_] the Surrendered Notes are being transferred in a transaction permitted by
Rule 144 under the Securities Act;
or
[_] the Surrendered Notes are being transferred pursuant to an effective
registration statement under the Securities Act;
or
[_] such transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A or
Rule 144, and the Transferor hereby further certifies that the Notes are
being transferred in compliance with the transfer restrictions applicable
to the Global Notes and in accordance with the requirements of the
exemption claimed, which certification is supported by an Opinion of
Counsel, provided by the transferor or the transferee (a copy of which the
Transferor has attached to this certification) in form reasonably
acceptable to the Company and to the Registrar, to the effect that such
transfer is in compliance with the Securities Act;
and the Surrendered Notes are being transferred in compliance with any
applicable blue sky securities laws of any state of the United States.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and Lehman Brothers Inc., Montgomery
Securities and Dabney/Resnick/Imperial LLC, the initial purchasers of such Notes
being transferred. Terms used in this certificate and not otherwise defined in
the Indenture have the meanings set forth in Regulation S under the Securities
Act.
___________________________
[Insert Name of Transferor]
By:
-----------------------
Name:
Title:
Dated: _____________, _____
___________________________
[Address of Transferor]
___________________________
cc: Imperial Credit Industries, Inc.
B4-2
<PAGE>
Exhibit B-5
FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER
FROM CERTIFICATED NOTE TO RULE 144A GLOBAL NOTE OR
REGULATION S PERMANENT GLOBAL NOTE
(Pursuant to Section 2.06(e) of the Indenture)
Chemical Trust Company of California
101 California Street
Suite 2725
San Francisco, CA 94111
Attention: Corporate Trust Department
Re: 9-7/8% Senior Notes due 2007 of Imperial Credit Industries, Inc.
Reference is hereby made to the Indenture, dated as of January 23, 1997
(the "Indenture"), among Imperial Credit Industries, Inc., as issuer (the
"Company"), the Subsidiary Guarantors and Chemical Trust Company of California,
as trustee. Capitalized terms used but not defined herein shall have the
meanings given to them in the Indenture.
In connection with such request and in respect of the Notes surrendered to
the Trustee herewith for exchange (the "Surrendered Notes"), the Holder of such
Surrendered Notes hereby certifies that:
[CHECK ONE]
[_] the Surrendered Notes are being transferred to the beneficial owner of such
Notes;
or
[_] the Surrendered Notes are being transferred pursuant to and in accordance
with Rule 144A under the United States Securities Act of 1933, as amended
(the "Securities Act"), and, accordingly, the Transferor hereby further
certifies that the Surrendered Notes are being transferred to a Person that
the Transferor reasonably believes is purchasing the Surrendered Notes for
its own account, or for one or more accounts with respect to which such
Person exercises sole investment discretion, and such Person and each such
account is a "qualified institutional buyer" within the meaning of Rule
144A, in each case in a transaction meeting the requirements of Rule 144A;
or
[_] the Surrendered Notes are being transferred in a transaction permitted by
Rule 144 under the Securities Act;
or
[_] the Surrendered Notes are being transferred in a transaction permitted by
Rule 904 under the Securities Act;
B5-1
<PAGE>
or
[_] the Surrendered Notes are being transferred pursuant to an effective
registration statement under the Securities Act;
or
[_] such transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A or
Rule 144, and the Transferor hereby further certifies that the Notes are
being transferred in compliance with the transfer restrictions applicable
to the Global Notes and in accordance with the requirements of the
exemption claimed, which certification is supported by an Opinion of
Counsel, provided by the transferor or the transferee (a copy of which the
Transferor has attached to this certification) in form reasonably
acceptable to the Company and to the Registrar, to the effect that such
transfer is in compliance with the Securities Act;
and the Surrendered Notes are being transferred in compliance with any
applicable blue sky securities laws of any state of the United States.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and Lehman Brothers Inc., Montgomery
Securities and Dabney/Resnick/Imperial, LLC, the initial purchasers of such
Notes being transferred. Terms used in this certificate and not otherwise
defined in the Indenture have the meanings set forth in Rule 144 or Regulation S
under the Securities Act.
___________________________
[Insert Name of Transferor]
By:
-----------------------
Name:
Title:
Dated: _____________, _____
cc: Imperial Credit Industries, Inc.
B5-2
<PAGE>
EXHIBIT 4.2
A/B EXCHANGE
REGISTRATION RIGHTS AGREEMENT
Dated as of January 23, 1997
by and among
IMPERIAL CREDIT INDUSTRIES, INC.
IMPERIAL BUSINESS CREDIT, INC.,
IMPERIAL CREDIT ADVISORS, INC., and
FRANCHISE MORTGAGE ACCEPTANCE CO. LLC,
as Guarantors
and
LEHMAN BROTHERS INC.
MONTGOMERY SECURITIES
DABNEY/RESNICK/IMPERIAL, LLC
<PAGE>
This Registration Rights Agreement (this "Agreement") is made and entered
---------
into as of January 23, 1997 by and among Imperial Credit Industries, Inc., a
California corporation (the "Company"), Imperial Business Credit, Inc., a
-------
California corporation, Imperial Credit Advisors, Inc., a California
corporation, and Franchise Mortgage Acceptance Co. LLC, a California limited
liability company (together, the "Guarantors"), and Lehman Brothers Inc.,
----------
Montgomery Securities and Dabney/Resnick/Imperial, LLC (each, a "Purchaser" and,
---------
collectively, the "Purchasers"), each of whom has agreed to purchase the
----------
Company's 9 7/8% Series A Senior Notes due 2007 (the "Series A Senior Notes")
---------------------
pursuant to the Purchase Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated January
17, 1997 (the "Purchase Agreement"), by and among the Company, the Guarantors
------------------
and the Purchasers. In order to induce the Purchasers to purchase the Series A
Senior Notes, the Company has agreed to provide the registration rights set
forth in this Agreement. The execution and delivery of this Agreement is a
condition to the obligations of the Purchasers set forth in Section 2 of the
Purchase Agreement.
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have the
following meanings:
Act: The Securities Act of 1933, as amended.
---
Broker-Dealer: Any broker or dealer registered under the Exchange Act.
-------------
Closing Date: The date of this Agreement.
------------
Commission: The Securities and Exchange Commission.
----------
Consummate: A registered Exchange Offer shall be deemed "Consummated" for
----------
purposes of this Agreement upon the occurrence of (i) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Series B Senior Notes to be issued in the Exchange Offer, (ii)
the maintenance of such Registration Statement continuously effective and the
keeping of the Exchange Offer open for a period not less than the minimum period
required pursuant to Section 3(b) hereof, and (iii) the delivery by the Company
to the Registrar under the Indenture of Series B Senior Notes in the same
aggregate principal amount as the aggregate principal amount of Series A Senior
Notes that were tendered by Holders thereof pursuant to the Exchange Offer.
Damages Payment Date: With respect to the Series A Senior Notes, each
--------------------
Interest Payment Date.
1
<PAGE>
Effectiveness Target Date: As defined in Section 5.
-------------------------
Exchange Act: The Securities Exchange Act of 1934, as amended.
------------
Exchange Offer: The registration by the Company under the Act of the
--------------
Series B Senior Notes pursuant to a Registration Statement pursuant to which the
Company offers the Holders of all outstanding Transfer Restricted Securities the
opportunity to exchange all such outstanding Transfer Restricted Securities held
by such Holders for Series B Senior Notes in an aggregate principal amount equal
to the aggregate principal amount of the Transfer Restricted Securities tendered
in such exchange offer by such Holders.
Exchange Offer Registration Statement: The Registration Statement
-------------------------------------
relating to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Purchasers propose to sell
--------------
the Series A Senior Notes to certain "qualified institutional buyers," as such
term is defined in Rule 144A under the Act, and to certain institutional
"accredited investors," as such term is defined in Rule 501(a)(1), (2), (3) and
(7) of Regulation D under the Act ("Accredited Institutions").
-----------------------
Holders: As defined in Section 2(b) hereof.
-------
Indemnified Holder: As defined in Section 8(a) hereof.
------------------
Indenture: The Indenture, dated as of January 23, 1997, among the
---------
Company, Chemical Trust Company of California, as trustee (the "Trustee"), and
-------
the Guarantors, pursuant to which the Senior Notes are to be issued, as such
Indenture is amended or supplemented from time to time in accordance with the
terms thereof.
Interest Payment Date: As defined in the Indenture and the Senior Notes.
---------------------
NASD: National Association of Securities Dealers, Inc.
----
Person: An individual, partnership, corporation, trust or unincorporated
------
organization, or a government or agency or political subdivision thereof.
Prospectus: The prospectus included in a Registration Statement, as
----------
amended or supplemented by any prospectus supplement and by all other amendments
thereto, including post-effective amendments, and all material incorporated by
reference into such Prospectus.
Purchaser: As defined in the preamble hereto.
---------
Record Holder: With respect to any Damages Payment Date relating to
-------------
Senior Notes, each Person who is a Holder of Senior Notes on the record date
with respect to the Interest Payment Date on which such Damages Payment Date
shall occur.
2
<PAGE>
Registration Default: As defined in Section 5 hereof.
--------------------
Registration Statement: Any registration statement of the Company
----------------------
relating to (a) an offering of Series B Senior Notes pursuant to an Exchange
Offer or (b) the registration for resale of Transfer Restricted Securities
pursuant to the Shelf Registration Statement, which is filed pursuant to the
provisions of this Agreement, in each case, including the Prospectus included
therein, all amendments and supplements thereto (including post-effective
amendments) and all exhibits and material incorporated by reference therein.
Senior Notes: The Series A Senior Notes and the Series B Senior Notes.
------------
Series B Senior Notes: The Company's 9 7/8% Series B Senior Notes due
---------------------
2007 to be issued pursuant to the Indenture in the Exchange Offer.
Shelf Filing Deadline: As defined in Section 4 hereof.
---------------------
Shelf Registration Statement: As defined in Section 4 hereof.
----------------------------
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as
---
in effect on the date of the Indenture.
Transfer Restricted Securities: Each Senior Note, until the earliest to
------------------------------
occur of (a) the date on which such Senior Note is exchanged in the Exchange
Offer and entitled to be resold to the public by the Holder thereof without
complying with the prospectus delivery requirements of the Act, (b) the date on
which such Senior Note has been effectively registered under the Act and
disposed of in accordance with a Shelf Registration Statement and (c) the date
on which such Senior Note is distributed to the public pursuant to Rule 144
under the Act or by a Broker-Dealer pursuant to the "Plan of Distribution"
contemplated by the Exchange Offer Registration Statement (including delivery of
the Prospectus contained therein).
Underwritten Registration or Underwritten Offering: A registration in
------------------------- ---------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) Transfer Restricted Securities. The securities entitled to the
------------------------------
benefits of this Agreement are the Transfer Restricted Securities.
(b) Holders of Transfer Restricted Securities. A Person is deemed to be a
-----------------------------------------
holder of Transfer Restricted Securities (each, a "Holder") whenever such Person
------
owns Transfer Restricted Securities.
3
<PAGE>
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permissible under applicable
law or Commission policy (after the procedures set forth in Section 6(a) below
have been complied with), the Company and the Guarantors shall (i) cause to be
filed with the Commission as soon as practicable after the Closing Date, but in
no event later than 30 days after the Closing Date, a Registration Statement
under the Act relating to the Series B Senior Notes and the Exchange Offer, (ii)
use their best efforts to cause such Registration Statement to become effective
at the earliest possible time, but in no event later than 90 days after the
Closing Date, (iii) in connection with the foregoing, file (A) all pre-effective
amendments to such Registration Statement as may be necessary in order to cause
such Registration Statement to become effective, (B) if applicable, a post-
effective amendment to such Registration Statement pursuant to Rule 430A under
the Act and (C) cause all necessary filings in connection with the registration
and qualification of the Series B Senior Notes to be made under the Blue Sky
laws of such jurisdictions as are necessary to permit Consummation of the
Exchange Offer, and (iv) upon the effectiveness of such Registration Statement,
commence the Exchange Offer. The Exchange Offer shall be on the appropriate
form permitting registration of the Series B Senior Notes to be offered in
exchange for the Transfer Restricted Securities and to permit resales of Senior
Notes held by Broker-Dealers as contemplated by Section 3(c) below.
(b) The Company shall cause the Exchange Offer Registration Statement to
be effective continuously and shall keep the Exchange Offer open for a period of
not less than the minimum period required under applicable federal and state
securities laws to Consummate the Exchange Offer; provided, however, that in no
event shall such period be less than 20 business days. The Company shall cause
the Exchange Offer to comply with all applicable federal and state securities
laws. No securities other than the Senior Notes shall be included in the
Exchange Offer Registration Statement. The Company shall use its best efforts
to cause the Exchange Offer to be Consummated on the earliest practicable date
after the Exchange Offer Registration Statement has become effective, but in no
event later than 30 business days thereafter.
(c) The Company shall indicate in a "Plan of Distribution" section
contained in the Prospectus contained in the Exchange Offer Registration
Statement that any Broker-Dealer who holds Series A Senior Notes that are
Transfer Restricted Securities and that were acquired for its own account as a
result of market-making activities or other trading activities (other than
Transfer Restricted Securities acquired directly from the Company), may exchange
such Series A Senior Notes pursuant to the Exchange Offer; however, such Broker-
Dealer may be deemed to be an "underwriter" within the meaning of the Act and
must, therefore, deliver a prospectus meeting the requirements of the Act in
connection with any resales of the Series B Senior Notes received by such
Broker-Dealer in the Exchange Offer, which prospectus delivery requirement may
be satisfied by the delivery by such Broker-Dealer of the Prospectus contained
in the Exchange Offer Registration Statement. Such "Plan of Distribution"
section shall also contain all other information with respect to such resales by
Broker-Dealers that the Commission may
4
<PAGE>
require in order to permit such resales pursuant thereto, but such "Plan of
Distribution" shall not name any such Broker-Dealer or disclose the amount of
Senior Notes held by any such Broker-Dealer except to the extent required by the
Commission as a result of a change in policy after the date of this Agreement.
The Company and the Guarantors shall use their best efforts to keep the
Exchange Offer Registration Statement continuously effective, supplemented and
amended as required by the provisions of Section 6(c) below to the extent
necessary to ensure that it is available for resales of Senior Notes acquired by
Broker-Dealers for their own accounts as a result of market-making activities or
other trading activities, and to ensure that it conforms with the requirements
of this Agreement, the Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period of one year from the
date on which the Exchange Offer Registration Statement is declared effective.
The Company shall provide sufficient copies of the latest version of such
Prospectus to Broker-Dealers promptly upon request at any time during such one-
year period in order to facilitate such resales.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Company is not required to file an
------------------
Exchange Offer Registration Statement or to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy (after the procedures set forth in Section 6(a) below have been complied
with) or (ii) if any Holder of Transfer Restricted Securities shall notify the
Company within 20 business days of the Consummation of the Exchange Offer (A)
that such Holder is prohibited by applicable law or Commission policy from
participating in the Exchange Offer, or (B) that such Holder may not resell the
Series B Senior Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and that the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
Holder, or (C) that such Holder is a Broker-Dealer and holds Series A Senior
Notes acquired directly from the Company or one of its affiliates, then the
Company and the Guarantors shall:
(x) cause to be filed a shelf registration statement pursuant to Rule
415 under the Act, which may be an amendment to the Exchange Offer
Registration Statement (in either event, the "Shelf Registration Statement")
----------------------------
on or prior to the earliest to occur of (1) the 30th day after the date on
which the Company determines that it is not required to file the Exchange
Offer Registration Statement, (2) the 30th day after the date on which the
Company receives notice from a Holder of Transfer Restricted Securities as
contemplated by clause (ii) above, and (3) the 60th day after the Closing
Date (such earliest date being the "Shelf Filing Deadline"), which Shelf
---------------------
Registration Statement shall provide for resales of all Transfer Restricted
Securities the Holders of which shall have provided the information required
pursuant to Section 4(b) hereof; and
5
<PAGE>
(y) use their best efforts to cause such Shelf Registration Statement
to be declared effective by the Commission on or before the 30th day after
the Shelf Filing Deadline.
The Company and the Guarantors shall use their best efforts to keep such Shelf
Registration Statement continuously effective, supplemented and amended as
required by the provisions of Sections 6(b) and (c) hereof to the extent
necessary to ensure that it is available for resales of Senior Notes by the
Holders of Transfer Restricted Securities entitled to the benefit of this
Section 4(a), and to ensure that it conforms with the requirements of this
Agreement, the Act and the policies, rules and regulations of the Commission as
announced from time to time, for a period of at least three years following the
Closing Date.
(b) Provision by Holders of Certain Information in Connection with the
------------------------------------------------------------------
Shelf Registration Statement. No Holder of Transfer Restricted Securities may
- ----------------------------
include any of its Transfer Restricted Securities in any Shelf Registration
Statement pursuant to this Agreement unless and until such Holder furnishes to
the Company in writing, within 20 business days after receipt of a request
therefor, such information as the Company may reasonably request for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein. No Holder of Transfer Restricted Securities shall
be entitled to Liquidated Damages pursuant to Section 5 hereof unless and until
such Holder shall have used its best efforts to provide all such reasonably
requested information. Each Holder as to which any Shelf Registration Statement
is being effected agrees to furnish promptly to the Company all information
required to be disclosed in order to make the information previously furnished
to the Company by such Holder not materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) any of the Registration Statements required by this Agreement is
not filed with the Commission on or prior to the date specified for such filing
in this Agreement, (ii) any of such Registration Statements has not been
declared effective by the Commission on or prior to the date specified for such
effectiveness in this Agreement (the "Effectiveness Target Date"), (iii) the
-------------------------
Exchange Offer has not been Consummated within 30 business days after the
Effectiveness Target Date with respect to the Exchange Offer Registration
Statement or (iv) any Registration Statement required by this Agreement is filed
and declared effective but shall thereafter cease to be effective or fail to be
usable for its intended purpose without being succeeded immediately by a post-
effective amendment to such Registration Statement that cures such failure and
that is itself immediately declared effective (each such event referred to in
clauses (i) through (iv), a "Registration Default"), the Company and each of the
--------------------
Guarantors hereby jointly and severally agree to pay liquidated damages to each
Holder of Transfer Restricted Securities with respect to the first 90-day period
immediately following the occurrence of such Registration Default, in an amount
equal to $.05 per week per $1,000 principal amount of Transfer Restricted
Securities held by such Holder for each week or portion thereof that the
Registration Default continues. The amount of the liquidated damages shall
increase by an additional $.05 per week per $1,000
6
<PAGE>
in principal amount of Transfer Restricted Securities with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of liquidated damages of $.50 per week per $1,000 principal
amount of Transfer Restricted Securities. All accrued liquidated damages shall
be paid to Record Holders by the Company by wire transfer of immediately
available funds or by federal funds check on each Damages Payment Date, as
provided in the Indenture. Following the cure of all Registration Defaults
relating to any particular Transfer Restricted Securities, the accrual of
liquidated damages with respect to such Transfer Restricted Securities will
cease.
All obligations of the Company and the Guarantors set forth in the
preceding paragraph that are outstanding with respect to any Transfer Restricted
Security at the time such security ceases to be a Transfer Restricted Security
shall survive until such time as all such obligations with respect to such
Security shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection with the
-------------------------------------
Exchange Offer, the Company and the Guarantors shall comply with all of the
provisions of Section 6(c) below, shall use their best efforts to effect such
exchange to permit the sale of Transfer Restricted Securities being sold in
accordance with the intended method or methods of distribution thereof, and
shall comply with all of the following provisions:
(i) If in the reasonable opinion of counsel to the Company there is a
question as to whether the Exchange Offer is permitted by applicable law, the
Company and the Guarantors hereby agree to seek a no-action letter or other
favorable decision from the Commission allowing the Company and the
Guarantors to Consummate an Exchange Offer for such Series A Senior Notes.
The Company and each Guarantor each hereby agrees to pursue the issuance of
such a decision to the Commission staff level but shall not be required to
take commercially unreasonable action to effect a change of Commission
policy. The Company and each Guarantor each hereby agrees, however, to (A)
participate in telephonic conferences with the Commission, (B) deliver to the
Commission staff an analysis prepared by counsel to the Company setting forth
the legal bases, if any, upon which such counsel has concluded that such an
Exchange Offer should be permitted and (C) diligently pursue a resolution
(which need not be favorable) by the Commission staff of such submission.
(ii) As a condition to its participation in the Exchange Offer
pursuant to the terms of this Agreement, each Holder of Transfer Restricted
Securities shall furnish, upon the request of the Company, prior to the
Consummation thereof, a written representation to the Company (which may be
contained in the letter of transmittal contemplated by the Exchange Offer
Registration Statement) to the effect that (A) it is not an affiliate of the
Company, (B) it is not engaged in, and does not intend to engage in, and has
no arrangement or understanding with any person to participate in, a
distribution of the Series B Senior Notes
7
<PAGE>
to be issued in the Exchange Offer and (C) it is acquiring the Series B
Senior Notes in its ordinary course of business. In addition, all such
Holders of Transfer Restricted Securities shall otherwise cooperate in the
Company's preparations for the Exchange Offer. Each Holder hereby
acknowledges and agrees that any Broker-Dealer and any such Holder using the
Exchange Offer to participate in a distribution of the securities to be
acquired in the Exchange Offer (1) could not under Commission policy as in
effect on the date of this Agreement rely on the position of the Commission
enunciated in Morgan Stanley and Co., Inc. (available June 5, 1991) and Exxon
---------------------------- -----
Capital Holdings Corporation (available May 13, 1988), as interpreted in the
----------------------------
Commission's letter to Shearman & Sterling dated July 2, 1993, and similar
no-action letters (including any no-action letter obtained pursuant to clause
(i) above), and (2) must comply with the registration and prospectus delivery
requirements of the Act in connection with a secondary resale transaction and
that such a secondary resale transaction should be covered by an effective
registration statement containing the selling security holder information
required by Item 507 or 508, as applicable, of Regulation S-K if the resales
are of Series B Senior Notes obtained by such Holder in exchange for Series A
Senior Notes acquired by such Holder directly from the Company.
(iii) Prior to effectiveness of the Exchange Offer Registration
Statement, the Company and the Guarantors shall provide a supplemental letter
to the Commission (A) stating that the Company and the Guarantors are
registering the Exchange Offer in reliance on the position of the Commission
enunciated in Exxon Capital Holdings Corporation (available May 13, 1988),
----------------------------------
Morgan Stanley and Co., Inc. (available June 5, 1991) and, if applicable, any
----------------------------
no-action letter obtained pursuant to clause (i) above and (B) including a
representation that neither the Company nor any Guarantor has entered into
any arrangement or understanding with any Person to distribute the Series B
Senior Notes to be received in the Exchange Offer and that, to the best of
the Company's information and belief, each Holder participating in the
Exchange Offer is acquiring the Series B Senior Notes in its ordinary course
of business and has no arrangement or understanding with any Person to
participate in the distribution of the Series B Senior Notes received in the
Exchange Offer.
(b) Shelf Registration Statement. In connection with the Shelf
----------------------------
Registration Statement, the Company and the Guarantors shall comply with all the
provisions of Section 6(c) below and shall use their best efforts to effect such
registration to permit the sale of the Transfer Restricted Securities being sold
in accordance with the intended method or methods of distribution thereof, and
pursuant thereto the Company will as expeditiously as possible prepare and file
with the Commission a Registration Statement relating to the registration on any
appropriate form under the Act, which form shall be available for the sale of
the Transfer Restricted Securities in accordance with the intended method or
methods of distribution thereof.
(c) General Provisions. In connection with any Registration Statement and
------------------
any Prospectus required by this Agreement to permit the sale or resale of
Transfer Restricted Securities (including, without limitation, any Registration
Statement and the related Prospectus required to permit resales of Senior Notes
by Broker-Dealers), the Company shall:
8
<PAGE>
(i) use its best efforts to keep such Registration Statement
continuously effective and provide all requisite financial statements
(including, if required by the Act or any regulation thereunder, financial
statements of the Guarantors) for the period specified in Section 3 or 4 of
this Agreement, as applicable; upon the occurrence of any event that would
cause any such Registration Statement or the Prospectus contained therein (A)
to contain a material misstatement or omission or (B) not to be effective and
usable for resale of Transfer Restricted Securities during the period
required by this Agreement, the Company shall file promptly an appropriate
amendment to such Registration Statement, in the case of clause (A),
correcting any such misstatement or omission, and, in the case of either
clause (A) or (B), use its best efforts to cause such amendment to be
declared effective and such Registration Statement and the related Prospectus
to become usable for their intended purpose(s) as soon as practicable
thereafter;
(ii) prepare and file with the Commission such amendments and post-
effective amendments to the Registration Statement as may be necessary to
keep the Registration Statement effective for the applicable period set forth
in Section 3 or 4 hereof, as applicable, or such shorter period as will
terminate when all Transfer Restricted Securities covered by such
Registration Statement have been sold; cause the Prospectus to be
supplemented by any required Prospectus supplement, and as so supplemented to
be filed pursuant to Rule 424 under the Act, and to comply fully with the
applicable provisions of Rules 424 and 430A under the Act in a timely manner;
and comply with the provisions of the Act with respect to the disposition of
all securities covered by such Registration Statement during the applicable
period in accordance with the intended method or methods of distribution by
the sellers thereof set forth in such Registration Statement or supplement to
the Prospectus;
(iii) advise the underwriter(s), if any, and selling Holders promptly
and, if requested by such Persons, to confirm such advice in writing, (A)
when the Prospectus or any Prospectus supplement or post-effective amendment
has been filed, and, with respect to any Registration Statement or any post-
effective amendment thereto, when the same has become effective, (B) of any
request by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional information
relating thereto, (C) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement under the Act or
of the suspension by any state securities commission of the qualification of
the Transfer Restricted Securities for offering or sale in any jurisdiction,
or the initiation of any proceeding for any of the preceding purposes, (D) of
the existence of any fact or the happening of any event that makes any
statement of a material fact made in the Registration Statement, the
Prospectus, any amendment or supplement thereto, or any document incorporated
by reference therein untrue, or that requires the making of any additions to
or changes in the Registration Statement or the Prospectus in order to make
the statements therein not misleading. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption from
qualification of the Transfer Restricted Securities under state securities or
Blue Sky laws, the Company and the
9
<PAGE>
Guarantors shall use their best efforts to obtain the withdrawal or lifting
of such order at the earliest possible time;
(iv) furnish to each of the selling Holders and each of the
underwriter(s), if any, before filing with the Commission, copies of any
Registration Statement or any Prospectus included therein or any amendments
or supplements to any such Registration Statement or Prospectus (including
all documents incorporated by reference after the initial filing of such
Registration Statement), which documents will be subject to the review of
such Holders and underwriter(s), if any, for a period of at least five
business days, and the Company will not file any such Registration Statement
or Prospectus or any amendment or supplement to any such Registration
Statement or Prospectus (including all such documents incorporated by
reference) to which a selling Holder of Transfer Restricted Securities
covered by such Registration Statement or the underwriter(s), if any, shall
reasonably object within five business days after the receipt thereof. A
selling Holder or underwriter, if any, shall be deemed to have reasonably
objected to such filing if such Registration Statement, amendment, Prospectus
or supplement, as applicable, as proposed to be filed, contains a material
misstatement or omission;
(v) promptly prior to the filing of any document that is to be
incorporated by reference into a Registration Statement or Prospectus,
provide copies of such document to the selling Holders and to the
underwriter(s), if any, make the Company's representatives available (and
representatives of the Guarantors) for discussion of such document and other
customary due diligence matters, and include such information in such
document prior to the filing thereof as such selling Holders or
underwriter(s), if any, reasonably may request;
(vi) make available at reasonable times for inspection by the selling
Holders, any underwriter participating in any disposition pursuant to such
Registration Statement, and any attorney or accountant retained by such
selling Holders or any of the underwriter(s), all financial and other
records, pertinent corporate documents and properties of the Company and the
Guarantors and cause the Company's and the Guarantors's officers, directors,
managers and employees to supply all information reasonably requested by any
such Holder, underwriter, attorney or accountant in connection with such
Registration Statement subsequent to the filing thereof and prior to its
effectiveness;
(vii) if requested by any selling Holders or the underwriter(s), if
any, promptly incorporate in any Registration Statement or Prospectus,
pursuant to a supplement or post-effective amendment if necessary, such
information as such selling Holders and underwriter(s), if any, may
reasonably request to have included therein, including, without limitation,
information relating to the "Plan of Distribution" of the Transfer Restricted
Securities, information with respect to the principal amount of Transfer
Restricted Securities being sold to such underwriter(s), the purchase price
being paid therefor and any other terms of the offering of the Transfer
Restricted Securities to be sold in such offering; and make all required
filings of such Prospectus supplement or post-effective amendment as soon
10
<PAGE>
as practicable after the Company is notified of the matters to be
incorporated in such Prospectus supplement or post-effective amendment;
(viii) cause the Transfer Restricted Securities covered by the
Registration Statement to be rated with the appropriate rating agencies, if
so requested by the Holders of a majority in aggregate principal amount of
Senior Notes covered thereby or the underwriter(s), if any;
(ix) furnish to each selling Holder and each of the underwriter(s), if
any, without charge, at least one copy of the Registration Statement, as
first filed with the Commission, and of each amendment thereto, including, if
requested in writing by a Holder, all documents incorporated by reference
therein and all exhibits (including exhibits incorporated therein by
reference);
(x) deliver to each selling Holder and each of the underwriter(s), if
any, without charge, as many copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto as such
Persons reasonably may request; the Company and the Guarantors hereby
consent to the use of the Prospectus and any amendment or supplement thereto
by each of the selling Holders and each of the underwriter(s), if any, in
connection with the offering and the sale of the Transfer Restricted
Securities covered by the Prospectus or any amendment or supplement thereto;
(xi) enter into, and cause the Guarantors to enter into, such
agreements (including an underwriting agreement), and make, and cause the
Guarantors to make, such representations and warranties, and take all such
other actions in connection therewith in order to expedite or facilitate the
disposition of the Transfer Restricted Securities pursuant to any
Registration Statement contemplated by this Agreement, all to such extent as
may be requested by any Purchaser or by any Holder of Transfer Restricted
Securities or underwriter in connection with any sale or resale pursuant to
any Registration Statement contemplated by this Agreement; and whether or not
an underwriting agreement is entered into and whether or not the registration
is an Underwritten Registration, the Company and the Guarantors shall:
(A) furnish to each Purchaser, each selling Holder and each
underwriter, if any, in such substance and scope as they may request and
as are customarily made by issuers to underwriters in primary underwritten
offerings, upon the date of the Consummation of the Exchange Offer and, if
applicable, the effectiveness of the Shelf Registration Statement:
(1) a certificate, dated the date of Consummation of the
Exchange Offer or the date of effectiveness of the Shelf
Registration Statement, as the case may be, signed by (y) the
President, any Vice President, or any Manager and (z) a principal
financial or accounting officer of each of the Company and each
Guarantor, confirming, as of the date thereof, the matters set forth
in paragraphs (a), (b), (c)
11
<PAGE>
and (d) of Section 7 of the Purchase Agreement and such other
matters as such parties may reasonably request;
(2) an opinion, dated the date of Consummation of the Exchange
Offer or the date of effectiveness of the Shelf Registration
Statement, as the case may be, of counsel for the Company and the
Guarantors, covering the matters set forth in paragraph (h) of
Section 7 of the Purchase Agreement and such other matter as such
parties may reasonably request, and in any event including a
statement to the effect that such counsel has participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the
Company, the Purchasers' representatives and the Purchasers' counsel
in connection with the preparation of such Registration Statement
and the related Prospectus and have considered the matters required
to be stated therein and the statements contained therein, although
such counsel has not independently verified the accuracy,
completeness or fairness of such statements; and that such counsel
advises that, on the basis of the foregoing (relying as to
materiality to a large extent upon facts provided to such counsel by
officers and other representatives of the Company and without
independent check or verification), no facts came to such counsel's
attention that caused such counsel to believe that the applicable
Registration Statement, at the time such Registration Statement or
any post-effective amendment thereto became effective, and, in the
case of the Exchange Offer Registration Statement, as of the date of
Consummation, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus contained in such Registration Statement as of its date
and, in the case of the opinion dated the date of Consummation of
the Exchange Offer, as of the date of Consummation, contained an
untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Without limiting the foregoing, such counsel may state further that
such counsel assumes no responsibility for, and has not
independently verified, the accuracy, completeness or fairness of
the financial statements, notes and schedules and other financial
data included in any Registration Statement contemplated by this
Agreement or the related Prospectus; and
(3) a customary comfort letter, dated as of the date of
Consummation of the Exchange Offer or the date of effectiveness of
the Shelf Registration Statement, as the case may be, from the
Company's independent accountants, in the customary form and
covering matters of the type customarily covered in comfort letters
by underwriters in connection with primary underwritten offerings,
and affirming the matters set forth in the comfort letters delivered
pursuant to Section 7(j) of the Purchase Agreement, without
exception;
12
<PAGE>
(B) set forth in full or incorporate by reference in the
underwriting agreement, if any, the indemnification provisions and
procedures of Section 8 hereof with respect to all parties to be
indemnified pursuant to said Section; and
(C) deliver such other documents and certificates as may be
reasonably requested by such parties to evidence compliance with clause
(A) above and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company pursuant to this
clause (xi), if any.
If at any time the representations and warranties of the Company and the
Guarantors contemplated in clause (A)(1) above cease to be true and correct,
the Company or the Guarantors shall so advise the Purchasers and the
underwriter(s), if any, and each selling Holder promptly and, if requested by
such Persons, shall confirm such advice in writing;
(xii) prior to any public offering of Transfer Restricted Securities,
cooperate with, and cause the Guarantors to cooperate with, the selling
Holders, the underwriter(s), if any, and their respective counsel in
connection with the registration and qualification of the Transfer Restricted
Securities under the securities or Blue Sky laws of such jurisdictions as the
selling Holders or underwriter(s) may request and do any and all other acts
or things necessary or advisable to enable the disposition in such
jurisdictions of the Transfer Restricted Securities covered by the Shelf
Registration Statement; provided, however, that neither the Company nor the
Guarantors shall be required to register or qualify as a foreign corporation
where it is not now so qualified or to take any action that would subject it
to the service of process in suits or to taxation, other than as to matters
and transactions relating to the Registration Statement, in any jurisdiction
where it is not now so subject;
(xiii) shall issue, upon the request of any Holder of Series A Senior
Notes covered by the Shelf Registration Statement, Series B Senior Notes,
having an aggregate principal amount equal to the aggregate principal amount
of Series A Senior Notes surrendered to the Company by such Holder in
exchange therefor or being sold by such Holder; such Series B Senior Notes to
be registered in the name of such Holder or in the name of the purchaser(s)
of such Senior Notes, as the case may be; in return, the Series A Senior
Notes held by such Holder shall be surrendered to the Company for
cancellation;
(xiv) cooperate with, and cause the Guarantors to cooperate with, the
selling Holders and the underwriter(s), if any, to facilitate the timely
preparation and delivery of certificates representing Transfer Restricted
Securities to be sold and not bearing any restrictive legends; and enable
such Transfer Restricted Securities to be in such denominations and
registered in such names as the Holders or the underwriter(s), if any, may
request at least two business days prior to any sale of Transfer Restricted
Securities made by such underwriter(s);
(xv) use its best efforts to cause the Transfer Restricted Securities
covered by the Registration Statement to be registered with or approved by
such other governmental
13
<PAGE>
agencies or authorities as may be necessary to enable the seller or sellers
thereof or the underwriter(s), if any, to consummate the disposition of such
Transfer Restricted Securities, subject to the proviso contained in clause
(viii) above;
(xvi) if any fact or event contemplated by clause (c)(iii)(D) above
shall exist or have occurred, prepare a supplement or post-effective
amendment to the Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so
that, as thereafter delivered to the purchasers of Transfer Restricted
Securities, the Prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements
therein not misleading;
(xvii) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of the Registration Statement and provide
the Trustee under the Indenture with printed certificates for the Transfer
Restricted Securities which are in a form eligible for deposit with The
Depositary Trust Company;
(xviii) cooperate and assist in any filings required to be made with
the NASD and in the performance of any due diligence investigation by any
underwriter (including any "qualified independent underwriter") that is
required to be retained in accordance with the rules and regulations of the
NASD, and use its reasonable best efforts to cause such Registration
Statement to become effective and approved by such governmental agencies or
authorities as may be necessary to enable the Holders selling Transfer
Restricted Securities to consummate the disposition of such Transfer
Restricted Securities;
(xix) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make generally available to its
security holders, as soon as practicable, a consolidated earnings statement
meeting the requirements of Rule 158 (which need not be audited) for the
twelve-month period (A) commencing at the end of any fiscal quarter in which
Transfer Restricted Securities are sold to underwriters in a firm or best
efforts Underwritten Offering or (B) if not sold to underwriters in such an
offering, beginning with the first month of the Company's first fiscal
quarter commencing after the effective date of the Registration Statement;
(xx) cause the Indenture to be qualified under the TIA not later than
the effective date of the first Registration Statement required by this
Agreement, and, in connection therewith, cooperate, and cause the Guarantors
to cooperate, with the Trustee and the Holders of Senior Notes to effect such
changes to the Indenture as may be required for such Indenture to be so
qualified in accordance with the terms of the TIA; and execute, and cause the
Guarantors to execute, and use its best efforts to cause the Trustee to
execute, all documents that may be required to effect such changes and all
other forms and documents required to be filed with the Commission to enable
such Indenture to be so qualified in a timely manner;
14
<PAGE>
(xxi) cause all Transfer Restricted Securities covered by the
Registration Statement to be listed on each securities exchange on which
similar securities issued by the Company are then listed if requested by the
Holders of a majority in aggregate principal amount of Series A Senior Notes
or the managing underwriter(s), if any; and
(xxii) provide promptly to each Holder upon request each document
filed with the Commission pursuant to the requirements of Section 13 and
Section 15 of the Exchange Act.
Each Holder agrees by acquisition of a Transfer Restricted Security that,
upon receipt of any notice from the Company of the existence of any fact of the
kind described in Section 6(c)(iii)(D) hereof, such Holder will forthwith
discontinue disposition of Transfer Restricted Securities pursuant to the
applicable Registration Statement until such Holder's receipt of the copies of
the supplemented or amended Prospectus contemplated by Section 6(c)(xvi) hereof,
or until it is advised in writing (the "Advice") by the Company that the use of
------
the Prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the Prospectus. If
so directed by the Company, each Holder will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies then in such
Holder's possession, of the Prospectus covering such Transfer Restricted
Securities that was current at the time of receipt of such notice. In the event
the Company shall give any such notice, the time period regarding the
effectiveness of such Registration Statement set forth in Section 3 or 4 hereof,
as applicable, shall be extended by the number of days during the period from
and including the date of the giving of such notice pursuant to Section
6(c)(iii)(D) hereof to and including the date when each selling Holder covered
by such Registration Statement shall have received the copies of the
supplemented or amended Prospectus contemplated by Section 6(c)(xvi) hereof or
shall have received the Advice.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's or the Guarantors's performance
of or compliance with this Agreement will be borne by the Company or the
Guarantors, regardless of whether a Registration Statement becomes effective,
including without limitation: (i) all registration and filing fees and expenses
(including filings made by any Purchaser or Holder with the NASD (and, if
applicable, the fees and expenses of any "qualified independent underwriter" and
its counsel that may be required by the rules and regulations of the NASD));
(ii) all fees and expenses of compliance with federal securities and state Blue
Sky or securities laws; (iii) all expenses of printing (including printing
certificates for the Series B Senior Notes to be issued in the Exchange Offer
and printing of Prospectuses), messenger and delivery services and telephone;
(iv) all fees and disbursements of counsel for the Company and the Guarantors
and, subject to Section 7(b) below, the Holders of Transfer Restricted
Securities; (v) all application and filing fees in connection with listing
Senior Notes on a national securities exchange or automated quotation system
pursuant to the requirements hereof; and (vi) all fees and disbursements of
independent certified public accountants of the Company and the Guarantors
15
<PAGE>
(including the expenses of any special audit and comfort letters required by or
incident to such performance).
The Company will, in any event, bear its and each Guarantor's internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expenses of
any annual audit and the fees and expenses of any Person, including special
experts, retained by the Company.
(b) In connection with any Registration Statement required by this
Agreement (including, without limitation, the Exchange Offer Registration
Statement and the Shelf Registration Statement), the Company will reimburse the
Purchasers and the Holders of Transfer Restricted Securities being tendered in
the Exchange Offer and/or resold pursuant to the "Plan of Distribution"
contained in the Exchange Offer Registration Statement or registered pursuant to
the Shelf Registration Statement, as applicable, for the reasonable fees and
disbursements of not more than one counsel, who shall be Latham & Watkins or
such other counsel as may be chosen by the Holders of a majority in principal
amount of the Transfer Restricted Securities for whose benefit such Registration
Statement is being prepared.
SECTION 8. INDEMNIFICATION
(a) The Company and each Guarantor, jointly and severally, agree to
indemnify and hold harmless (i) each Holder and (ii) each person, if any, who
controls (within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act) any Holder (any of the persons referred to in this clause (ii)
being hereinafter referred to as a "controlling person") and (iii) the
------------------
respective officers, directors, partners, employees, representatives and agents
of any Holder or any controlling person (any person referred to in clause (i),
(ii) or (iii) may hereinafter be referred to as an "Indemnified Holder"), to the
------------------
fullest extent lawful, from and against any and all losses, claims, damages,
liabilities, judgments, actions and expenses (including without limitation and
as incurred, reimbursement of all reasonable costs of investigating, preparing,
pursuing or defending any claim or action, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, including the
reasonable fees and expenses of counsel to any Indemnified Holder) directly or
indirectly caused by, related to, based upon, arising out of or in connection
with any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement or Prospectus (or any amendment or
supplement thereto), or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any act or failure to act or any alleged act or
failure to act in connection with, or relating in any manner to the transactions
contemplated hereby, except insofar as such losses, claims, damages, liabilities
or expenses are caused by an untrue statement or omission or alleged untrue
statement or omission that is made in reliance upon and in conformity with
information relating to any of the Holders furnished in writing to the Company
by any of the Holders expressly for use therein.
16
<PAGE>
In case any action or proceeding (including any governmental or regulatory
investigation or proceeding) shall be brought or asserted against any of the
Indemnified Holders with respect to which indemnity may be sought against the
Company or the Guarantors, such Indemnified Holder (or the Indemnified Holder
controlled by such controlling person) shall promptly notify the Company and the
Guarantors in writing; provided, that the failure to give such notice shall not
relieve the Company or any Guarantor of its obligations pursuant to this
Agreement. Such Indemnified Holder shall have the right to employ its own
counsel in any such action and the fees and expenses of such counsel shall be
paid, as incurred, by the Company and the Guarantors (regardless of whether it
is ultimately determined that an Indemnified Holder is not entitled to
indemnification hereunder). The Company and the Guarantors shall not, in
connection with any one such action or proceeding or separate but substantially
similar or related actions or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys (in addition to
any local counsel) at any time for such Indemnified Holders, which firm shall be
designated by the Holders. The Company shall be liable for any settlement of
any such action or proceeding effected with the Company's prior written consent,
which consent shall not be withheld unreasonably, and the Company agrees to
indemnify and hold harmless any Indemnified Holder from and against any loss,
claim, damage, liability or expense by reason of any settlement of any action
effected with the written consent of the Company. The Company shall not,
without the prior written consent of each Indemnified Holder, settle or
compromise or consent to the entry of judgment in or otherwise seek to terminate
any pending or threatened action, claim, litigation or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether or not
any Indemnified Holder is a party thereto), unless such settlement, compromise,
consent or termination includes an unconditional release of each Indemnified
Holder from all liability arising out of such action, claim, litigation or
proceeding.
(b) Each Holder of Transfer Restricted Securities agrees, severally and
not jointly, to indemnify and hold harmless the Company and each Guarantor, and
their respective directors, officers, and any person controlling (within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company
and the Guarantors, and the respective officers, directors, partners, employees,
managers, representatives and agents of each such person, to the same extent as
the foregoing indemnity from the Company and the Guarantors to each of the
Indemnified Holders, but only with respect to claims and actions based on
information relating to such Holder furnished in writing by such Holder
expressly for use in any Registration Statement. In case any action or
proceeding shall be brought against the Company, the Guarantors, or their
respective directors, managers, officers or any such controlling person in
respect of which indemnity may be sought against a Holder of Transfer Restricted
Securities, such Holder shall have the rights and duties given the Company and
the Guarantors and the Company, the Guarantors and their directors or officers
or such controlling person shall have the rights and duties given to each Holder
by the preceding paragraph. In no event shall the liability of any selling
Holder hereunder be greater in amount than the dollar amount of the proceeds
received by such Holder upon the sale of the Registrable Securities giving rise
to such indemnification obligation.
17
<PAGE>
(c) If the indemnification provided for in this Section 8 is unavailable
to an indemnified party under Section 8(a) or Section 8(b) hereof (other than by
reason of exceptions provided in those Sections) in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
applicable indemnifying party, in lieu of indemnifying such indemnified party,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Holders on the other hand from their sale of
Transfer Restricted Securities or if such allocation is not permitted by
applicable law, the relative fault of the Company on the one hand and of the
Indemnified Holder on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of the
Company and the Guarantors on the one hand and of the Indemnified Holder on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or any Guarantor or by the Indemnified Holder and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in the second paragraph
of Section 8(a), any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim.
The Company, each Guarantor and each Holder of Transfer Restricted
Securities agree that it would not be just and equitable if contribution
pursuant to this Section 8(c) were determined by pro rata allocation (even if
the Holders were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages, liabilities
or expenses referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8, none of the Holders (and its related Indemnified
Holders) shall be required to contribute, in the aggregate, any amount in excess
of the amount by which the total discount received by such Holder with respect
to the Series A Senior Notes exceeds the amount of any damages which such Holder
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Holders' obligations to contribute pursuant to this
Section 8(c) are several in proportion to the respective principal amount of
Series A Senior Notes held by each of the Holders hereunder and not joint.
18
<PAGE>
SECTION 9. RULE 144A
The Company hereby agrees with each Holder, for so long as any Transfer
Restricted Securities remain outstanding, to make available to any Holder or
beneficial owner of Transfer Restricted Securities in connection with any sale
thereof and any prospective purchaser of such Transfer Restricted Securities
from such Holder or beneficial owner, the information required by Rule
144A(d)(4) under the Act in order to permit resales of such Transfer Restricted
Securities pursuant to Rule 144A.
SECTION 10. PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Holder may participate in any Underwritten Registration hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements and (b) completes
and executes all reasonable questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up letters and other documents required under the
terms of such underwriting arrangements.
SECTION 11. SELECTION OF UNDERWRITERS
The Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement who desire to do so may sell such Transfer Restricted
Securities in an Underwritten Offering. In any such Underwritten Offering, the
investment banker or investment bankers and manager or managers that will
administer the offering will be selected by the Holders of a majority in
aggregate principal amount of the Transfer Restricted Securities included in
such offering; provided, that such investment bankers and managers must be
reasonably satisfactory to the Company.
SECTION 12. MISCELLANEOUS
(a) Remedies. The Company and each of the Guarantors agree that monetary
--------
damages (including the liquidated damages contemplated hereby) would not be
adequate compensation for any loss incurred by reason of a breach by it of the
provisions of this Agreement and hereby agree to waive the defense in any action
for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not, and will cause the
--------------------------
Guarantors not to, on or after the date of this Agreement enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Neither the Company nor any of the Guarantors has previously
entered into any agreement granting any registration rights with respect to its
19
<PAGE>
securities to any Person. The rights granted to the Holders hereunder do not in
any way conflict with and are not inconsistent with the rights granted to the
holders of the Company's securities under any agreement in effect on the date
hereof.
(c) Adjustments Affecting the Senior Notes. The Company will not take any
--------------------------------------
action, or permit any change to occur, with respect to the Senior Notes that
would materially and adversely affect the ability of the Holders to Consummate
any Exchange Offer.
(d) Amendments and Waivers. The provisions of this Agreement may not be
----------------------
amended, modified or supplemented, and waivers or consents to or departures from
the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities. Notwithstanding the foregoing, a waiver or
consent to departure from the provisions hereof that relates exclusively to the
rights of Holders whose securities are being tendered pursuant to the Exchange
Offer and that does not affect directly or indirectly the rights of other
Holders whose securities are not being tendered pursuant to such Exchange Offer
may be given by the Holders of a majority of the outstanding principal amount of
Transfer Restricted Securities being tendered or registered.
(e) Notices. All statements, reports, notices and other communications
-------
provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered or certified, return receipt requested), telex,
telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Registrar under the Indenture, with a copy to the Registrar under the
Indenture; and
(ii) if to the Company or the Guarantors:
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard
Building 1, Suite 210
Torrance, California 90505
Telecopier No.: (310) 373-4305
Attention: Chief Financial Officer
With a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard
Beverly Hills, California 90212
Telecopier No.: (310) 274-8357
Attention: Thomas J. Poletti
20
<PAGE>
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on the
next business day, if timely delivered to an air courier guaranteeing overnight
delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(f) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
and be binding upon the successors and assigns of each of the parties, including
without limitation and without the need for an express assignment, subsequent
Holders of Transfer Restricted Securities; provided, however, that this
Agreement shall not inure to the benefit of or be binding upon a successor or
assign of a Holder unless and to the extent such successor or assign acquired
Transfer Restricted Securities from such Holder.
(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(j) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
(k) Entire Agreement. This Agreement together with the other Operative
----------------
Documents (as defined in the Purchase Agreement) is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
with respect to the registration rights granted by the Company with respect to
the Transfer Restricted Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
21
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
IMPERIAL CREDIT INDUSTRIES, INC.
By: /s/ H. Wayne Snavely
____________________________
Name: H. Wayne Snavely
Title: Chairman
GUARANTORS:
IMPERIAL BUSINESS CREDIT, INC.
By: /s/ H. Wayne Snavely
____________________________
Name: H. Wayne Snavely
Title: Chairman
IMPERIAL CREDIT ADVISORS, INC.
By: /s/ H. Wayne Snavely
____________________________
Name: H. Wayne Snavely
Title: Chairman
FRANCHISE MORTGAGE ACCEPTANCE CO. LLC
By: /s/ H. Wayne Snavely
____________________________
Name: H. Wayne Snavely
Title: Chairman
22
<PAGE>
LEHMAN BROTHERS INC.
By: /s/ David J. Kim
____________________________
Name: David J. Kim
Title: Vice President
MONTGOMERY SECURITIES
By: /s/ illegible
____________________________
Name:
Title:
DABNEY/RESNICK/IMPERIAL, LLC
By: /s/ Jason W. Reese
____________________________
Name: Jason W. Reese
Title: Managing Director
23
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Imperial Credit Industries, Inc.:
We consent to the use of our report included herein and to the references to
our firm under the headings "Summary Historical and Pro Forma Consolidated
Financial and Other Data," "Selected Financial Data," and "Experts" in the
Registration Statement. Our report contains an explanatory paragraph regarding
the adoption of Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights."
KPMG Peat Marwick LLP
Los Angeles, California
February 17, 1997
<PAGE>
EXHIBIT 25.1
_____________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM T-l
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
___________________________
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(B)(2)_________
___________________________
CHEMICAL TRUST COMPANY OF CALIFORNIA
(formerly Manufacturers Hanover Trust Company of California)
(Exact name of trustee as specified in its charter)
CALIFORNIA 94-2926573
(State of incorporation I.R.S. employer
if not a national bank) identification No.)
101 California Street, #2725
San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
___________________________
IMPERIAL CREDIT INDUSTRIES, INC.
(Exact name of obligor as specified in its charter)
CALIFORNIA 95-4054791
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
23550 Hawthorne Boulevard, Building 1, Suite #210
Torrance, California 90505
(Address of principal executive offices) (Zip Code)
___________________________
9 7/8% Senior Notes due January 15, 2007
(Title of the indenture securities)
__________________________________
<PAGE>
GENERAL
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Superintendent of Banks of the State of California,
235 Montgomery Street, San Francisco, California 94104-2980.
Board of Governors of the Federal Reserve System,
Washington, D.C. 20551
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES
a) Title of the securities outstanding under each such other indenture.
$20,174,000 9 3/4% Senior Notes due January 15, 2004 issued under
Indenture dated as of January 31, 1994.
b) A brief statement of the facts relied upon as a basis for the claim
that no conflicting interest within the meaning of Section 310 (b) (1) of the
Act arises as a result of the trusteeship under any such other indenture,
including a statement as to how the indenture securities will rank as compared
with the securities issued under such other indenture.
The Trustee is not deemed to have a conflicting interest within the
meaning of Section 310 (b) (1) of the Act because the indenture securities
referenced in (a) above (the "Prior Securities") are not in default and the
indenture to be qualified and the indenture entered into in connection with the
Prior Securities are wholly unsecured and rank equally.
ITEM 16. LIST OF EXHIBITS
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Incorporation of the Trustee as now in
effect, including the Restated Articles of Incorporation dated December 23, 1986
and the Certificate of Amendment dated March 26, 1992 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 33-55136, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (See Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-55136, which is incorporated by reference).
2
<PAGE>
3. Authorization to exercise corporate trust powers (Contained in
Exhibit 2).
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to
Form T-1 filed in connection with Registration Statement No. 33-55136, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 21(b) of the Act
(See Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-55136, which is incorporated by reference).
7. A copy of the latest report of condition of the Trustee,
published pursuant to law or the requirements of its supervising or examining
authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, Chemical Trust Company of California, a corporation organized and
existing under the laws of the State of California, has duly caused this
statement of eligibility to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of San Francisco and State of
California, on the 7th day of February, 1997.
CHEMICAL TRUST COMPANY OF CALIFORNIA
By /s/ Hans H. Helley
--------------------------
HANS H. HELLEY
Assistant Vice President
3
<PAGE>
EXHIBIT 7. Report of Condition of the Trustee.
- --------------------------------------------------------------------------------
4
<PAGE>
CONSOLIDATED REPORT OF CONDITION OF Chemical Trust Company of California
--------------------------------------
(Legal Title)
LOCATED AT San Francisco San Francisco CA 94111
----------------------------------------------------------------------
(City) (County) (State) (Zip)
AS OF CLOSE OF BUSINESS ON December 31, 1996 BANK NO. 1476
---------------------- ---------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DOLLAR AMOUNT IN THOUSANDS
<S> <C>
ASSETS
1. Cash and due from banks 10,939
2. U.S. Treasury securities 10,215
3. Obligations of other U.S. Government agencies and corporations
4. Obligations of States and political subdivisions
5. Other securities (including $__________ corporate stock)
(a) Loans
(b) Less: Reserve for possible loan losses
(c) Loans (Net)
7. Bank Premises, furniture and fixtures and other assets
representing bank premises (including $ -0- capital leases) 103
------
8. Real estate owned other than bank premises
9. Investments in subsidiaries not consolidated
10. Other assets (complete schedule on reverse) (including
$________ intangibles) 939
11. TOTAL ASSETS 22,196
LIABILITIES
12. Liabilities For borrowed money
13. Mortgage indebtedness (including $________ capital leases)
14. Other liabilities (complete on schedule on reverse) 2,699
15. TOTAL LIABILITIES 2,699
------
16. Capital notes and debentures
SHAREHOLDERS EQUITY
17. Preferred stock--
(Number shares outstanding __________________) Amount $
18. Common stock--
(Number shares authorized 100 ) Amount $
------------------
(Number shares outstanding 100 ) Amount $ 10
------------------
19. Surplus Amount $ 9,990
20. TOTAL CONTRIBUTED CAPITAL 10,000
21. Retained earnings and other capital reserves 9,497
22. TOTAL SHAREHOLDERS EQUITY 19,497
23. TOTAL LIABILITIES AND CAPITAL ACCOUNTS 22,196
======
</TABLE>
5
<PAGE>
MEMORANDA
1. Assets deposited with State Treasurer to qualify for exercise
of fiduciary powers (market value) 605
- --------------------------------------------------------------------------------
The undersigned, Francis J. Farrell, VP & Manager and
------------------------------------
(Name and Title)
Frank J. Seidel, Vice President
- -------------------------------
(Name and Title)
of the above named trust company, each declares, for himself alone and not for
the other: I have a personal knowledge of the matters contained in this report
(including the reverse side hereof), and I believe that each statement in said
report is true. Each of the undersigned, for himself alone and not for the
other, certifies under penalty of perjury that the foregoing is true and
correct.
Executed on 1/30/97 , at San Francisco , California
-------------- -------------------
(Date) (City)
/s/Francis J. Farrell /s/Frank J. Seidel
--------------------- ------------------
(Signature) (Signature)
SCHEDULE OF OTHER ASSETS
<TABLE>
<S> <C>
Accounts Receivable $422
Accrued Interest 37
Deferred Taxes 396
Other 84
----
Total (same as Item 10) $939
</TABLE>
SCHEDULE OF OTHER LIABILITIES
<TABLE>
<S> <C>
Accrued Income Taxes $1,507
Accrued Expenses & A/P 377
Accrued Pension & Benefits 815
------
Total (same as Item 14) $2,699
</TABLE>
6
