<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1997
REGISTRATION NO. 333-30809
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
IMPERIAL CREDIT CAPITAL TRUST I
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6733 95-4639513
(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)
CHASE MANHATTAN BANK DELAWARE
1201 MARKET STREET
WILMINGTON, DELAWARE 19801
(302) 428-3375
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
IMPERIAL CREDIT INDUSTRIES, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 6122 95-4054791
(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 CO-
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)
IMPERIAL BUSINESS CREDIT, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 6159 33-0664339
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
16935 WEST BERNARDO DRIVE, SUITE 150
SAN DIEGO, CALIFORNIA 92127
(619) 675-1070
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO-
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
<PAGE>
IMPERIAL CREDIT ADVISORS, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 6282 33-0648410
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
20371 IRVINE AVENUE
SANTA ANA HEIGHTS, CALIFORNIA 92707
(214) 474-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO-
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)
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 6159 06-1429737
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2029 CENTURY PARK EAST, SUITE 1190
LOS ANGELES, CALIFORNIA 90067
(800) 661-3622
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO-
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)
AUTOMARKETING NETWORK, INC.
(EXACT NAME OF CO-REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
FLORIDA 6141 65-0310419
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2101 CORPORATE BOULEVARD, SUITE 316
BOCA RATON, FLORIDA 33431
(561) 997-2440
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF CO-
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN S. RASKIN
AUTO MARKETING NETWORK, INC.
2101 CORPORATE BOULEVARD, SUITE 316
BOCA RATON, FLORIDA 33431
(561) 997-2440
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
<PAGE>
COPIES TO:
THOMAS J. POLETTI, ESQ.
SUSAN B. KALMAN, ESQ.
DARREN O. BIGBY, ESQ.
FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN
9100 WILSHIRE BOULEVARD, 8TH FLOOR EAST
BEVERLY HILLS, CALIFORNIA 90212
TELEPHONE (310) 273-1870
FACSIMILE (310) 274-8357
----------------
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: [_]
----------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE(1) FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Remarketed Redeemable Par
Securities, Series B of
Imperial Credit Capital
Trust I .................. $70,000,000 100.000% $70,000,000 $21,212.12
- --------------------------------------------------------------------------------
Resettable Rate Debentures
of Imperial Credit
Industries, Inc........... * * * --(2)
- --------------------------------------------------------------------------------
Guarantee of Imperial
Credit Industries, Inc. of
Remarketed Par Securities,
Series B.................. * * * --(3)
- --------------------------------------------------------------------------------
Guarantee of Resettable
Rate Debentures, Series B. * * * --(4)
- --------------------------------------------------------------------------------
Total............................................................ $21,212.12*
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
* Previously paid.
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) under the Securities Act of 1933.
(2) The Resettable Rate Debentures, Series B will be exchanged for outstanding
unregistered Resettable Rate Debentures, Series A which were purchased by
Imperial Credit Capital Trust I with the proceeds of the sale of
unregistered Remarketed Redeemable Par Securities, Series A. No separate
consideration will be received for the issuance of Resettable Rate
Debentures, Series B. Pursuant to Rule 457(a), no separate fee is payable
with respect to the Resettable Rate Debentures, Series B.
(3) Imperial Credit Industries, Inc. will guarantee certain payments and
distributions of the Remarketed Redeemable Par Securities, Series B as set
forth in the Registration Statement. Pursuant to Rule 457(n), no filing
fee is required.
(4) Imperial Business Credit, Inc., Imperial Credit Advisors, Inc., Auto
Marketing Network, Inc. and Franchise Mortgage Acceptance Company LLC will
guarantee the payment of the Resettable Rate Debentures, Series B.
Pursuant to Rule 457(n), no filing fee is required.
The Registrants hereby amend this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrants
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT 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 October 16, 1997
PRELIMINARY PROSPECTUS
$70,000,000
OFFER FOR ALL OUTSTANDING REMARKETED REDEEMABLE PAR SECURITIES, SERIES A IN
EXCHANGE FOR REMARKETED REDEEMABLE PAR SECURITIES, SERIES B WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OF
IMPERIAL CREDIT CAPITAL TRUST I
(LIQUIDATION AMOUNT $1,000 PER SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, TO THE EXTENT THAT THE TRUST HAS ASSETS
AVAILABLE FOR DISTRIBUTION BY
[LOGO OF IMPERIAL CREDIT APPEARS HERE]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON , UNLESS
EXTENDED
Imperial Credit Capital Trust I, a Delaware statutory business trust (the
"Trust"), hereby offers, upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (the "Letter of
Transmittal" which, together with this Prospectus, constitute the "Exchange
Offer"), to exchange an aggregate liquidation amount of up to $70,000,000 of
its Remarketed Redeemable Par Securities, Series B (the "New Par Securities")
of the Trust, which have been registered under the Securities Act, for a like
liquidation amount of the issued and outstanding Remarketed Redeemable Par
Securities, Series A (the "Old Par Securities") (together, the "Par
Securities") of the Trust from the registered holders thereof. Concurrently
herewith, the following exchanges will also occur: (i) Imperial Credit
Industries, Inc., a California corporation (the "Company"), will exchange its
guarantee of the payment of distributions and payments on liquidation or
redemption of the Old Par Securities (the "Old Trust Guarantee") for a like
guarantee of the New Par Securities (the "New Trust Guarantee"); (ii) the
Company will exchange all of its outstanding Resettable Rate Debentures, Series
A (the "Old Debentures") for a like amount of its Resettable Rate Debentures,
Series B (the "New Debentures"); (iii) Auto Marketing Network, Inc., a Florida
corporation ("AMN"), Imperial Business Credit, Inc., a California corporation
("IBC"), Imperial Credit Advisors, Inc., a California corporation ("ICAI"), and
Franchise Mortgage Acceptance Company LLC, a California limited liability
company ("FMAC") (collectively the "Subsidiary Guarantors") will exchange their
full, unconditional and joint and several guarantee of the Old Debentures (the
"Old Subsidiary Guarantees") for a full, unconditional and joint and several
guarantee of the New Debentures (the "New Subsidiary Guarantees") (these
transactions, together with the exchange of the Old Par Securities for the New
Par Securities, are collectively referred to herein as the "Exchange"). The New
Trust Guarantee, the New Debentures, and the New Subsidiary Guarantees have
also been registered under the Securities Act. The Old Par Securities, the Old
Trust Guarantee, the Old Debentures and the Old Subsidiary Guarantees are
referred to collectively herein as the "Old Securities," and the New Par
Securities, New Trust Guarantee, New Debentures and the New Subsidiary
Guarantees are collectively referred to herein as the "New Securities."
The terms of the New Securities are identical in all material respects to the
Old Securities, except for certain transfer restrictions relating to the Old
Securities.
The Par Securities represent undivided beneficial ownership interests in the
assets of the Trust. The Company indirectly owns all of the beneficial
ownership interests represented by common securities of the Trust (the "Common
Securities" and together with the Par Securities, the "Trust Securities"). On
June 9, 1997, the Trust issued $72,165,000 liquidation amount of Trust
Securities in transactions pursuant to exemptions from the registration
requirements of the Securities Act and applicable state securities laws. The
Trust exists for the sole purposes of issuing the Trust Securities and
investing the proceeds thereof in the Old Debentures, which will be exchanged
for the New Debentures (together, the "Debentures"). New Debentures will
evidence the same class of debt as the Old Debentures and will be issued
pursuant to, and entitled to the benefits of, the Indenture governing the Old
Debentures (the "Indenture").
(continued on page i)
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 24 FOR A DESCRIPTION OF CERTAIN RISKS TO
BE CONSIDERED AND FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE PAR
SECURITIES, INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH
PAYMENTS OF DISTRIBUTIONS ON THE PAR SECURITIES MAY BE DEFERRED AND THE RELATED
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF SUCH DEFERRAL.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES 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>
IMPERIAL CREDIT INDUSTRIES, INC.
PRINCIPAL OPERATING SUBSIDIARIES AND DIVISIONS
--------------------
IMPERIAL CREDIT
INDUSTRIES, INC.
"ICII"
--------------------
------------------------------------------------------------------
100% 100% 100% 66.7% 100%
owned owned owned owned owned
- -------------- ----------- --------------- ---------------
Imperial Imperial Franchise Auto
Business Credit Mortgage Marketing
Credit, Inc. Advisors, Acceptance Co. Network, Inc.
"IBC" Inc. LLC "AMN"
"ICAI" "FMAC"
- -------------- ----------- --------------- ---------------
------------------
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 Lending Loan
Division Participation
"ALD" and Investment
Group
"LPIG"
-------------- ---------------
<PAGE>
(Continued from cover page)
Any Old Par Securities not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Declaration
(except for those rights relating to the Exchange Offer which terminate upon
consummation of the Exchange Offer). Following consummation of the Exchange
Offer, the holders of Old Par Securities will continue to be subject to all of
the existing restrictions upon transfer thereof and none of the Registrants
will have any further obligation to such holders (other than under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Par Securities held by them. Any Old Par Securities which have not
been exchanged for New Par Securities pursuant to the Exchange Offer will be
mandatorily redeemed by the Company on the Remarketing Settlement Date, as
described under "Description of the Securities--Redemption--Transfer
Restricted Security Redemption." To the extent that Old Par Securities are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Par Securities could be adversely affected. See "Risk Factors--
Consequences of Failure to Exchange Old Par Securities."
The New Par Securities will be a new issue of securities for which there
currently is no established trading market. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Par
Securities. See "Risk Factors--Lack of Public Market May Affect Resale of New
Par Securities."
Old Par Securities may be tendered for exchange on or prior to 5:00 p.m.,
Eastern Daylight Time, on , 1997 (such time on such date being hereinafter
called the "Expiration Date"), unless the Exchange Offer is extended by the
Trust (in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.) Tenders of Old Par Securities
may be withdrawn at any time on or prior to the Expiration Date. The Exchange
Offer is not conditioned upon any minimum liquidation amount of Old Par
Securities being tendered for exchange. However, the Exchange Offer is subject
to certain events and conditions which may be waived by the Company or the
Trust. The Company has agreed to pay all expenses of the Exchange Offer. See
"The Exchange Offer--Fees and Expenses." This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Old Par
Securities as of , 1997.
Neither the Company nor the Trust will receive any cash proceeds from the
issuance of the New Par Securities offered hereby. No dealer-manager is being
used in connection with this Exchange Offer. See "Use of Proceeds."
For an index of defined terms, see "Index of Principal Definitions."
----------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE DOCUMENTS
INCORPORATED OR DEEMED INCORPORATED BY REFERENCE HEREIN, AND ANY INFORMATION
OR REPRESENTATIONS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SUBSIDIARY GUARANTORS OR THE TRUST
OR BY ANY AGENT, DEALER OR UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED
HEREBY IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
THE DELIVERY OF THIS PROSPECTUS DOES NOT IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
i
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"). Investors should note
that any safe-harbor for "forward-looking statements" does not apply to
statements made in connection with an initial public offering. All statements
other than statements of historical facts included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and located elsewhere herein regarding industry
prospects and the Company's financial position are forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could
cause actual results to differ materially from the Company's expectations
("Cautionary Statements") are disclosed in this Prospectus including, without
limitation, the forward-looking statements included in this Prospectus and
under "Risk Factors." All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Statements.
----------------
AVAILABLE INFORMATION
The Company and Franchise Mortgage Acceptance Company LLC ("FMAC") are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith file
reports and other information with the Commission. The Company, the Trust and
the Subsidiary Guarantors have filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Commission under the Securities Act with
respect to the New Securities. This Prospectus does not contain all the
information, exhibits and undertakings contained in the Registration
Statement, to which reference is hereby made. Statements contained in this
Prospectus as to the terms of any contract or other document are not
necessarily complete with respect to each such contract or other document
filed as an exhibit to the Registration Statement. Reference is made to the
exhibits for a more complete description of the matter involved. Such reports,
proxy statements and other information filed by the Company and FMAC with the
Commission pursuant to the informational requirements of the Exchange Act may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Chicago
Regional Office, Suite 1400, Citicorp Center, 14th Floor, 500 West Madison
Street, Chicago, Illinois 60661; and New York Regional Office, 7 World Trade
Center, 13th Floor, Suite 1300, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549. Documents filed by the Company can also be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy statements and other information regarding the Company
and FMAC.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Company does not believe such financial
statements would be material to holders of the Securities because (i) all of
the voting securities of the Trust will be owned, directly or indirectly, by
the Company, a reporting company under the Exchange Act, (ii) the Trust has no
independent operations but exists for the sole purpose of issuing securities
representing undivided beneficial interests in its assets and investing the
proceeds thereof in Debentures issued by the Company and (iii) the obligations
of the Trust under the Securities are guaranteed by the Company to the extent
described herein. See "Relationship Among the Par Securities, the Debentures
and the Guarantee."
No separate financial statements of AMN, IBC or ICAI, have been included or
incorporated by reference herein. The Company does not believe that such
financial statements would be material to holders of the Par Securities
because (i) all of the common stock of AMN, IBC, and ICAI is owned by the
Company, a reporting company under the Exchange Act and (ii) each of AMN, IBC,
and ICAI fully and unconditionally guarantees the obligations of the Company
under the Debentures. See "Description of Debentures" and "Description of
Guarantee."
ii
<PAGE>
INCORPORATION BY REFERENCE
The Company's annual report on Form 10-K for the fiscal year ended December
31, 1996 and the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, filed by the Company with the Commission pursuant
to the Exchange Act are 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 240, Torrance
California 90505, telephone number (310) 791-8040. Attention: General Counsel.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
THE COMPANY AT THE ADDRESS AND TELEPHONE NUMBER SET FORTH ABOVE. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE NO LATER
THAN FIVE BUSINESS DAYS PRIOR TO THE EXPIRATION DATE.
iii
<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" and
the consolidated financial statements and the notes thereto appearing elsewhere
in this Prospectus. 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.
This Prospectus contains forward-looking statements that inherently 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 TRUST
The Trust is a statutory business trust formed under the Delaware Business
Trust Act, as amended (the "Trust Act"), pursuant to (i) a declaration of trust
(as so amended and restated, the "Declaration") dated as of May 28, 1997,
executed by the Company, as sponsor, and the trustees of the Trust and (ii) a
certificate of trust, dated as of May 28, 1997, filed with the Secretary of
State of the State of Delaware. The Trust exists for the exclusive purpose of
(i) issuing and selling the Trust Securities representing undivided beneficial
ownership interests in the assets of the Trust, (ii) investing the gross
proceeds from such sales in the Debentures and (iii) engaging in only those
other activities necessary or incidental thereto.
All of the Common Securities of the Trust are owned by the Company. The Par
Securities rank on a parity, and payments will be made thereon pro rata, with
the Common Securities. Distributions are payable semi-annually in arrears on
June 15th (June 14 in 2002) and December 15th of each year, commencing December
15, 1997, and on the Scheduled Remarketing Settlement Date (as defined below).
In the event that any date on which Distributions are payable on the Par
Securities is not a Business Day, then payment of the Distributions payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional Distributions or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment
was originally payable (each date on which Distributions are payable in
accordance with the foregoing, a "Distribution Date"). A "Business Day" means
any day other than a Saturday or a Sunday, or a day on which banking
institutions in The City of New York are authorized or required by law or
executive order to remain closed or a day on which the principal corporate
trust office of the Property Trustee or the Indenture Trustee (as defined
below) is closed for business. If on any Distribution Date or redemption date
an Indenture Event of Default (as defined herein under "Description of
Debentures--Indenture Events of Default") shall have occurred and be
continuing, the rights of the holders of the Common Securities to payment in
respect of distributions and payments upon liquidation, redemption and
otherwise will be subordinated to the rights of holders of the Par Securities.
See "Description of Securities--Subordination of Common Securities."
The Trust's affairs are conducted by the trustees (the "Trustees") appointed
by the Company as the owner of all of the Common Securities. The holder of the
Common Securities is entitled to appoint, remove or replace any of, or increase
or reduce the number of, the Trustees. The duties and obligations of the
Trustees are governed by the Declaration. As of the date of this Prospectus,
the Trust has five Trustees. Three Trustees (the "Regular Trustees") are
employees or officers of the Company. A fourth Trustee (the "Property Trustee")
of the Trust is a financial institution that is not affiliated with the Company
and has a minimum amount of combined capital and surplus of not less than
$50,000,000, which acts as property trustee and as indenture trustee for the
purposes of compliance with the provisions of Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The fifth Trustee of the Trust is an
entity having a principal place of business in, or a natural person resident
of, the State of Delaware (the "Delaware Trustee"). The Company will pay all
fees and expenses related to the Trust and the Exchange Offer.
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The Property Trustee for the Trust is The Chase Trust Company of California
and its principal corporate trust office is at 101 California Street, Suite
2725, San Francisco, California 94111. The Delaware Trustee for the Trust is
The Chase Manhattan Bank Delaware and its address in the State of Delaware is
1201 Market Street, Wilmington, Delaware 19801.
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
SPTL for investment and (v) maintaining business and financial flexibility to
take advantage of changing market conditions with respect to specific financial
services businesses.
The Company has 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. As a result, the Company has divested substantially all of its
residential mortgage lending and residential mortgage servicing businesses and
expanded its presence in other specialty finance markets. Throughout this
realignment, the Company's core business has remained consistent in that it
originates loans and leases funded primarily by warehouse lines of credit and
repurchase facilities and securitizations and whole loan sales in the secondary
market. For the six months ended June 30, 1997 and the years ended December 31,
1996 and 1995, the Company originated or acquired $656.8 million, $2.2 billion
and $3.0 billion of loans and leases, respectively. In addition, during the six
months ended June 30, 1997 and the years ended December 31, 1996 and 1995, the
Company completed securitization transactions totaling $477.2 million, $1.3
billion and $1.0 billion, respectively.
For the year ended December 31, 1996, a substantial portion of the Company's
operations were conducted through its non-conforming residential mortgage
lending subsidiary, Southern Pacific Funding Corporation ("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.
During the fourth quarter of 1996 and the first quarter of 1997, ICII sold
additional shares of its SPFC common stock reducing its ownership percentage to
49.4% as of March 31, 1997. As a result, commencing with the three months ended
March 31, 1997, the financial statements of SPFC are no longer consolidated
with those of ICII. During July and August of 1997, the Company sold an
additional 500,000 shares of its SPFC common stock further reducing its
ownership interest to 47.0%. As a result of this deconsolidation, certain of
the financial and operating data presented for the six months ended June 30,
1997 will not be comparable with such data for periods prior to the
deconsolidation. For a further description of the effect of such
deconsolidation, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General--Deconsolidation."
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 specialty commercial finance company engaged in
the business of originating and servicing loans and equipment leases to small
businesses, with a
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primary focus on established national and regional franchise concepts. More
recently, FMAC has expanded its focus to include retail energy licensees
(service stations, convenience stores, truck stops, car washes and quick lube
businesses) and golf operating businesses (golf courses and golf practice
facilities). FMAC originates long-term fixed and variable rate loan and lease
products and sells such loans and leases either through securitizations or
whole loan sales to institutional purchasers on a servicing retained basis.
FMAC also periodically makes equity investments or receives contingent equity
compensation as part of its core lending and leasing business. FMAC originated
loans and leases through 11 marketing offices in nine states at June 30, 1997.
Since inception, it has funded over $1.4 billion in loans and leases and at
June 30, 1997, had a servicing portfolio of $1.1 billion. For the six months
ended June 30, 1997, the year ended December 31, 1996 and the six months ended
December 31, 1995, FMAC originated or acquired $300.6 million, $458.5 million
and $163.5 million of franchise loans and securitized $158.6 million, $325.1
million and $105.2 million of loans, respectively.
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 June 30, 1997, CBC had total loan commitments of $649.1 million of
which $378.6 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"). In October 1996, IBC
expanded its 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. For the six months
ended June 30, 1997 and the years ended December 31, 1996 and 1995, IBC
originated $64.5 million, $87.2 million and $36.0 million of leases and
securitized $115.5 million, $87.0 million and $85.2 million of leases,
respectively.
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 June 30, 1997,
LPIG had total loan commitments of $350.2 million of which $194.8 million
of loans were outstanding.
Auto Lend Group. Auto Lend was formed in September 1996 to finance
automobile dealership inventories. As of June 30, 1997, Auto Lend had total
loan commitments of $45.6 million of which $13.5 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 six months ended June 30,
1997 and the years ended December 31, 1996 and 1995, IPLD loan originations
totaled $148.1 million, $260.9 million and $160.0 million, respectively.
CONSUMER LENDING. Consumer lending is conducted through the Auto Marketing
Network, Inc. ("AMN") subsidiary of the Company and through the Auto Lending
Division ("ALD") and Consumer Credit Division ("CCD") of SPTL.
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Auto Marketing Network. AMN was acquired on March 14, 1997 to finance on
a nationwide basis the purchase of new and used automobiles primarily to
sub-prime borrowers. At June 30, 1997, AMN was headquartered in Florida and
had regional offices in Texas, Virginia, Tennessee, and operations
facilities in Oklahoma. For the period from its acquisition through June
30, 1997, AMN originated $93.9 million in sub-prime auto loans.
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 six months ended June 30, 1997 and the years ended December 31,
1996 and 1995, ALD originated $39.7 million, $35.0 million and
$19.0 million, respectively, 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 six months ended
June 30, 1997 and the years ended December 31, 1996 and 1995, CCD
originated $10.0 million, $22.0 million and $14.6 million respectively, in
loans and had $45.5 million of loans outstanding as of June 30, 1997.
ADVISORY, INVESTMENT AND OTHER ACTIVITIES. The Company conducts advisory
services through its Imperial Credit Advisors, Inc. ("ICAI") subsidiary and has
substantial investments in Southern Pacific Funding Corporation ("SPFC"), a
publicly traded non-conforming residential mortgage lender, Dabney/
Resnick/Imperial, LLC ("DRI"), an investment banking firm, and Imperial Credit
Mortgage Holdings, Inc. ("IMH"), a publicly traded real estate investment trust
engaged in mortgage finance activities.
Imperial Credit Advisors. ICAI oversees the day-to-day operations of IMH
pursuant to a management agreement more fully described in "Certain
Transactions--Relationships with IMH--Other Arrangements and Transactions
with IMH." For the six months ended June 30, 1997 and the years ended
December 31, 1996 and 1995, ICAI earned $2.8 million, $3.3 million and
$37,888 in management fees and incentive payments pursuant to the
management agreement, respectively.
Southern Pacific Funding Corporation. SPFC is a publicly traded specialty
finance company (NYSE Symbol: "SFC") which 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. As of
June 30, 1997, ICII owned 10,242,500 shares of SPFC common stock,
representing 49.4% of the outstanding common stock of SPFC, which,
commencing with the three months ended March 31, 1997, is reflected on the
Company's financial statements as "Investment in Southern Pacific Funding
Corporation." ICII's investment in SPFC constituted 2.4% of the Company's
total assets and contributed 13.2% of the Company's total revenue for the
six months ended June 30, 1997. During July and August 1997, the Company
sold an additional 500,000 shares of its SPFC common stock, reducing its
ownership in SPFC stock to 47.0%.
Dabney/Resnick/Imperial. In September 1996, ICII entered into various
transactions with Dabney/Resnick, Inc., subsequently renamed
Dabney/Resnick/Imperial, LLC, 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.
Imperial Credit Mortgage Holdings. Simultaneously with IMH's initial
public offering in November 1995, the Company contributed certain operating
assets of ICII's mortgage conduit operations and SPTL's warehouse lending
operations for 500,000 shares of IMH's common stock. IMH is a publicly
traded
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specialty finance company (AMEX Symbol: "IMH") which operates three
businesses: (i) long-term investment operations which invests primarily in
nonconforming residential mortgage loans and securities backed by such
loans, (ii) warehouse lending operations which provides short-term lines of
credit to originators of mortgage loans and (iii) conduit operations,
through its affiliate ICI Funding Corporation ("ICIFC"), which primarily
purchases and sells or securitizes non-conforming mortgage loans. As of
June 30, 1997, the Company owned 462,269 shares of IMH common stock,
representing 4.9% of the outstanding common stock of IMH.
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 June 30, 1997, the Company had warehouse lines of credit and
commitments of $590.0 million. Amounts outstanding under these facilities at
June 30, 1997 totaled $358.1 million. The Company plans to use existing
warehouse lines to fund the business operations and securitization programs of
its subsidiaries. Business operations are conducted through divisions of SPTL
and are also financed through deposits, capital contributions from ICII to SPTL
and Federal Home Loan Bank of San Francisco ("FHLB") and commercial borrowings.
At June 30, 1997, SPTL had total deposits of approximately $1.3 billion
(excluding deposits of the Company maintained with SPTL).
On January 23, 1997, the Company concurrently completed a tender offer (the
"Tender Offer") for its 9 3/4% Senior Notes due 2004 (the "9 3/4% Senior
Notes") and issued $200.0 million of the 9 7/8% Senior Notes for net proceeds
of approximately $193.8 million. The Company used approximately $73.2 million
of the net proceeds to consummate the Tender Offer. Approximately $20.2 million
of the 9 3/4% Senior Notes remain outstanding.
On June 9, 1997, the Trust issued $72,165,000 liquidation amount of Trust
Securities pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Trust invested the proceeds thereof in the Old Debentures, which will
be exchanged for the New Debentures, which will be issued pursuant to, and
entitled to the benefits of, the Indenture.
RECENT DEVELOPMENTS
On August 1, 1997, the Company announced that Imperial Credit Commercial
Mortgage Investment Corporation ("ICCMIC"), a Maryland corporation that elected
to be treated as a Real Estate Investment Trust, filed a registration statement
with the Commission covering a proposed initial public offering of 20,000,000
shares of common stock. All of the shares are being offered by ICCMIC. The net
proceeds will be primarily used to purchase initial investments from SPTL.
ICCMIC intends to invest primarily in performing multifamily and commercial
loans and in mortgage backed securities. The offering is expected to close in
the fourth quarter of 1997.
On August 29, 1997, the Company announced that Franchise Mortgage Acceptance
Company, a Delaware corporation ("FMC"), filed a registration statement with
the Commission covering a proposed initial public offering of 8,750,000 shares
of common stock. Of those shares, 5,312,500 are being sold by FMC and 2,500,000
are being sold by the Company and 937,500 are being sold by another selling
stockholder. Prior to the closing of the proposed initial public offering FMAC
will merge into FMC which was incorporated in August 1997 for the purpose of
succeeding to the business of FMAC. The net proceeds will be used by FMC to
repay certain indebtedness to the Company, to fund future loan and lease
originations and equity investments, and for general corporate purposes. The
offering is expected to close in the fourth quarter of 1997.
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ICAI oversees the day-to-day operations of IMH pursuant to a management
agreement more fully described in "Certain Transactions--Relationships with
IMH--General." IMH and ICII intend to negotiate the termination of the
management agreement. IMH is required to pay ICII a fee upon such termination.
The fee may be paid in shares of registered IMH common stock, other securities,
in cash, or a combination of the foregoing. The consummation of the transaction
is conditioned on several factors including negotiation of major terms of the
transaction, execution of formal documentation and approval of the
disinterested and unaffiliated members of the board of directors of each of IMH
and ICII. There can be no assurance that this transaction will be consummated
and even if consummated, the Company cannot currently determine the amount of
the termination fee or the form of consideration with which it will be paid.
In September 1997, IMH filed a registration statement with the Commission for
the sale of 3,170,094 shares of IMH common stock, of which 82,363, 50,000 and
37,731 shares were offered by ICII, SPTL and ICAI, respectively, which
represented all of the shares of IMH common stock held by such entities as of
the date of filing.
On October 2, 1997, the Company announced that SPTL had acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap
Morgtgage Backed, L.P (collectively "PrinCap"). PrinCap's primary business is
the warehouse lending of residential mortgages to small and medium sized
brokers and mortgage bankers on a national basis. PrinCap provides short term
lines of credit to be utilized by its clients for the purpose of aggregating
pools of loans for ultimate sale to identified investors. The assets acquired
from PrinCap were contributed to a subsidiary of SPTL.
THE EXCHANGE OFFER
The Trust is making the Exchange Offer of the New Par Securities in reliance
on the position of the Staff of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") as set forth in certain
interpretive letters addressed to third parties in other transactions relating
to the transferability of the exchanged securities following registration.
However, none of the Company, the Trust nor the Subsidiary Guarantors
(collectively, the "Registrants") has sought its own interpretive letter and
there can be no assurance that the Staff of the Division of Corporation Finance
of the Commission would make a similar determination with respect to the
Exchange Offer as it has in such interpretive letters to third parties. Based
on these interpretations by the Staff of the Division of Corporation Finance,
and subject to the two immediately following sentences, the Registrants believe
that New Par Securities issued pursuant to this Exchange Offer in exchange for
Old Par Securities may be offered for resale, resold and otherwise transferred
by a holder thereof (other than a holder who is a broker-dealer) without
further compliance with the registration and prospectus delivery requirements
of the Securities Act, provided that such New Par Securities are acquired in
the ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Par Securities. However, any holder of Old Par Securities who is an
"affiliate" of the Registrants (within the meaning of Rule 405 under the
Securities Act) or who intends to participate in the Exchange Offer for the
purpose of distributing New Par Securities, or any broker-dealer who purchased
Old Par Securities from the Trust to resell them pursuant to Rule 144A under
the Securities Act ("Rule 144A") or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the
Staff of the Division of Corporation Finance of the Commission set forth in the
above-mentioned interpretive letters, (b) will not be permitted or entitled to
tender such Old Par Securities in the Exchange Offer and (c) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other transfer of such Old Par Securities unless
such sale is made pursuant to an exemption from such requirements. In addition,
as described below, if any broker-dealer holds Old Par Securities acquired for
its own account as a result of market-making or other trading activities and
exchanges such Old Par Securities for New Par Securities, then such broker-
dealer must deliver a prospectus meeting the requirements of the Securities Act
in connection with any resales of such New Par Securities.
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Each holder of Old Par Securities who wishes to exchange Old Par Securities
for New Par Securities in the Exchange Offer will be required to represent that
(i) it is not an "affiliate" of any of the Registrants (ii) any New Par
Securities to be received by it are being acquired in the ordinary course of
its business, (iii) it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
such New Par Securities, and (iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such New Par Securities. In
addition, the Registrants may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Registrants (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds
the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Par Securities for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the New Par Securities for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Par Securities.
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. Based on the position
taken by the Staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Registrants believe that
broker-dealers who acquired Old Par Securities for their own accounts, as a
result of market-making activities or other trading activities ("Participating
Broker-Dealers") may fulfill their prospectus delivery requirements with
respect to the New Par Securities received upon exchange of such Old Par
Securities with this Prospectus, as it may be amended or supplemented from time
to time. Subject to certain exceptions, the Registrants have agreed that this
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with resales of such New Par
Securities for a period ending one year after the Registration Statement of
which this Prospectus constitutes a part is declared effective. Any
Participating Broker-Dealer who is an "affiliate" of the Registrants (within
the meaning of Rule 405 under the Securities Act) may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. See "The Exchange Offer--"Purpose and Effect."
THE SECURITIES
The Par Securities represent undivided beneficial ownership interests in the
assets of the Trust. The Company indirectly owns all of the beneficial
ownership interests represented by the Common Securities of the Trust. On June
9, 1997, the Trust issued $72,165,000 liquidation amount of Trust Securities
pursuant to exemptions from, or in transactions not subject to, the
registration requirements of the Securities Act and applicable state securities
laws. The Trust exists for the sole purposes of issuing the Trust Securities
and investing the proceeds thereof in the Old Debentures, which will be
exchanged for the New Debentures. The New Debentures will evidence the same
class of debt as the Old Debentures and will be issued pursuant to, and
entitled to the benefits of, the Indenture.
The Debentures will mature on June 15, 2032, or earlier in certain
circumstances following the occurrence of a Tax Event. A "Tax Event" means the
receipt by the Company of an opinion of independent tax counsel to the Company,
experienced in such matters, to the effect that, as a result of any amendment
to, change in or announced proposed change in the laws (or any regulations
thereunder) of the United States or any political subdivision or taxing
authority thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is adopted or which proposed change,
pronouncement or decision is announced on or after the date of original
issuance of the Par Securities, there is more than an insubstantial risk that
(i) the Trust is, or will be within 90 days of the date of such opinion,
subject to United States federal income tax with respect to income received or
accrued on the Debentures, (ii) interest payable by the Company on such
Debentures is not, or within 90 days of the date of such opinion, will not be,
deductible by the Company, in whole or in part, for United States federal
income tax purposes, or (iii) the Trust is, or will be within 90 days of the
date of such opinion, subject to more than a de
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minimis amount of other taxes, duties or other governmental charges. See
"Description of Securities--Redemption--Special Event Redemption or
Distribution of Debentures; Shortening of Stated Maturity." The Par Securities
will have a preference under certain circumstances with respect to cash
distributions and amounts payable on liquidation, redemption or otherwise over
the Common Securities. See "Description of Securities--Subordination of Common
Securities."
Holders of Par Securities are entitled to receive cumulative cash
distributions ("Distributions"), accumulating from the date of original
issuance, at a rate per annum equal to 10 1/4% (the "Initial Distribution
Rate") of the liquidation amount of $1,000 per Par Security from the date of
original issuance until but excluding the Remarketing Settlement Date.
"Remarketing Settlement Date" means the Scheduled Remarketing Settlement Date
on which purchases and sales of Par Securities pursuant to a Remarketing are
consummated. "Scheduled Remarketing Settlement Date" means June 14, 2002, or
such other date determined pursuant to this definition, unless a Trust
Enforcement Event has occurred and is continuing on the 25th Business Day prior
to such Scheduled Remarketing Settlement Date, in which case the Scheduled
Remarketing Settlement Date will be the 30th Business Day after the date of
cure or waiver of such Trust Enforcement Event; provided that if (x) purchases
and sales of Par Securities pursuant to a Remarketing are not consummated on
any Scheduled Remarketing Settlement Date for any reason (including the
Company's failure to make the deposit required in the event of a Special
Mandatory Redemption) other than the occurrence and continuance of any other
Trust Enforcement Event or if (y) the Company fails to redeem Debentures in
connection with a Tax Opinion Redemption after cancelling the Remarketing, the
next Scheduled Remarketing Settlement Date will be the 30th Business Day after
such Scheduled Remarketing Settlement Date. From and after the Remarketing
Settlement Date, holders of Par Securities will be entitled to receive
Distributions at the rate per annum that results from the implementation of the
remarketing procedures described herein (the "Remarketing") consummated on the
Remarketing Settlement Date. See "Prospectus Summary--Remarketing" and
"Description of Securities--Remarketing." The Remarketing is scheduled to occur
on June 11, 2002, and the Remarketing Settlement Date is scheduled to be June
14, 2002. Distributions accumulate and are payable semi-annually in arrears on
June 15th (June 14 in 2002) and December 15th of each year commencing December
15, 1997, and on the Scheduled Remarketing Settlement Date. At all times, the
distribution rate in effect on the Par Securities (the "Applicable Distribution
Rate"), the distribution payment dates and other payment dates for the Par
Securities will correspond to the interest rate, interest payment dates and
other payment dates for the Debentures, which are the sole assets of the Trust.
See "Description of Securities--Distributions."
The Company guarantees the payment of Distributions and payments on
liquidation of the Trust or redemption of the Par Securities, but only in each
case to the extent of funds held by the Trust, as described herein. See
"Description of Guarantee." If the Company does not make interest payments on
the Debentures held by the Trust, the Trust will have insufficient funds to pay
Distributions on the Par Securities.
The Debentures are fully, unconditionally and jointly and severally
guaranteed on a senior unsecured basis by each of the Subsidiary Guarantors,
which consist of all of the Company's Restricted Subsidiaries other than
Southern Pacific Thrift and Loan Association ("SPTL") and the Special Purpose
Subsidiaries (as defined herein under "Description of Debentures--Certain
Definitions") until the Remarketing Settlement Date. The Subsidiary Guarantees
will be released on the Remarketing Settlement Date.
The Company's obligations under the Guarantee, taken together with its
obligations under the Debentures and the Indenture, including its obligation to
pay all costs, expenses and liabilities of the Trust (other than with respect
to the Par Securities), constitute a full and unconditional guarantee of all of
the Trust's obligations under the Par Securities and the Declaration of Trust.
Until the Remarketing Settlement Date, the Debentures and the Guarantee will be
general unsecured obligations of the Company ranking on a parity with all
Indebtedness of the Company, if any, that is not subordinated to the Debentures
or the Guarantee and senior to any Indebtedness of the Company that is
subordinated to the Debentures or the Guarantee. Until the Remarketing
Settlement Date, when the Subsidiary Guarantees will be released, the
Subsidiary Guarantees will rank on a parity with all
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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. Until the
Remarketing Settlement Date, the Debentures and the Guarantee will be
effectively subordinated to all Indebtedness and other liabilities of SPTL and
the Special Purpose Subsidiaries, and the Debentures, the Guarantee and the
Subsidiary Guarantees will be effectively subordinated to secured Indebtedness
of the Company and the Subsidiary Guarantors. As of June 30, 1997, on a pro
forma basis after giving effect to the sale of the Par Securities by the Trust
(the "Offering") and the application of proceeds thereof, the Debentures and
the Guarantee would have been effectively subordinated to approximately $1.3
billion of deposits and other borrowings at SPTL and the Debentures, the
Guarantee and the Subsidiary Guarantees would have been effectively
subordinated to approximately $358.1 million of secured Indebtedness of the
Subsidiary Guarantors.
After the Remarketing Settlement Date, the Debentures and the Guarantee will
be subordinated and junior in right of payment to all Senior Debt of the
Company and will be effectively subordinated to all Indebtedness and other
liabilities of all the Subsidiaries of the Company. "Senior Debt" means all
Indebtedness permitted to be incurred by the Company under the terms of the
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Debentures and all Obligations with respect to the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt does not
include (i) any liability for federal, state, local or other taxes owed or
owing by the Company, (ii) any Indebtedness of the Company to any of its
Subsidiaries or other Affiliates, (iii) any trade payables or (iv) any
Indebtedness that is incurred in violation of the Indenture. As of June 30,
1997, on a pro forma basis after giving effect to the Offering, and the
application of proceeds thereof and the Remarketing, the Debentures and the
Guarantee would have been subordinated to approximately $219.8 million of
Senior Debt of the Company and would have been effectively subordinated to
approximately $1.6 billion of Indebtedness of the Company's Subsidiaries
(including approximately $1.3 billion of deposits and other borrowings at SPTL
and approximately $358.1 million of secured Indebtedness of the Company's
Subsidiaries, but not including the Trust's guarantee of $200.0 million of the
9 7/8% Senior Notes due 2007 (the "9 7/8% Senior Notes")). After the
Remarketing Settlement Date, the terms of the Debentures place no limitation on
the amount of Indebtedness that may be incurred by the Company or on the amount
of liabilities and obligations of the Company's subsidiaries. See "Description
of Debentures--Ranking."
Following the Remarketing Settlement Date, the Company has the right to defer
payment of interest on the Debentures at any time or from time to time for a
period not exceeding 10 consecutive semi-annual periods with respect to each
deferral period (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Debentures. "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. Upon the termination of any such Extension
Period and the payment of all amounts then due on June 15th (June 14 in 2002)
and December 15th of each year, commencing December 15, 1997, and on the
Scheduled Remarketing Settlement Date (each, an "Interest Payment Date"), the
Company may elect to begin a new Extension Period subject to the requirements
set forth herein. Accordingly, there could be multiple Extension Periods of
varying lengths throughout the term of the Debentures. If interest payments on
the Debentures are so deferred, distributions on the Par Securities will also
be deferred and the Company may not, and may not permit any subsidiary of the
Company to, (i) declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, the Company's
capital stock or (ii) make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities that rank on a
parity with or junior to the Debentures or make any guarantee payments with
respect to any guarantee by the Company of the debt securities of any
subsidiary of the Company if such guarantee ranks on a parity with or junior to
the Debentures (other than (a) dividends or distributions in common stock of
the Company, (b) payments under the Guarantee, (c) any declaration of a
dividend in connection with the
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<PAGE>
implementation of a stockholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, and (d) purchases of common stock related to the issuance of
common stock or rights under any of the Company's benefit plans). During an
Extension Period, interest on the Debentures will continue to accrue (and the
amount of Distributions to which holders of the Par Securities are entitled
will accumulate) at the Adjusted Distribution Rate (as defined herein under "--
The Exchange Offer--The New Par Securities--Remarketing"), compounded semi-
annually, and holders of the Par Securities will be required to accrue interest
income for United States federal income tax purposes prior to receipt of the
cash related to such interest income. See "Description of Debentures--Option to
Extend Interest Payment Period" and "United States Federal Income Tax
Consequences--Interest Income and Original Issue Discount."
The Par Securities are subject to mandatory redemption, in whole or in part,
upon repayment of the Debentures held by the Trust at maturity or their earlier
redemption, in an amount equal to the amount of related Debentures maturing or
being redeemed and at a redemption price equal to the redemption price of such
Debentures, in each case plus accumulated and unpaid Distributions thereon to
the date of redemption.
The Debentures are redeemable at the option of the Company, in whole or in
part, at any time or from time to time through and including June 15, 2001, at
a redemption price equal to the greater of (i) 100% of the principal amount of
such Debentures or (ii) the present value of the principal amount of such
Debentures if such Debentures were redeemed on June 14, 2002 together with
scheduled payments of interest from the prepayment date to but excluding June
14, 2002 (the "Remaining Life") discounted at the Adjusted Treasury Rate (as
defined herein), plus, in each case, accrued and unpaid interest, if any, to
the date of redemption. On and after June 15, 2012, the Debentures are
redeemable prior to maturity, at the option of the Company, in whole or in
part, at a redemption price equal to 100% of the principal amount thereof, plus
a premium which will decline ratably on each June 15 thereafter to zero on and
after June 15, 2022, plus accrued and unpaid interest thereon, if any, to the
date of redemption. If the Exchange Offer has occurred, any Old Par Securities
which have not been exchanged for New Par Securities pursuant to the Exchange
Offer will be mandatorily redeemed by the Company on the Remarketing Settlement
Date, as described under "Description of Securities--Redemption--Transfer
Restricted Security Redemption." After the Remarketing Settlement Date, the
Debentures are also redeemable by the Company at any time, in whole (but not in
part), upon the occurrence and continuation of a Special Event, at a redemption
price equal to 100% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption, subject to the further
conditions described under "Description of Securities--Redemption."
If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date (the
third Business Day prior to any Scheduled Remarketing Settlement Date), Lehman
Brothers Inc. (the "Remarketing Agent") is unable to remarket, at a price of
$1,000 per Par Security, all of the Par Securities tendered or deemed tendered
for purchase in the Remarketing on such Scheduled Remarketing Date, then such
unsold Par Securities will be exchanged on the related Scheduled Remarketing
Settlement Date with the Trust for Debentures having an aggregate principal
amount equal to the aggregate liquidation amount of such unsold Par Securities
and such Debentures shall be immediately redeemed, unless as a result of such
redemption, less than $25.0 million principal amount of Debentures would remain
outstanding. In such latter event, the Company is required to redeem on such
Scheduled Remarketing Settlement Date all of the Debentures and the
consummation of purchases and sales of Par Securities pursuant to such
Remarketing will not occur. In either such case (a "Special Mandatory
Redemption"), the redemption price of the Debentures will be 100% of the
principal amount of the Debentures so redeemed. See "Description of
Securities--Remarketing."
Upon the occurrence and continuation of a Special Event, the Company will
have the right, if certain conditions are met, (i) to terminate the Trust and
cause the Debentures to be distributed to the holders of the Par Securities in
exchange therefor upon liquidation of the Trust, (ii) to shorten the Stated
Maturity of the Debentures, in the case of a Tax Event, to a date not earlier
than June 14, 2012, or (iii) after the Scheduled Remarketing Date, to redeem
the Debentures in whole (but not in part) within 90 days following the
occurrence
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<PAGE>
of such Special Event and thereby cause a mandatory redemption of the Par
Securities. See "Description of Securities--Redemption--Special Event
Redemption or Distribution of Debentures; Shortening of Stated Maturity."
Moreover, the Debentures are also redeemable on the Remarketing Settlement Date
in connection with a Tax Opinion Redemption. See "Description of Securities--
Redemption--Tax Opinion Redemption."
In the event of the liquidation of the Trust, after satisfaction of the
claims of creditors of the Trust, if any, as provided by applicable law, the
holders of the Par Securities will be entitled to receive a liquidation amount
of $1,000 per Par Security, plus accumulated and unpaid Distributions thereon
to the date of payment, which may be in the form of a distribution of such
amount in Debentures as described above. If such liquidation amount can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate liquidation amount, then the amounts payable directly by the
Trust on the Par Securities will be paid on a pro rata basis. The holders of
the Common Securities will be entitled to receive distributions upon any such
liquidation pro rata with the holders of the Par Securities, except that if an
Indenture Event of Default (as defined herein under "Description of
Debentures--Indenture Events of Default") has occurred and is continuing, the
Par Securities will have a priority over the Common Securities. See
"Description of Securities--Liquidation Distribution Upon Dissolution."
11
<PAGE>
THE EXCHANGE OFFER
On June 9, 1997, the Trust issued $70,000,000 liquidation amount of Old Par
Securities. The Old Par Securities 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. (the "Initial
Purchaser"), as a condition to their purchase of the Old Par Securities,
required that the Trust, the Company and the Subsidiary Guarantors agreed to
commence the Exchange Offer following the offering of the Old Par Securities.
The New Par Securities will evidence the same class of security as the Old Par
Securities and will be issued pursuant to, and entitled to the benefits of, the
Indenture. As used herein, the term "Par Securities" means the Old Par
Securities and the New Par Securities, treated as a single class.
SECURITIES OFFERED.... Up to $70,000,000 aggregate liquidation amount of New
Par Securities which have been registered under the
Securities Act. The terms of the New Par Securities and
the Old Par Securities are identical in all material
respects, except for certain transfer restrictions
relating to the Old Par Securities.
THE EXCHANGE OFFER.... The New Par Securities are being offered in exchange
for a like principal amount of Old Par Securities. The
issuance of the New Par Securities is intended to
satisfy obligations of the Trust, the Company and the
Subsidiary Guarantors contained in the Registration
Rights Agreement, dated June 9, 1997, among the Trust,
the Company, the Subsidiary Guarantors and the Initial
Purchaser (the "Registration Rights Agreement"). The
Company will issue, promptly after the Expiration Date,
$1,000 liquidation amount of New Par Securities in
exchange for each $1,000 liquidation amount of
outstanding Old Par Securities tendered and accepted in
connection with the Exchange Offer. For a description
of the procedures for tendering Old Par Securities, see
"The Exchange Offer--Procedures for Tendering Old Par
Securities."
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 Par Securities pursuant to the
Exchange Offer may be withdrawn at any time prior to
the Expiration Date. Any Old Par Security 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.
PROCEDURES FOR TENDERING OLD
PAR SECURITIES.......
Tendering holders of Old Par Securities must complete
and sign a Letter of Transmittal in accordance with the
instructions contained therein and forward the same by
mail, facsimile or hand delivery, together with any
other required documents, to the Exchange Agent, either
with the Old Par Securities to be tendered or in
compliance with the specified procedures for guaranteed
delivery of Old Par Securities. Certain brokers,
dealers, commercial banks, trust companies and other
nominees may also effect tenders by book-entry
transfer. Holders of Old Par Securities registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee are urged to contact such
person promptly if they wish to tender Old Par
Securities pursuant to the Exchange Offer. See "The
Exchange Offer--Procedures for Tendering Old Par
Securities."
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<PAGE>
Letters of Transmittal and certificates representing
Old Par Securities should not be sent to the Trust, the
Company, or the Subsidiary Guarantors. Such documents
should only be sent to the Exchange Agent. Questions
regarding how to tender and requests for information
should be directed to the Exchange Agent. See "The
Exchange Offer-Exchange Agent."
ACCRUED Each New Par Security will pay cumulative distributions
DISTRIBUTIONS........ from June 9, 1997. Holders of the Old Par Securities
whose Old Par Securities are accepted for exchange will
not receive any accumulated distributions on such Old
Par Securities and will be deemed to have waived the
right to receive any distributions on such Old Par
Securities accumulated from and after June 9, 1997.
FEDERAL INCOME TAX
CONSEQUENCES......... The exchange pursuant to the Exchange Offer will not
constitute a taxable event for United States federal
income tax purposes. Holders of Old Par Securities
should review the information set forth under "United
States Federal Income Tax Consequences" prior to
tendering Old Par Securities in the Exchange Offer.
USE OF PROCEEDS....... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
EXCHANGE AGENT........ The Chase 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 Par
Securities (including holders who are not permitted to
participate in the Exchange Offer or who may not freely
resell New Par Securities received in the Exchange
Offer) may require the Trust, the Company and the
Subsidiary Guarantors to file, and use best efforts to
cause to become effective, a shelf registration
statement under the Securities Act, which would cover
resales of Par Securities by such holders. See "The
Exchange Offer--Purpose and Effect."
CONDITIONS TO THE
EXCHANGE OFFER....... The Exchange Offer is not conditioned on any minimum
principal amount of Old Par Securities being tendered
for exchange. The Exchange Offer is subject to certain
other customary conditions, each of which may be waived
by the Trust. See "The Exchange Offer--Certain
Conditions to the Exchange Offer."
CONSEQUENCES OF
FAILURE TO EXCHANGE.. Any Old Par Securities not tendered and accepted in the
Exchange Offer will remain outstanding and will be
entitled to all the same rights and will be subject to
the same limitations applicable thereto under the
Declaration (except for those rights which terminate
upon consummation of the Exchange Offer). Following
consummation of the Exchange Offer, the holders of Old
Par Securities will continue to be subject to all of
the existing restrictions upon transfer thereof and
neither the Company nor the Trust will have any further
obligation to such holders (other than under certain
limited circumstances to provide for registration under
the Securities Act of the Old Par Securities held by
them). Any Old Par Securities which have not been
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<PAGE>
exchanged for New Par Securities pursuant to the
Exchange Offer will be mandatorily redeemed by the
Company on the Remarketing Settlement Date, as
described under "Description of Securities--
Redemption--Transfer Restricted Security Redemption."
To the extent that Old Par Securities are tendered and
accepted in the Exchange Offer, a holder's ability to
sell untendered Old Par Securities could be adversely
affected. See "Risk Factors--Consequences of Failure to
Exchange Old Par Securities."
THE NEW PAR SECURITIES
THE TRUST............. Imperial Credit Capital Trust I, a Delaware statutory
business trust. The sole assets of the Trust are the
Debentures.
SECURITIES OFFERED....
$70,000,000 aggregate liquidation amount of the Trust's
Remarketed Redeemable Par Securities, Series B, which
have been registered under the Securities Act
(liquidation amount $1,000 per Par Security). The terms
of the New Par Securities are identical in all material
respects to the terms of the Old Par Securities, except
for certain transfer restrictions relating to the Old
Par Securities. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer," "Description of
Securities" and "Description of "Old Securities."
DISTRIBUTIONS......... From the date of original issuance until but excluding
the Remarketing Settlement Date, holders of the Par
Securities will be entitled to receive Distributions at
a rate per annum equal to 10 1/4% of the liquidation
amount of $1,000 per Par Security. From and after the
Remarketing Settlement Date, holders of Par Securities
will be entitled to receive Distributions at the rate
per annum that results from the Remarketing consummated
on the Remarketing Settlement Date. See "--Remarketing"
below. The Remarketing is scheduled to occur on June
11, 2002, and the Remarketing Settlement Date is
scheduled to be June 14, 2002. See "Description of
Securities--Distributions." Distributions accumulate
and will be payable semi-annually in arrears on June
15th (June 14 in 2002) and December 15th of each year,
commencing December 15, 1997, and on each Scheduled
Remarketing Settlement Date. The distribution rate,
distribution payment dates and other payment dates for
the Par Securities will correspond to the interest
rate, interest payment dates and other payment dates on
the Debentures. See "Description of Securities."
DEBENTURES............ The Trust invested the proceeds from the issuance of
the Trust Securities in an equivalent amount of
Debentures of the Company. The Debentures will mature
on June 15, 2032, or earlier in certain circumstances,
following the occurrence of a Tax Event (the "Stated
Maturity"). See "Risk Factors--Ranking of Obligations
Under the Debentures, the Guarantee, and the Subsidiary
Guarantees of Note to Investors" and "Description of
Debentures--Ranking."
SUBSIDIARY Until the Remarketing Settlement Date, the Debentures
GUARANTEES............ will be fully and unconditionally and jointly and
severally guaranteed on a senior unsecured basis by
each of the Company's Restricted Subsidiaries (as
defined herein under "Description of Debentures--
Certain Definitions") other than SPTL and the Special
Purpose Subsidiaries (the "Subsidiary Guarantors"). The
Subsidiary Guarantees will be released on the
Remarketing Settlement Date. See "Description of
Debentures--Subsidiary Guarantees."
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<PAGE>
GUARANTEE.............
Payment of distributions out of monies held by the
Trust, and payments on liquidation of the Trust or the
redemption of Par Securities, are guaranteed by the
Company to the extent the Trust has funds available
therefor. If the Company does not make principal or
interest payments on the Debentures, the Trust will not
have sufficient funds to make Distributions on the Par
Securities, in which event the Guarantee shall not
apply to such Distributions until the Trust has
sufficient funds available therefor. The Company's
obligations under the Guarantee, taken together with
its obligations under the Debentures and the Indenture,
including its obligation to pay all costs, expenses and
liabilities of the Trust (other than with respect to
the Par Securities), constitute a full and
unconditional guarantee pursuant to Section 3a-5(a) of
the Investment Company Act of 1940 ("the Investment
Company Act") of all of the Trust's obligations under
the Par Securities. See "Description of Guarantee" and
"Relationship Among the Par Securities, the Debentures
and the Guarantee."
RANKING............... Until the Remarketing Settlement Date, the Debentures
and the Guarantee will be general unsecured obligations
of the Company ranking on a parity with all
Indebtedness of the Company, if any, that is not
subordinated to the Debentures or Guarantee and senior
to any Indebtedness of the Company that is subordinated
to the Debentures or Guarantee. Until the Remarketing
Settlement Date, when the Subsidiary Guarantees will be
released, the Subsidiary Guarantees will rank on a
parity with all 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. Until the Remarketing Settlement
Date, the Debentures and the Guarantees will be
effectively subordinated to all Indebtedness and other
liabilities of SPTL and the Special Purpose
Subsidiaries, and the Debentures, the Guarantee and the
Subsidiary Guarantees will be effectively subordinated
to secured Indebtedness of the Company and the
Subsidiary Guarantors. As of June 30, 1997, on a pro
forma basis after giving effect to the Offering and the
application of proceeds thereof, the Debentures and the
Guarantee would have been effectively subordinated to
approximately $1.3 billion of deposits and other
borrowings at SPTL and the Debentures, the Guarantee
and the Subsidiary Guarantees would have been
effectively subordinated to approximately $358.1
million of secured Indebtedness of the Subsidiary
Guarantors.
After the Remarketing Settlement Date, the Debentures
and the Guarantee will be subordinated and junior in
right of payment to all Senior Debt of the Company,
will be effectively subordinated to secured
Indebtedness of the Company and will be effectively
subordinated to all Indebtedness and other liabilities
of all of the Subsidiaries of the Company. As of June
30, 1997, on a pro forma basis after giving effect to
the Offering and the application of proceeds thereof,
and the Remarketing, the Debentures and the Guarantee
would have been subordinated to approximately $219.8
million of Senior Debt of the Company, and would have
been effectively subordinated to approximately $1.6
billion of Indebtedness of the Company's Subsidiaries
(including approximately $1.3 billion of deposits and
other borrowings at SPTL and approximately $358.1
million of secured Indebtedness of the Company's
subsidiaries but not including the Trust's guarantee of
$200.0 million of the 9 7/8% Senior Notes).
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<PAGE>
ICII is a holding company that conducts substantially
all of its business operations through its subsidiaries.
For the six months ended June 30, 1997 and the years
ended December 31, 1996 and 1995, approximately 12.7%,
34.8% and 30.2%, respectively, of the Company's total
revenue was generated by the operations of ICII, with
87.3%, 65.2% and 69.8%, respectively, being generated by
the Company's subsidiaries. Consequently, the Company's
operating cash flow and its ability to service its
Indebtedness, including the Debentures, are 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 Debentures on a senior
unsecured basis until the Remarketing Settlement Date.
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 Debentures will be effectively subordinated to all
indebtedness of SPTL. As of June 30, 1997, SPTL had
approximately $1.3 billion of deposits and other
borrowings, all of which would have been effectively
senior to the Debentures. In addition, due to these
restrictions and SPTL's rapid growth, SPTL has retained
most 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 has
contributed approximately $35.0 million of the proceeds
of the 9 7/8% Senior Notes offering to the capital of
SPTL in the form of subordinated indebtedness. Depending
upon SPTL's growth, ICII may be required to make
additional capital contributions to SPTL. There can be
no assurance that the Company's operations will generate
sufficient cash flow to support payment of interest or
principal on the Debentures, 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
16
<PAGE>
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 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 June 30,
1997, the amount SPTL could dividend to ICII under
California law would be limited to $27.3 million. See
"Risk Factors--Ranking of Obligations under the
Debentures, the Guarantee and the Subsidiary Guarantees
of Note to Investors." "Description of Debentures--
Ranking" and "Description of Guarantee--Status of
Guarantee."
REMARKETING......... On the Scheduled Remarketing Date, the Remarketing Agent
will use commercially reasonable efforts to remarket, at
a price equal to 100% of the liquidation amount thereof,
Par Securities (or, if the Debentures have been
distributed to holders of the Par Securities in
liquidation of the Trust, Debentures) which holders of
the Par Securities have tendered or have been deemed to
have tendered for purchase in the Remarketing. In the
Remarketing, the Remarketing Agent will determine, after
canvassing the market and considering prevailing market
conditions at the time for the Par Securities and
similar securities, the lowest distribution rate per
annum, if any, on the Par Securities, not exceeding the
rate per annum, determined on the Scheduled Remarketing
Date by the Remarketing Agent in its discretion, equal
to the greater of (a) the 30-year Treasury Rate plus 600
basis points and (b) a nationally-recognized high-yield
index rate for similarly-rated issues, plus 100 basis
points (the "Maximum Adjusted Distribution Rate"), that
will enable it to remarket, at a price of $1,000 per Par
Security, all Par Securities tendered or deemed tendered
for purchase in the Remarketing (the "Adjusted
Distribution Rate"). Notwithstanding the foregoing, if
the Remarketing Agent is able to market some, but is
unable to remarket all, of the Par Securities tendered
or deemed tendered for purchase in the Remarketing, the
Adjusted Distribution Rate will be the highest rate, not
exceeding the Maximum Adjusted Distribution Rate,
required to remarket the Par Securities sold in the
Remarketing. See "Description of Par Securities--
Remarketing."
Each holder of Par Securities will be given the
opportunity to indicate irrevocably, no later than the
second Business Day prior to the Scheduled Remarketing
Date (the "Election Date"), whether it wishes (i) to
tender all or any portion of such Par Securities for
purchase in the Remarketing or (ii) to retain and not
have all or
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<PAGE>
any portion of the Par Securities owned by it remarketed
in the Remarketing. IF ANY HOLDER OF PAR SECURITIES
FAILS TIMELY TO DELIVER A NOTICE TO THE PROPERTY TRUSTEE
OF ITS ELECTION (I) TO RETAIN AND NOT TO HAVE ALL OR ANY
PORTION OF THE PAR SECURITIES OWNED BY IT REMARKETED IN
THE REMARKETING TO BE CONDUCTED ON THE SCHEDULED
REMARKETING DATE OR (II) TO TENDER ALL OR ANY PORTION OF
SUCH PAR SECURITIES FOR PURCHASE IN THE REMARKETING (A
"NOTICE OF ELECTION"), THE PAR SECURITIES OWNED BY IT
WILL BE DEEMED TO BE TENDERED FOR PURCHASE IN THE
REMARKETING. See "Description of Securities--
Remarketing."
If a holder of Par Securities has indicated by timely
delivery of a Notice of Election that it wishes to
tender Par Securities held by it for purchase in the
Remarketing and such holder desires to purchase Par
Securities in the Remarketing at or above a specified
rate, such holder should separately notify the
Remarketing Agent in accordance with the procedures
specified in the Notice of Remarketing and indicate the
specified rate per annum at or above which such holder
will purchase Par Securities. In such case, the
Remarketing Agent will give priority to such holder's
purchase of a number of Par Securities equal to the
number of Par Securities tendered by such holder in the
Remarketing, provided that the Adjusted Distribution
Rate is not less than the specified rate.
If, by 4:00 P.M., New York City time, on any Scheduled
Remarketing Date, the Remarketing Agent is unable to
remarket, at a price of $1,000 per Par Security, all of
the Par Securities tendered or deemed tendered for
purchase in the Remarketing on such Scheduled
Remarketing Date, then such unsold Par Securities will
be exchanged on the related Scheduled Remarketing
Settlement Date with the Trust for Debentures having an
aggregate principal amount equal to the aggregate
liquidation amount of such unsold Par Securities and
such Debentures shall be immediately redeemed, unless as
a result of such redemption, less than $25.0 million
principal amount of Debentures would remain outstanding.
In such latter event, the Company is required to redeem
on such Scheduled Remarketing Settlement Date all of the
Debentures and the consummation of purchases and sales
of Par Securities pursuant to such Remarketing will not
occur. In either such case, the redemption price of the
Debentures will be 100% of the principal amount of the
Debentures so redeemed.
AS A RESULT OF SUCH SPECIAL MANDATORY REDEMPTION, ALL
PAR SECURITIES TENDERED OR DEEMED TENDERED FOR PURCHASE
IN THE REMARKETING WILL BE PURCHASED IN THE REMARKETING,
OR MANDATORILY REDEEMED, ON THE REMARKETING SETTLEMENT
DATE.
RIGHT TO DEFER Following the Remarketing Settlement Date, the Company
INTEREST............ has the right to defer payment of interest on the
Debentures by extending the interest payment period on
the Debentures, from time to time, for up to 10
consecutive semi-annual periods. There could be multiple
Extension Periods of varying lengths throughout the term
of the Debentures. If interest payments on the
Debentures are so deferred, distributions on the Par
Securities will also be deferred for an equivalent
period and the Company may not, and may not permit any
subsidiary of the Company to, (i) declare or pay any
dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to,
the Company's capital stock or (ii) make any payment of
principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities that rank on a
parity with or junior to the Debentures or make any
guarantee payments with respect to any guarantee by the
Company of
18
<PAGE>
the debt securities of any subsidiary of the Company if
such guarantee ranks on a parity with or junior to the
Debentures (other than (a) dividends or distributions
in common stock of the Company, (b) payments under the
Guarantee, (c) any declaration of a dividend in
connection with the implementation of a stockholders'
rights plan, or the issuance of stock under any such
plan in the future, or the redemption or repurchase of
any such rights pursuant thereto, and (d) purchases of
common stock related to the issuance of common stock or
rights under any of the Company's benefit plans).
During an Extension Period, interest on the Debentures
will continue to accrue (and the amount of
Distributions to which holders of the Par Securities
are entitled will accumulate) at the Adjusted
Distribution Rate, compounded semi-annually. During an
Extension Period, holders of Par Securities will be
required to include the stated interest on their pro
rata share of Debentures in their gross income as
original issue discount ("OID") even though the cash
payments attributable thereto have not been made. See
"Description of Debentures--Option to Extend Interest
Payment Period" and "United States Federal Income Tax
Consequences--Interest Income and Original Issue
Discount."
REDEMPTION............ The Trust Securities will be redeemed upon repayment of
the Debentures held by the Trust at maturity or their
earlier redemption. The Debentures are redeemable at
the option of the Company, in whole or in part, at any
time or from time to time prior to June 15, 2001, at a
redemption price equal to the greater of (i) 100% of
the principal amount of such Debentures and (ii) the
present value of the principal amount of such
Debentures as if redeemed on June 14, 2002, together
with scheduled prepayments of interest from the
prepayment date to but excluding June 14, 2002,
discounted at the Adjusted Treasury Rate, plus, in each
case, accrued and unpaid interest, if any, to the date
of redemption. On and after June 15, 2012, the
Debentures are redeemable by the Company, in whole or
in part, at a redemption price equal to 100% of the
aggregate principal amount thereof plus a premium which
will decline ratably on each June 15 thereafter to zero
on and after June 15, 2022, plus accrued and unpaid
interest, if any, to the date of redemption. In
addition, the Debentures are redeemable at the option
of the Company at any time after the Remarketing
Settlement Date, in whole, upon the occurrence and
continuation of a Special Event, as described under "--
Special Event" below, at a redemption price equal to
100% of the principal amount thereof plus accrued and
unpaid interest to the date of redemption.
If all Par Securities tendered or deemed tendered in
the Remarketing are not remarketed at a price of $1,000
per Par Security, Debentures (and, thus, Par
Securities) are subject to redemption as part of a
Special Mandatory Redemption. As a result, investors
who do not validly elect to hold the Par Securities
following the Remarketing Settlement Date are entitled
to receive, on the Remarketing Settlement Date, an
amount equal to 100% of the liquidation amount of such
Par Securities. If the Exchange Offer has occurred, any
Par Securities which have not been exchanged for New
Par Securities pursuant to such Exchange Offer must be
redeemed by the Company on the Remarketing Settlement
Date, as described under "Description of Securities--
Redemption--Transfer Restricted Security Redemption"
and "--Registration Rights."
19
<PAGE>
SPECIAL EVENT......... Upon the occurrence and continuation of a Special Event
(including a Tax Event), the Company will have the
right, if certain conditions are met, (i) to terminate
the Trust and cause the Debentures to be distributed to
the holders of the Trust Securities in exchange
therefor upon liquidation of the Trust, (ii) to shorten
the stated maturity of the Debentures, in the case of a
Tax Event, to a date not earlier than June 14, 2012, or
(iii) after the Scheduled Remarketing Date, to redeem
the Debentures in whole (but not in part) within 90
days following the occurrence of such Special Event and
thereby cause a mandatory redemption of the Trust
Securities. See "Description of Securities--
Redemption--Special Event Redemption or Distribution of
Debentures; Shortening of Stated Maturity." Moreover,
the Debentures are redeemable on the Remarketing
Settlement Date in connection with a Tax Opinion
Redemption. See "Description of Securities--
Redemption--Tax Opinion Redemption."
LIQUIDATION OF THE In the event of the liquidation of the Trust, after
TRUST................. satisfaction of the claims of creditors of the Trust,
if any, as provided by applicable law, the holders of
the Trust Securities will be entitled to receive a
liquidation amount of $1,000 per Trust Security plus
accumulated and unpaid Distributions thereon to the
date of payment, which may be in the form of a
distribution of such amount in Debentures as described
above. If such liquidation amount can be paid only in
part because the Trust has insufficient assets
available to pay in full the aggregate liquidation
amount, then the amounts payable directly by the Trust
on the Trust Securities shall be paid on a pro rata
basis. The holder of the Common Securities will be
entitled to receive distributions upon any such
liquidation pro rata with the holders of the Par
Securities, except that if an Indenture Event of
Default has occurred and is continuing, the Par
Securities shall have a priority over the Common
Securities. See "Description of Securities--Liquidation
Distribution Upon Dissolution."
An explanation of the significance of ratings may be
obtained from S&P and Moody's. Generally, rating
agencies base their ratings on such material and
information, and such of their own investigations,
studies and assumptions, as they deem appropriate. A
credit rating of a security is not a recommendation to
buy, sell or hold securities. There is no assurance
that any rating will apply for any given period of time
or that a rating may not be adjusted or withdrawn.
ABSENCE OF MARKET FOR
THE NEW PAR
SECURITIES............
The New Par Securities will be a new issue of
securities for which there currently is no established
trading market. Accordingly, there can be no assurance
as to the development or liquidity of any market for
the New Par Securities. The Company currently is
obligated to apply for listing of the New Par
Securities, upon request of the holders of a majority
in aggregate liquidation amount of the New Par
Securities, only in connection with a registration
statement covering the New Par Securities, provided
that the New Par Securities qualify for listing.
----------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE PAR SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE
24.
20
<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,
1996 and 1995 and for each of the years in the three-year period ended
December 31, 1996, which have been audited by KPMG Peat Marwick LLP,
independent auditors. The report of KPMG Peat Marwick LLP covering the
December 31, 1996 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") in
1995. 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, 1994, 1993 and 1992 and the income statement data for the
years ended December 31, 1993 and 1992 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 June 30, 1997, and income statement data for the six-month periods ended
June 30, 1997 and 1996 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
six month period ended June 30, 1997 give effect to the application of the net
proceeds of $67.3 million from the Offering and the acquisition by the Company
of all of the capital stock of AMN as if they had occurred at the beginning of
such period (the "Pro Forma Transactions"). The pro forma consolidated
financial data are unaudited and do not purport to represent what the
Company's results of operations would actually have been if the Pro Forma
Transactions, as applicable, had occurred on the dates specified and do not
project the Company's 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>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------------------------------------
PRO FORMA
1997(1) 1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- ----------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Gain on sale of loans
and leases............ $37,316 $ 37,224 $ 40,877 $ 88,156 $ 39,557 $ 8,628 $ 18,149 $ 20,606
Net interest income
after provision
for loan losses....... 31,902 35,925 22,617 62,662 28,304 15,959 21,423 13,264
Gains on sale of SPFC
stock................. 4,306 4,306 62,007 82,690 -- -- -- --
Equity in net income of
SPFC.................. 12,931 12,931 -- -- -- -- -- --
Other income........... 8,168 7,414 14,855 23,425 17,448 48,217 31,854 13,222
------- --------- --------- --------- ----------- --------- ---------- --------
Total revenue.......... 94,623 97,800 140,356 256,933 85,309 72,804 71,426 47,092
Personnel expense...... 25,440 23,104 23,402 48,355 34,053 33,477 24,520 15,678
Other expenses......... 28,908 27,094 24,418 50,694 27,127 28,037 15,433 8,190
------- --------- --------- --------- ----------- --------- ---------- --------
Total expenses......... 54,348 50,198 47,820 99,049 61,180 61,514 39,953 23,868
------- --------- --------- --------- ----------- --------- ---------- --------
Income before income
taxes, minority
interest, and
extraordinary item.... 40,275 47,602 92,536 157,884 24,129 11,290 31,473 23,224
Income taxes........... 14,751 17,843 37,769 69,874 10,144 4,685 13,055 9,583
Minority interest in
income (loss) of
consolidated
subsidiaries.......... 4,654 4,654 3,110 12,026 (208) -- -- --
------- --------- --------- --------- ----------- --------- ---------- --------
Income before
extraordinary item.... 20,870 25,105 51,657 75,984 14,193 6,605 18,418 13,641
Extraordinary item-
repurchase of 9 3/4%
Senior Notes due 2004,
net of income taxes... (3,995) (3,995) -- -- -- 919 -- --
------- --------- --------- --------- ----------- --------- ---------- --------
Net income............. $16,875 $ 21,110 $ 51,657 $ 75,984 $ 14,193 $ 7,524 $ 18,418 $ 13,641
======= ========= ========= ========= =========== ========= ========== ========
CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............ $ 500,528 $ 357,320 $ (6,082) $(1,173,703) $ 961,579 $ (903,050) $(78,865)
Net cash (used in)
provided by investing
activities............ (337,789) 191,189 154,372 140,961 (796,638) (145,701) 21,302
Net cash (used in)
provided by financing
activities............ (216,436) (470,897) (113,209) 1,047,004 (177,314) 1,066,584 70,216
--------- --------- --------- ----------- --------- ---------- --------
Net change in cash... $ (53,697) $ 77,612 $ 35,081 $ 14,262 $ (12,373) $ 17,833 $ 12,653
========= ========= ========= =========== ========= ========== ========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------
PRO FORMA
1997(1) 1997 1996 1996 1995 1994 1993 1992
--------- ------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA(2):
Loans originated:
ICII................... $ -- $ -- $ 310 $ 310 $1,816 $4,260 $6,019 $3,383
SPTL................... 198 198 145 531 724 NA(3) NA(3) NA(3)
SPFC(4)................ -- -- 245 790 288 190 -- --
FMAC................... 301 301 208 459 164 -- -- --
IBC.................... 65 65 34 87 36 -- -- --
AMN.................... 145 94 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total................ $ 709 $ 658 $942 $2,177 $3,028 $4,450 $6,019 $3,383
====== ====== ====== ====== ====== ====== ====== ======
Loans securitized:
ICII................... $ -- $ -- $ -- $ -- $ 177 $ -- $ -- $ --
SPTL................... 203 203 -- 277 511 46 -- --
SPFC(4)................ -- -- 232 657 165 -- -- --
FMAC................... 159 159 167 325 105 -- -- --
IBC.................... 116 116 47 87 85 -- -- --
AMN.................... -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total................ $ 478 $ 478 $ 446 $1,346 $1,043 $ 46 $ -- $ --
====== ====== ====== ====== ====== ====== ====== ======
Outstanding balance of
loans and leases
securitized
(at the end of
period)(5)............ $1,413 $1,413 $1,270 $2,118 $1,047 $45 $ -- $ --
SELECTED RATIOS:
Ratio of earnings to
fixed charges(6)...... 1.6x 1.8x 2.4x 2.2x 1.3x 1.2x 2.1x 2.2x
Pre-tax interest
coverage ratio(7)..... 4.0 5.6 23.0 17.0 3.9 2.4 -- --
Ratio of indebtedness
to total
capitalization
(at end of
period)(8)............ NA 52.3% 29.5% 40.5% 46.1% 51.4% -- % -- %
Average equity to
average assets........ NA 11.88 5.87 7.27 4.72 4.86 6.71 7.71
Return on average
common equity......... 13.76 17.21 81.95 45.55 17.59 10.57 31.76 37.75
Return on average
assets................ 1.63 1.63 4.81 3.31 0.82 0.51 2.13 2.91
SPTL REGULATORY CAPITAL
RATIOS (AT END OF
PERIOD):
California leverage
limitation(9)......... 11.92% 11.92% 12.53% 13.50% 11.58% 11.50% 7.29% 8.73%
Risk-based--Tier 1..... 9.17 9.17 8.92 9.71 11.72 14.21 10.27 14.94
Risk-based--Total...... 12.68 12.68 10.01 10.87 13.18 15.13 10.73 15.74
FDIC Leverage Ratio.... 9.07 9.07 8.09 9.35 8.04 8.08 9.47 8.78
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 2.87% 2.87% 2.53% 2.64% 1.55% 1.16% 0.64% 0.79%
Allowance for loan
losses as a
percentage of
non-performing loans.. 50.75 50.75 31.29 38.94 44.30 53.83 65.91 79.10
Net charge-offs as a
percentage of average
total loans held for
investment............ 0.69 0.69 0.27 0.94 0.36 0.23 0.89 0.18
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $20,550 $ 74,247 $ 39,166 $ 24,904 $ 37,277 $ 19,444
Interest bearing
deposits.............. 241,285 3,369 267,776 10,600 90,000 30,000
Loans held for sale ... 573,965 940,096 1,341,810 263,807 1,238,006 328,575
Loans held for
investment, net....... 1,120,066 1,068,599 668,771 1,029,556 154,595 84,843
Securitization related
assets................ 34,327 159,707 58,272 4,558 529 982
Total assets........... 2,277,736 2,470,639 2,510,635 1,420,409 1,572,663 479,430
Deposits............... $1,260,991 $1,069,184 $1,092,989 $ 934,621 $1,001,468 $422,551
Borrowings from FHLB... -- 140,500 190,000 295,000 320,000 --
Other borrowings....... 358,129 694,352 987,810 -- 147,611 --
Senior notes(10)....... 219,792 88,209 80,472 80,344 -- --
Debentures(11)......... 70,000 -- -- -- -- --
Total liabilities...... 2,013,706 2,231,131 2,416,533 1,344,536 1,504,411 429,652
Shareholders' equity... 264,030 239,508 94,102 75,873 68,253 49,778
</TABLE>
- --------
(1) Income statement and related data and ratios for the six months ended
June 30, 1997 reflect the Pro Forma Transactions and balance sheet and
related data and ratios reflect the Offering as of June 30, 1997 as
follows:
(a) The sale of the Debentures generated estimated net proceeds of $67.3
million. As a result, cash and total assets were increased by $67.3
million and $70.0 million, respectively, and the Debentures and total
liabilities were increased by $70.0 million.
(b) The acquisition of AMN and the issuance of the Debentures are reflected
as if they occurred on January 1, 1997. Interest expense was increased
on a pro forma basis by $1.8 million reflecting interest on the
Debentures at 10.25%. Results of operations for AMN are reflected for
the period from January 1 to June 30, 1997. Earnings on investment of
the proceeds of the issuance of the Debentures have not been included.
Assuming such proceeds had been invested at 5% at January 1, 1997, pro
forma income for the six months ended June 30, 1997 before
extraordinary item would have been $21.7 million.
(2) Does not include loans originated or securitized by ICIFC. Commencing
with the three months ended March 31, 1997, the financial statements of
ICIFC are no longer consolidated with those of ICII.
(3) Information not available.
(4) Commencing with the three months ended March 31, 1997, the financial
statements of SPFC are no longer consolidated with those of ICII.
(5) Represents outstanding balance of loans and leases securitized, excluding
loans held for sale and investment.
(6) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary item,
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.
(7) Ratio of (i) the sum of income before income taxes and extraordinary item
plus interest expense on non-funding indebtedness to (ii) interest
expense on non-funding indebtedness.
(8) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
plus total shareholders' equity.
(9) Ratio of (i) SPTL's total shareholders' equity to (ii) total deposits.
(10) At June 30, 1997, represents $200.0 million of the 9 7/8% Senior Notes
and approximately $20.2 million of the 9 3/4% Senior Notes not tendered
pursuant to the Tender Offer , net of discount of $392,000 related to the
9 3/4% Senior Notes.
(11) Represents Guaranteed Preferred Beneficial Interests in the Debentures.
23
<PAGE>
RISK FACTORS
Prospective purchasers of the Par Securities should carefully review the
information contained elsewhere in this Prospectus and should particularly
consider the following matters. To the extent any of the information contained
in this Prospectus constitutes a "forward-looking statement" as defined in
Section 27A(i)(1) of the Securities Act (investors should note that any safe
harbor for forward-looking statements does not apply to statements made in
connection with an initial public offering), the risk factors set forth below
are cautionary statements identifying important factors that could cause
actual results to differ materially from those in the forward-looking
statement. See "Special Note Regarding Forward-Looking Statements."
BORROWINGS AND SUBSTANTIAL LEVERAGE HAVE THE POTENTIAL TO CAUSE NET INTEREST
AND OPERATING LOSSES AND ADVERSELY AFFECT THE COMPANY'S ABILITY TO SERVICE
OUTSTANDING INDEBTEDNESS
The Company is highly leveraged. At June 30, 1997, on a pro forma basis
after giving effect to the Offering, the Company's total Indebtedness
(excluding deposits and borrowings at SPTL) was $647.9 million and its total
shareholders' equity was $264.0 million.
The Company's ability to make scheduled payments of the principal of, or to
pay the interest on, or to refinance its Indebtedness (including the
Debentures) 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 Debentures 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 Debentures, or to make
anticipated capital expenditures. It may be necessary for the Company to
refinance all or a portion of the principal of the Debentures 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 Debentures, 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 Additional Interest (as
defined herein), if any, on the Debentures. See "Business--Funding and
Securitizations" and "Description of Debentures."
DIVERSIFICATION STRATEGY AND RISK OF LENDING TO DIVERSIFIED BUSINESSES
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.
Furthermore, since March 1997, the Company continued to reduce its percentage
ownership of SPFC, its former non-conforming residential mortgage subsidiary,
to 47.0% as of August 15, 1997. Prior to the expansion and commencement of
these new businesses, the Company had little or no experience in operating
certain of such businesses. Although
24
<PAGE>
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.
THE SUCCESS OF THE COMPANY'S BUSINESS IS HIGHLY DEPENDENT UPON THE MEMBERS OF
THE SENIOR MANAGEMENT OF THE COMPANY
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.
VALUE OF SECURITIZATION RELATED ASSETS SUBJECT TO FLUCTUATION
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
excess cash flows generated by the securitized assets. The interests
representing the excess cash flows are classified either as trading securities
or retained interest in loan and lease securitizations.
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 cash flows, 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 cash flows
and a portion of the retained interest on a monthly basis.
The Company's securitization related assets and trading securities currently
include interest-only securities and overcollateralization amounts and may in
the future include principal-only and subordinated securities. Realization of
these securitization related assets and trading securities in cash is subject
to the timing and ultimate realization of cash flows associated therewith,
which is in turn effected by the prepayment and loss characteristics of the
underlying loans and leases. The Company estimates future cash flows from
these securitization related assets and trading securities and values such
securities utilizing assumptions that it believes are consistent with those
that would be utilized by an unaffiliated third party purchaser. If actual
experience differs from the assumptions used in the determination of the asset
value, future cash flows and earnings could be negatively impacted, and the
Company could be required to reduce the value of its securitization related
assets and trading securities. The value of such securities can therefore
fluctuate widely and may be extremely sensitive to changes in discount rates,
projected mortgage loan prepayments and loss assumptions. To the Company's
knowledge, the market for the sale of the securitization related assets and
trading securities is limited. No assurance can be given that securitization
related assets and trading securities could be sold at their reported value,
if at all.
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DEPENDENCE ON SECURITIZATION AND WAREHOUSE FACILITIES TO FINANCE LENDING
ACTIVITIES MAY CREATE LIQUIDITY RISKS
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 cash flows 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. In addition, 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 $590.0
million in financing at June 30, 1997. See "Business--Other Activities." These
credit and repurchase facilities expire between September 30, 1997 and
December 31, 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 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."
THE COMPANY'S PROFITABILITY MAY BE ADVERSELY AFFECTED BY CYCLICAL ECONOMIC
CONDITIONS AND FLUCTUATIONS IN INTEREST RATES
The Company's businesses may be adversely affected in any economic slowdown
or recession. Periods of economic slowdown or recession may be accompanied by
decreased demand for consumer and commercial credit
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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.
Fluctuations in Interest Rates May Affect Profitability
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 securitization related assets.
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.
To reduce risks associated with its originations and purchases of loans and
leases, the Company may enter into transactions designed to hedge interest
rate risks, including buying and selling of futures and forwards. The nature
and quantity of the hedging transactions is determined by management based on
various factors, including market 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.
SECURITIZATION AND SALE OF LOANS AND LEASES MAY SUBJECT COMPANY TO CONTINGENT
OBLIGATIONS
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 cash flows or
applying excess cash flows 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 June 30, 1997 and December 31, 1996,
credit enhancement amounts provided by the Company (in the form of deposit
accounts and overcollateralization levels) aggregated approximately $34.3
million and $49.5 million, respectively. The Company is subject to the risks
of default and foreclosure following the sale of the loans or leases sold
through securitizations. In addition, documents governing the Company's
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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.
LENDING TO CREDIT-IMPAIRED BORROWERS MAY AFFECT COMPANY PROFITABILITY
In the Company's sub-prime lending businesses, such as AMN's sub-prime auto
loan 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, 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.
THE COMPANY'S OPERATIONS ARE SUBJECT TO 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 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 Bank Insurance Fund of the FDIC, is subject to extensive
federal and state governmental supervision, regulation and control, including
regulation by the FDIC and the California Department of Financial
Institutions. 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."
In January 1996, the California Department of Corporations and the FDIC
conducted 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 has had or will have an adverse effect on the
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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 IN THE BUSINESSES IN WHICH THE COMPANY OPERATES MAY ADVERSELY
AFFECT THE COMPANY'S OPERATIONS
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.
THE COMPANY'S OPERATIONS MAY BE SUBJECT TO 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.
EFFECT OF FMAC'S OPERATIONS MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENT IN
FMAC COMMON STOCK.
On August 29, 1997, the Company announced that FMC filed a registration
statement with the Commission covering a proposed initial public offering of
8,750,000 shares of common stock. Of those shares, 5,321,500 are being sold by
FMC, 2,500,000 are being sold by the Company and 937,500 are being sold by
another selling stockholder. Prior to the offering, the Company owned 66.67%
of FMAC and consolidated FMAC's financial statements with those of ICII.
Immediately after the offering, assuming no exercise of the underwriters'
over-allotment option, the Company will own 44.4% of the common stock of FMC.
As a result of the offering, FMC's financial statements will no longer be
consolidated with those of ICII. After the offering ICII's investment in FMC
will be recorded on the Company's financial statements as "Investment in
Franchise Mortgage Acceptance Company."
Of the net income or loss of FMAC, 44.4% (immediately after the offering)
will be recognized on a pre-tax basis in the Company's financial statements.
Any such recognized net loss may adversely affect the Company's ability to
conduct future activities under the covenants of the Indenture and otherwise.
As a small business leader, FMAC is or may be subject to many of the same
risks set forth in "--The Success of the Company's Business is Highly
Dependent Upon the Members of the Senior Management of the Company," "--Value
of Securitization Related Assets Subject to Fluctuation," "--Dependence on
Securitization and Warehouse Facilities to Finance Lending Activities May
Create Liquidity Risks," "--The Company's Profitability May be Adversely
Affected by Cyclical Economic Conditions and Fluctuations in Interest Rates,"
"--Securitization and Sale of Loans and Leases May Subject the Company to
Contingent Obligations," "--The Company's
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Operations are Subject to Government Regulation," "--Competition in the
Businesses in Which it Operates May Adversely Affect the Company's Operations"
and "--Company Operations May be Subject to Environmental Liabilities." In
addition, FMAC is specifically subject to additional risks relating to the
following:
Certain of FMAC's Underwriting Requirements and Risks May Adversely Affect
Credit Quality.
Business Valuation. FMAC's loans are underwritten in accordance with FMAC's
underwriting guidelines which permit borrowers to borrow up to a specified
percentage of the value of the business unit and, in certain instances, the
real estate pledged as collateral in connection with the loans. The value of
the business unit is derived from a formula based upon the business concept
and the revenues and cash flows generated by the business unit from its
operations, as well as a valuation for each loan is performed by an
independent third-party hired by FMAC. However, there can be no assurance that
FMAC's valuations actually reflect an amount that could be realized upon a
current sale of a borrower's business unit and related personal and real
property. In addition, in the event of a default by a particular borrower,
there may be factors present that reduce the revenues or cash flow derived at
the location and the value of the enterprise.
Credit Risks Associated with Loans Not Securitized or Sold. Certain of
FMAC's loans and leases may not be readily saleable or securitizable, or may
be saleable or securitizable only after the individual loan or lease portfolio
performance characteristics become apparent over time. To the extent that such
loans and leases are not sold or securitized, FMAC must fund such assets with
borrowings or internally generated funds and bears the entire credit risk
associated with such assets. FMAC's inability ultimately to sell or securitize
substantially all of the loans and leases it originates would have a material
adverse effect on FMAC's business and results of operations.
Franchise Termination; Nonrenewal. A borrower's franchise agreement may be
subject to termination in the event of default after applicable cure periods.
Default provisions under franchise agreements are generally drafted broadly,
and include, among other things, failure to meet operating standards, actions
which may threaten licensed intellectual property, and investments by
principals in a competitive business. There is no assurance that the borrowers
will not default under their respective franchise agreements, or that the
borrowers will be able to satisfy the requirements for renewal of the
franchise agreement for an additional term. In the event a franchise agreement
terminates, the related borrower would not be able to continue to operate the
business unit. The termination or nonrenewal of the franchise agreement likely
will result in a borrower's inability to satisfy its obligations under the
loan and a substantial decrease in the value of the collateral securing such
obligations. License agreements by borrowers on FMAC's retail energy loans may
contain similar provisions.
Balloon Payment at Maturity and Extension Increases Lender Risks. FMAC may
from time to time originate loans with a balloon payment due at maturity. The
ability of a borrower to pay such amount will normally depend on its ability
to fully refinance the loan or sell the business unit and related property at
a price sufficient to permit the borrower to make balloon payments. The
ability of a borrower to refinance will be affected by a number of factors,
including, without limitation, the value of the related property, the
financial condition and operating history of the borrower and the related
property limitations on transfer imposed by franchise or license agreements,
the strength of the commercial real estate market, tax laws, and prevailing
general economic conditions.
FMAC'S CONCENTRATION ON RESTAURANT, RETAIL ENERGY AND GOLF SECTORS MAY EXPOSE
FMAC TO CONCEPT FAILURES, INDUSTRY CYCLES AND OTHER INDUSTRY SPECIFIC RISKS
Risks Relating to Franchise Concepts. The ability of a borrower operating as
a franchisee to repay its loan is subject to general business risks typically
associated with operating a business and particularly with operating a quick
service restaurant/casual dining restaurant or other franchised business,
including, without limitation, (i) an increase in the cost of labor
(including, without limitation, mandatory increases in the minimum wage
payable to employees) or food products, (ii) a decrease in the consumer demand
for a particular product or class of products offered by a particular
franchise concept and (iii) adverse changes in the economy in the geographic
location in which a particular restaurant is located.
Risks Relating to Retail Energy Concepts. Gasoline profit margins
associated with the sale of motor fuel have a significant impact on such
borrowers and are affected by numerous factors outside of each borrower's
control, including the supply and demand for motor fuel in retail markets,
volatility in the wholesale gasoline
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market and competitive pricing influences in each borrower's local market
area. Any sustained shortage of motor fuel from a borrower's suppliers could
substantially reduce the volume of motor fuel sold by such borrower. A
material decrease in either the volume of motor fuel sold or the profit margin
on such sales for an extended time period could have a material adverse effect
on the income of borrowers in the retail energy sector and their ability to
service loans from FMAC.
Risks Relating to Golf Loans. The amount spent by consumers on discretionary
activities, such as those offered by borrowers in the golf sector, has
historically been dependent upon levels of discretionary income which may be
adversely affected by general economic conditions. A decrease in consumer
spending on golf-associated activities could have a material adverse effect on
the financial condition and results of operations of Borrowers in the golf
sector and their ability to repay FMAC's loans. In addition, the inherent
seasonality of participation in golf and golf-related activities and the
effect of weather conditions generally result in greater revenues and income
during the second and third quarters as compared to the first and fourth
quarters of the year. Poor weather conditions and unforseen natural events may
result in reduced utilization of borrowers' golf facilities and have an
adverse effect on revenues of borrowers in the golf sector.
Risks Relating to Equipment Loans and Leases. FMAC retains a residual
interest in the equipment covered by its leases. The estimated fair market
value of the equipment at the end of the contract term of the lease, if any,
is reflected as an asset on FMAC's balance sheet for leases held to maturity
and will be included as part of the gain on sale in any lease securitization
transaction. Any failure by FMAC to realize aggregate recorded residual values
could have a material adverse effect on its business and results of
operations.
Risks Relating to Equity Investments. FMAC periodically makes passive equity
investments in companies operating in the sectors served by its lending and
leasing business. Equity investments involve a higher degree of risk than
loans or leases in that such companies generally have no contractual
obligation to repay amounts invested by the Company, the investment is not
secured and FMAC bears the risk of loss of its entire investment. Generally,
FMAC is unable to control the activities of these companies due to its
minority ownership interest and lacks representation in the management of such
companies.
FMAC's Limited History of Independent Operations and New Products Limit the
Ability of FMAC to Predict Future Performance
FMAC has experienced substantial growth in loan and lease originations and
total revenues since inception, and in particular since June 1995 when the
Company acquired the operations of Franchise Mortgage LLC. FMAC had been
unprofitable until 1996 and there can be no assurance that FMAC will be
profitable in the future or that these rates of growth will be sustainable or
indicative of future results. Prior to FMAC's initial public offering, FMAC
benefited from the financial, administrative and other resources of FMAC and
Greenwich Capital Financial Products, Inc., a prior owner of the operations of
Franchise Mortgage LLC. Accordingly, FMAC's prospects must be evaluated in
light of the risks, expenses and difficulties it will encounter as an
independent business. There can be no assurance that FMAC will develop the
financial, management or other resources necessary to operate successfully as
an independent company. In light of FMAC's aforementioned growth in loan and
lease originations, the historical performance of FMAC's earnings may be of
limited relevance in predicting future performance. Also, the loans originated
by FMAC and included in FMAC's securitizations have been outstanding for a
relatively short period of time. Consequently, the delinquency and loss
experience of FMAC's loans and leases to date may not be indicative of results
to be experienced in the future. It is unlikely that FMAC will be able to
maintain delinquency and loss ratios at current levels as the portfolio
becomes more seasoned.
FMAC has recently expanded its product offerings to include leases and has
expanded its marketing efforts to include borrowers in the retail energy and
golf sectors. FMAC has either limited or no experience with these new products
and markets, and there can be no assurance that FMAC will be able to compete
in these markets successfully or that the return on FMAC's investment in these
new products and markets will be consistent with FMAC's historical financial
results.
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One-Time Deferred Income Tax Charge Will Reduce FMAC's Earnings
As a result of terminating FMAC's LLC status upon completion of its initial
public offering, FMAC will be required to record a one-time non-cash charge
against earnings for deferred income taxes based upon the change from FMAC's
LLC status to C Corporation status. Management estimates that there will be a
charge for the quarter ending December 31, 1997 and the year ending December
31, 1997; if such a charge were recorded at June 30, 1997, the amount would
have been approximately $7.0 million.
EFFECT OF SPFC'S OPERATIONS MAY ADVERSELY AFFECT THE COMPANY'S INVESTMENT IN
SPFC COMMON STOCK
As of June 30, 1997, ICII owned 49.4% of SPFC's outstanding common stock.
ICII's investment in SPFC, which is recorded on the Company's financial
statements in "Investment in Southern Pacific Funding Corporation," accounted
for 2.4% of the Company's total assets and contributed 13.2% to the Company's
total revenue for the three months ended June 30, 1997. Of the net income or
loss of SPFC, 49.4% is recognized on a pre-tax basis in the Company's
financial statements. Any such recognized net loss may adversely affect the
Company's ability to conduct future activities under the covenants of the
Indenture and otherwise. As an originator of non-conforming residential
mortgage loans, SPFC is or may be subject to many of the same risks set forth
in "--The Success of the Company's Business is Highly Dependent Upon the
Members of the Senior Management of the Company," "--Value of Securitization
Related Assets Subject to Fluctuation," "--Dependence on Securitization and
Warehouse Facilities to Finance Lending Activities May Create Liquidity
Risks," "--The Company's Profitability May be Adversely Affected by Cyclical
Economic Conditions and Fluctuations in Interest Rates," "--Securitization and
Sale of Loans and Leases May Subject Company to Contingent Obligations," "--
Lending to Credit Impaired Borrowers May Affect Company Profitability," "--The
Company's Operations are Subject to Government Regulation," "--Competition in
the Businesses in Which The Company Operates May Adversely Affect the
Company's Operations" and "--The Company's Operations May be Subject to
Environmental Liabilities." In addition, SPFC is specifically subject to
additional risks relating to the following:
Limited History of Independent Operations of Limited Relevance in Predicting
Future Performance
SPFC commenced operations in January 1993 as a division of SPTL and became
an operating subsidiary of ICII in April 1995. Although SPFC has been
profitable for each year since inception and has experienced substantial
growth in mortgage loan originations and total revenues, there can be no
assurance that SPFC will be profitable in the future or that these rates of
growth will be sustainable or indicative of future results. Since inception in
January 1993, SPFC's growth in originating and purchasing loans has been
significant. In light of this growth, the historical financial performance of
SPFC may be of limited relevance in predicting future performance. Also, the
loans originated and purchased by SPFC and included in SPFC's securitizations
have been outstanding for a relatively short period of time. As of June 30,
1997, SPFC's delinquency ratio (representing mortgage loans 30 days or more
past due) was 8.7%, with total foreclosures of $50.0 million. Also, the
mortgage loans related to the interest-only and residual certificates retained
by SPTL which were not contributed to SPFC by the Company in connection with
SPFC's initial public offering have generally had higher delinquency ratios
than SPFC's delinquency ratios, even though such loans were generally
underwritten to SPFC's underwriting standards. Consequently, the delinquency
and loss experience of SPFC's loans to date may not be indicative of future
results. It is unlikely that SPFC will be able to maintain delinquency and
loan loss ratios at their present levels as SPFC's loan portfolio becomes more
seasoned.
Origination of Adjustable Rate Mortgage Loans May Adversely Affect Operations
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 non-conforming ARMs 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 non-conforming ARMs than it is required to
pay in interest on the related borrowings, which do not have such payment
caps.
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No Assurance of Planned Expansion
SPFC's operations have substantially expanded since inception and SPFC
intends to continue to pursue a growth strategy for the forseeable future.
There can be no assurance that SPFC will anticipate and respond effectively to
all of the changing demands that its expanding operations will have on SPFC's
management, information and operating systems and cash reserves and the
failure of SPFC to meet challenges of any such expansion could have a material
adverse effect on SPFC's results of operations and financial condition. There
can be no assurance that SPFC will successfully achieve its planned expansion
or, if achieved, that the expansion will result in profitable operations.
Delinquency Ratings and Performance May be Affected by Contracted Servicing
SPFC currently contracts for the servicing of all loans it originates,
purchases and holds for sale. As with any external service provider, SPFC is
subject to risks associated with inadequate or untimely services. Many of
SPFC's borrowers require notices and reminders to keep their loans current and
to prevent delinquencies and foreclosures. A substantial increase in SPFC's
delinquency rate or foreclosure rate could adversely affect its ability to
access profitably the capital markets for its financing needs, including
future securitizations. SPFC has no plans to establish and perform servicing
operations at this time. If any contract servicer were to be terminated either
by SPFC or by any outside third party in connection with a securitization, the
change in servicing may result in greater delinquencies and losses on the
related loans, which in turn would adversely impact the value of the interest-
only and residual certificates held by SPFC in connection with any
securitization.
FRAUDULENT CONVEYANCE LAWS MAY ADVERSELY AFFECT SUBSIDIARY GUARANTEES
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 Debentures. 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 Debentures 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 Debentures 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 Debentures 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
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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 Debentures--Subsidiary Guarantees."
CHANGE OF CONTROL PROVISIONS MAY REQUIRE REPURCHASE OF DEBENTURES
The Declaration provides that upon the occurrence of a Change of Control on
or prior to the Remarketing Settlement Date, each holder of Par Securities
will have the right to require the Trust to cause all or any part (equal to
$1,000 liquidation amount or any integral multiple thereof) of the Par
Securities to be exchanged for an equivalent principal amount of Debentures.
Promptly thereafter, such Debentures will be repurchased by the Company
pursuant to the Indenture (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 thereon to the date of purchase. See "Description of
Securities--Change of Control."
Certain future credit or other borrowing agreements may contain similar
restrictions. The Company's ability to pay cash to the holders of Debentures
upon a repurchase may prohibit the Company from purchasing any Debentures
prior to their stated maturity and may provide that certain Change of Control
events would constitute a default thereunder. See "Description of Debentures--
Certain Covenants of the Company."
If a Change of Control were to occur, it is unlikely that the Company would
be able to both repurchase all of the Debentures 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 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 Debentures issued in exchange for Securities tendered
pursuant to a Change of Control Offer.
EFFECT OF ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF SECURITIES
If a Trust Enforcement Event occurs and is continuing, then the holders of
Par Securities would rely on, and in certain circumstances could cause, the
enforcement by the Property Trustee of its rights as a holder of the
Debentures against the Company. In addition, the holders of a majority in
liquidation amount of the Par Securities will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Property Trustee or to direct the exercise of any trust or power
conferred upon the Property Trustee under the Declaration, including the right
to direct the Property Trustee to exercise the remedies available to it as a
holder of the Debentures. If the Property Trustee fails to enforce its rights
with respect to the Debentures held by the Trust, any holder of Par Securities
may institute legal proceedings directly against the Company to enforce the
Property Trustee's rights under such Debentures without first instituting any
legal proceedings against such Property Trustee or any other person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Debentures, the Trust would lack funds for the payment of
Distributions or amounts payable on redemption of the Par Securities or
otherwise, and, in such event, holders of the Par Securities would not be able
to rely upon the Guarantee for payment of such amounts. However, in the event
the Company failed to pay interest on or principal of the Debentures on the
payment date on which such payment is due and payable, then a holder of Par
Securities may directly institute a proceeding against the Company for
enforcement of payment to such holder of the interest or Additional Interest
on, premium, if any, or principal of such Debentures having a principal amount
equal to the aggregate liquidation amount of the Par Securities of such holder
(a "Direct Action"). In connection with such Direct Action, the Company will
be subrogated to the rights of such holder of Par Securities under the
Declaration to the extent of any payment made by the Company to such holder of
Securities in such Direct Action. Except as set forth herein, holders of Par
Securities will not be able to exercise directly any other remedy available to
the holders of Debentures or assert directly any other rights in respect of
the Debentures. See "Description of Securities--Trust Enforcement Events,"
"Description of Guarantee" and "Description of Debentures--Indenture Events of
Default." The Declaration provides that each holder of Par Securities by
acceptance thereof agrees to the provisions of the Guarantee and the
Indenture.
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RANKING OF OBLIGATIONS UNDER THE DEBENTURES, THE GUARANTEE AND THE SUBSIDIARY
GUARANTEES OF NOTE TO INVESTORS
Until the Remarketing Settlement Date, the Debentures and the Guarantee will
be general unsecured obligations of the Company ranking on a parity with all
Indebtedness of the Company, if any, that is not subordinated to the
Debentures or Guarantee and senior to any Indebtedness of the Company that is
subordinated to the Debentures or Guarantee. Until the Remarketing Settlement
Date, when the Subsidiary Guarantees will be released, the Subsidiary
Guarantees will rank on a parity with all 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. Until the Remarketing Settlement Date, the
Debentures and the Guarantee will be effectively subordinated to all
Indebtedness and other liabilities of SPTL and the Special Purpose
Subsidiaries, and the Debentures, the Guarantee and the Subsidiary Guarantees
will be effectively subordinated to secured Indebtedness of the Company and
the Subsidiary Guarantors. As of June 30, 1997, on a pro forma basis after
giving effect to the Offering and the application of proceeds thereof, the
Debentures and Guarantee would have been effectively subordinated to
approximately $1.3 billion of deposits and other borrowings at SPTL and the
Debentures, Guarantee and Subsidiary Guarantees would have been effectively
subordinated to approximately $358.1 million of secured Indebtedness of the
Subsidiary Guarantors.
After the Remarketing Settlement Date, the Debentures and the Guarantee will
be subordinated and junior in right of payment to all Senior Debt of the
Company, will be effectively subordinated to secured Indebtedness of the
Company and will be effectively subordinated to all Indebtedness and other
liabilities of all of the Subsidiaries of the Company. As of June 30, 1997, on
a pro forma basis after giving effect to the Offering and the application of
proceeds thereof, the Debentures and Guarantee would have been subordinated to
approximately $219.8 million of Senior Debt of the Company and would have been
effectively subordinated to approximately $1.6 billion of Indebtedness of the
Company's Subsidiaries (including approximately $1.3 billion of deposits and
FHLB borrowings at SPTL and $358.1 million of secured Indebtedness of the
Company's Subsidiaries).
ICII is a holding company that conducts substantially all of its business
operations through its subsidiaries. For the six months ended June 30, 1997
and the years ended December 31, 1996 and 1995, approximately 12.7%, 34.8% and
30.2%, respectively, of the Company's total revenue was generated by the
operations of ICII, with 87.3%, 65.2% and 69.8%, respectively, being generated
by the Company's subsidiaries. Consequently, the Company's operating cash flow
and its ability to service its Indebtedness, including the Debentures, are
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 Debentures on a senior unsecured basis until the Remarketing
Settlement Date.
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 Debentures
will be effectively subordinated to all indebtedness of SPTL. As of June 30,
1997, SPTL had approximately $1.3 billion of deposits and other borrowings,
all of which would have been effectively senior to the Debentures. In
addition, due to these restrictions and SPTL's rapid growth, SPTL has retained
most 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 has contributed
approximately $35.0 million of the proceeds of the 9 7/8% Senior Notes
offering to the capital of SPTL in the form of subordinated indebtedness. In
addition, the Company has contributed approximately $35.0 million of the
proceeds of the Offering to SPTL. Depending upon SPTL's growth, ICII may be
required to make additional capital contributions to SPTL. There can be no
assurance that the Company's operations will generate sufficient cash flow to
support payment of interest or principal on the Debentures, or that dividend
distributions will be available from SPTL or any ICII subsidiary to fund such
payments.
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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 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 June 30, 1997, the amount SPTL could dividend to ICII under California law
would be limited to $27.3 million.
EFFECT OF TENDER OF PAR SECURITIES IN THE REMARKETING; EFFECT OF ELECTION TO
RETAIN
Any Notice of Election to retain or tender Par Securities for purchase in
the Remarketing will be irrevocable. In addition, if any holder of Par
Securities fails timely to deliver a Notice of Election, the Par Securities of
such holder will be deemed tendered for purchase in the Remarketing. See
"Description of Securities--Remarketing."
If a holder of Par Securities makes a valid election to retain Par
Securities, following the Remarketing Settlement Date, the distribution rate
on such holder's retained Securities will be the Adjusted Distribution Rate
and the Distributions on such holder's retained Par Securities may be deferred
as described in "--Option to Extend Interest Payment Period; Tax
Consequences." In addition, the obligations of the Company under the Guarantee
and under the Debentures will no longer be senior unsecured obligations of the
Company and will rank subordinate and junior in right of payment to all
Indebtedness of the Company. See "--Ranking of Obligations under the
Debentures, the Guarantee and the Subsidiary Guarantees of Note to Investors."
OPTION TO EXTEND INTEREST PAYMENT PERIOD; POTENTIAL ADVERSE TAX CONSEQUENCES
TO THE HOLDERS
Following the Remarketing Settlement Date, the Company has the right under
the Indenture to defer the payment of interest on the Debentures at any time
or from time to time for a period not exceeding 10 consecutive semi-annual
periods, provided that no Extension Period may extend beyond the Stated
Maturity of the Debentures. As a consequence of any such deferral, semi-annual
Distributions on the Securities by the Trust will be deferred during such
Extension Period but would continue to accumulate at the Adjusted Distribution
Rate, compounded semi-annually during any such Extension Period. During any
such Extension Period, the Company
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may not, and may not permit any subsidiary of the Company to, (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank on a parity
with or junior to the Debentures or make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of
the Company if such guarantee ranks on a parity with or junior to the
Debentures (other than (a) dividends or distributions in common stock of the
Company, (b) payments under the Guarantee (c) any declaration of a dividend in
connection with the implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). Prior to the termination of any such Extension
Period, the Company may further extend the Extension Period, provided that no
Extension Period may exceed 10 consecutive semi-annual periods or extend
beyond the Stated Maturity of the Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period subject to
the above requirements. See "Description of Securities--Distributions" and
"Description of Debentures--Option to Extend Interest Payment Period."
Should the Company defer payment of interest on the Debentures, a holder of
Par Securities will be required to accrue income (in the form of original
issue discount) for United States federal income tax purposes in respect of
its pro rata share of the Debentures held by the Trust. As a result, a holder
of Par Securities will include such interest income in gross income for United
States federal income tax purposes in advance of the receipt of cash
attributable to such interest income, and will not receive the cash related to
such income from the Trust if the holder disposes of the Par Securities prior
to the record date for the payment of Distributions with respect to such
Extension Period. See "United States Federal Income Tax Consequences--Interest
Income and Original Issue Discount" and "--Sales of Par Securities."
The Company has no current intention of exercising its right, following the
Remarketing Settlement Date, to defer payments of interest by extending the
interest payment period on the Debentures. However, should the Company elect
to exercise such right in the future, the market price of the Par Securities
is likely to be adversely affected. A holder that disposes of its Par
Securities during an Extension Period, therefore, might not receive the same
return on its investment as a holder that continues to hold its Par
Securities. In addition, as a result of the existence of the Company's right
to defer interest payments, the market price of the Par Securities (which
represent undivided beneficial ownership interests in the Debentures),
following the Remarketing Settlement Date, may be more volatile than the
market prices of other similar securities where the issuer does not have such
right to defer interest payments.
SPECIAL EVENT REDEMPTION; SHORTENING OF STATED MATURITY
Upon the occurrence and continuation of a Special Event, the Company will
have the right, if certain conditions are met, (i) to terminate the Trust and
cause the Debentures to be distributed to the holders of the Par Securities in
exchange therefor upon liquidation of the Trust, (ii) to shorten the Stated
Maturity of the Debentures, in the case of a Tax Event, to a date not earlier
than June 14, 2012 or (iii) after the Remarketing Settlement Date, to redeem
the Debentures in whole (but not in part) within 90 days following the
occurrence of such Special Event and thereby cause a mandatory redemption of
the Par Securities. See "Description of Securities--Redemption--Special Event
Redemption or Distribution of Debentures; Shortening of Stated Maturity."
There can be no assurance as to the market prices for the Par Securities or
the Debentures that may be distributed in exchange for Par Securities if a
dissolution or liquidation of the Trust were to occur or if the Stated
Maturity of the Debentures is shortened. Because holders of Par Securities may
receive Debentures upon the occurrence of a Special Event, prospective
purchasers of Par Securities are also making an investment decision with
regard to the Debentures and should carefully review all the information
regarding the Debentures contained herein. See "Description of Securities--
Redemption--Special Event Redemption or Distribution of Debentures; Shortening
of Stated Maturity" and "Description of Debentures--General."
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LIQUIDATION DISTRIBUTION OF DEBENTURES
Upon the occurrence and continuation of a Special Event, the Company will
have the right to terminate the Trust and cause the Debentures to be
distributed, after the satisfaction of liabilities to creditors (if any), to
the holders of the Trust Securities in liquidation of the Trust. In addition,
upon liquidation of the Trust and certain other events, the Debentures may be
distributed to such holders. Under current United States federal income tax
law and interpretations thereof and assuming, as expected, the Trust is
treated as a grantor trust for United States federal income tax purposes, a
distribution by the Trust of the Debentures pursuant to a liquidation of the
Trust will not be a taxable event to the Trust or to holders of the Par
Securities and will result in a holder of the Par Securities receiving
directly such holder's pro rata share of the Debentures (previously held
indirectly through the Trust). If, however, the liquidation of the Trust were
to occur because the Trust is subject to United States federal income tax with
respect to income accrued or received on the Debentures as a result of the
occurrence of a Tax Event or otherwise, the distribution of Debentures to
holders of the Par Securities by the Trust could be a taxable event to the
Trust and each holder, and holders of the Par Securities may be required to
recognize gain or loss as if they had exchanged their Par Securities for the
Debentures they received upon the liquidation of the Trust. See "United States
Federal Income Tax Consequences--Distribution of Debentures or Cash Upon
Liquidation of the Trust."
There can be no assurance as to the market prices for Par Securities or
Debentures that may be distributed in exchange for Par Securities if a
liquidation of the Trust occurs. Accordingly, the Par Securities that an
investor may purchase, whether pursuant to the offer made hereby or in the
secondary market, or the Debentures that a holder of Par Securities may
receive on liquidation of the Trust, may trade at a discount to the price that
the investor paid to purchase the Par Securities offered hereby. Because
holders of Par Securities may receive Debentures on termination of the Trust,
prospective purchasers of Par Securities are also making an investment
decision with regard to the Debentures and should carefully review all the
information regarding the Debentures contained herein. See "Description of
Securities--Redemption--Special Event Redemption or Distribution of
Debentures; Shortening of Stated Maturity" and "Description of Debentures--
General."
If the holders of Par Securities receive Debentures upon liquidation or
dissolution of the Trust, the Debentures will be subject to the remarketing
procedures that would have been applicable to the Par Securities. See
"Description of Securities--Remarketing."
HOLDERS OF PAR SECURITY WILL HAVE LIMITED VOTING RIGHTS
Holders of Par Securities generally will have limited voting rights relating
only to the modification of the Par Securities and certain other matters
described herein. Holders of Par Securities will not be entitled to vote to
appoint, remove or replace any of the Trustees (as defined below), which
voting rights are vested exclusively in the holder of the Common Securities.
The Trustees and the Company may amend the Declaration without the consent of
holders of Par Securities to ensure that the Trust will be classified as a
grantor trust for United States federal income tax purposes, even if such
action adversely affects the interests of such holders. See "Description of
Securities--Voting Rights; Amendment of the Declaration."
LACK OF PUBLIC MARKET MAY AFFECT RESALE OF NEW PAR SECURITIES
The New Par Securities are being offered to the holders of the Old Par
Securities. The Old Par Securities constitute a new class of securities with
no established trading market. The Old Par Securities are eligible for trading
in the PORTAL market. To the extent that Old Par Securities are tendered and
accepted in the Exchange Offer, the trading market for the remaining
untendered Old Par Securities could be adversely affected. There is no
existing trading market for the New Par Securities, and there can be no
assurance regarding the future development of a market for the New Par
Securities, or the ability of holders of the New Par Securities to sell their
New Par Securities or the price at which such holders may be able to sell
their New Par Securities. If such a market were to develop, the New Par
Securities 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. The Initial Purchaser has advised the Company that it
currently intends to make a market in the New Par Securities. The Initial
Purchaser is not obligated to do
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so, however, and any market-making with respect to the New Par Securities 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 Par Securities
or that an active public market for the New Par Securities will develop. The
Company does not intend to apply for listing or quotation of the New Par
Securities on any securities exchange or stock market unless requested to do
so by the holders of a majority in aggregate principal amount of the New Par
Securities or the managing underwriter, if any, only in connection with the
registration of the New Par Securities.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD PAR SECURITIES
Holders of Old Par Securities who do not exchange their Old Par Securities
for New Par Securities pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Par Securities as set
forth in the legend thereon as a consequence of the issuance of the Old Par
Securities 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 Par Securities may not be offered or
sold, unless registered under the Securities Act and applicable state
securities laws. None of the Trust, the Company nor the Subsidiary Guarantors
(collectively, the "Registrants") currently anticipate that it will register
Old Par Securities under the Securities Act. Based on interpretations by the
Staff of the Division of Corporation Finance of the Commission, as set forth
in no-action letters issued to third parties, the Registrants believe that New
Par Securities issued pursuant to this Exchange Offer in exchange for Old Par
Securities may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such New Par Securities are acquired in the
ordinary course of such holder's business and that such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such New Par Securities. However, any holder of Old Par Securities who is an
"affiliate" of the Registrants (within the meaning of Rule 405 under the
Securities Act) or who intends to participate in the Exchange Offer for the
purpose of distributing New Par Securities, or any broker-dealer who purchased
Old Par Securities from the Trust to resell them pursuant to Rule 144A under
the Securities Act ("Rule 144A") or any other available exemption under the
Securities Act, (a) will not be able to rely on the interpretations of the
Staff of the Division of Corporation Finance of the Commission set forth in
the above-mentioned interpretive letters, (b) will not be permitted or
entitled to tender such Old Par Securities in the Exchange Offer and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Old Par
Securities unless such sale is made pursuant to an exemption from such
requirements. In addition, as described below, if any broker-dealer holds Old
Par Securities acquired for its own account as a result of market-making or
other trading activities and exchanges such Old Par Securities for New Par
Securities, then such broker-dealer must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Par Securities.
Each holder of Old Par Securities who wishes to exchange Old Par Securities
for New Par Securities in the Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the Registrants, (ii) any New Par
Securities to be received by it are being acquired in the ordinary course of
its business, (iii) it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
such New Par Securities, and (iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such New Par Securities. In
addition, the Registrants may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Registrants (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds
the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Par Securities for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the Old Par Securities for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Par Securities.
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. Based on the position
taken by the Staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Registrants believe that
broker-dealers who acquired Old Par Securities for their own accounts, as a
result of market-making activities or other trading activities ("Participating
Broker-Dealers") may fulfill their prospectus
39
<PAGE>
delivery requirements with respect to the New Par Securities received upon
exchange of such Old Par Securities with this Prospectus, as it may be amended
or supplemented from time to time. Subject to certain exceptions, the
Registrants have agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer
in connection with resales of such New Par Securities for a period ending one
year after the Registration Statement of which this Prospectus constitutes a
part is declared effective. Any Participating Broker-Dealer who is an
"affiliate" of the Registrants (within the meaning of Rule 405 under the
Securities Act) may not rely on such interpretive letters and must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. See "The Exchange Offer--Resales of
New Par Securities" and "--Broker-Dealer Considerations."
Any Old Par Securities not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Declaration
(except for those rights relating to the Exchange Offer which terminate upon
consummation of the Exchange Offer). Following consummation of the Exchange
Offer, the holders of Old Par Securities will continue to be subject to all of
the existing restrictions upon transfer thereof and none of the Registrants
will have any further obligation to such holders (other than under certain
limited circumstances) to provide for registration under the Securities Act of
the Old Par Securities held by them. Any Old Par Securities which have not
been exchanged for New Par Securities pursuant to the Exchange Offer will be
mandatorily redeemed by the Company on the Remarketing Settlement Date, as
described under "Description of the Securities--Redemption--Transfer
Restricted Security Redemption." To the extent that Old Par Securities are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Par Securities could be adversely affected. See "The Exchange
Offer--Consequences of a Failure to Exchange Old Par Securities." In addition,
to comply with the securities laws of certain jurisdictions, if applicable,
the New Par Securities 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
Registrants have agreed, pursuant to the Registration Rights Agreement,
subject to certain limitations specified therein, to register or qualify the
New Par Securities for offer or sale under the securities laws of such
jurisdiction as any holder reasonably requests in writing. Unless a holder so
requests, the Registrants do not currently intend to register or qualify the
sale of the New Par Securities in any such jurisdictions. See "The Exchange
Offer."
USE OF PROCEEDS
None of the Registrants will receive any cash proceeds from the issuance of
the New Par Securities offered hereby. The New Par Securities will be
exchanged for Old Par Securities in like liquidation amount, which will be
retired and canceled. The cash proceeds from the sale of the Old Par
Securities were used to purchase the Old Debentures.
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the consolidated financial statements of the Company. The Par Securities will
be classified in the consolidated balance sheet of the Company as a liability
under the caption "Guaranteed Preferred Beneficial Interests in Company's
Debentures" and appropriate disclosures about the Par Securities will be
included in the notes to the consolidated financial statements. For financial
reporting purposes, the Company will record Distributions payable on the Par
Securities as an expense in the consolidated statements of income.
40
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997. In addition, at June 30, 1997, the Company had other debt consisting
of deposits ($1.3 billion) 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.
<TABLE>
<CAPTION>
AT JUNE 30,
1997
------------
ACTUAL
--------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
Cash........................................................ $ 20,550
Loans held for sale......................................... 573,965
Other borrowings............................................ 358,129
Long-term debt:
9 3/4% Senior Notes due 2004(1)........................... 19,792
9 7/8% Senior Notes due 2007.............................. 200,000
Debentures................................................ 70,000
Shareholders' equity:
Preferred Stock; 8,000,000 shares authorized; none issued
and outstanding.......................................... --
Common Stock, no par value; 80,000,000 shares authorized;
38,693,876 shares issued and outstanding................. 147,208
Retained earnings........................................... 110,087
Unrealized gain on securities available for sale, net....... 6,735
--------
Total shareholders' equity................................ 264,030
--------
Total capitalization.................................... $553,822
========
</TABLE>
- --------
(1) Represents approximately $20.2 million of the 9 3/4% Senior Notes not
tendered pursuant to the Tender Offer net of discount of $382,000.
41
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated income statement data for each of the years in the
three-year period ended December 31, 1996 and the selected consolidated
balance sheet data as of December 31, 1996 and 1995 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, 1996 consolidated financial statements
contains an explanatory paragraph regarding the adoption of SFAS 122 in 1995.
The selected consolidated balance sheet data as of December 31, 1994, 1993 and
1992 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 June 30, 1997 and for each of the six month periods ended
June 30, 1997 and 1996 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
six months ended June 30, 1997 are not necessarily indicative of results to be
expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of loans.. $ 37,224 $40,877 $ 88,156 $ 39,557 $ 8,628 $18,149 $20,606
-------- -------- -------- -------- ------- ------- -------
Interest on loans...... 96,442 88,282 188,242 120,244 79,173 51,612 32,741
Interest on
investments........... 6,754 2,389 10,807 6,630 3,610 1,972 1,162
Interest on other
finance activities.... 1,391 3,209 8,422 2,608 -- -- --
-------- -------- -------- -------- ------- ------- -------
Total interest
income.............. 104,587 93,880 207,471 129,482 82,783 53,584 33,903
Interest expense....... 60,056 67,738 135,036 95,728 61,674 29,811 19,959
-------- -------- -------- -------- ------- ------- -------
Net interest income.. 44,531 26,142 72,435 33,754 21,109 23,773 13,944
Provision for loan and
lease losses.......... 8,606 3,525 9,773 5,450 5,150 2,350 680
-------- -------- -------- -------- ------- ------- -------
Net interest income
after provision for
loan and lease
losses.............. 35,925 22,617 62,662 28,304 15,959 21,423 13,264
Loan servicing income.. 3,450 1,562 1,680 12,718 16,332 6,785 5,910
Gain on sale of
servicing rights...... -- 7,808 7,591 3,578 30,837 23,655 6,658
Sale of SPFC stock..... 4,306 62,007 82,690 -- -- -- --
Equity in net income
of SPFC............... 12,931 -- -- -- -- -- --
Other income........... 3,964 5,485 14,154 1,152 1,048 1,414 654
-------- -------- -------- -------- ------- ------- -------
Total other income... 24,651 76,862 106,115 17,448 48,217 31,854 13,222
-------- -------- -------- -------- ------- ------- -------
Total revenues....... 97,800 140,356 256,933 85,309 72,804 71,426 47,092
Expenses:
Personnel expense...... 23,104 23,402 48,355 34,053 33,477 24,520 15,678
Other expenses......... 27,094 24,418 50,694 27,127 28,037 15,433 8,190
-------- -------- -------- -------- ------- ------- -------
Total expenses....... 50,198 47,820 99,049 61,180 61,514 39,953 23,868
-------- -------- -------- -------- ------- ------- -------
Income before income
taxes, minority
interest and
extraordinary item.. 47,602 92,536 157,884 24,129 11,290 31,473 23,224
Income taxes............ 17,843 37,769 69,874 10,144 4,685 13,055 9,583
Minority interest in
income (loss) of
consolidated
subsidiaries........... 4,654 3,110 12,026 (208) -- -- --
-------- -------- -------- -------- ------- ------- -------
Income before
extraordinary item.. 25,105 51,657 75,984 14,193 6,605 18,418 13,641
Extraordinary item-
repurchase of 9 3/4%
Senior Notes due 2004,
net of income taxes.... (3,995) -- -- -- 919 -- --
-------- -------- -------- -------- ------- ------- -------
Net income........... $ 21,110 $ 51,657 $ 75,984 $ 14,193 $ 7,524 $18,418 $13,641
======== ======== ======== ======== ======= ======= =======
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- ----------- --------- ---------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME PER SHARE--FULLY
DILUTED(1):
Income before
extraordinary item.... $ 0.62 $ 1.39 $ 1.95 $ 0.40 $ 0.19 $ 0.54 $ 0.45
Extraordinary item-
repurchase of 9 3/4%
Senior Notes due
2004.................. (0.10) -- -- -- 0.03 -- --
--------- --------- --------- ----------- --------- ---------- --------
Net income........... $ 0.52 $ 1.39 $ 1.95 $ 0.40 $ 0.22 $ 0.54 $ 0.45
========= ========= ========= =========== ========= ========== ========
Weighted average fully
diluted shares
outstanding (000s).... 40,782 37,176 38,975 35,122 33,582 33,880 30,229
CASH FLOW DATA:
Net cash provided by
(used in)
operating activities.. $ 500,528 $ 357,320 $ (6,082) $(1,173,703) $ 961,579 $ (903,050) $(78,865)
Net cash (used in)
provided by
investing activities.. (337,789) 191,189 154,372 140,961 (796,638) (145,701) 21,302
Net cash (used in)
provided by
financing activities.. (216,436) (470,897) (113,209) 1,047,004 (177,314) 1,066,584 70,216
--------- --------- --------- ----------- --------- ---------- --------
Net change in cash... $ (53,697) $ 77,612 $ 35,081 $ 14,262 $ (12,373) $ 17,833 $ 12,653
========= ========= ========= =========== ========= ========== ========
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- ----------- --------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING AND FINANCIAL
DATA(2):
Loans originated:
ICII................. $ -- $ 310 $ 310 $ 1,816 $ 4,260 $ 6,019 $ 3,383
SPTL................. 198 145 531 724 NA(3) NA(3) NA(3)
SPFC(4).............. -- 245 790 288 190 -- --
FMAC................. 301 208 459 164 -- -- --
IBC.................. 65 34 87 36 -- -- --
AMN(5)............... 94 -- -- -- -- -- --
--------- --------- --------- ----------- --------- ---------- --------
Total.............. $ 658 $ 942 $ 2,177 $ 3,028 $ 4,450 $ 6,019 $ 3,383
========= ========= ========= =========== ========= ========== ========
Loans securitized:
ICII................. $ -- $ -- $ -- $ 177 $ -- $ -- $ --
SPTL................. 203 -- 277 511 46 -- --
SPFC(4).............. -- 232 657 165 -- -- --
FMAC................. 159 167 325 105 -- -- --
IBC.................. 116 47 87 85 -- -- --
AMN.................. -- -- -- -- -- -- --
--------- --------- --------- ----------- --------- ---------- --------
Total.............. $ 478 $ 446 $ 1,346 $ 1,043 $ 46 $ -- $ --
========= ========= ========= =========== ========= ========== ========
Outstanding balance of
loans and leases
securitized (at end
of period)(6)......... $1,413 $1,270 $2,118 $1,047 $45 $ -- $ --
SELECTED RATIOS:
Ratio of earnings to
fixed charges(7)...... 1.8x 2.4x 2.2x 1.3x 1.2x 2.1x 2.2x
Pre-tax interest
coverage ratio(8)..... 5.6 23.0 17.0 3.9 2.4 -- --
Ratio of indebtedness
to total
capitalization (at
end of period)(9)..... 52.3% 29.5% 40.5% 46.1% 51.4% -- % -- %
Average equity to
average assets........ 11.88 5.87 7.27 4.72 4.86 6.71 7.71
Return on average
common equity......... 17.21 81.95 45.55 17.59 10.57 31.76 37.75
Return on average
assets................ 1 .63 4.81 3.31 0.82 0.51 2.13 2.91
SPTL REGULATORY CAPITAL
RATIOS
(AT END OF PERIOD):
California leverage
limitation(10)........ 11.92% 12.53% 13.50% 11.58% 11.50% 7.29% 8.73%
Risk-based--Tier 1..... 9.17 8.92 9.71 11.72 14.21 10.27 14.94
Risk-based--Total...... 12.68 10.01 10.87 13.18 15.13 10.73 15.74
FDIC Leverage Ratio.... 9.07 8.09 9.35 8.04 8.08 9.47 8.78
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 2.87% 2.53% 2.64% 1.55% 1.16% 0.64% 0.79%
Allowance for loan
losses as a
percentage of non-
performing loans...... 50.75 31.29 38.94 44.30 53.83 65.91 79.10
Net charge-offs as a
percentage of average
total loans held for
investment............ 0.69 0.27 0.94 0.36 0.23 0.89 0.18
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, ----------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 20,550 $ 74,247 $ 39,166 $ 24,904 $ 37,277 $ 19,444
Interest bearing
deposits.............. 241,285 3,369 267,776 10,600 90,000 30,000
Investment securities,
including FHLB Stock.. 93,902 101,448 28,713 18,817 18,000 5,000
Loans held for sale.... 573,965 940,096 1,341,810 263,807 1,238,006 328,575
Loans held for
investment, net....... 1,120,066 1,068,599 668,771 1,029,556 154,595 84,843
Securitization related
assets................ 34,327 159,707 58,272 4,558 529 982
Total assets........... 2,277,736 2,470,639 2,510,635 1,420,409 1,572,663 479,430
Deposits............... $1,260,991 $1,069,184 $1,092,989 $ 934,621 $1,001,468 $422,551
Borrowings from FHLB... -- 140,500 190,000 295,000 320,000 --
Other borrowings....... 358,129 694,352 987,810 -- 147,611 --
Senior notes (11)...... 219,792 88,209 80,472 80,343 -- --
Remarketed par
securities............ 70,000 -- -- -- -- --
Total liabilities...... 2,013,706 2,231,131 2,416,533 1,344,536 1,504,411 429,652
Shareholders' equity... 264,030 239,508 94,102 75,873 68,253 49,778
</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. Commencing
with the three months ended March 31, 1997, the financial statements of
ICIFC are no longer consolidated with those of ICII.
(3) Information not available.
(4) Commencing with the three months ended March 31, 1997, the financial
statements of SPFC are no longer consolidated with those of ICII.
(5) Represents loans originated for the period from AMN's acquisition (March
14, 1997) through June 30, 1997.
(6) Represents the outstanding balance of loans and leases securitized,
excluding loans held for sale and investment.
(7) 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.
(8) 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.
(9) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness
plus total shareholders' equity.
(10) Ratio of (i) SPTL's total shareholders' equity to (ii) total deposits.
(11) At June 30, 1997, represents $200.0 million of the 9 7/8% Senior Notes
and approximately $20.2 million of the 9 3/4% Senior Notes not tendered
pursuant to the Tender Offer, net of discount of $392,000 related to the
9 3/4% Senior Notes.
44
<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"), Imperial Credit Advisors, Inc. ("ICAI") and Auto
Marketing Network, Inc. ("AMN"). The majority-owned consolidated subsidiary is
Franchise Mortgage Acceptance Company LLC ("FMAC"). Minority interests in
these subsidiaries (other than AMN which was acquired in March 1997) are
reflected in other liabilities at December 31, 1995 and in Minority Interest
in Consolidated Subsidiaries at December 31, 1996 and June 30, 1997 on the
Company's consolidated balance sheet. As of June 30, 1997, FMAC was owned
66.7% by ICII and 33.3% by the President of FMAC. As of June 30, 1997, ICII
owned 49.4% of the outstanding capital stock of Southern Pacific Funding
Corporation ("SPFC"). In March 1997, the Company disposed of its common stock
interest in ICIFC. As a result, commencing with the three months ended March
31, 1997, the financial statements of SPFC and ICIFC are no longer
consolidated with those of ICII. See "-- Deconsolidation."
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 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. ("IMH"), 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 IMH. As of
June 30, 1997, the Company owned 4.9% of the capital stock of IMH.
Additionally, the Company's wholly-owned subsidiary, ICAI, entered into a
management agreement with IMH pursuant to which it provides management
advisory services to IMH in exchange for management fees. See "Business--
Advisory, Investment and 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
45
<PAGE>
1996, the Company sold substantially all of its conforming residential
mortgage loan servicing rights. 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.
Historically, the Company's subsidiaries have engaged in capital markets
transactions, including the sale of their common stock to the public. Examples
of such sales have included the Company's former mortgage banking operations,
restructured to form IMH, and the Company's sub-prime residential mortgage
banking subsidiary, SPFC. The Company has recently announced its intention to
sell shares of its franchise lending subsidiary through Franchise Mortgage
Acceptance Corporation, a Delaware corporation ("FMC") which was incorporated
in August 1997 for the purpose of succeeding to the business of FMAC, to the
public sometime in the fourth quarter of 1997. Based on these historic and
current transactions, it would not be unlikely for the Company to engage in
future sales of subsidiary stock for its remaining wholly or partially owned
companies. The Company may also decide to move current divisions of existing
subsidiaries into their own separate companies, and subsequently engage in a
public offering of shares in the newly formed entity. While the Company has
historically engaged in the types of transactions described above, there are
no other current plans to engage in such transactions. The Company currently
has no intention of repurchasing any shares of previously sold subsidiary
stock.
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 1996, a substantial portion of the Company's
operations were conducted through SPFC.
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 $64.5 million, $87.2 million and
$36.0 million and it securitized, including leases acquired through purchase
transactions, $115.5 million, $87.0 million and $85.2 million of leases during
the six months ended June 30, 1997 and the years ended December 31, 1996 and
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 six months ended June 30, 1997, the year ended
December 1996, and for the six-month period ended December 31, 1995, FMAC
originated or acquired $300.6 million, $449.3 million and $163.5 million and
securitized $158.6 million, $325.1 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 June 30, 1997 and December 31, 1996 and
1995, CBC had total commitments of $649.1 million, $547.7 million and $364.2
million, respectively, of which $378.6 million of loans were outstanding at
June 30, 1997.
In September 1996, the Company entered into various transactions with
Dabney/Resnick, Inc., 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.
46
<PAGE>
In March 1997, the Company acquired all of the outstanding shares of AMN, a
sub-prime auto lender, for $750,000. The Company then advanced AMN $11.6
million to repay amounts owed pursuant to operating lines of credit and for
working capital purposes. For the period from its acquisition (March 14, 1997)
through June 30, 1997, AMN originated $93.9 million of sub-prime auto loans.
As a part of the Company's diversification strategy, and the related
acquisitions of FMAC, FCAC and CBCC as well as the Avco Acquisition, the
product mix of the Company's interest earning assets changed in 1996 to
include a much larger percentage of higher-yielding loan and lease products as
compared to the previous year.
Deconsolidation
During the first quarter ended March 31, 1997, the Company reduced its
common stock ownership in SPFC from 51.2% at December 31, 1996 to 49.4% at
March 31, 1997. As a result, commencing with the three months ended March 31,
1997. SPFC's financial statements are no longer consolidated with those of
ICII. Under Generally Accepted Accounting Principles ("GAAP"), when a
subsidiary's ownership percentage is reduced to below 50%, consolidation is no
longer required. Accordingly, the Company's investment in SPFC is reflected in
the Company's statement of condition as a separate line item entitled
"Investment in Southern Pacific Funding Corporation" and in the statement of
income as "Equity in net income of Southern Pacific Funding Corporation." The
income from SPFC will represent the Company's percentage ownership in SPFC's
net income. For the three months and six months ended June 30, 1997, the
equity in net income of SPFC was $6.7 million and $12.9 million, respectively.
During the first quarter of 1997, ICII disposed of its common stock interest
in ICIFC, a subsidiary engaged in mortgage conduit operations for IMH. At
December 31, 1996, ICII owned 100% of the common stock of ICIFC which
represented a 1% economic interest since IMH a former subsidiary and now a
separate publicly held mortgage real estate investment trust, owned all of the
nonvoting preferred stock of ICIFC, which gave IMH a 99% economic interest in
ICIFC. The Company's disposal of its remaining economic interest in ICIFC
concludes its exit from its original mortgage banking business.
Prior to March 31, 1997, ICII owned 100% of the voting common stock of ICIFC
which entitled it to a 1% economic interest. ICIFC is the corporation through
which IMH conducts its mortgage conduit operations. Since 100% of the common
stock of ICIFC was owned by ICII, ICII consolidated the financial statements
of ICIFC in its financial statements. As a result, the assets and liabilities
of the Company reflected on its balance sheet were greater than they would
otherwise be absent such consolidation. However, since ICII only owned 1% of
the economic interest of ICIFC, it considered ICIFC's operations immaterial to
the Company. Therefore, to more properly reflect the Company's true financial
condition, in March 1997 the Company disposed of its common stock interest in
ICIFC. As a result, commencing with the three months ended March 31, 1997, the
financial statements of ICIFC are no longer consolidated with those of ICII.
The aforementioned deconsolidations of SPFC and ICIFC are collectively
referred to as the "Deconsolidation."
Securitization Related Assets
During the six months ended June 30, 1997, the Company completed lease
securitizations totaling $477.2 million. The Company has retained interests in
loan and lease securitizations representing the excess of the total amount of
loans sold in the securitization over the amounts represented by interests in
the security sold to investors. The retained interests in the loan and lease
securitizations were $34.3 million and $49.5 million at June 30, 1997 and
December 31, 1996, respectively. At June 30, 1997 and December 31, 1996, the
Company's consolidated balance sheet reflected Capitalized Excess Servicing
Fees Receivable of $0 and $23.1 million, respectively. At June 30, 1997 and
December 31, 1996, the Company's consolidated balance sheet reflected Interest
Only and Residual Certificates of $0 and $87.0 million, respectively. The
decline in Capitalized Excess Servicing Fees Receivable and Interest Only and
Residual Certificates resulted from the deconsolidation of SPFC and ICIFC.
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Servicing Rights
When the Company purchases servicing rights from others, or loans which
include the associated servicing rights, the price paid for the servicing
rights, net of amortization based on assumed prepayment rates, is included on
the consolidated balance sheet as "Purchased and Originated Servicing Rights,"
("PMSRs" and "OMSRs"). At June 30, 1997, PMSRs and OMSRs outstanding were $6.5
million, consisting of $6.1 million at SPTL and $400,000 at ICAI. At December
31, 1996, PMSRs and OMSRs were $14.9 million, consisting of $5.5 million at
SPTL, $400,000 at ICAI and $8.8 million at ICIFC. During the three months
ended March 31, 1997, the Company disposed of its ownership interest in ICIFC
and, therefore, ICIFC is no longer consolidated.
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 will not exceed 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
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Income for the three months and six months ended June 30, 1997 before
extraordinary items was $14.1 million and $25.1 million or $0.35 and $0.62 per
share, as compared to $43.0 million and $51.7 million or $1.11 and $1.39 per
share for the same periods last year, respectively.
Net income for the three months ending June 30, 1997 was $14.1 million or
$0.35 per share. Net income including a $4.0 million extraordinary item
representing a loss on the early retirement of debt for the six months ending
June 30, 1997 was $21.1 million or $0.52 per share. There were no
extraordinary items for the same periods last year.
Total revenues for the Company during the second quarter ended June 30, 1997
were $57.5 million as compared to $96.1 million reported for the same period
in 1996. Excluding the gains on the sale of SPFC stock for the second quarter
ending June 30, 1996 total revenues increased by 69% to $57.5 million as
compared to $34.1 million for the same period last year. Total revenues for
the six months ended June 30, 1997 were $97.8 million, as compared to
$140.4 million for the same period last year. Excluding the gains on the sale
of SPFC stock for the six month periods ended June 30, 1997 and 1996, total
revenues increased by 19% to $93.5 million from $78.3 million, respectively.
Gain on sale of loans and leases increased $9.4 million to $28.6 million
during the second quarter of 1997 from $19.2 million for the same period last
year. The increase in gain on sale of loans and leases was primarily
attributable to increased volume and profitability on loans securitized by
SPTL and FMAC, partially offset by the deconsolidation of SPFC and ICIFC.
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Gain on sale of loans decreased $3.7 million to $37.2 million for the six
months ended June 30, 1997 from $40.9 million for the same period last year,
primarily as a result of the deconsolidation of SPFC and ICIFC.
Net interest income continued to improve for the second quarter of 1997. Net
interest income increased by $10.3 million to $23.7 million for the second
quarter of 1997 from $13.4 million for the same period last year. For the six
months ended June 30, 1997, net interest income increased $18.4 million to
$44.5 million from $26.1 million for the same period last year. Excluding net
interest income for SPFC and ICIFC from the second quarter and six months
ended June 30, 1996, net interest income would have increased by $10.7 million
and $20.3 million, respectively, for the quarter and six months ended June 30,
1997 as compared to the same periods last year. Net interest margin at SPTL
was 4.37% for the second quarter of 1997, an increase of 22 basis points as
compared to 4.15% for the same period last year. For the six months ended June
30, 1997 net interest margin was 4.29%, an increase of 41 basis points as
compared to 3.88% for the same period last year. The improvement in net
interest margin is primarily the result of the Company's efforts to originate
higher yielding loan and lease products.
Interest income increased $11.0 million to $55.4 million for the second
quarter of 1997 from $44.4 million for the same period last year. For the six
months ended June 30, 1997, interest income increased $10.7 million to $104.6
million from $93.9 million for the same period last year. The increase in
interest income was primarily attributable to the increase in yield and
average outstanding balances on interest earning assets, partially offset by
the deconsolidation of SPFC and ICIFC in 1997. Excluding interest income for
SPFC and ICIFC from the second quarter and six months ended June 30, 1996,
interest income would have increased by $19.5 million and $33.5 million for
the second quarter and six months ended June 30, 1997, respectively, when
compared to the same periods last year.
Interest expense increased $697,000 to $31.7 million for the second quarter
of 1997 from $31.0 million for the same period last year. For the six months
ended June 30, 1997, interest expense decreased $7.6 million to $60.1 million
from $67.7 million for the same period last year. Excluding interest expense
for SPFC and ICIFC from the second quarter and six months ended June 30, 1996,
interest expense would have increased by $8.8 million and $13.2 million for
the second quarter and six months ended June 30, 1997, respectively, as
compared to the same periods last year. This increase in interest expense
primarily resulted from higher borrowing costs as a result of the Company's
newly issued Senior Notes and Par Securities, as well as from increased
outstanding average balances of deposits and warehouse lines.
Loan servicing income totaled $2.2 million for the second quarter of 1997 as
compared to an expense of $448,000 for the same period last year. The increase
in loan servicing income was primarily attributable to an increase in the
outstanding performing balance of loans and leases serviced for others at
FMAC, IBC and SPTL.
Other income, which includes REIT management fees, totaled $2.1 million
during the second quarter of 1997 as compared to $4.3 million for the same
period in 1996. Other income decreased during the second quarter of 1997 as a
result of a gain on the disposition of IMH stock totaling $1.1 million during
the second quarter of 1996, and the deconsolidation of SPFC and ICIFC in 1997.
For the six months ended June 30, 1997, REIT management fees totaled $2.8
million as compared to $1.2 million for the same period last year. The REIT
management fee results from the Company's advisory contract with IMH.
During the first quarter of 1997, the Company successfully issued $200.0
million of 9.875% Senior Notes due 2007. A portion of the proceeds from the
offering was used to repurchase $69.8 million of the outstanding 9.75% Senior
Notes, due 2004. As a result, the Company recorded an extraordinary item
relating to the early retirement of debt of $4.0 million or $0.10 per share
for the first quarter. The Company expects to utilize the remaining proceeds
for capital contributions to subsidiaries, strategic acquisitions,
investments, and for general corporate purposes.
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During the second quarter of 1997, Imperial Credit Capital Trust I, a
subsidiary of the Company organized for the sole purpose of issuing trust
securities (the "Trust"), issued $70.0 million of Remarketed Par Securities
("Old Par Securities") (the "Offering"). These securities can be redeemed at
par upon their maturity or remarketed as 30 year capital instruments. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the Offering are being used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
Total expenses for the Company during the quarter ended June 30, 1997 were
$29.1 million, an increase of $8.4 million from the $20.7 million reported for
the same period in 1996. For the six months ended June 30, 1997, total
expenses were $50.2 million, an increase of $2.4 million from the $47.8
million reported for the same period last year. Excluding total expenses for
SPFC and ICIFC from the second quarter and six months ending June 30, 1996,
total expenses increased by $14.2 million and $12.5 million when compared to
the second quarter and six months ending June 30, 1997, respectively.
Total expenses increased primarily due to an increase in OREO expenses from
properties foreclosed on related to the former mortgage banking operations
exited in 1996. Expenses also increased due to the expansion of operations at
the Company's new business lines and subsidiaries including AMN, acquired in
the first quarter of 1997.
Personnel expenses increased to $12.4 million for the three months ended
June 30, 1997 as compared to $11.0 million for the same period of the previous
year. Excluding personnel expenses for SPFC and ICIFC from the three months
ended June 30, 1996, personnel expense increased to $12.4 million from $6.9
million for the quarter ending June 30, 1997. The increase in personnel
expense excluding SPFC and ICIFC results from the Company's acquisition and
expansion activities throughout 1996 and during the first six months of 1997.
For the six months ended June 30, 1997, personnel expenses remained
essentially the same at $23.1 million as compared to $23.4 million primarily
due to the Company's expansion activities offset by the deconsolidation of
SPFC and ICIFC.
Amortization of PMSR's and OMSR's increased to $206,000 for the three months
ended June 30, 1997 as compared to $114,000 for the same period last year. The
increase primarily resulted from an increase in prepayment rates on the
underlying mortgage loan portfolio partially offset by the deconsolidation of
SPFC and ICIFC. For the six months ended June 30, 1997 amortization of PMSR's
and OMSR's decreased to $225,000 as compared to $832,000 for the same period
last year. The decrease was primarily the result of the deconsolidation of
SPFC and ICIFC.
Occupancy expense remained relatively constant at $983,000 for the three
months ended June 30, 1997 as compared to $950,000 for the same period of the
previous year. The increase in occupancy expense was primarily attributable to
the Company's acquisition and expansion activities throughout 1996 and during
the first six months of 1997 partially offset by the the deconsolidation of
SPFC and ICIFC. For the six months ended June 30, 1997 occupancy expense
decreased to $1.9 million as compared to $2.3 million for the same period last
year primarily due to the deconsolidation of SPFC and ICIFC.
Net expenses of OREO increased to $3.5 million for the three months ended
June 30, 1997 as compared to $1.2 million for the same period last year. Net
expenses of OREO increased primarily due to an increase in OREO expenses from
properties foreclosed on related to the conforming mortgage banking operations
exited in 1996. For the six months ended June 30, 1997 and 1996, net expenses
of OREO were $4.2 million and $4.0 million, respectively.
In the prior year's six months ending June 30, 1996, the Company recorded a
$3.8 million restructuring charge representing the costs anticipated to be
incurred in connection with the Company's exit from the conforming mortgage
business. For the three and six month periods ended June 30, 1997, there were
no additional restructuring charges required.
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All other general and administrative expenses, including Federal Deposit
Insurance Corporation ("FDIC") insurance premiums, data processing,
professional services, and telephone and other communications expense,
increased to $12.0 million for the three months ended June 30, 1997 as
compared to $7.4 million for the same period last year. For the six months
ended June 30, 1997 and 1996 these expenses were $20.7 million and $13.5
million, respectively. Excluding SPFC and ICIFC for the second quarter and six
months ending June 30, 1996, such expenses were $6.4 million and $11.0 million
in the prior year. The overall increase in general and administrative expenses
was primarily attributable to the Company's acquisition and expansion
activities throughout 1996 and during the first six months of 1997.
As a result of the growth in the loan portfolio and the change in its
product mix, the Company continued to add to the allowance for loan and lease
losses. The provision for loan and lease losses increased $3.7 million to $5.7
million for the second quarter of 1997 from $2.0 million for the same period
last year. The increase in the provision for loan and lease losses for the
second quarter of 1997 was primarily the result of the continuing change in
the composition of the Company's investment loan portfolio to higher yielding
loan products. Nonaccrual loans and leases as of June 30, 1997 and December
31, 1996 were $48.3 million and $50.1 million or 4.21% and 4.60% of gross
loans held for investment, respectively.
The balance of nonaccrual loans relating to the former mortgage banking
operations included $16.0 million and $19.9 million of loans for June 30, 1997
and December 31, 1996, respectively. The Company periodically reviews the
allowance for loan and lease losses in connection with the overall loan and
lease portfolio. Based on the Company's charge-off experience and relatively
stable nonaccrual loans the Company believes the current balance of the
allowance for loan and lease losses is sufficient in relation to the amount of
known and inherent risk in the loan and lease portfolio.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company's consolidated net income for the year ended December 31, 1996
was $76.0 million as compared to $14.2 million for 1995, an increase of 435%.
The increase in net income is attributable to several factors: gains on sale
of SPFC stock; a 123% increase in gain on sale of loans; a 115% increase in
net interest income; and an improved net interest margin. These positive
factors were partially offset by an increase in total expenses and the
provision for loan and lease losses.
Revenues for the year ended December 31, 1996 increased 201% to $256.9
million as compared to $85.3 million for 1995. Expenses for the year ended
December 31, 1996 increased 62% to $99.0 million as compared to $61.2 million
for 1995. Total revenues included a pre-tax gain of $82.7 million from the
sales of SPFC's common stock through an initial public offering in August 1996
and a secondary offering in November 1996. Prior to the sale of SPFC stock,
SPFC was a wholly owned subsidiary of the Company. In SPFC's initial public
offering, ICII sold 3.5 million shares, and recorded a gain of $30.6 million
with SPFC selling 5.2 million primary shares to the public, resulting in a
gain to the Company of $31.4 million. In November 1996, ICII sold an
additional 1.5 million shares of SPFC common stock through a secondary
offering in which ICII was the sole selling shareholder, resulting in a gain
to the Company of $20.6 million, and reducing its ownership in SPFC to 51.2%
at December 31, 1996.
Gain on sale of loans increased 123% to $88.2 million for the year ended
December 31, 1996 as compared to $39.6 million for 1995. The increase was
primarily the result of substantially increased volume and profitability on
the sale of various variable and fixed rate loan products through
securitizations. Gain on sale of loans includes $55.4 million in gains
recorded as the result of the securitization of $657.4 million of the
Company's sub prime residential mortgage loans at SPFC, $11.2 million in gains
resulting from the securitization of $277.0 million of commercial and multi-
family loans at SPTL, $3.6 million gain on sale of the Company's retained
interest in the securitization of $105.2 million of franchise loans at FMAC
which were accounted for as a financing at December 31, 1995 and a gain on
sale of $13.7 million resulting from the securitization of $325.1 million of
franchise loans during the second and fourth quarters of 1996. During the year
ended December 31, 1996, the Company wrote down the carrying value of its
Capitalized Excess Servicing Fees Receivable by $4.7 million due to actual
performance results differing from original excess cash flows estimated by the
Company.
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For the year ended December 31, 1996, net interest income, increased $38.6
million or 115% to $72.4 million as compared to $33.8 million for 1995. The
increase in interest income was due to acquisitions completed throughout the
last half of 1995, and the 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 in 1996 includes a larger percentage of
higher-yielding loan and lease products as compared to 1995.
For the year ended December 31, 1996, interest income increased $78.0
million or 60% to $207.5 million from $129.5 million for 1995. The increase in
interest on loans was primarily attributable to an overall increase in the
yield on outstanding loan and lease products. Interest income also increased
as a result of the Company's loan and lease securitizations, which contributed
interest income of $8.4 million from the accretion of discounts on the
Company's Capitalized Excess Servicing Fees Receivable.
For the year ended December 31, 1996, interest expense increased $39.3
million or 41% to $135.0 million from $95.7 million for 1995. The increase in
interest expense primarily resulted from increased outstanding average
balances of warehouse lines of credit.
For the year ended December 31, 1996, consolidated net interest margin
increased to 3.40%, an increase of 132 basis points as compared to 2.08% for
1995. The improvement in net interest income and margin is largely the result
of the Company's repositioning itself with the origination and acquisition of
higher yielding loan and lease products. Acquisitions have added to the
improvement in net interest income and net interest margin. For the year ended
December 31, 1996, net interest margin and net income benefited from a full
year of operation from CBC as well as the fourth quarter purchase of equipment
leases totaling approximately $85 million with a weighted average interest
rate of 15.5% from Avco Leasing Services, a division of Avco Financial
Services of Southern California, Inc.
Loan servicing income for the year ended December 31, 1996 decreased 87% to
$1.7 million as compared to $12.7 million for 1995. 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 of the remaining delinquent conforming residential mortgage servicing
portfolio of the Company's former mortgage banking operations.
During the years ended December 31, 1996 and 1995, the Company sold mortgage
loan servicing rights relating to $3.2 billion and $957.2 million principal
amount of loans, resulting in pre-tax gains of $7.6 million and $3.6 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 sales price and the increased amounts of
capitalized servicing rights on the portfolio sold during the year ended
December 31, 1996 as compared to 1995 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 plan to exit the conforming mortgage banking
business.
Other income, including management fees, for the year ended December 31,
1996 increased to $14.2 million as compared to $1.2 million for 1995. This
increase was primarily due to fee income generated from ICAI's management
contract with IMH and dividend payments received by the Company on its
investment in IMH. Additionally, increasing other income was the resolution
and recovery of $2.5 million of certain outstanding reconciling items at SPTL.
Personnel expenses increased 42% to $48.4 million for the year ended
December 31, 1996 as compared to $34.1 million for 1995. 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.
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Amortization of PMSRs and OMSRs decreased 72% to $1.1 million for the year
ended December 31, 1996 as compared to $4.0 million for 1995. The decrease was
the result of a decreased outstanding balance of PMSRs and OMSRs 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 19% to $4.7 million for the year ended December
31, 1996 as compared to $3.9 million for 1995. 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, as well as to
the continued expansion of SPFC throughout 1996.
Net expenses of OREO increased 267% to $7.0 million for the year ended
December 31, 1996 as compared to $1.9 million for 1995. The increase in net
expense of OREO was primarily the result of the increase in the volume of
properties foreclosed on and liquidated by the Company's former mortgage
banking operations.
FDIC insurance premiums decreased 71% to $327,000 for the year ended
December 31, 1996 as compared to $1.1 million for 1995. 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 of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. During
the three months ended March 31, 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 year ended
December 31, 1996, the Company incurred actual charges of approximately $3.2
million. The Company believes that significant changes to the exit plan are
not likely, and that the exit plan should be completed in the second quarter
of 1997. The Company has included in the restructuring provision 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 109% to $33.8 million for the year ended December 31, 1996 as
compared to $16.2 million for 1995. 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, and the continued expansion
of SPFC throughout 1996.
Income taxes increased 589% to $69.9 million for the year ended December 31,
1996 as compared to $10.1 million for 1995. The increase in income taxes was
due to the 554% increase in the Company's income before income taxes. Income
taxes includes deferred income taxes relating to sales of the Company's stock
in SPFC.
Minority interest in income of consolidated subsidiaries increased to $12.0
million for the year ended December 31, 1996 as compared to a loss of $208,000
for 1995. The increase was due primarily to the Company's sales during 1996 of
49% of its interest in SPFC. As a result of the sales, a significant portion
of SPFC's net income was allocable to SPFC's minority shareholders.
As a result of the growth in the loan portfolio and the change in its
product mix, the Company continued to add to the allowance for loan and lease
losses. For the year ended December 31, 1996, the provision for loan losses
increased $4.3 million to $9.8 million as compared to $5.5 million for 1995.
The increase in the loan and lease loss provision for the year ended
December 31, 1996 was primarily the result of an increase in nonaccrual loans
(specifically one purchased loan portfolio) and due to the continuing change
in the composition of the Company's investment loan portfolio to include
higher yielding loan products.
At December 31, 1996, of the $50.1 million of nonaccrual loans, 89%, 3% and
8% were single family, multi-family and non-residential loans, respectively,
as compared to 76%, 18% and 6%, respectively, at
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December 31, 1995. 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.
Total NPAs increased 63% to $63.6 million at December 31, 1996, as compared
to $39.0 million at December 31, 1995. The ratio of the allowance for loan and
lease losses to nonaccrual loans decreased to 39.9% at December 31, 1996 from
44.3% at December 31, 1995. NPAs as a percentage of total assets were 2.64%
and 1.55% at December 31, 1996 and 1995, respectively.
The Company believes the overall increase in NPAs was primarily a result of
the acquisition of a portfolio of sub-prime residential mortgage loans by SPTL
late in 1995. Nonaccrual loans in the acquired portfolio increased to $18.2
million from $0.6 million at December 31, 1996 and 1995, respectively.
Although the levels of nonaccrual loans has increased, actual losses from the
acquired portfolio have been minor at $337,000 and $0 in 1996 and 1995,
respectively. The Company considered the level of NPAs related to its other
lending activities to be acceptable due to the attractive yield on these
loans.
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.
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 1994. Income before extraordinary items
increased 115% to $14.2 million as compared to $6.6 million for 1994. Net
income for the year ended December 31, 1995 increased 89% to $14.2 million as
compared to $7.5 million for 1994. 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 1994. 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 the year ended December
31, 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 32% to $33.8 million and 2.08% compared to $21.1 million and
1.57% for 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 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.
54
<PAGE>
Loan servicing income for the year ended December 31, 1995 decreased 22% to
$12.7 million as compared to $16.3 million for 1994. 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
the year ended December 31, 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 the years ended December 31, 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 the year ended December 31, 1995, the average gain on
sale of servicing rights decreased 66% to 37 basis points as compared to 108
basis points for 1994. 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 servicing rights, net of the related capitalized PMSRs and
OMSRs. 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 the year ended December 31, 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
the year ended December 31, 1995, as compared to $0.3 million in 1994.
Scheduled amortization of capitalized servicing rights was $2.8 million in the
year ended December 31, 1995, substantially equal to the $2.9 million in 1994.
Occupancy expense increased 15% to $3.9 million in the year ended December
31, 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 the year ended
December 31, 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 the year ended December 31,
1995 as compared to $0.4 million in 1994.
FDIC insurance premiums decreased 48% to $1.1 million in the year ended
December 31, 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 the year ended December 31,
55
<PAGE>
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 the year ended
December 31, 1995, an increase of 6% from $5.2 million for 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 1994.
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.
Total NPAs 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. NPAs 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 NPAs 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 NPAs 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.
LIQUIDITY AND CAPITAL RESOURCES
General
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
56
<PAGE>
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
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
residential 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 residential 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 residential mortgage banking operations and its own investing
activities through deposits and, if necessary through borrowings under lines
of credit and from the FHLB. See "--Lines Of Credit and Warehouse Facilities."
At June 30, 1997 and December 31, 1996 and 1995, SPTL had maximum FHLB
borrowings available equal to $63.9 million, $212.7 million and $501.4
million, respectively. 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. The highest FHLB advance outstanding during the
year ended December 31, 1996 was $338.0 million, with an average outstanding
balance of $188.8 million. The outstanding balance of FHLB advances was $140.5
million at December 31, 1996. The highest FHLB advance outstanding during the
six months ended June 30, 1997 was $79.5 million, with an average outstanding
balance of $78.1 million. There were no outstanding balances of FHLB advances
on June 30, 1997. 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. 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. Since December 31,
1991, SPTL has increased deposits as necessary so that deposits, together with
cash, liquid assets and FHLB borrowings have been sufficient to provide the
funding for its loans held for sale and investment. As of June 30, 1997,
SPTL's deposit portfolio which consists primarily of certificate accounts
increased approximately $209 million to $1.3 billion from $1.1 billion at
December 31, 1996.
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.
57
<PAGE>
In January 1994, the Company issued $90.0 million principal amount of the 9
3/4% Senior Notes due 2004. In October 1994, the Company repurchased $8.5
million of said notes. As of December 31, 1995, the Company was not in
compliance with certain debt covenants related to these notes. Subsequent to
December 31, 1995, these defaults were corrected. In March 1996, the Company
reissued the $8.5 million of the notes which it purchased in October 1994. At
December 31, 1996, $90.0 million of these notes were outstanding.
In January 1997, the Company issued $200.0 million principal amount of the 9
7/8% Senior Notes and used a portion of the proceeds to purchase approximately
$69.8 million of the 9 3/4% Senior Notes.
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. In
March 1997, ICII sold an additional 370,000 shares of SPFC common stock for
net proceeds of approximately $6.2 million. After the sale of such common
stock by ICII, ICII owned approximately 49.4% of the issued and outstanding
shares of SPFC's common stock as of June 30, 1997, excluding shares issuable
upon exercise of options granted or to be granted pursuant to SPFC's stock
option plans and shares issuable upon conversion of the $75.0 million of
convertible subordinated notes, mentioned above.
During the second quarter of 1997, Imperial Credit Capital Trust I, a
subsidiary of the Company organized for the sole purpose of issuing trust
securities, issued $70.0 million of Old Par Securities. These securities can
be redeemed at par upon their maturity or remarketed as 30 year capital
instruments at the Company's option. Under current tax law, the interest
payments on these securities are tax-deductible. The proceeds from the
Offering are being used for capital contributions to subsidiaries, strategic
acquisitions, investments and general corporate purposes.
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 June 30, 1997 and December 31,
1996, $123.8 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.
58
<PAGE>
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.
Lines of Credit and Warehouse Facilities
The Company is dependent upon its ability to access warehouse lines of
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 $590.0 million in financing at June 30, 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 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.
ICII and its subsidiaries, as indicated in the table below, have warehouse
lines of credit available where each indicated entity can close loans in its
name. The loan collateral for each facility is held by an independent third-
party custodian and each entity has the ability to borrow against such
collateral at a percentage of the original principal balance. The following
table sets forth certain terms of such lines of credit as of June 30, 1997:
<TABLE>
<CAPTION>
SPREAD
WEIGHTED TO
AVERAGE PRINCIPAL LIBOR
INTEREST COMMITMENT AMOUNT (BASIS
RATE AMOUNT* OUTSTANDING EXPIRATION DATE POINTS)
-------- ---------- ----------- ------------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Greenwich Capital Finan-
cial (AMN)............. 6.88% $210,000 $146,577 30 days on demand 125
Banco Santander
(FMAC)(1).............. 7.29 50,000 16,560 Under extension 160
Sanwa Bank of California
(FMAC)(1).............. 7.50 15,000 12,092 September 30, 1997 200
Credit Suisse First Bos-
ton (FMAC)(1).......... 7.29 300,000 167,900 December 31, 1997 160
CoreStates Bank, N.A.
(IBC).................. 8.67 15,000 15,000 November 30, 1997 230
-------- --------
$590,000 $358,129
======== ========
</TABLE>
- --------
* SPTL is currently negotiating and expects to enter into a $200.0 million
line of credit with a major investment bank.
(1) Includes $630,000 of Accrued Interest payable as of June 30, 1997.
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 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 cash flows, 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.
59
<PAGE>
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. 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 the
overcollateralized amount is reflected in the Company's financial statements
as retained interest in loan and lease securitization. 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.
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 $158.6, $325.1 million and $105.2 million of franchise loans
during the six months ended June 30, 1997, the year ended December 31, 1996
and the period from its inception at June 30, 1995 through December 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. The
purchase limit under the facility is $110.0 million and as of June 30, 1997,
there was approximately $108.6 million of commercial paper outstanding under
the facility. In addition to the CNAI facility, during the six months ended
June 30, 1997, IBC completed a securitization of $115.5 million of lease
receivables through a term finance facility with Conti Financial Services.
Commercial Mortgage Lending. During the six months ended June 30, 1997 and
the year ended December 31, 1996, SPTL securitized $203.1 and $277.0 million,
respectively, of multi-family and commercial real estate loans. SPTL retained
subordinated bonds of approximately $22.0 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 the Company 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.
60
<PAGE>
The following table sets forth the securitizations effected by the Company
since inception:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
ISSUE 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 Franchise Loan Receivables Trust ("FLRT") 105.2
1995-B.......................................
March 1996 SPSAC 1996-1................................. 102.4
June 1996 SPSAC 1996-2................................. 130.0
June 1996 FLRT 1996-A.................................. 167.4
July 1996 Second delivery of SPSAC 1996-2.............. 40.0
August 1996 SPSAC 1996-3................................. 150.0
September 1996 Southern Pacific Thrift & Loan 1996 C-1...... 277.0
October 1996 Second delivery of SPSAC 1996-3.............. 50.0
December 1996 SPSAC 1996-4................................. 185.0
December 1996 FLRT 1996-B.................................. 157.7
March 1997 IBCI 1997-1.................................. 84.6
June 1997 Southern Pacific Thrift & Loan -- Series 1997 203.1
C-1..........................................
June 1997 FMAC 1997-A.................................. 158.6
--------
Total(1)..................................... $2,708.5
========
</TABLE>
- --------
(1) Excludes IBC's monthly deliveries to a CNAI securitization vehicle which
totaled $30.9 million, $87.0 million and $85.2 million for the six months
ended June 30, 1997 and the year ended December 31, 1996 and 1995,
respectively
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
$8.6 million for the six months ended June 30, 1997, as compared to $3.5
million, $9.8 million, $5.5 million and $5.2 million for the six months ended
June 30, 1996, and the years ended December 31, 1996, 1995 and 1994,
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.
61
<PAGE>
Non-Performing Assets ("NPA") 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. The Company incurred losses of
approximately $5 million related to the former mortgage banking OREO during
the year ended December 31, 1996. During the six months ended June 30, 1997
and for year ended December 31, 1995, the impact of loans repurchased as the
result of borrower misrepresentations was not material.
The following table sets forth the amount of NPAs attributable to the
Company's former mortgage banking operations and to all of its other lending
activities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------
AT JUNE 30, 1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ---------------------
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..... $ 20,966 $16,000 $ 24,711 $19,928 $ 2,652 $ 20,990 $ 4,012 $ 5,697
Commercial property.... 3,911 -- 3,052 -- 1,824 -- 2,201 --
Multi-family property.. 4,360 -- 1,421 -- 5,522 -- 1,195 --
Leases and installment. 3,075 -- 997 -- -- -- -- --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total nonaccrual loans.. 32,312 16,000 30,181 19,928 9,998 20,990 7,408 5,697
---------- ------- ---------- ------- ---------- -------- -------- ----------
OREO:
One to four family..... 8,987 4,906 6,639 3,508 1,937 4,173 1,217 1,277
Commercial property.... 2,753 -- 1,200 -- 211 -- 445 --
Multi-family property.. 309 -- 867 -- 858 -- 329 --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total OREO.............. 12,049 4,906 8,706 3,508 3,006 4,173 1,991 1,277
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total loans with
modified terms......... -- -- 1,256 -- 870 -- 76 --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total NPAs.............. $ 44,361 $20,906 $ 40,143 $23,436 $ 13,874 $ 25,163 $ 9,475 $ 6,974
========== ======= ========== ======= ========== ======== ======== ==========
Total loans and OREO.... $1,713,172 $34,312 $2,012,704 $40,955 $1,168,783 $869,463 $216,555 $1,094,144
Total NPAs as a
percentage of loans and
OREO................... 2.59% 60.93% 1.99% 57.22% 1.19% 2.89% 4.38% 0.64%
</TABLE>
62
<PAGE>
The following table summarizes certain information regarding the Company's
allowance for loan and lease losses and OREO losses:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- -------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Beginning balance................. $19,999 $13,729 $13,729 $ 7,054 $ 3,255
Provision for loan and lease
losses........................... 8,606 3,525 9,773 5,450 5,150
Business acquisitions............. 4,864 -- 4,500 4,320 --
Lease sales....................... (900) -- -- -- --
Deconsolidation of ICIFC.......... (687) -- -- -- --
------- ------- ------- ------- -------
31,882 17,254 28,002 16,824 8,405
------- ------- ------- ------- -------
Loans charged off:
Mortgage........................ (1,826) (1,157) (2,485) (2,024) (1,397)
Multi-family.................... (420) (973) (1,095) (334) --
Commercial...................... (780) (249) (465) (169) --
Leases.......................... (3,567) (548) (3,465) (461) (39)
Consumer........................ (1,376) (434) (816) (118) --
------- ------- ------- ------- -------
Total......................... (7,969) (3,361) (8,326) (3,106) (1,436)
------- ------- ------- ------- -------
Recoveries on loans previously
charged off:
Mortgage........................ 50 25 -- 11 7
Leases.......................... 425 -- 323 -- 64
Consumer........................ 132 33 -- -- 14
------- ------- ------- ------- -------
Total......................... 607 58 323 11 85
------- ------- ------- ------- -------
Net charge-offs................... (7,362) (3,303) (8,003) (3,095) (1,351)
------- ------- ------- ------- -------
Ending balance.................... $24,520 $13,951 $19,999 $13,729 $ 7,054
======= ======= ======= ======= =======
Ratio of allowance for loan losses
to total loans held for
investment....................... 2.12% 1.79% 1.82% 1.99% 0.68%
Ratio of allowance for loan losses
to nonaccrual loans.............. 50.8 32.2 39.9 44.3 53.8
Total nonaccrual loans as a
percentage of loans held for
investment....................... 4.18 5.56 4.55 4.50 1.26
OREO losses:
OREO writedowns................. $ 147 $ 2,088 $ 3,252 $ 2,085 $ 369
Loss (gain) on sale of OREO..... 3,384 1,988 2,843 (957) (119)
------- ------- ------- ------- -------
Total OREO losses............. $ 3,531 $ 4,076 $ 6,095 $ 1,128 $ 250
======= ======= ======= ======= =======
</TABLE>
The increase in the provision for loan and lease losses was primarily the
result of the increase in nonaccrual loans and the increase in the amount of
net charge-offs. Although nonaccrual loans increased for the six months ended
June 30, 1997 from December 31, 1996, 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.
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,
63
<PAGE>
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
June 30, 1997, 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 $322.2 million, representing a
positive cumulative gap ratio of 121.0%. 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 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.
64
<PAGE>
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.
INTEREST RATE SWAPS
The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk. The contract or notional amounts do not
represent exposure to credit loss. Risk originates from the inability of
counterparties to meet the terms of the contracts and from market movements in
securities values and interest rates. The Company controls the credit risk of
its interest rate cap, floor and swap agreements through credit approvals,
limits and monitoring procedures.
As a part of the SPTL securitization in the third quarter of 1996 of $277.0
million of multi-family and commercial mortgage loans, the Company delivered
subordinate bonds of approximately $22 million into a total rate of return
swap with JP Morgan. The provisions for the swap entitle the Company to
receive the total return on the subordinate bonds delivered in exchange for a
floating payment of LIBOR plus a spread of 1.95%. The termination date of the
swap, September 30, 1997, could be accelerated in the event the securities
delivered into the swap decline in value more than $3.0 million over a three
month period. In the event of the early termination of the swap, the Company
would be required to pay a fee representing 1.95% of the calculated value of
the underlying securities over the period from the accelerated termination
date to September 30, 1997. The remaining deposit associated with the swap was
$1.2 million at June 30, 1997. The swap is an off balance sheet instrument.
65
<PAGE>
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 June 30, 1997, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. The amounts 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 JUNE 30, 1997
---------------------------------------------------------------------------------------------------
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................... $ 20,550 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 20,550
Other interest-bearing
deposits............... 241,285 -- -- -- -- -- -- -- 241,285
Trading securities, at
market................. 37,408 -- -- -- -- -- -- -- 37,408
Securities available
for sale, at market.... 42,553 -- -- 2,581 -- -- -- -- 45,134
Securities held for
investment............. -- -- -- 2,647 -- -- -- -- 2,647
FHLB stock............. 8,713 -- -- -- -- -- -- -- 8,713
Loans held for sale.... 573,965 -- -- -- -- -- -- -- 573,965
Loans held for
investment, net of
unearned discount and
deferred loan fees(1).. 666,302 150,030 115,251 66,746 3,830 51,002 91,424 -- 1,144,585
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total interest-earning
assets................ 1,590,776 150,030 115,251 71,974 3,830 51,002 91,424 -- 2,074,287
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Less:
Allowance for loan and
lease losses........... -- -- -- -- -- -- -- (24,520) (24,520)
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Net interest-earning
assets................. 1,590,776 150,030 115,251 71,974 3,830 51,002 91,424 (24,520) 2,049,767
Non-interest-earning
assets................. -- -- -- -- -- -- -- 227,969 227,969
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total assets.......... $1,590,776 $ 150,030 $ 115,251 $ 71,974 $ 3,830 $ 51,002 $ 91,424 $203,449 $2,277,736
========== ========= ========= ======== ======== ========= ======== ======== ==========
Interest-bearing
liabilities:
Deposits............... 443,222 365,791 366,671 85,307 -- -- -- -- 1,260,991
Borrowings from FHLB... -- -- -- -- -- -- -- -- --
Other borrowings....... 358,129 -- -- -- -- -- -- -- 358,129
Senior notes .......... -- -- -- -- -- 219,792 -- -- 219,792
Remarketed par
securities............. -- -- -- -- 70,000 -- -- -- 70,000
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total interest-bearing
liabilities........... 801,351 365,791 366,671 85,307 70,000 219,792 -- -- 1,908,912
Non-interest-bearing
liabilities............ -- -- -- -- -- -- -- 104,794 104,794
Shareholders' equity... -- -- -- -- -- -- -- 264,030 264,030
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total liabilities and
shareholders' equity.. $ 801,351 $ 365,791 $ 366,671 $ 85,307 $ 70,000 $ 219,792 $ -- $368,824 $2,277,736
========== ========= ========= ======== ======== ========= ======== ======== ==========
Interest rate
sensitivity gap(2)..... $ 789,425 $(215,761) $(251,420) $(13,333) $(66,170) $(168,790) $ 91,424 $ -- $ 165,375
========== ========= ========= ======== ======== ========= ======== ======== ==========
Cumulative interest
sensitivity gap........ $ 789,425 $ 573,664 $ 322,244 $308,911 $242,741 $ 73,951 $165,375 $165,375
========== ========= ========= ======== ======== ========= ======== ========
Cumulative interest
sensitivity gap as a
percentage of total
assets................. 34.66% 25.19% 14.15% 13.56% 10.66% 3.25% 7.26%
Cumulative net interest
earning assets as a
percent of interest
bearing liabilities.... 198.51% 149.15% 121.01% 119.08% 114.37% 103.87% 108.66% 108.66%
</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.
66
<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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 OVER 1996 DECEMBER 31, 1996 OVER 1995
----------------------------------- ------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------- -------- ------- -------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(decrease)
in:
Investments and
interest bearing
deposits.......... $ 4,184 $ 6,037 $ (5,783) $ 4,438 $ 507 $ 3,400 $ 314 $ 4,221
FHLB stock........ (286) 243 (30) (73) (194) 185 (35) (44)
Loans held for
sale.............. 1,669 8,670 (7,088) 3,251 35,161 15,746 33,977 84,884
Loans held for
investment, net... (18,174) 18,397 4,686 4,909 (29,704) 18,010 (5,192) (16,886)
Capitalized
excess servicing
fees receivable... (5,573) (355) 4,110 (1,818) 3,609 924 1,281 5,814
------- ------- -------- ------- -------- ------- ------- --------
Total interest
income.......... (18,180) 32,992 (4,105) 10,707 9,379 38,265 30,345 77,989
------- ------- -------- ------- -------- ------- ------- --------
Deposits.......... 6,235 (957) (2,570) 2,708 11,700 (1,908) (358) 9,434
Borrowings from
Imperial Bank..... (302) -- -- (302) 302 -- -- 302
FHLB borrowings... (6,339) 887 2,168 (3,284) (6,807) (869) 311 (7,365)
Other borrowings.. (20,177) (8,002) 15,020 (13,159) 25,586 3,951 6,150 35,687
Senior notes ..... 11,752 (221) (5,626) 5,905 706 (122) (9) 575
Remarketed par
securities........ 450 -- -- 450 -- -- -- --
Convertible
subordinated
debentures........ -- -- -- -- 675 -- -- 675
------- ------- -------- ------- -------- ------- ------- --------
Total interest
expense......... (8,381) (8,293) 8,992 (7,682) 32,162 1,052 6,094 39,308
------- ------- -------- ------- -------- ------- ------- --------
Change in net
interest income.... $(9,799) $41,285 $(13,097) $18,389 $(22,783) $37,213 $24,251 $ 38,681
======= ======= ======== ======= ======== ======= ======= ========
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995 OVER 1994
-------------------------------------
RATE/
VOLUME RATE VOLUME TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Increase/(decrease)
in:
Investments and
interest bearing
deposits.......... $ 1,302 $ 1,079 $ 503 $ 2,884
FHLB stock........ 61 70 5 136
Loans held for
sale.............. (14,656) 3,022 (1,496) (13,130)
Loans held for
investment, net... 54,467 (156) (110) 54,201
Capitalized
excess servicing
fees receivable... 2,608 -- -- 2,608
-------- -------- ------- --------
Total interest
income.......... 43,782 4,015 (1,098) 46,699
-------- -------- ------- --------
Deposits.......... (5,297) 17,278 (2,181) 9,800
Borrowings from
Imperial Bank..... (129) -- -- (129)
FHLB borrowings... 3,315 4,270 1,339 8,924
Other borrowings.. 11,664 281 3,472 15,417
Senior notes ..... 177 (136) 1 42
Remarketed par
securities........ -- -- -- --
Convertible
subordinated
debentures........ -- -- -- --
-------- -------- ------- --------
Total interest
expense......... 9,730 21,693 2,631 34,054
-------- -------- ------- --------
Change in net
interest income.... $ 34,052 $(17,678) $(3,729) $ 12,645
======== ======== ======= ========
</TABLE>
67
<PAGE>
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company
for the six months ended June 30, 1997 and the years ended December 31, 1996,
1995 and 1994. 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 six months ended June 30,
1997 and the years ended December 31, 1996, 1995 and 1994. 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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
--------------------------- ---------------------------
YIELD/ YIELD/
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Investments and
interest bearing
deposits........ $ 146,434 $ 6,336 8.65% $ 143,067 $ 9,862 6.89%
FHLB stock...... 10,540 418 7.93 15,853 945 5.96
Loans held for
sale............ 615,390 32,553 10.58 1,140,790 101,170 8.87
Loans held for
investment,
net(1).......... 1,071,573 63,889 11.92 779,522 87,072 11.17
Capitalized
excess servicing
fees receivable. 30,571 1,391 9.10 53,052 8,422 15.87
---------- -------- ---------- --------
Total interest-
earning assets.. 1,874,508 104,587 11.16 2,132,284 207,471 9.73
---------- -------- ---------- --------
Non interest-
earning assets... 190,204 163,055
---------- ----------
Total assets.... $2,064,712 $2,295,339
========== ==========
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
Interest-bearing
liabilities:
Deposits........ $1,162,193 34,213 5.89% $1,063,799 $ 60,999 5.73%
Borrowings from
Imperial Bank... -- -- -- 3,311 302 9.12
Borrowings from
FHLB............ 81,143 2,828 6.97 201,693 12,055 5.98
Remarketed par
securities 8,500 450 10.59 -- -- --
Other
borrowings...... 314,455 12,147 7.73 645,313 52,050 8.07
Senior notes.... 200,988 10,418 10.37 88,365 8,955 10.13
Convertible
subordinated
debentures...... -- -- -- 10,068 675 6.70
---------- -------- ---------- --------
Total interest-
bearing
liabilities(2).. 1,767,279 60,056 6.80 2,012,549 135,036 6.71
---------- -------- ---------- --------
Non interest-
bearing
liabilities...... 52,123 115,962
Shareholders'
equity........... 245,310 166,828
---------- ----------
Total
liabilities and
shareholders'
equity.......... $2,064,712 $2,295,339
========== ==========
Net interest rate
spread........... $ 44,531 4.36% $ 72,435 3.02%
======== ========
Net interest
margin(2)........ 4.75% 3.40%
Ratio of
interest-earning
assets to
interest-bearing
liabilities...... 106.07% 105.95%
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ---------------------------
YIELD/ YIELD/
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets:
Investments and
interest bearing
deposits........ $ 131,277 $ 5,641 4.30% $ 89,155 $ 2,757 3.09%
FHLB stock...... 19,720 989 5.02 18,398 853 4.64
Loans held for
sale............ 361,156 16,286 4.51 719,487 29,416 4.09
Loans held for
investment,
net(1).......... 1,091,536 103,958 9.52 521,200 49,757 9.55
Capitalized
excess servicing
fees receivable. 22,257 2,608 11.72 -- -- --
---------- -------- ---------- -------
Total interest-
earning assets.. 1,625,946 129,482 7.96 1,348,240 82,783 6.14
---------- -------- ---------- -------
Non interest-
earning assets... 45,167 70,117
---------- ----------
Total assets.... $1,671,113 $1,418,357
========== ==========
LIABILITIES AND
SHAREHOLDERS'
EQUITY:
Interest-bearing
liabilities:
Deposits........ $ 867,162 $ 51,565 5.95% $ 992,972 $41,765 4.21%
Borrowings from
Imperial Bank... -- -- -- 1,415 129 9.12
Borrowings from
FHLB............ 310,425 19,420 6.26 235,922 10,496 4.45
Remarketed par
securities -- -- -- -- -- --
Other
borrowings...... 251,684 16,363 6.50 18,877 946 5.01
Senior notes.... 81,500 8,380 10.28 79,807 8,338 10.45
Convertible
subordinated
debentures...... -- -- -- -- -- --
---------- -------- ---------- -------
Total interest-
bearing
liabilities(2).. 1,510,771 95,728 6.34 1,328,993 61,674 4.64
---------- -------- ---------- -------
Non interest-
bearing
liabilities...... 88,306 19,025
Shareholders'
equity........... 72,036 70,339
---------- ----------
Total
liabilities and
shareholders'
equity.......... $1,671,113 $1,418,357
========== ==========
Net interest rate
spread........... $ 33,754 1.62% $21,109 1.50%
======== =======
Net interest
margin(2)........ 2.08% 1.57%
Ratio of
interest-earning
assets to
interest-bearing
liabilities...... 107.62% 101.45%
</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 senior notes, the convertible subordinated debentures and
the remarketed par securities during the six months ended June 30, 1997
and the years ended December 31, 1996, 1995 and 1994 were 6.48% and 5.91%,
6.55% and 3.85%, 6.11% and 2.59%, and 4.27% and 2.18%, respectively.
68
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 125"). 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.
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.
Under the provisions of SFAS 125, management has determined that mortgage
backed securities retained by the Company as a result of securitization
transactions will be classified as trading securities. All other retained
securities will be classified as available for sale or trading as determined
at the time of securitization.
Changes in market value are included in operations, if classified as trading
securities, or in shareholders' equity as unrealized gains or losses, net of
the related tax effect, if classified as available for sale. SFAS 125 was
effective for the Company on January 1, 1997. The implementation of SFAS 125
did not have a material impact on the Company's financial condition or results
of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 supersedes APB Opinion No. 15, "Earnings per Share" ("APB
15"), and specifies the computation, presentation, and disclosure requirements
for earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. SFAS 128 will replace the presentation of primary EPS
with a presentation of basic EPS, and fully diluted EPS with diluted EPS. SFAS
128 will also require dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator of the diluted EPS computation. This statement
shall be effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The Company has determined that this statement will have no significant impact
on the financial position, results of operations, or income per share for
1997.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). This statement requires disclosures
about capital structures that had been included in a number of previously
existing separate statements and opinions. This statement shall be effective
for the financial statements for both interim and annual periods ending after
December 15, 1997. At this time the Company has determined that this statement
will have no significant impact on its financial position or results of
operations for 1997.
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In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. All items that are required to be recognized
under accounting standards as components of comprehensive income are to be
reported in a financial statement that is displayed with the same prominence
as other financial statements. This statement stipulates that comprehensive
income reflect the change in equity of an enterprise during a period from
transactions and other events and circumstances from nonowner sources.
Comprehensive income will thus represent the sum of net income and
comprehensive income, although SFAS 130 does not require the use of the terms
comprehensive income or other comprehensive income. The accumulated balance of
other comprehensive income is required to be displayed separately from
retained earnings and additional paid in capital in the statement of financial
condition. This statement is effective for the fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. At this time the
Company has determined that this Statement will have no significant impact on
its financial position or results of operations for 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires that selected
information about those operating segments be reported in interim financial
statements. This statement supersedes SFAS 14 "Financial Reporting for
Segments of a Business Enterprise". SFAS No. 131 requires that all public
enterprises report financial and descriptive information about its reportable
operating segments. Operating segments are defined as components regularly
evaluated by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This statement is effective for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years should be restated. Management is in
the process of determining the impact, if any, this statement will have on the
Company.
The Commission has approved rule amendments to clarify and expand existing
disclosure requirements for derivative financial instruments. The amendments
require enhanced disclosure of accounting policies for derivative financial
instruments in the footnotes to the financial statements. In addition, the
amendment expands existing disclosures requirements to include quantitative
and qualitative information about market risk inherent in market risk
sensitive instruments. The required quantitative and qualitative information
should be disclosed outside the financial statements and related notes
thereto. The enhanced accounting policy disclosure requirements were effective
for the quarter ended June 30, 1997. As the Company believes that the
derivative financial instrument disclosure contained within the notes to the
consolidated financial statements of the 1996 Form 10-K substantially conform
with the accounting policy requirements of these amendments, no further
interim period disclosure has been provided. The rule amendments that required
expanded disclosure of quantitative and qualitative information about market
risk are effective with the 1997 Form 10-K.
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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.
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. As a result, the Company has divested substantially all of
its residential mortgage lending and residential mortgage servicing businesses
and expanded its presence in other specialty finance markets. Throughout this
realignment, the Company's core business has remained consistent in that it
originates loans and leases funded primarily by warehouse lines of credit and
repurchase facilities, and securitizations and whole loan sales in the
secondary market. For the six months ended June 30, 1997 and the years ended
December 31, 1996 and 1995, the Company originated or acquired $656.8 million,
$2.2 billion and $3.0 billion of loans and leases, respectively. In addition,
during the six months ended June 30, 1997 and the years ended December 31,
1996 and 1995, the Company completed securitization transactions of
$477.2 million, $1.3 billion and $1.0 billion, respectively.
For the year ended December 31, 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. During the fourth quarter of
1996 and the first quarter of 1997, ICII sold additional shares of its SPFC
common stock reducing its ownership percentage to 49.4% as of March 31, 1997.
As a result, commencing with the three months ended March 31, 1997 the
financial statements of SPFC are no longer consolidated with those of ICII. As
a result of this deconsolidation, certain of the financial and operating data
presented for the six months ended June 30, 1997 and thereafter will not be
comparable with such data for periods prior to the deconsolidation. For a
further description of the effect of such deconsolidation, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General--Deconsolidation."
FRANCHISE LENDING
Acquisition of FMAC
FLRT, Inc. (formerly Franchise Mortgage Acceptance Corporation), FMAC's
predecessor, was incorporated by Wayne L. Knyal as a California corporation in
April 1991 and was wholly owned by him at that time. FLRT, Inc. and certain
individuals formed a limited partnership for the purpose of originating and
securitizing franchise loans. As the general partner of such limited
partnership, FLRT, Inc. owned the sole rights to service such loans (the "FLRT
Servicing Contracts"). In March 1993, Mr. Knyal entered into a joint venture
with Greenwich Capital Financial Products, Inc. ("Greenwich") pursuant to
which Mr. Knyal became the president of the
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Franchise Mortgage Acceptance Company division (the "FMAC Division") of
Greenwich. Between March 1993 and June 1995, the FMAC Division originated and
securitized franchise loans, however, FLRT, Inc. retained all rights to the
FLRT Servicing Contracts.
On June 30, 1995, ICII acquired from Greenwich certain assets of the FMAC
Division, including all of Greenwich's rights under certain servicing
contracts entered into by the FMAC Division (the "FMAC Servicing Contracts")
and a $410,000 obligation owed by Mr. Knyal to Greenwich. The FMAC Servicing
Contracts pertain to the servicing of franchise loans that were previously
securitized by Greenwich through the FMAC Division and other franchise loans
owned by Greenwich and not yet securitized. Concurrent with the closing of the
transactions described above, ICII entered into an operating agreement with
Mr. Knyal for the formation of FMAC. In connection with the acquisition, FMAC
or its affiliates assumed certain liabilities related to the FMAC Servicing
Contracts and Greenwich agreed to act as FMAC's exclusive agent in connection
with the securitization of franchise loans for a period of 24 months.
FMAC was formed to originate, securitize and service franchise loans. Under
the terms of the operating agreement, in exchange for a 66.7% ownership
interest in FMAC, ICII was obligated to contribute to FMAC $1.3 million in
cash and all of the assets purchased from Greenwich. In exchange for a 33.3%
ownership interest in FMAC, Knyal caused FLRT, Inc., to contribute to FMAC all
of its rights under the FLRT Servicing Contracts.
On August 29, 1997, the Company announced that Franchise Mortgage Acceptance
Company ("FMC"), a Delaware corporation which was incorporated in August 1997
for the purpose of succeeding to the business of FMAC, filed a registration
statement with the Securities and Exchange Commission covering a proposed
initial public offering of its common stock. FMAC will merge into FMC
immediately prior to the proposed intial public offering. Mr. Knyal currently
beneficially owns 85% of the common stock of FMAC held by FLRT, Inc. FMAC's
administrative and executive offices are located in Los Angeles, California
and Greenwich, Connecticut.
General
FMAC is a specialty commercial finance company engaged in the business of
originating and servicing loans and equipment leases to small businesses, with
a primary focus on established national and regional franchise concepts. Since
commencing business in 1991, FMAC believes it has become a leading lender to
national and regional quick service restaurant ("QSR") franchisees, and FMAC
has developed a growing presence in the casual dining sector. More recently,
FMAC has expanded its focus to include retail energy licensees (service
stations, convenience stores, truck stops, car washes and quick lube
businesses) and golf operating businesses (golf courses and golf practice
facilities). FMAC originates long-term fixed and variable rate loan and lease
products and sells such loans and leases either through securitizations or
whole loan sales to institutional purchasers on a servicing retained basis.
FMAC believes that its loan and lease products are attractive investments to
institutional investors because of the credit profile of its borrowers,
relatively long loan and lease terms, call protection through prepayment
penalties and appropriate risk-adjusted yields. FMAC also periodically makes
equity investments or receives contingent equity compensation as part of its
core lending and leasing business. FMAC originated loans and leases through 11
marketing offices in nine states at June 30, 1997. Since FMAC's inception, it
has funded over $1.4 billion in loans and leases and at June 30, 1997, had a
servicing portfolio of $1.1 billion. FMAC's loan and lease originations grew
to $458.5 million in 1996 from $218.7 million in 1995 and to $300.6 million
for the six month period ended June 30, 1997 from $208.4 million for the
comparable period in 1996. At June 30, 1997, FMAC's average initial loan
balance was $730,000 and the percentage of its loans and leases that were 90
days or more delinquent was 0.1%.
FMAC's focus is to provide funding to industries that have been historically
underserved by banks and other traditional sources of financing. This focus
requires FMAC to develop specific industry expertise in the sectors which it
serves in order to provide individualized financial solutions for its
borrowers. FMAC believes that its industry expertise and proprietary
databases, combined with its responsiveness to borrowers, flexibility in
structuring transactions and broad product offerings give it a competitive
advantage over more traditional, highly regulated small business lenders.
FMAC's borrowers are generally small business operators, most of whom are
independent, multi-unit franchisees, with proven operating experience and a
history of generating positive
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operating cash flows. FMAC relies primarily upon its assessment of enterprise
value, based in part on independent third party valuations, and historical
operating cash flows to make credit determinations, as opposed to relying
solely on the value of real estate and other collateral.
In 1991, FMAC began making loans to franchisees of Taco Bell Corp. In 1992
and 1993, other national QSR concepts, such as Burger King, Wendy's, Pizza
Hut, KFC and Hardee's, were approved. The Company's principal loan products at
that time were fixed rate, 15-year, fully amortizing loans. In 1995, the
Company began making loans to casual dining concepts such as TGI Friday's,
Applebee's and Denny's and offering its borrowers adjustable rate loans. Also
in 1995, FMAC began offering development and construction ("DEVCO") loans to
its more experienced borrowers to fund the development and construction or
acquisition of new business units or the conversion of existing business units
into a different franchise concept. In 1996, FMAC expanded its approved
concepts to include strong regional restaurants such as Carl's, Jr., Church's
Chicken and Golden Corral and launched its Golf Finance Group to provide
financing to owners and operators of golf courses and golf practice
facilities. The Equipment Finance Group also commenced activities in 1996 to
provide equipment loans and leases to the sectors which the Company serves. In
February 1997, FMAC created its Retail Energy Finance Group to make loans to
businesses that distribute retail petroleum products.
Loan Originations
Overview
FMAC offers permanent loans, DEVCO loans (including acquisition loans) and
equipment loans and leases to those sectors in which it operates.
Permanent loans. Substantially all of the FMAC's permanent loans are self-
amortizing long-term fixed or adjustable rate loans provided for purposes
other than development and construction of business units. Permanent loans
have a maximum term and amortization of up to 15 years. Fixed rate loans are
tied to the U.S. Treasury rates plus a spread while adjustable rate loans are
tied to the London interbank offered rate ("LIBOR") plus a spread and
generally reprice on a monthly basis. As a cash flow lender, FMAC maintains
flexibility to tailor a loan program to fit the specific needs of its
borrowers. The terms of the loans vary in part based on the collateral
pledged.
FMAC focuses on the cash flow of the subject business, the continuing
ability of the borrower to operate the business unit in a cash positive manner
and the borrower's ability to repay the loan since neither the real property
mortgage nor the franchise or license agreement is generally assignable to
secure the loan. In determining enterprise value, in addition to a borrower's
credit profile, FMAC focuses on the following factors:
. Business Profitability. FMAC seeks to lend to borrowers whose subject
business operations provide adequate cash flow to support loan payments.
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. Strength of Business Concept. FMAC emphasizes loans to borrowers whose
subject business has significant national or regional market penetration.
. Operating Experience. FMAC emphasizes loans to borrowers having ownership
of multiple business units with strong industry backgrounds.
. Site Considerations. FMAC focuses on a business' location, physical
condition and environmental characteristics.
Location. FMAC lends to borrowers with business units located in high
traffic areas that it believes exhibit strong retail property
fundamentals.
Physical Condition. FMAC loans to borrowers investing in well-
maintained existing properties or in newly constructed properties. Each
group uses third party appraisal professionals who conduct physical
site inspections of each subject property.
Environmental. FMAC engages outside professionals to independently
conduct Phase I environmental assessments for new financings. Phase II
environmental assessment reports are also prepared, if recommended by
the Phase I assessments. FMAC will not finance a business if a Phase II
report indicates significant environmental concerns.
. Collateral. Loans are partially secured by taking a first lien on all
available furniture, fixtures and equipment. Where the available
collateral includes a building on a ground lease, FMAC requires an
assignment of the lease in addition to a security interest on the
building and on the furniture, fixtures and equipment. If the collateral
includes owned real estate, FMAC also obtains a first mortgage on the
property. Borrowers with additional collateral are generally afforded
better credit terms. Depending on the collateral provided, loan to value
ratios, up front fees and interest rates are adjusted to properly reflect
credit risk.
Development and Construction Loans. DEVCO loans are offered to fund the
development and construction or acquisition of new business units or the
conversion of existing business units into a different franchise concept.
DEVCO loans are an interest-only short-term product. Fixed rate DEVCO loans
are tied to U.S. Treasury rates, while adjustable rate DEVCO loans are tied to
LIBOR. The loans generally include up front points and exit fees.
DEVCO loans generally have an 18 month maturity which is comprised of two
terms. The borrower must receive a Certificate of Occupancy ("CO") within 12
months of the date of the loan. If a CO is received, the term of the loan is
extended for six months to complete the construction or acquisition phase. If
a CO is not received after 12 months, the loan is called. After 18 months the
borrower can apply for a permanent loan which will be re-underwritten.
FMAC believes that DEVCO loans create a pipeline for FMAC's permanent loans.
As a result of fee incentives built into the DEVCO products, borrowers
generally look to convert into permanent loans on the maturity date. DEVCO
loans are secured by the real property mortgage or leasehold interest as well
as all available furniture, fixtures and equipment.
When used as a construction or development loan, a DEVCO loan provides a
seasoning period to allow the borrower to construct a business unit before
converting to a permanent loan. When used as an acquisition or conversion
loan, the interest only period of a DEVCO loan gives the Borrower the
opportunity to improve business unit performance and achieve a higher cash
flow before locking into long-term financing.
Equipment Loans and Leases. FMAC provides equipment financing to experienced
owners and operators in those sectors in which FMAC operates. Equipment loans
are fixed rate products tied to U.S. Treasury rates. These loans have a
maximum term of up to 10 years. In addition, FMAC offers standard equipment
leases. Substantially all of the leases originated by FMAC are "direct
financing" leases in that they transfer substantially all of the benefits and
risks of equipment ownership to the lessee. Because FMAC's leases are
classified as direct financing leases, FMAC records total estimated
unguaranteed residual value and initial direct
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costs as the gross investment in the lease. The difference between the gross
investment in the lease and the cost of the leased equipment is defined as
"unearned income." Interest income is recognized over the term of the lease by
amortizing the unearned income and deferred initial direct costs using the
interest method.
Lending Groups
FMAC's focus at inception was to provide secured financing to franchisees of
Taco Bell Corp. After establishing an infrastructure and credit expertise,
FMAC began expanding its QSR concepts, loaning to casual dining concepts and
moving into other related lending sectors such as retail energy, golf and
equipment finance. FMAC carefully reviews industry data seeking sectors with a
combination of large capital requirements, proven cash flow generating
capabilities, standardized operations, a scarcity of long term funding sources
and characteristics attractive to secondary market investors. This business
formula provides the template to identify, test and determine the potential
value of entering into new sectors.
FMAC's lending groups currently include Restaurant Finance, Retail Energy
Finance, Golf Finance and Equipment Finance. Each of these groups includes a
core group of professionals who are experts in the sector and can target
selected Borrowers in such sector.
Restaurant Finance Group. The Restaurant Finance Group was organized in 1991
and originally focused on providing loans to national and regional franchise
concepts such as Taco Bell, Burger King, Hardee's, KFC, Wendy's and Pizza Hut.
In 1995, FMAC began making loans to casual dining concepts such as TGIF,
Applebee's, and Denny's and other successful casual dining concepts. In 1996,
FMAC expanded the approved concepts to include strong regional restaurants
such as Carl's, Jr., Church's Chicken and Golden Corral. As of June 30, 1997,
the Restaurant Finance Group originated loans through a network of eight
offices in seven states. For the six month period ended June 30, 1997 this
group originated $252.0 million of restaurant loans.
The Restaurant Finance Group, which is headquartered in Denver, Colorado,
includes marketing, processing, underwriting, credit, closing and
administrative professionals with extensive experience in QSR and casual
dining restaurant finance. The marketing professionals generate loans on a
national basis which are processed and underwritten at FMAC's headquarters or
in one of FMAC's five regional offices located in Greenwich, Atlanta, Dallas,
Newport Beach and Los Angeles. Credit committee approval is obtained in these
regional offices unless the transaction exceeds regional credit authority in
which case approval must be obtained from FMAC's Senior Credit Committee. See
"--Underwriting."
Franchisees utilize restaurant loans for a variety of purposes, including
the acquisition, development and construction of new franchise units, to
refinance existing franchise debt, to provide business expansion and
remodeling proceeds and for working capital. Loans offered are fixed and
adjustable loans typically ranging in size from $200,000 to $1.2 million with
terms of up to 15 years. Generally, FMAC's restaurant finance borrowers own
three or more units, have three or more years of ownership in the concept, or
have an equivalent ownership tenure in a different major fast food or casual
dining concept.
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The following table sets forth FMAC's QSR and casual dining loan
originations for the periods indicated by franchise concept.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
-------------------------------- -------------------------------- --------------------------------
NUMBER PRINCIPAL % OF NUMBER PRINCIPAL % OF NUMBER PRINCIPAL % OF
OF LOANS AMOUNT TOTAL OF LOANS AMOUNT TOTAL OF LOANS AMOUNT TOTAL
ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
QSRs:
Taco Bell........... 111 $102,314 40.6% 228 $163,011 37.7% 54 $ 44,614 20.4%
Burger King......... 36 33,586 13.3 112 111,443 25.8 92 61,329 28.0
Church's Chicken.... 86 29,374 11.7 -- -- -- -- -- --
Wendy's............. 32 22,622 9.0 42 35,639 8.2 26 18,319 8.4
KFC................. 41 18,447 7.3 22 14,511 3.4 59 30,400 13.9
Hardee's............ -- -- -- 57 40,586 9.4 40 34,964 16.0
Other QSR........... 23 13,422 5.3 43 22,267 5.1 -- -- --
--- -------- ----- --- -------- ----- --- -------- -----
Total QSR........... 329 219,765 87.2 504 387,457 89.6 271 189,626 86.7
Casual Dining:
Applebee's.......... 11 14,528 5.8 -- -- -- -- -- --
Golden Corral....... 4 6,232 2.5 5 14,450 3.3 -- -- --
TGI Friday's........ 6 5,110 2.0 3 7,870 1.8 1 2,550 1.2
Pizza Hut........... -- -- -- 16 8,093 1.9 38 26,566 12.1
Other Casual
Dining............. 8 6,385 2.5 11 13,220 3.1 -- -- --
--- -------- ----- --- -------- ----- --- -------- -----
Total Casual
Dining............. 29 32,255 12.8 35 43,633 10.1 39 29,116 13.3
Other Restaurant..... -- -- -- 2 1,440 0.3 -- -- --
--- -------- ----- --- -------- ----- --- -------- -----
Total............... 358 $252,020 100.0% 541 $432,530 100.0% 310 $218,742 100.0%
=== ======== ===== === ======== ===== === ======== =====
</TABLE>
Retail Energy Finance Group. The Retail Energy Finance Group was organized
in February 1997 to provide loans to national and regional businesses that
distribute retail petroleum products such as service stations, convenience
stores, truck stops, car washes and quick lube stores. Customers to date have
included major national operators of retail petroleum businesses as well as
major national chains such as Texaco, Chevron and Arco who seek to develop a
sponsored loan program for their dealers and sellers. As of June 30, 1997, the
Retail Energy Finance Group originated loans through a network of seven
offices in five states. For the six months ended June 30, 1997, this group
originated $23.5 million of energy loans.
The Retail Energy Finance Group, which is headquartered in Morristown, New
Jersey, includes personnel similar to the Restaurant Finance Group as well as
industry professionals hired from major oil companies and energy related
commercial lending roles who evaluate each customer's specific needs and
suggest personalized financial solutions. Similar to the Restaurant Finance
Group, energy loans are originated on a national basis and underwritten at
FMAC's headquarters or in one of five regional offices.
Retail energy business operators use loans for existing station
acquisitions, the purchase of real estate associated with currently leased
facilities, funding for replacement or upgrading of underground storage tanks
("UST") and development to transform a gasoline station/convenience store into
a multi-profit center facility which may include a car wash, quick lube shop,
co-branded fast food express unit or slot machines in states such as Nevada
where gaming is permitted. Generally, FMAC's borrowers include business owners
with five to 50 established locations. Loans typically range in size from
$500,000 to $2.5 million. These loans are fixed and adjustable rate loans
having a term of up to 20 years. FMAC requires borrowers to provide at least
one additional revenue source aside from gasoline sales, such as a car wash or
fast food, convenience items or quick lube center in order to diversify the
revenue stream.
Golf Finance Group. The Golf Finance Group is part of FMAC's Diversified
Products Group, which focuses on potential expansion into other sectors which
are not related to the restaurant or retail energy sectors. The Golf Finance
Group was organized in 1996 to provide loans to experienced owners and
operators of golf courses and golf facilities, such as driving ranges and
practice facilities. For the six months ended June 30, 1997, this group
originated $9.9 million of golf loans.
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The Golf Finance Group includes professionals with extensive commercial
lending experience. The loan origination process is conducted by experienced
golf facility lenders who solicit qualified owners nationwide. The group is
supported by loan processing, underwriting and closing departments which work
with borrowers throughout the process. The Golf Finance Group operates out of
four offices in four states.
Loans are used for a variety of purposes, including debt refinance, golf
course or facility acquisitions, expansions, renovations and improvements,
purchase of new equipment, new golf course or facility development, purchase
of underlying real estate and working capital. Loans typically range in size
from $1.0 million to $5.0 million with a maximum term of up to 20 years. Since
FMAC generally lends against existing cash flow, all non-acquisition golf
courses and facilities must have a minimum operating history of 12 months
under ownership by the borrower.
Equipment Finance Group. The Equipment Finance Group was organized in 1996
to provide equipment financing to experienced owners and operators in those
sectors in which FMAC operates. For the six months ended June 30, 1997 the
group originated $15.2 million of equipment loans and leases.
Equipment loans and leases are originated either through FMAC's direct sales
or telemarketing groups, third party originators or in connection with loans
offered in each sector in which FMAC operates. FMAC's equipment loans and
leases typically range in size from $200,000 to $400,000. FMAC believes the
activities of this group complement those of groups in its other sectors and
provides a more complete financing solution for its borrowers.
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The following table sets forth FMAC's loan and lease origination activity by
sector for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------------------- -------------------------------------------
WEIGHTED % OF WEIGHTED % OF
AVERAGE PRINCIPAL PRINCIPAL AVERAGE PRINCIPAL PRINCIPAL
LENDING SECTOR NUMBER OF INTEREST AMOUNT AMOUNT NUMBER OF INTEREST AMOUNT AMOUNT
AND TYPE OF ORIGINATION ORIGINATIONS RATE ORIGINATED ORIGINATED ORIGINATIONS RATE ORIGINATED ORIGINATED
- ----------------------- ------------ -------- ---------- ---------- ------------ -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Restaurant Loans:
Fixed-rate
loans........... 302 10.62% $198,365 64.6% 292 10.24% $218,765 47.7%
Variable-rate
loans......... .. 56 9.59 53,655 17.5 249 9.31 213,765 46.6
--- ----- -------- ----- --- ----- -------- -----
Total (2)..... .. 358 10.40 252,020 82.1 541 9.78 432,530 94.3
--- ----- -------- ----- --- ----- -------- -----
Retail Energy
Loans:
Fixed-rate
loans......... .. 23 10.76 19,500 6.4 -- -- -- --
Variable-rate
loans......... .. 6 9.69 4,000 1.3 -- -- -- --
--- ----- -------- ----- --- ----- -------- -----
Total (3)..... .. 29 10.58 23,500 7.7 -- -- -- --
--- ----- -------- ----- --- ----- -------- -----
Golf Loans:
Fixed-rate
loans......... .. 4 12.09 9,850 3.2 2 10.95 14,200 3.1
Variable-rate
loans......... .. -- -- -- -- 3 9.74 10,251 2.3
--- ----- -------- ----- --- ----- -------- -----
Total (3)..... .. 4 12.09 9,850 3.2 5 10.44 24,451 5.4
--- ----- -------- ----- --- ----- -------- -----
Equipment
Finance:
Fixed-rate loans
and leases.... .. 82 12.08 15,247 7.0 10 12.14 1,486 0.3
--- ----- -------- ----- --- ----- -------- -----
Total loan and
lease
originations.. .. 473 10.56% $300,617 100.0% 556 9.83% $458,467 100.0%
=== ===== ======== ===== === ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995(1)
-------------------------------------------
WEIGHTED % OF
AVERATE PRINCIPAL PRINCIPAL
LENDING SECTOR NUMBER OF INTEREST AMOUNT AMOUNT
AND TYPE OF ORIGINATION ORIGINATIONS RATE ORIGINATED ORIGINATED
- ----------------------- ------------ -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Restaurant Loans:
Fixed-rate
loans........... 202 10.12% $143,515 65.6%
Variable-rate
loans......... .. 108 8.40 75,227 34.4
--- ----- -------- -----
Total (2)..... .. 310 9.53 218,742 100.0
--- ----- -------- -----
Retail Energy
Loans:
Fixed-rate
loans......... .. -- -- -- --
Variable-rate
loans......... .. -- -- -- --
--- ----- -------- -----
Total (3)..... .. -- -- -- --
--- ----- -------- -----
Golf Loans:
Fixed-rate
loans......... .. -- -- -- --
Variable-rate
loans......... .. -- -- -- --
--- ----- -------- -----
Total (3)..... .. -- -- -- --
--- ----- -------- -----
Equipment
Finance:
Fixed-rate loans
and leases.... .. -- -- -- --
--- ----- -------- -----
Total loan and
lease
originations.. .. 310 9.53% $218,742 100.0%
=== ===== ======== =====
</TABLE>
- ----
(1) Loan and lease origination activity for the six months ended December 31,
1995 and for the six months ended June 30, 1995 have been combined to show
a 12 month period for the purpose of comparing to the year ended
December 31, 1996.
(2) For the six months ended June 30, 1997, 78.7% and 21.3% of FMAC restaurant
loans consisted of permanent and DEVCO loans, respectively; such
percentages were 75.4% and 24.6% at December 31, 1996 and 97.3% and 2.7%
at December 31, 1995.
(3) For the six months ended June 30, 1997 and for the years ended December
31, 1996 and 1995, all of FMAC's retail energy loans and golf loans were
permanent loans.
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<PAGE>
Geographic Distribution--The following table sets forth by state the number
of loans and leases originated by FMAC for the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995
---------------------------------- ---------------------------------- ----------------------------------
PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER OF AMOUNT % OF TOTAL NUMBER OF AMOUNT % OF TOTAL NUMBER OF AMOUNT % OF TOTAL
ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED
------------ ---------- ---------- ------------ ---------- ---------- ------------ ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California...... 103 $ 64,038 21.3% 42 $ 33,209 7.2% 23 $ 13,172 6.0%
Michigan........ 33 24,370 8.1 7 4,848 1.1 9 7,414 3.4
Texas........... 26 23,829 7.9 41 29,189 6.4 15 13,471 6.2
Louisiana....... 15 15,784 5.3 5 4,243 0.9 -- -- --
North Carolina.. 19 14,641 4.9 21 23,106 5.0 22 13,444 6.1
Nevada.......... 11 11,895 4.0 18 11,284 2.5 -- -- --
New Jersey...... 16 12,205 4.1 29 30,746 6.7 14 10,906 5.0
Virginia........ 17 11,144 3.7 16 35,744 7.8 25 18,859 8.6
Ohio............ 21 9,960 3.3 10 6,501 1.4 9 8,192 3.7
South Carolina.. 9 8,867 2.9 20 16,927 3.7 8 5,460 2.5
Utah............ 8 9,038 3.0 5 7,482 1.6 -- -- --
Illinois........ 27 8,366 2.8 10 5,855 1.3 6 3,686 1.7
Colorado........ 8 7,268 2.4 6 3,155 0.7 10 6,066 2.8
Alabama......... 12 6,677 2.2 20 18,479 4.0 26 18,435 8.4
Pennsylvania.... 8 6,385 2.1 58 35,196 7.7 15 7,852 3.6
Florida......... 13 6,279 2.1 7 3,854 0.8 20 12,779 5.8
New York........ 4 3,640 1.2 21 13,499 2.9 12 9,588 4.4
Maryland........ 4 2,661 0.9 21 25,019 5.5 3 1,621 0.7
Connecticut..... 3 1,316 0.4 36 34,620 7.6 16 8,956 4.1
Other States.... 116 52,252 17.4 163 115,511 25.2 77 58,841 27.0
--- -------- ----- --- -------- ----- --- -------- -----
Totals: 473 $300,615 100.0% 556 $458,467 100.0% 310 $218,742 100.0%
=== ======== ===== === ======== ===== === ======== =====
</TABLE>
EQUITY INVESTMENTS
FMAC periodically makes passive equity investments in companies operating in
the sectors served by its lending and leasing businesses. Such investments may
be made in conjunction with loans and leases or independent of any borrowing
relationship. FMAC's equity investments, which are generally made through
subsidiary limited liability companies, have taken the form of common stock
equivalents, contingent equity interests such as warrants, and combinations
thereof. At June 30, 1997, FMAC had investments in entities operating 267
units, including Taco Bell, Church's Chicken, KFC, Hardee's and Hot 'N Now
franchisees. In certain cases, concurrent equity investments have been made
directly by the Selling Stockholders and certain of FMAC's officers and
directors.
FMAC analyzes potential equity opportunities independently of credit
analysis done in connection with its lending business, taking advantage of its
industry expertise and extensive database of operating information. In
general, FMAC has structured its investments so that operating control is
retained by experienced business operators while FMAC maintains control over
certain key corporate decisions that may affect its investments over time. To
date, all of FMAC's equity investments have involved actual or contingent
minority (less than 50%) equity ownership. In certain cases, FMAC is obligated
to make additional equity investments at the option of the majority investor.
Many of FMAC's investments include "put" and "call" options at specified
values to facilitate FMAC's investment exit strategy.
At June 30, 1997, FMAC had made five common stock equivalent equity
investments aggregating $4.4 million and was obligated to make up to an
additional $5.6 million in equity investments under existing arrangements. Of
these equity transactions, three were made in 1996 in connection with loans
made by FMAC in the initial aggregate amount of $83.8 million, and two were
made in 1997, one in connection with loans made by FMAC in the initial
aggregate amount of $28.6 million.
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<PAGE>
Marketing
FMAC originates the majority of its loans through the efforts of its
Marketing Vice Presidents ("MVPs"), comprised of experienced, credit trained
professionals located in FMAC's regional and district offices in Alabama,
California, Colorado, Connecticut, Georgia, Nebraska, New Jersey, Texas and
Washington. Each of the Restaurant, Retail Energy, Golf and Equipment Finance
Groups has dedicated marketing departments, specifically targeting customers
by sectors. In addition to its direct marketing activities, FMAC maintains a
telemarketing center in Columbus, Nebraska. The telemarketing center is used
to perform basic telemarketing functions for each of the various lending
groups, as well as to coordinate cross-marketing requests and opportunities.
Applicants are identified through in-person solicitation, targeted mailings,
phone solicitations, participation at conventions, institutional direct-
response advertising and through existing borrower relationships. MVPs meet
with prospective borrowers to determine the amount and appropriateness of the
requested loan or lease proceeds as well as to make a preliminary
determination of the borrowers' creditworthiness. Qualifying prospects are
presented with a proposal generated through FMAC's proprietary underwriting
software. Only after the prospective borrower understands the loan or lease
product is a loan or lease application(s) taken. FMAC believes that this
procedure accounts for the low denial rate FMAC has experienced. Since this
model was originally developed in 1994, FMAC has funded over 90% of the
applications submitted by its MVPs. Additionally, FMAC estimates it funds
approximately 45% of all potential borrowers it interviews.
FMAC maintains multiple prospect and borrower databases. The information
varies from a simple name and address list to one that includes borrower cash
flow margins by sector, concept, geography, demographic information and other
variables. FMAC uses relational database software to store variables important
to the credit process. Additionally, FMAC has created an in-house research
department which provides analysis on various franchise concepts and industry
sectors. FMAC has an extensive library of borrower financial statements and
uses the information for proprietary studies, which assist management in
focusing on various industries.
Underwriting
Each of FMAC's lending groups operates under a set of underwriting
guidelines that represents prudent credit standards designed to meet uniform
standards for securitization purposes. Each lending group has a credit manager
responsible for these guidelines who is a member of the Senior Credit
Committee (the "SCC"). Loans above specified limits are submitted to the SCC.
The Chief Credit Officer is the chairman of the SCC and has ultimate
responsibility for the credit standards and guidelines for each of FMAC's
lending groups.
Underwriting guidelines are consistent across each of FMAC's lending groups.
Below is a discussion of the methodology which has been used for the
Restaurant Finance Group. Similar guidelines are being used by FMAC's Retail
Energy and Golf Finance Groups.
Under FMAC's current restaurant finance underwriting guidelines, each loan
is originated after a review of the following criteria: (i) the applicant's
ability to repay the loan, (ii) the adequacy of the cash flow of both the
franchise unit and the borrower and (iii) the real and tangible personal
property that serves as collateral for such loan. FMAC has created an
underwriting model which incorporates historical operating results of the
borrower and compares them to industry statistics for the applicable franchise
concept. The model helps outline the loan proposal to fit the approval
guidelines. Loan officers input data provided by potential borrowers into the
underwriting model and determine as to whether or not a loan would qualify
under FMAC's underwriting guidelines before submission to the credit group.
This pre-screening process allows for documentation once a loan is accepted
for underwriting. FMAC's loan originations typically range in size from
$200,000 to $1.2 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 searches are conducted for
all borrowers before and after
80
<PAGE>
origination of a loan. FMAC prefers borrowers to pay off all existing loans
and equipment leases with FMAC's loan proceeds. For cases in which
encumbrances will survive the funding of the loan, FMAC reviews all such
notes, pledge and security agreements, and loan documents.
Although the franchise agreement is not assigned to secure the 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.
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 loan. The
underwriting guidelines include three levels of analysis on each loan request,
each of which must be satisfied to qualify for FMAC's loan program. The first
two are fixed charge coverage ratio tests at both the consolidated borrower
level (minimum of 1.25x) and at the individual unit level (minimum 1.15x). The
fixed charge coverage ratio is the ratio of EBITDA (adjusted earnings before
interest, tax, depreciation and amortization) plus rent over annual principal
plus interest plus rent. This formula puts real estate mortgage loans and
enterprise only loans on a comparable basis. The third analysis is the loan to
value at the unit level. The "business value" of a franchise unit is derived
from a formula based upon the franchise concept and the revenues 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 the
franchisor. In the case of enterprise loans, the maximum loan-to-business
value is generally 65%. A loan secured by real property (fee or leasehold) is
subject to a maximum loan to value of approximately 70%. 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.
FMAC hires independent third parties to perform a valuation of the subject
franchise unit and as applicable, realty interests of the specific franchised
restaurants and specialty retail locations. The appraisals are based on the
premise that the value of a unit is related to revenues and EBITDA. Value-to-
revenue ratios are used to estimate the market value of a unit site. An
example of a factor in the selection of applicable value ratios is unit EBITDA
margins, especially margins for the most recent 12 months. To determine realty
interest valuation, appraisers utilize realty comparables, market based data
in estimating market rentals and estimates of modeled cost and depreciation of
any subject building.
Retail energy lending involves certain additional underwriting issues. In
the case of loans and leases to operators of service stations, convenience
stores, truck stops, car washes and quick lube stores, FMAC must also concern
itself with: (i) risks associated with USTs and other environmental matters;
(ii) protections afforded borrowers via the Petroleum Marketers Practices Act
and how these protections relate to senior lenders; (iii) profit margin
volatility inherent in the petroleum marketing; and (iv) the relative value of
location (side of street, relation to traffic lights), competition and the
value of the trademark in the service area.
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<PAGE>
In the case of golf lending, FMAC also focuses on other issues such as: (i)
the cost and availability of secondary water supplies; (ii) the length of the
season of play; (iii) existing and planned competition; (iv) the number of
active golfers in the serving area; (v) environmental risks with regards to
chemical storage and the application of the chemicals and fertilizers; (vi)
expense ratios for more complex (more expensive) courses, e.g. special mowing
techniques, over-seeding during hot weather and (vii) tee and green insurance.
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").
General
CBC is a senior secured asset-based lender located in West Los Angeles,
California which has historically conducted its lending business activities
primarily with California-based companies. 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, Chicago and
Seattle. At June 30, 1997, and December 31, 1996, CBC had outstanding loans
totaling $378.6 million and $288.5 million, respectively. CBC had unused loan
commitments of $270.5 million at June 30, 1997.
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 June 30, 1997, CBC had outstanding loans
totaling $138.5 million to technology companies.
At June 30, 1997, CBC's loan portfolio represented lending relationships
with 125 customers, with an average total loan per customer of $3.0 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.
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<PAGE>
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. CBC's
auditors conduct quarterly audits of the collateral and financial condition of
each borrower.
Inventory Loans--These loans are revolving lines of credit that are
collateralized by eligible inventory that is restricted to raw materials and
finished goods. Inventory loans are generally made in conjunction with
accounts receivable loans to qualifying borrowers. Borrowers are required to
provide CBC with monthly inventory designations that are 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
the loan proceeds as 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 June 30, 1997, December 31, 1996, and 1995, and the
percentage of CBC's portfolio comprised of each loan type as of such date.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, ------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
OUTSTANDING % OF OUTSTANDING % OF OUTSTANDING % OF
BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL
----------- ----- ----------- ----- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable
loans.................. $286.7 75.7% $208.1 72.1% $127.3 82.6%
Inventory loans......... 51.7 13.7 34.9 12.1 18.9 12.3
Participation loans(1).. 40.2 10.6 45.5 15.8 8.0 5.1
------ ----- ------ ----- ------ -----
Total................. $378.6 100.0% $288.5 100.0% $154.2 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
- --------
(1) Participation loans include $48.1 million, $48.4 million and $10.3 million
purchased and $7.9 million, $2.9 million and $2.3 million sold at June 30,
1997 and December 31, 1996 and 1995, respectively.
The weighted average yield on CBC's loans outstanding was 12.69%, 12.41% and
13.25% at June 30, 1997 and December 31, 1996 and 1995, respectively.
CBC had commitments to make additional fundings on lines of credit with
existing borrowers totaling approximately $270.5 million, $259.2 million and
$209.9 million at June 30, 1997 and December 31, 1996 and 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.
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<PAGE>
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 an audit 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.
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.
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<PAGE>
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 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.
COMMERCIAL 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 net purchase price
for the Avco Acquisition was approximately $94.8 million.
General
IBC's corporate headquarters are located in San Diego, California. IBC
carries out its business equipment leasing operations from both its
headquarters and its sales offices in Irvine, California, Denver, Colorado and
Atlanta, Georgia.
IBC's lease originations totaled $64.5 million, $87.2 million and $36.0
million for the six months ended June 30, 1997 and the years ended December
31, 1996 and 1995, respectively. During the six months ended June 30, 1997 and
the years ended December 31, 1996 and 1995, IBC securitized $115.5 million,
$87.0 million and $85.2 million of leases, respectively.
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<PAGE>
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 also 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.
The following table sets forth IBC's lease originations by equipment type
for the period presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------------------------- ----------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LEASES AMOUNT % OF TOTAL OF LEASES AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------ ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computers............... 1,031 $18,820 29.2% 857 $21,331 24.5%
Automotive.............. 889 6,723 10.4 475 4,279 4.9
Manufacturing/Machine
work................... 248 6,423 10.0 380 11,289 13.0
Furniture and fixtures.. 389 5,730 8.9 242 5,963 6.8
Restaurant.............. 510 5,648 8.8 395 6,238 7.2
Heavy equipment......... 186 3,522 5.5 163 3,938 4.5
Radio television
production equipment... 97 2,425 3.7 202 3,838 4.4
Health/Sports equipment. 72 1,683 2.6 125 3,069 3.5
Print/Typeset equipment. 50 1,296 2.0 141 3,251 3.7
Dry cleaning/Washing.... 35 751 1.1 102 2,387 2.7
Clothing manufacture.... 14 696 1.1 59 2,373 2.7
Other................... 625 10,783 16.7 1,204 19,251 22.1
----- ------- ----- ----- ------- -----
Total................. 4,146 $64,500 100.0% 4,345 $87,207 100.0%
===== ======= ===== ===== ======= =====
</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
86
<PAGE>
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.
IBC's broker advisory panel consists of a group of its most 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 primary and secondary market originated by commercial
banks. During the six months ended June 30, 1997 and the year ended December
31, 1996, LPIG purchased senior secured loan participations with outstanding
loan commitments totaling $372.7 million and $267.1 million, respectively.
Loans outstanding under commitments as of June 30, 1997 were $196.9 million.
At June 30, 1997, 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 June 30, 1997, loan participations held by LPIG ranged in size
from approximately $800,000 to approximately $17.5 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.
87
<PAGE>
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 June 30, 1997 and
December 31, 1996:
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
---------------------------------------------- ----------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL % OF TOTAL
COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
---------- ----------- ----------- ----------- ---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hotels.................. $55,629 14.9% $ 23,216 11.8% $ 33,942 12.7% $ 14,436 9.0%
Manufacturing
(all segments)......... 55,349 14.9 29,000 14.7 69,893 26.2 43,865 27.3
Waste disposal services. 32,500 8.7 14,620 7.4 10,000 3.8 6,129 3.8
Broadcasting (Radio).... 24,000 6.4 18,360 9.3 -- -- -- --
Food processing......... 20,000 5.4 8,592 4.4 -- -- -- --
Transportation (rail)... 15,000 4.0 14,490 7.4 -- -- -- --
Air carrier (cargo)..... 15,000 4.0 11,999 6.1 20,000 7.5 16,484 10.2
Outdoor advertising..... 15,000 4.0 11,889 6.0 19,000 7.1 6,479 4.0
Office products
distributor............ 15,000 4.0 7,680 3.9 15,000 5.6 9,205 5.7
Automobile rentals...... 15,000 4.0 -- -- -- -- -- --
Telecommunications...... 15,000 4.0 -- -- -- -- -- --
Food distribution....... 14,833 4.0 8,257 4.2 4,917 1.8 4,917 3.1
Chemicals............... 11,779 3.2 8,636 4.4
Broadcasting (TV)....... 11,005 3.0 3,805 1.9 24,625 9.2 15,040 9.4
Collection services..... 10,456 2.8 7,574 3.9 11,000 4.1 6,054 3.8
Paper (all segments).... 8,878 2.4 1,737 0.9 15,195 5.7 7,670 4.8
Tobacco................. 8,382 2.3 6,701 3.4 -- -- -- --
Defense................. 6,976 1.9 2,976 1.5 4,643 1.7 1,427 0.9
Garment................. 5,000 1.3 2,850 1.5 -- -- -- --
Supermarkets............ 4,925 1.3 4,925 2.5 14,474 5.4 10,784 6.7
Direct mail advertising. 4,652 1.2 2,371 1.2 4,758 1.8 2,664 1.7
Park management......... 4,390 1.2 3,190 1.6 4,620 1.7 3,580 2.2
Restaurants............. 3,982 1.1 3,982 2.0 5,000 1.9 5,000 3.1
Cable television........ -- -- -- -- 10,000 3.8 6,937 4.3
-------- ----- -------- ----- -------- ----- -------- -----
Total................. $372,736 100.0% $196,850 100.0% $267,067 100.0% $160,671 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
AUTO LEND GROUP
SPTL's Auto Lend Group ("Auto Lend") was established in September 1996, to
provide automobile inventory financing for automobile dealers. The principal
types of loans originated are fixed-rate lines of credit. Auto Lend had $13.5
million of loans outstanding at June 30, 1997. 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 Lending Division ("IPLD") was formed in February 1994
to expand the Company's apartment and commercial property lending business.
For the six months ended June 30, 1997 and the years ended December 31, 1996
and 1995, IPLD funded approximately $148.1 million, $260.9 million and $160.0
million in loans, respectively. During the six months ended June 30, 1997 and
the years ended December 31, 1996 and 1995, SPTL completed securitizations of
$203.1, and approximately $277.0 million and $57.7 million of multi-family and
commercial mortgage loans originated or purchased by IPLD, respectively. At
June 30, 1997 and December 31, 1996 and 1995 $2.5 million, $1.9 million and
$0.4 million or 2.2% and 1.1% and 0.04%, respectively, of IPLD's outstanding
loans were 30 days or more delinquent. At June 30, 1997 and December 31, 1996
and 1995, $1.5 million, $4.4 million and $0.4 million, respectively, of IPLD
originated loans
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<PAGE>
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. Most of IPLD's loans have been 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 AMN and the Auto Lending Division of SPTL, the Company makes sub-
prime automobile finance loans. The Company also makes home improvement loans
and other consumer credit available through the Consumer Credit Division of
SPTL.
AUTO MARKETING NETWORK, INC.
In March 1997, the Company acquired all of the outstanding shares of AMN for
$750,000 and advanced AMN $11.6 million to repay amounts owed pursuant to
operating lines of credit and for working capital purposes. AMN is
headquartered in Boca Raton, Florida and offers loans to finance the purchase
of new and used automobiles primarily to sub-prime borrowers. At June 30,
1997, AMN had regional offices in Texas, Virginia, Tennessee, and operations
facilities in Oklahoma and is currently licensed in 45 states. Automobile
finance contracts are acquired principally from an active dealer base of
approximately 900 franchised automobile dealers. AMN provides its dealers with
training and support designed to allow dealers to accelerate underwriting and
final loan approval.
For the period from its acquisition (March 14, 1997) through June 30, 1997,
AMN originated $93.9 million in sub-prime auto loans. At June 30, 1997, $14.5
million or 9.7% of AMN's outstanding loans were 30 days or more delinquent.
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 six months ended June 30, 1997 and the years ended December 31,
1996 and 1995, ALD originated approximately $39.7 million, $35.0 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.
89
<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 six months ended June 30, 1997 and the year ended December 31,
1996, CCD originated $10.0 million and $22.0 million in loans, respectively,
all of which are held for investment. At June 30, 1997 and December 31, 1996,
$1.6 million and $0.9 million or 3.6% and 2.4%, respectively, of CCD's
outstanding loans were 30 days or more delinquent.
ADVISORY, INVESTMENT AND OTHER ACTIVITIES
The Company conducts advisory services through its Imperial Credit Advisors,
Inc. ("ICAI") subsidiary and has substantial investments in Southern Pacific
Funding Corporation ("SPFC"), a publicly traded non-conforming residential
mortgage lender, Dabney/Resnick/Imperial, LLC, ("DRI"), an investment banking
firm and Imperial Credit Mortgage Holdings, Inc. ("IMH"), a publicly traded
real estate investment trust engaged in mortgage finance activities.
IMPERIAL CREDIT ADVISORS, INC.
ICAI oversees the day-to-day operations of IMH pursuant to a management
agreement more fully described in "Certain Transactions--Relationships with
IMH--Other Transactions--General." For the six months ended June 30, 1997 and
the years ended December 31, 1996 and 1995, ICAI earned $2.8 million,
$3.3 million and $37,888 in management fees and incentive payments pursuant to
the management agreement.
IMH and ICII intend to negotiate the termination of the management
agreement. IMH is required to pay ICII a fee upon such termination. The fee
may be paid in shares of registered IMH common stock, other securities, in
cash, or a combination of the foregoing. The consummation of the transaction
is conditioned on several factors including negotiation of major terms of the
transaction, execution of formal documentation and approval of the
disinterested and unaffiliated members of the board of directors of each of
IMH and ICII. There can be no assurance that this transaction will be
consummated and even if consummated, the Company cannot currently determine
the amount of the termination fee or the form of consideration with which it
will be paid.
SOUTHERN PACIFIC FUNDING CORPORATION
SPFC is a publicly traded specialty finance company (NYSE Symbol: "SFC")
which 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. As of June 30, 1997, ICII owned 10,242,500 shares of SPFC
common stock, representing 49.4% of the outstanding common stock of SPFC
which, commencing with the three months ended March 31, 1997, is reflected on
the Company's financial statements as "Investment in Southern Pacific Funding
Corporation." ICII's investment in SPFC constituted 2.4% of the Company's
total assets and contributed 13.2% of the Company's total revenue for the six
months ended June 30, 1997. During July and August of 1997 ICII sold 500,000
shares of SPFC common stock, further reducing its ownership interest in SPFC
to 47.0%.
DABNEY/RESNICK/IMPERIAL, LLC
In September 1996, the Company entered into various transactions with
Dabney/Resnick, Inc. subsequently renamed Dabney/Resnick/Imperial, LLC
("DRI"). 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 and securities, arranges private placements and
provides advisory and other services in connection with mergers, acquisitions,
restructurings, and other financial transactions.
90
<PAGE>
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
Simultaneously with IMH's initial public offering in November 1995, the
Company contributed certain operating assets of ICII's mortgage conduit
operations and SPTL's warehouse lending operations for 500,000 shares of IMH's
common stock. IMH is a publicly traded specialty finance company (AMEX Symbol:
"IMH") which operated three businesses: (i) the long-term investment
operations which invests primarily in nonconforming residential mortgage loans
and securities backed by such loans, (ii) the conduit operations which
primarily purchases and sells or securitizes non-conforming mortgage loans and
(iii) the warehouse lending operations which provides short-term lines of
credit to originators of mortgage loans. As of June 30, 1997, the Company
owned 462,269 shares of IMH common stock, representing 4.9% of the outstanding
common stock of IMH.
In September 1997, IMH filed a registration statement with the Commission
for the sale of 3,170,094 shares of IMH common stock, of which 82,363, 50,000
and 37,731 shares were offered by ICII, SPTL and ICAI, respectively, which
represented all of the shares of IMH common stock held by such entities as of
the date of filing.
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 JUNE 30, --------------------------------
1997 1996 1995 1994
----------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans secured by real
estate:
One to four family......... $ 305,768 $ 375,476 $228,721 $ 897,494
Multi-family............... 18,547 2,527 7,028 82,004
Commercial................. 2,640 11,011 133,189 30,287
---------- ---------- -------- ----------
326,955 389,014 368,938 1,009,785
---------- ---------- -------- ----------
Leases..................... 11,733 99,717 7,297 23,667
Installment loans.......... 105,634 34,248 1,900 4,290
Franchise loans............ 102,012 115,910 46,766 --
Asset-based loans.......... 372,544 288,528 154,252 --
Commercial loans........... 237,687 173,932 110,104 5,882
---------- ---------- -------- ----------
1,156,565 1,101,349 689,257 1,043,624
---------- ---------- -------- ----------
Unearned income............ (3,272) (6,336) (5,217) (5,900)
Deferred loan fees......... (8,707) (6,415) (1,540) (1,115)
---------- ---------- -------- ----------
1,144,586 1,088,598 682,500 1,036,609
Allowance for loan losses.. (24,520) (19,999) (13,729) (7,054)
---------- ---------- -------- ----------
Total.................. $1,120,066 $1,068,599 $668,771 $1,029,555
========== ========== ======== ==========
</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 June 30, 1997 and
December 31, 1996 and 1995 were
91
<PAGE>
$0.2 million and $14.6 million, $0.1 million and $11.0 million, $0.1 million
and $3.4 million, respectively. The largest loan held for investment at June
30, 1996 and December 31, 1996 and 1995 was a performing loan secured by a
first deed of trust.
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 and
commercial borrowings. The Company has also accessed the capital markets
through equity and debt offerings. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Lines of Credit and Warehouse Facilities" and "--Securitizations."
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 "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 DECEMBER 31,
---------------------------------------------------------
AT JUNE 30, 1997 1996 1995
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
% OF INTEREST % OF INTEREST % OF INTEREST
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 33,214 2.6% 5.60% $ 47,890 4.5% 4.73% $ 51,146 4.7% 1.27%
Time deposits of less
than $100,000.......... 949,194 74.9 5.93 803,556 74.9 5.84 755,499 69.1 5.67
Time deposits of
$100,000 and over...... 284,189 22.5 5.26 220,820 20.6 5.74 286,794 26.2 5.97
---------- ----- ---------- ----- ---------- -----
Total................. $1,266,597 100.0% 5.78% $1,072,266 100.0% 5.77% $1,093,439 100.0% 5.54%
========== ===== ========== ===== ========== =====
</TABLE>
The following table sets forth the dollar amount of deposits by time
remaining to maturity:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
AT JUNE 30, 1997 1996 1995
------------------- ------------------- -------------------
% OF % OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Three months or less.... $ 448,828 35.4% $ 404,565 37.7% $ 356,353 32.6%
Over three months
through six months..... 365,791 28.9 279,397 26.1 259,300 23.7
Over six months through
twelve months.......... 366,671 29.0 311,862 29.1 367,285 33.6
Over twelve months...... 85,307 6.7 76,442 7.1 110,501 10.1
---------- ----- ---------- ----- ---------- -----
Total................. $1,266,597 100.0% $1,072,266 100.0% $1,093,439 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
Certificates of deposit of $100,000 and over totaled approximately $284.2
million, $220.8 million and $286.8 million at June 30, 1997 and December 31,
1996 and 1995, respectively. Interest expense associated with certificates of
deposit of $100,000 and over was approximately $7.7 million, $13.6 million and
$15.4 million for the six months ended June 30, 1997, the years ended December
31, 1996 and 1995, respectively.
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<PAGE>
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 5.78% at June 30, 1997 as
compared to 5.77% at December 31, 1996 and 5.54% at December 31, 1995. 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 June 30,
1997, there were no outstanding balances of FHLB advances.
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.
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
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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, 1997, the $400 figure was
adjusted by the Board of Governors of the Federal Reserve System to $424 until
December 31, 1997, 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, 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.
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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 become 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. 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.
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 Department of Financial Institutions (the "DFI") and, by the
FDIC. In states other than California where SPTL operates loan production
offices, SPTL may be subject to certain state and local laws, including those
governing qualification to do business. 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 DFI, the FDIC, the Federal Reserve
Board or any other bank regulatory authority, except with respect to the
general regulatory and enforcement authority of the DFI 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.
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General
SPTL is governed by the California Industrial Loan Law and the rules and
regulations of the DFI 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 DFI has broad supervisory and
enforcement authority with respect to SPTL and its affiliates. The enforcement
authority of the DFI 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 Bank Insurance Fund of 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 regulates 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 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 DFI are required before any merger,
consolidation or change in control, or the establishment, relocation or
closure of an office facility of SPTL. However, only the DFI's approval is
required to establish a loan production office limited to the solicitation of
loans.
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 DFI 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 grounds therefor. If satisfactory
corrective action is not effectuated within an appropriate time, 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. The DFI also has the authority, independent of the FDIC, to issue
cease and desist orders, impose operating restrictions, and take other actions
to assure the safety and soundness of the institution.
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.
In January 1996, the California Department of Corporations (predecessor to
the DFI) and the FDIC conducted 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)
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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 has had or 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.
The FDIC and the DOC recently completed a joint examination of SPTL. SPTL
has not yet received from the FDIC the formal reports of its examination.
However, based on the exit interview conducted by the FDIC 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 FDIC will
require SPTL to take remedial action to correct any violations which have not
previously been corrected. SPTL is unable at this time to determine the
outcome of the FDIC's examination. The FDIC has enforcement powers to impose,
among other things, injunctions, cease and desist orders, criminal or civil
penalties, removal from office or the revocation of SPTL's charter. Although
the Company does not believe that an enforcement action is warranted under the
circumstances, 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 20% of total assets or 40% with the approval of
the Commissioner. California law contains requirements for the diversification
of the loan portfolios 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 (which
restriction is repealed effective January 1, 1998); (ii) make any 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) make
any loan secured primarily by unimproved real property in an amount in excess
of 10% of its unimpaired capital stock and surplus not available for
dividends; (iv) 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; (v) 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 (vi) 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. SPTL had paid-up and
unimpaired capital stock and surplus not available for dividends of $80.5
million at each of June 30, 1997 and December 31, 1996 and 1995.
At June 30, 1997 and December 31, 1996 and 1995, SPTL was in compliance with
its California investment law restrictions. 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. 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.
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Effective January 1, 1997, as a result of changes in the California
Industrial Loan Law passed in 1996, SPTL may invest in the capital stock,
obligations, or other securities of one or more corporations, subject to rules
or orders prescribed by the DFI, if such investment would be lawful for
commercial banks. California chartered commercial banks may invest in equity
securities of one or more corporations upon receiving either general
authorization or specific authorization from the California Superintendent of
Banks. General authorization is available for the investment in the equity
securities of one corporation in an amount not exceeding 10% of the gross
capital of the bank, provided that such investments in all corporations do not
exceed 25% of the gross capital of the bank. Specific authorization is not
subject to such investment limits. Under federal law, SPTL is considered an
insured state bank, and as such, it may make any equity investment, including
an investment in the equity securities of an operating subsidiary, that is
permissible for a national bank. Operating subsidiaries include corporations,
limited liability companies or similar entities. Operating subsidiaries of
national banks may engage in activities that are part of, or incidental to the
business of banking, as determined by the Office of the Comptroller of the
Currency (the "OCC"). Recently revised regulations of the OCC define certain
activities that are currently permissible for operating subsidiaries of
national banks. In addition, SPTL's purchase of loan originations from an
operating subsidiary may not be subject to the limitations on "covered
transactions" under federal banking law. See "--Transactions with Affiliates."
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 DFI. 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. Subject to prior approval of the DFI, 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. Also under
federal law, a transaction by SPTL with any person shall be deemed to be a
transaction with an affiliate to the extent that the proceeds of the
transaction are used for the benefit of, or transferred to that affiliate.
The term "affiliate" excludes any company other than a bank, that is a
subsidiary of the depository institution, unless the FDIC has determined by
regulation or order not to exclude such subsidiary. Absent such determination,
transactions conducted between SPTL and its non-bank subsidiaries would not be
subject to the amount limitations and collateral requirements under federal
law. This exemption, however, is unavailable for transactions between a bank
and a subsidiary that engages in activities not permissible for the parent
depository institution.
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Under the California Industrial Loan Law, it is unlawful for SPTL to offer
or sell any security in an issuer transaction unless the DFI has issued a
permit authorizing such sale, which offer or sale is subject to applicable
provisions of the California Corporate Securities Act of 1968, as amended. The
DFI, however, has authority to exempt any such transaction which the DFI
determines is not comprehended within the purposes of the qualification
requirements and which the DFI finds not necessary or appropriate in the
public interest or for the protection of investors. The DFI also has authority
to impose conditions in any permit, including legends restricting
transferability, impounding proceeds, or other conditions deemed reasonable
and necessary in the public interest.
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 DFI. The DFI 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 DFI'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 DFI, 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 such as SPTL 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 June 30, 1997, the Tier 2 capital of SPTL consisted of its
allowance for loan losses and $35.0 million in term subordinated indebtedness.
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
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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 June 30, 1997, 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. 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.
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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, and (iii) FDIC minimum leverage ratio, at each of June 30, 1997
and December 31, 1996.
<TABLE>
<CAPTION>
AT JUNE 30, 1997 AT DECEMBER 31, 1996
------------------------------------------------- -------------------------------------------------
MINIMUM WELL CAPITALIZED MINIMUM WELL CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT ACTUAL REQUIREMENTS REQUIREMENT
-------------- -------------- ----------------- -------------- -------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- --------- ------- -------- ----- -------- ----- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation.......... $151,001 11.92% $ 63,330 5.00% $ -- -- % $144,798 13.50% $ 53,613 5.00% $ -- --
Risk-Based Capital... 188,261 12.68 118,807 8.00 148,509 10.00 145,018 10.87 106,715 8.00 133,393 10.00%
Risk-based Tier 1
Capital ............ 136,257 9.17 59,404 4.00 89,105 6.00 129,497 9.71 53,357 4.00 80,036 6.00
FDIC Leverage Ratio.. 136,257 9.07 60,096 4.00 75,120 5.00 129,497 9.35 55,397 4.00 69,247 5.00
</TABLE>
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's insurance premium for the first six months of 1997 was
approximately $115,000.
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.
Recent Legislation
A new California state regulatory agency was created in 1996 to be known as
the Department of Financial Institutions ("DFI"). The DFI became effective
July 1, 1997. All California 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. Most administrative and examination staff personnel have will
transferred to the DFI from the California Commissioner of Corporation's
office. 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
101
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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.
The 1996 California legislation that created the DFI also authorized the use
of the word "bank" by thrift and loan companies, such as SPTL, in their names.
Effective October 6, 1997, SPTL changed its name to "Southern Pacific Bank."
That legislation also granted the DFI jurisdiction over the issuance of
securities by a thrift and loan company requiring application and permit
unless otherwise exempt.
In addition, on December 6, 1996, the FDIC determined to continue 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. In addition, in accordance with the Funds Act, the FDIC
eliminated the minimum assessment amount for BIF-insured institutions. SPTL
has been notified that its combined FDIC and FICO assessment rate for 1997
will be approximately 4.3 cents per $100 of deposits.
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 Bank Holding Company Act
("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.
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)
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<PAGE>
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 June 30, 1997 and December 31,
1996, $123.8 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 DFI. Similarly, the federal
Change in Bank Control Act of 1978 requires any person or company that obtains
"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 retain its interest in 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. However, there is a
rebuttable presumption that any person acquiring 10% or more of any class of
voting securities of said institution is presumed to have "control." In such
cases, such person must file an application for approval with the FDIC or
rebut the presumption.
RESTRICTION ON INVESTMENTS BY IMPERIAL BANK
At June 30, 1997, Imperial Bank owned 9,261,106 shares of Common Stock, or
23.9% 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
103
<PAGE>
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."
Imperial Financial Group
In February 1997, the board of directors of Bancorp approved a plan to spin
off a portion of its specialty lending and finance businesses, including
Imperial Bank's common stock interest in ICII, to Imperial Financial Group,
Inc. ("IFG"), a recently created subsidiary of Imperial Bank formed to hold
various business assets of Bancorp and its subsidiaries.
Three directors of the Company also serve on the board of directors of IFG.
EMPLOYEES
As of June 30, 1997, the Company had 746 employees, (55 at ICII, 256 at
SPTL, 84 at IBC, 122 at FMAC, three at ICAI and 226 at AMN). 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 22,070 square feet of space in
Torrance, California at a current monthly rental of approximately $31,420.
The Company leases approximately 25,000 square feet of space in Santa Ana
Heights, California. The Company leases these facilities pursuant to a 10 year
lease, commencing September 1, 1992 and subleases the majority of these
premises to IMH at a monthly rental of approximately $33,936. See "Certain
Transactions-- Relationships with IMH."
The Company currently leases offices in Los Angeles, San Diego, Walnut
Creek, Newport Beach, Woodland Hills, Sacramento, San Jose and Irvine,
California, as well as in Birmingham, Alabama; Greenwich, Connecticut;
Atlanta, Georgia; Columbus, Nebraska; Tulsa, Oklahoma; Dallas, Texas;
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 Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII
et al., originally filed in Orange County Superior Court on March 5, 1997 and
recently ordered removed to arbitration. The complaint alleges breach of
contract, breach of implied covenant of good faith and fair dealing, negligent
misrepresentation, fraud, conspiracy to commit fraud, aiding and abetting
fraud, contractual indemnity and reimbursement, money
104
<PAGE>
had and received, and unjust enrichment arising from the Company's sale of a
group of loan production offices to plaintiffs. The plaintiffs seek
rescission, restitution and general, special and/or consequential damages, and
also exemplary and punitive damages as relate to the claims regarding fraud.
The plantiffs are seeking approximately $3.5 million in general damages and
approximately $10.0 million in punitive damages.
In Agoura Willow Creek, Ltd. vs. SPTL, filed on February 27, 1997, in Los
Angeles County Superior Court the plaintiff seeks damages of approximately
$3.6 million from SPTL for alleged breach of written contract and breach of
fiduciary duty arising out of a loan commitment agreement.
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, in Gibson vs. ICII, filed on October 5, 1994 in the U.S.
District Court, Southern District Florida, is a defendant against complaints
of violation of the Federal Real Estate Settlement Procedures Act ("RESPA").
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 or concealed. The Company was served with an
amended class action complaint on January 11, 1995 and a second amendment on
October 12, 1995. The trial court dismissed the case on February 20, 1997, and
plaintiff has filed an appeal.
A nearly identical RESPA class action complaint was filed in the U.S.
District Court for the District Massachusetts in Jereidini vs. ICII on
February 21, 1997.
In Steadfast Insurance Co., Inc. vs. AMN and ICII, filed on August 12, 1997
in the U.S. District Court, Northern District of Illinois, the plaintiff seeks
a declaratory judgement, compensatory damages in the amount of $9 million and
punitive damages arising from an alleged breach of contract and allegedly
fraudulent conduct by AMN. The claim relates to an insurance policy issued to
AMN in 1993 covering certain losses resulting from auto loan defaults.
All of the above referenced actions are being actively defended.
105
<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)...... 56 Chairman of the Board, President and Chief
Executive Officer
Kevin E. Villani............ 49 Executive Vice President, Chief Financial
Officer and a Director
Irwin L. Gubman............. 55 General Counsel and Secretary
Paul B. Lasiter............. 31 Senior Vice President and Controller
Stephen J. Shugerman(1)..... 50 President of SPTL and a Director
Joseph R. Tomkinson(1)...... 49 Director
Robert S. Muehlenbeck....... 49 Director
G. Louis Graziadio, III(2).. 47 Director
Perry A. Lerner(2)(3)....... 54 Director
James Clayburn LaForce, 67 Director
Jr.(2)(3)..................
</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 IMH.
KEVIN E. VILLANI has been the Executive Vice President and Chief Financial
Officer of the Company since September 1995 and a Director since June 1997.
From 1993 to 1996, Mr. Villani was the 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.
106
<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 IMH 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. He has
been a principal in the investment firm of Crown Capital Group, Inc. since
1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 through
1996, having been a partner with the firm from 1984 through 1996. 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 Bancorp, is
the father of G. Louis Graziadio, III. The Graziadio family and related
entities are significant shareholders of Bancorp.
107
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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(1) BONUS(1) COMPENSATION GRANTED
------------------ ------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely......... 1996 $300,000 $700,000 $28,564(2) 400,000(3)
President and Chief
Executive Officer 1995 300,000 252,603 32,960(2) --
1994 256,398 125,621 23,782(2) --
Kevin E. Villani......... 1996 200,000 200,000 12,986(4) 84,000(3)
Chief Financial Officer 1995 59,103 25,000 2,295(4) 66,000
1994 -- -- -- --
Paul B. Lasiter.......... 1996 87,500 50,000 6,886(5) 20,000(3)
Senior Vice President 1995 67,500 30,000 5,459(5) --
and Controller 1994 60,000 5,000 4,998(5) 16,500
Stephen J. Shugerman..... 1996 200,000 400,000 20,963(6) 100,000(3)
President of SPTL 1995 200,000 166,027 16,372(6) --
1994 166,500 81,531 16,702(6) --
</TABLE>
- --------
(1) As of January 1, 1997 the Company entered into employment agreements with
each of Messrs. Snavely, Villani and Shugerman pursuant to which annual
salary to be paid to Messrs. Snavely, Villani and Shugerman is $450,000,
$300,000 and $250,000, respectively. The annual bonus pursuant to these
agreements is not to exceed approximately $1.1 million, $400,000 and
$500,000, respectively.
(2) 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.
(3) See "--Stock Option Plans" for details regarding the terms of such
options.
(4) 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.
(5) In 1996, 1995 and 1994, consists of $6,886, $5,459 and $4,998,
respectively, under employee benefit plans.
(6) 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.
OPTION GRANTS AND EXERCISES
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
1996 PERCENTAGE EXERCISE OPTION TERM
OPTIONS OF TOTAL PRICE PER EXPIRATION -----------------------
NAME GRANTED GRANTS OPTION DATE 5% 10%
---- ------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Snavely........ 400,000 24.86% $13.6875 7/24/01 $1,512,642 $3,342,542
Kevin E. Villani........ 84,000 5.22% 10.5625 4/1/01 245,131 541,675
Paul B. Lasiter......... 20,000 1.24% 10.5625 4/1/01 58,364 128,970
Stephen J. Shugerman.... 100,000 6.21% 13.6875 7/24/01 378,160 835,636
</TABLE>
108
<PAGE>
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
</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
As of January 1, 1997, Mr. Snavely entered into a five-year employment
agreement at an annual base salary of $450,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including the
Company's return on equity, earnings per share and increase in the price of
the Company's common stock. Mr. Snavely's total cash compensation may not
exceed $1.5 million annually.
As of January 1, 1997, Mr. Villani entered into a five-year employment
agreement at an annual base salary of $300,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives identical to the
objectives established for Mr. Snavely. Mr. Villani's total cash compensation
may not exceed $700,000 annually.
As of January 1, 1997, Mr. Shugerman entered into a five-year employment
agreement at an annual base salary of $250,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including the
Company's earnings per share and certain qualitative objectives with respect
to the performance of SPTL. Mr. Shugerman's total cash compensation may not
exceed $750,000 annually.
Pursuant to the employment agreements with Messrs. Snavely, Villani and
Shugerman, they are each entitled to receive compensation following their
termination, as follows: (i) with cause: base salary shall be paid through the
date on which termination occurs, or (ii) without cause (or for "good reason"
as defined in the employment agreement), base salary shall be paid through the
date of termination together with the pro-rata portion of any cash bonus award
the employee would be entitled to receive at year end and a severance amount
equal to base salary reduced by the employee's projected primary social
security benefit. The severance amount shall be further reduced if the
executive becomes employed by another company or becomes an independent
contractor of another company and shall be eliminated entirely if such other
company is determined by the Board of Directors to compete with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of Messrs. Muehlenbeck,
Graziadio, Lerner and LaForce. Mr. Muehlenbeck is an Executive Vice President
of Imperial Bank. Mr. Graziado is a Director of Imperial Bancorp and Imperial
Trust Company.
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
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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.
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, 1996. 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 1,550,673 options were outstanding at December 31,
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 1,038,200 options were outstanding at December 31,
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.
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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.
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 $0.2 million, $0.3 million and $0.2 million for the six
months ended June 30, 1997 and the years ended December 31, 1996 and 1995,
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 $350,000 and $200,000
were charged to operations in 1996 and 1995.
Company matching contributions are made as of December 31st each year.
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LIMITATIONS ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
The Company's and the Subsidiary Guarantors' 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 and the State of Florida, as applicable, permit 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 and the Subsidiary Guarantors' 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 July
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)............................. 9,261,106 23.0%
Wellington Management Co.(4)................. 3,009,182 7.5
H. Wayne Snavely(5).......................... 1,356,281 3.4
Joseph R. Tomkinson(6)....................... 114,422 *
Stephen J. Shugerman(7)...................... 258,768 *
G. Louis Graziadio, III(8)................... 133,518 *
Robert S. Muehlenbeck(9)..................... 77,792 *
Perry A. Lerner(10).......................... 89,722 *
J. Clayburn LaForce(10)...................... 86,422 *
Paul Lasiter(11)............................. 26,540 *
Kevin E. Villani(12)......................... 30,000 *
All Directors and Officers as a Group (10
persons)(13)................................ 2,173,465 5.4
</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) Beneficial ownership is based on 40,350,082 shares of Common Stock as of
July 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.
In February 1997, the board of directors of Bancorp approved a plan to
spin off a portion of its specialty lending and finance business,
including Imperial Bank's common stock interest in ICII, to IFG, a
recently created subsidiary of Imperial Bank formed to hold various
business assets of Bancorp and its subsidiaries.
(4) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of March 31, 1997. 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 are deemed beneficial owners 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 997,052 shares subject to stock options exercisable within 60
days of July 31, 1997.
(6) Includes 77,052 shares subject to stock options exercisable within 60
days of July 31, 1997. Mr. Tomkinson resigned as an officer of the
Company in February 1996 but remains a Director.
(7) Includes 178,524 shares subject to stock options exercisable within 60
days of July 31, 1997.
(8) Includes 119,422 shares subject to stock options exercisable within 60
days of July 31, 1997.
(9) Includes 70,022 shares subject to stock options exercisable within 60
days of July 31, 1997.
(10) Includes 86,422 shares subject to stock options exercisable within 60
days of July 31, 1997.
(11) Includes 10,930 shares subject to stock options exercisable within 60
days of July 31, 1997.
(12) Includes 30,000 shares subject to stock options exercisable within 60
days of July 31, 1997.
(13) Includes 1,655,846 shares subject to stock options exercisable within 60
days of July 31, 1997.
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CERTAIN TRANSACTIONS
PRINCIPAL SHAREHOLDER; LIMITATIONS ON INVESTMENT; CONFLICTS OF INTEREST
At June 30, 1997, Imperial Bank owned 9,261,106 shares of Common Stock, or
23.9% of the Company. 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.
In February 1997, the board of directors of Bancorp approved a plan to spin
off a portion of its specialty lending and finance business, including
Imperial Bank's common stock interest in ICII, to IFG, a recently created
subsidiary of Bancorp formed to hold various business assets of Bancorp.
Two directors of the Company also serve on the Board of Directors of
Imperial Bank, IFG or their 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
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 did 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
received, 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 was
entitled to receive from IMH under his employment agreement with IMH 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.
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BANK DEPOSITS
The Company had deposits (including escrow balances) with SPTL which were
approximately $5.6 million, $4.5 million and $36.0 million at June 30, 1997,
December 31, 1996 and 1995, respectively.
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.
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.
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
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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 three months ended March 31, 1997 and the
years ended December 31, 1996 and 1995 were approximately $74,000, $713,000
and $256,000, 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 Mortgage Corp. USA ("Advanta") or subcontracted with
Advanta to perform such servicing functions.
In February and March 1996, certain of ICII's 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 March 31, 1997, all
amounts owed to ICII had been repaid.
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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.
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. Until the first
quarter of 1997, this line was guaranteed by ICII. The line has an expiration
date of October 24, 1997. As of June 30, 1997, SPFC had no amounts outstanding
with respect to this facility. The guarantee expired on April 1, 1997. ICII
does not intend to guarantee any other indebtedness of SPFC.
RELATIONSHIPS WITH IMH
THE CONTRIBUTION TRANSACTION
On November 20, 1995, the effective date of IMH'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 IMH common stock, the
Company (i) contributed to IMH 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 IMH 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, IMH 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 IMH'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 IMH, 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 IMH 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 IMH. 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 IMH
The Company and IMH 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 IMH that such agreements and the transactions provided for
therein, taken as a whole, are fair to both parties, while continuing certain
mutually beneficial arrangements.
IMH has entered into a sublease with the Company to lease a portion of its
facilities as IMH's executive offices and administrative facilities at an
aggregate monthly rental of approximately $33,936. The sublease expires in
1999.
The following is a summary of certain arrangements and transactions between
and the Company and IMH.
Tax Agreement
IMH has entered into an agreement (the "IMH 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 IMH Tax Agreement, the Company has agreed to indemnify and hold
IMH harmless from any tax liability attributable to periods ending on or
before November 20, 1995 in excess of such taxes as IMH has already paid or
provided for. For periods ending after the November 20, 1995, IMH 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 IMH or (ii)
IMH 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 IMH an amount equal to
the tax benefit as that benefit is realized. ICII will also agree to indemnify
IMH 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, IMH for any taxable period
after the Effective Date realizes a tax benefit, then IMH shall pay to the
Company the amount of such benefit at such time or times as IMH 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 IMH's liability
without first obtaining the consent of IMH. IMH generally controls all other
audits and administrative and judicial proceedings.
Services Agreement
Prior to March 31, 1997, ICIFC was allocated expenses of various
administrative services provided by ICII. IWLG was also allocated expenses
prior to the contribution transaction referenced above. The costs of such
services were not directly attributable to a specific division or subsidiary
and primarily included general corporate overhead, such as data processing,
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. In connection with IMH's initial public offering in November
1995, IMH and ICII entered into a services agreement (the "IMH Services
Agreement") under which ICII provided similar general corporate overhead
services to IMH and its affiliates, including ICIFC and IWLG. The Company
charged fees for each of the services which it provides under the IMH Services
Agreement based upon usage. The IMH Services Agreement expired on December 31,
1996. The allocation of expenses to ICIFC and IWLG and amounts paid to ICII
under the IMH Services Agreement for the six months ended June 30, 1997 and
for the years ended December 31, 1996, and 1995 aggregated $0, $518,000, and
$269,000, respectively.
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OTHER TRANSACTIONS
General
ICAI, a wholly-owned subsidiary of the Company, oversees the day-to-day
operations of IMH, subject to the supervision of IMH's Board of Directors,
pursuant to a management agreement (the "Management Agreement") effective as
of November 20, 1995, for an initial term that expired on January 31, 1997.
ICAI and IMH have concluded a five-year extension to the Management Agreement
whereby amounts payable thereunder would be subordinated to a specified rate
of return payable to IMH stockholders.
ICAI is entitled to receive a per annum base management fee payable monthly
in arrears of an amount equal to 75% of (i) 3/8 of 1% of gross mortgage assets
of IMH 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 IMH 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
IMH'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 six months ended June 30, 1997
and the years ended December 31, 1996 and 1995, ICAI earned $1.8 million, $2.0
million and $37,888 in management fees, respectively.
ICAI is entitled to receive as incentive compensation for each fiscal
quarter, an amount equal to 75% of 25% of the net income of IMH, 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 IMH's net income for the
quarter by its average net worth for the quarter. For such calculations, the
"net income" of IMH means the income of IMH 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 IMH'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 IMH, before deducting any underwriting discounts and
commissions and other expenses and costs relating to such offering, plus IMH'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 IMH's stockholders. The incentive payment to ICAI is
calculated quarterly in arrears before any income distributions are made to
stockholders for the corresponding period. During the six months ended June
30, 1997 and the years ended December 31, 1996 and 1995, ICAI earned $1.0
million, $1.3 million and $0, respectively, for ICAI's incentive payment. The
remaining 25% of the base management fee and of the incentive compensation fee
are payable to participants in IMH's executive bonus pool as determined by the
chief executive officer of IMH.
Pursuant to the Management Agreement, IMH 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 IMH's operations. The
expenses that are paid by IMH include issuance and transaction costs incident
to the acquisition, disposition and financing of investments, regular legal
and auditing fees and expenses of IMH, the fees and expenses of IMH'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 IMH's custodian and transfer agent,
if any. In addition, ICAI provides various administrative services to IMH such
as human resource and management information services. ICAI has subcontracted
with ICII and certain of its affiliates to provide certain of such
administrative services required under the Management Agreement.
Reimbursements of expenses incurred by ICAI which are the responsibility of
IMH are made monthly. During the six months ended June 30, 1997 and the years
ended December 31, 1996 and 1995, there were no monies paid to ICAI as
reimbursement of expenses.
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IMH and ICII intend to negotiate the termination of the Management
Agreement. IMH is required to pay ICII a fee upon such termination. The fee
may be paid in shares of registered IMH common stock, other securities, in
cash, or a combination of the foregoing. The consummation of the transaction
is conditioned on several factors including negotiation of major terms of the
transaction, execution of formal documentation and approval of the
disinterested and unaffiliated members of the board of directors of each of
IMH and ICII. There can be no assurance that this transaction will be
consummated and even if consummated, the Company cannot currently determine
the amount of the termination fee or the form of consideration with which it
will be paid.
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 bore interest at a rate of 12% per annum, and was secured by the
residual interests. On March 31, 1997, ICIFC renegotiated the loan, paying it
down by $9.5 million and setting a term of ten years. ICII has agreed to
compensate ICIFC for losses related to certain loans, to the extent that such
loans do not perform, with the exact terms to be determined later.
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, IMH 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. IMH 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, IMH purchased a subordinated interest in a lease
receivable securitization from IBC. The lease receivables underlying the
security were originated by IBC. IMH 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 IMH, and as of
June 30, 1997, holds the subordinated interest as an investment vehicle.
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Transfer of ICIFC Stock
To conclude the deconsolidation of ICIFC, in the first quarter of 1997 ICII,
as sole common shareholder, contributed the common shares of ICIFC to four
individuals in approximately equal number of shares, with an approximate value
of $25,000 each. ICII no longer has any equity interest in ICIFC.
RELATIONSHIPS WITH FMAC
On August 29, 1997, the Company announced that FMC, a Delaware corporation
that was formed in August 1997 for the purpose of succeeding to the business
of FMAC, filed a registration statement with the Securities and Exchange
Commission covering a proposed initial public offering of its common stock.
Immediately prior to the proposed initial public offering, FMAC will merge
into FMC. Upon the closing of the proposed initial public offering, ICII and
FLRT, Inc. will own 12,091,667 and 6,358,333, or 44.4% and 23.4%,
respectively, of the total outstanding shares of the FMC's common stock,
respectively, assuming no exercise of the underwriters' overallotment option.
FMAC and ICII have entered into agreements for the purpose of defining their
ongoing relationships. 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 FMAC
and ICII 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 FMAC as could have been obtained from
unaffiliated parties.
Additional or modified arrangements and transactions may be entered into by
FMAC, ICII, and their respective subsidiaries, after completion of the
proposed initial public offering. Any such future arrangements and
transactions will be determined through negotiation between FMAC and ICII, and
it is possible that conflicts of interest will be involved. All transactions
by and between FMAC and ICII must be approved by a majority of the
disinterested directors of FMAC.
The following is a summary of certain arrangements and transactions between
FMAC and ICII.
FMAC Services Agreement
FMAC and ICII will enter into a services agreement effective as of the
effective date of the proposed initial public offering (the "FMAC Services
Agreement") under which ICII will continue to provide human resource
administration and certain accounting functions to FMAC.
ICII will charge fees for each of the services which it will provide under
the FMAC Services Agreement based upon usage. The FMAC Services Agreement will
have an initial term that ends one year from the date of the proposed initial
public offering and is renewable annually thereafter. FMAC may terminate the
FMAC Services Agreement, in whole or in part, upon one month's written notice.
As part of the services to be provided under the FMAC Services Agreement, ICII
will provide FMAC with insurance coverage and self insurance programs,
including health insurance. The charge to FMAC for coverage will be based upon
a pro rata portion of the costs to ICII to the various policies. Management
believes that the terms of the FMAC Services Agreement are as favorable to
FMAC as could be obtained from independent third parties.
ICII Registration Rights Agreement
FMAC has entered into a registration rights agreement (the "ICII
Registration Rights Agreement") pursuant to which FMAC has agreed to file one
or more registration statements under the Securities Act in the future for
shares of FMAC held by ICII, subject to certain conditions set forth therein.
Pursuant to the ICII Registration Rights Agreement, FMAC will use its
reasonable efforts to cause such registration statements to be kept
continuously effective for the public sale from time to time of the shares of
FMAC held by ICII. Also, under the ICII Registration Rights Agreement, FLRT,
Inc. may piggyback its shares onto any registration statement concerning
shares of the FMAC's common stock held by ICII; provided however than for a
period of
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three years following the date of the proposed initial public offering, FLRT,
Inc. is limited in the amount of shares of FMAC's common stock it can sell to
that amount authorized pursuant to Rule 144. Thereafter, FLRT, Inc. has
registration rights similar to those granted to ICII under the ICII
Registration Rights Agreement without any volume limitations.
Transactions Involving SPTL
At December 31, 1995, FMAC had a net receivable of principal and interest on
loans from SPTL, ICII's wholly owned subsidiary, of $579,000. In July 1995,
FMAC sold approximately $3.8 million of servicing rights to SPTL, resulting in
a gain of $31,000. FMAC also had a receivable from ICII of $924,000 bearing
interest at 10.4% as of December 31, 1995 and a payable of $526,000 relating
to ICII's residual interest in the Franchise Loan Receivables Trust 1995-B.
FMAC provides subservicing on a contractual basis for servicing rights on
certain loans originated by FMAC's predecessor and sold to SPTL. At June 30,
1997, December 31, 1996 and 1995, there was approximately $151 million, $183
million and $262 million, respectively, of loans outstanding underlying this
subservicing arrangement. FMAC receives approximately 13 basis points for
providing such services.
FMAC purchased $55.3 million in loans at a $6.0 million premium from SPTL on
December 29, 1995. These loans had originally been purchased by SPTL from
Greenwich on November 30, 1995. FMAC purchased $15.5 million in loans at par
value from SPTL on June 26, 1997. These loans were purchased by SPTL from FMAC
in 1996 and 1997.
FMAC also has a master purchase and sale agreement with SPTL to originate
loans for SPTL under mutual agreement, and subject to SPTL underwriting each
such loan prior to sale of such loans. Under this agreement, FMAC also has the
ability to repurchase loans, under mutual agreement with SPTL. There is no
specified commitment by either party, and each individual sale is negotiated
separately as to pricing. This agreement has no expiration date. At June 30,
1997, loans originated for SPTL (and not repurchased), totaled approximately
$104.3 million. FMAC does not expect to originate a significant volume of
loans for SPTL under this arrangement in the future.
Borrowings and Guarantees
At June 30, 1997 and December 31, 1996, FMAC had borrowings from ICII
outstanding of $10.0 million and $17.7 million, respectively. FMAC paid
interest at 12% on the outstanding balances.
FMAC, among other subsidiaries of ICII, has jointly and severally and fully
and unconditionally guaranteed the 9 7/8% Senior Notes and the Par Securities.
Such guarantees will terminate upon the deconsolidation of FMAC in the
financial statements of ICII, which will be effective upon the closing of the
proposed initial public offering.
In consideration of ICII's guarantee of FMAC's warehouse lines of credit and
repurchase facilities, FMAC pays to ICII monthly a fee equal to 15 basis
points on FMAC's outstanding borrowings covered by such guarantee. ICII will
not guarantee any of FMAC's future warehouse lines of credit and repurchase
facilities.
ICII guaranteed FMAC's lease obligations for its executive and
administrative offices located in Los Angeles, California and Greenwich,
Connecticut. The parties to the leases are currently negotiating a release of
such guarantees. ICII will not guarantee any of FMAC's future leases.
ICII and FLRT, Inc. have agreed to indemnify FMAC against any and all
liability that FMAC and its stockholders (other than ICII and FLRT, Inc.) may
incur as a result of the lawsuit of DeWald et al. vs. Knyal, et al.
ICII Options Granted to Executive Officers and Key Employees of FMAC
In April 1996, ICII granted incentive stock options to purchase 25,000
shares of ICII common stock to each of Messrs. Shaughnessy and Rinaldi and
incentive stock options to purchase 10,000 shares of ICII common stock
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to Mr. Farren. In December 1995 and July 1996, ICII granted Raedelle A. Walker
incentive stock options to purchase an aggregate of 30,000 shares of ICII
common stock. The exercise price of all such options was the fair market value
of ICII common stock at the time of the grants.
Other Arrangements and Transactions With FMAC
In the ordinary course of business, FMAC has conducted transactions with
certain of its officers and directors and with affiliated companies and
entities. All such transactions are conducted at "arm's length" in accordance
with FMAC's policies.
Equity Investments
Franchise Equity Fund L.L.C. FMAC, ICII and Mr. Knyal are parties to an
Operating Agreement, dated April 1, 1996, pursuant to which such parties
organized Franchise Equity Fund L.L.C., a Delaware limited liability company
("FEF LLC"), for the purpose of making equity investments in franchisees of
PepsiCo related businesses. FMAC owns a 99% membership interest in, and is the
manager of FEF LLC. ICII and Mr. Knyal own 0.67% and 0.33% membership
interests, respectively, in FEF LLC.
In June 1996, FEF LLC, Mr. Knyal and certain other investors entered into an
agreement to organize five limited partnerships in New Jersey and Pennsylvania
(the "Summerwood Partnerships") for the purpose of acquiring and operating 68
Taco Bell and KFC units. FEF LLC made a loan of $2.0 million to the Summerwood
Partnerships in exchange for warrants to purchase a 40% limited partner
interest in each of the Summerwood Partnerships. In December 1996, FEF LLC
exercised the warrants in full, the $2.0 million loan was converted into
capital contributions and FEF LLC acquired a 40% limited partner interest in
each of the Summerwood Partnerships. Under certain circumstances, the general
partner of the Summerwood Partnerships may require FEF LLC to make additional
loans or capital contributions to the Summerwood Partnerships in the aggregate
amount of $2.0 million until the third anniversary of the acquisition. The
other investors have certain rights to purchase FEF LLC's limited partner
interest after the fifth anniversary of the acquisition, and FEF LLC has
certain rights to sell its limited partner interest to the other investors
after the seventh anniversary of the acquisition. In addition, pursuant to the
terms of the agreement, Mr. Knyal is required to personally guarantee any
obligations of the Summerwood Partnerships that the limited partners of such
partnerships are required to personally guarantee. In connection with the
acquisition, FMAC made 58 loans to the Summerwood Partnerships in the initial
aggregate amount of $40.6 million. The loans bear interest at annual rates
ranging from 9.19% to 10.8% and are due on dates ranging from July 2003 to
July 2011. At June 30, 1997, the outstanding balance of such loans was
$39.3 million.
In November 1996, FEF LLC and certain other investors organized Restaurant
Management of Carolina, L.P., a Delaware limited partnership ("Restaurant
Management LP"), for the purpose of acquiring and operating 37 Taco Bell
units. FEF LLC made an initial capital contribution of $3.0 million
($2.0 million of which has been repaid to FEF LLC) to, and owns a 32.5%
limited partner interest in, Restaurant Management LP. Under certain
circumstances, the general partner may require FEF LLC to make additional
capital contributions to Restaurant Management LP in the aggregate amount of
$2.0 million until the third anniversary of the acquisition. The purchase
price for the units was funded in part through 27 loans from FMAC in the
initial aggregate amount of $23.2 million. The loans bear interest at annual
rates ranging from 9.19%% to 10.0% and are due on dates ranging from June 1998
to December 2011. At June 30, 1997, the outstanding balance of such loans was
$22.9 million. The other investors have certain rights to purchase FEF LLC's
limited partner interest after the fifth anniversary of the acquisition, and
FEF LLC has certain rights to sell its limited partner interest to the other
investors after the seventh anniversary of the acquisition. In addition, in
March and August 1996, prior to the acquisition, FMAC made 15 loans to certain
affiliates of Restaurant Management LP in the initial aggregate amount of
$9.9 million. The loans bear interest at annual rates ranging from 10.25% to
10.45%. At June 30, 1997, the outstanding balance of such loans was
$9.7 million.
In December 1996, FEF LLC and certain other investors organized Family Eats
Limited Partnership, a Delaware limited partnership ("Family Eats LP"), for
the purpose of acquiring and operating 19 Taco Bell units. FEF LLC made a
capital contribution of $1.45 million to, and owns a 49% limited partner
interest in, Family
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Eats LP. Under certain circumstances, the general partner may require FEF LLC
to make additional capital contributions to Family Eats LP in the aggregate
amount of $1.55 million until the third anniversary of the acquisition. The
purchase price for the units was funded in part through 18 loans from FMAC in
the initial aggregate amount of $10.1 million. The loans bear interest at
annual rates ranging from 9.69% to 10.25% and are due on dates ranging from
July 1998 to October 2012. At June 30, 1997, the outstanding balance of such
loans was $10.0 million. The other investors have certain rights to purchase
FEF LLC's limited partner interest after the fifth anniversary of the
acquisition, and FEF LLC has certain rights to sell its limited partner
interest to the other investors after the seventh anniversary of the
acquisition.
CVB, L.L.C. FMAC, ICII and Mr. Knyal are parties to an Operating Agreement,
dated February 6, 1997, pursuant to which such parties organized CVB, L.L.C.,
a Delaware limited liability company ("CVB LLC"), for the purpose of making
equity investments in franchisees of Church's Chicken units. FMAC owns a 99%
membership interest in, and is the manager of, CVB LLC. ICII and Knyal own
0.67% and 0.33% membership interests, respectively, in CVB LLC.
In April 1997, CVB LLC and another investor organized Atlanta Franchise
Development Company, LLC, a Delaware limited liability company ("Atlanta
Franchise LLC"), for the purpose of acquiring and operating 100 Church's
Chicken units. CVB LLC made a nominal capital contribution to, and owns a 40%
membership interest in, Atlanta Franchise LLC. The purchase price for the
units was funded in part through 72 loans from FMAC in the initial aggregate
amount of $25.1 million. The loans bear interest at an annual rate of 11.72%
and are due in April 2012. At June 30, 1997, the outstanding balance of such
loans was $24.7 million. The other investor has certain rights to purchase CVB
LLC's membership interest after the fifth anniversary of the acquisition, and
CVB LLC has certain rights to sell its membership interest to Atlanta
Franchise LLC after the seventh anniversary of the acquisition.
HNN Equity, L.L.C. FMAC and ICII are parties to an operating agreement,
dated March 27, 1997, pursuant to which such parties organized HNN Equity,
L.L.C., a Delaware limited liability company ("HNN Equity LLC"), for the
purpose of making an equity investment in Hot N Now, L.L.C., a Delaware
limited liability company ("Hot 'N Now LLC"). FMAC and ICII each own a 50%
membership interest in, and share joint management of, HNN Equity LLC. In
April 1997, HNN Equity LLC and Davis/HNN, L.L.C. ("Davis/HNN LLC"), a limited
liability company principally owned by Ronald V. Davis, a director of the
Company, organized Hot 'N Now LLC under the laws of the state of Delaware for
the purpose of acquiring all franchisor and tradename rights to a QSR concept
named "Hot 'N Now" as well as acquiring and operating 36 Not 'N Now units. HNN
Equity LLC owns a 40% membership interest in Hot 'N Now LLC. Davis/HNN LLC
owns a 60% membership interest in, and is the manager of, Hot 'N Now LLC. The
purchase price for the Units was $2.0 million and was funded through a capital
contribution of $1.5 million by Davis/HNN LLC and a loan of $600,000 from
Davis/HNN LLC. The loan bears interest at an annual rate of 8% and is payable
out of distributable cash from the operations of Hot 'N Now LLC. Mr. Davis is
the Chief Executive Officer of Hot 'N Now LLC and Davis/HNN LLC is entitled to
an annual base fee of $60,000 per year in its capacity as manager of Hot 'N
Now LLC. The manager may require the members to make additional capital
contributions to Hot 'N Now LLC to satisfy the obligations of Hot 'N Now LLC
to make rent payments under real estate leases for 19 units. Such obligations
are also guaranteed by ICII.
PRG Equity, L.L.C. On April 14, 1997, FMAC organized PRG Equity, L.L.C., a
Delaware limited liability company ("PRG Equity LLC"), for the purpose of
making an equity investment in Pate Restaurant Enterprises, Ltd., a Florida
limited partnership which owns and operates seven Hardee's units ("Pate
Restaurant LP"). FMAC owns all of the membership interests in and manages PRG
Equity LLC. In April 1997, FMAC made seven loans to Pate Restaurant LP in the
initial aggregate amount of $3.5 million. In connection with such loans, PRG
Equity LLC acquired a 40% limited partner interest in Pate Restaurant LP. The
loans bear interest at annual rates ranging from 9.94% to 10.79% and are due
on dates ranging from November 1998 to May 2012. At June 30, 1997, the
outstanding balance of such loans was $3.4 million. The other investors in
Pate Restaurant LP have certain rights to purchase PRG Equity LLC's limited
partner interest after the seventh anniversary of the acquisition, and PRG
Equity LLC has certain rights to sell its limited partner interest to the
other investors after the seventh anniversary of the acquisition.
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RELATIONSHIPS WITH ICCMIC
ICCMIC Management Agreement
ICCMIC will enter into a management agreement (the "ICCMIC Management
Agreement") with Imperial Credit Commercial Asset Management Corporation
("ICCAMC"), a wholly-owned subsidiary of ICII, for an initial term expiring on
the second anniversary of the closing date of ICCMIC's initial public
offering. Thereafter, successive extensions, each for a period not to exceed
two years, may be made by agreement between ICCMIC and ICCAMC, subject to the
affirmative vote of a majority of ICCMIC's independent directors. ICCMIC may
terminate, or decline to renew the term of, the ICCMIC Management Agreement
without cause at any time after the first two years upon 60 days written
notice by a majority vote of the independent directors; provided that a
termination fee will be due. In addition, ICCMIC has the right to terminate
the ICCMIC Management Agreement upon the occurrence of certain specified
events, including a material breach by ICCAMC of any provision contained in
the ICCMIC Management Agreement that remains uncured at the end of the
applicable cure period, without the payment of any termination fee.
Pursuant to the provisions of the ICCMIC Management Agreement, ICCAMC at all
times will be subject to the supervision of ICCMIC's board of directors and
will have only such functions and authority as ICCMIC delegates to it. ICCAMC
will advise the board of directors as to the activities and operations of
ICCMIC. ICCAMC will be responsible for the day-to-day operations of ICCMIC
pursuant to the authority granted to it by ICCMIC's board of directors under
the ICCMIC Management Agreement, and ICCAMC will perform (or cause to be
performed) such services and activities relating to the assets and operations
of ICCMIC as may be directed by ICCMIC's board of directors or as ICCAMC
otherwise considers appropriate, including: (i) serving as ICCMIC's consultant
with respect to the formulation of investment criteria and preparation of
policy guidelines by the board of directors; (ii) advising and representing
ICCMIC in connection with the acquisition and commitment to acquire assets,
the sale and commitment to sell assets, and the maintenance and administration
of its portfolio of assets; (iii) advising ICCMIC regarding, and arranging
for, (a) the issuance of collateralized mortgage obligations ("CMOs")
collateralized by ICCMIC's mortgage loans, (b) reverse repurchase agreements
on ICCMIC's mortgage-backed securities ("MBS"), and (c) other borrowings, as
appropriate; (iv) furnishing reports and statistical and economic research to
ICCMIC regarding ICCMIC's activities and the services performed for ICCMIC by
ICCAMC; (v) monitoring and providing to ICCMIC's board of directors on an
ongoing basis price information and other data obtained from dealers that
maintain markets in assets identified by the board of directors from time to
time, and providing data and advice to the board of directors in connection
with the identification of such dealers; (vi) providing executive and
administrative personnel, office space and office services required in
rendering services to ICCMIC; administering the day-to-day operations of
ICCMIC; and performing and supervising the performance of such other
administrative functions necessary in the management of ICCMIC, including the
collection of revenues and the payment of ICCMIC's debts and obligations and
maintenance of appropriate computer services to perform such administrative
functions; (vii) communicating on behalf of ICCMIC with the holders of any
equity or debt securities of ICCMIC as required to satisfy the reporting and
other requirements of any governmental bodies or agencies or trading markets
and to maintain effective relations with such holders; (viii) to the extent
not otherwise subject to an agreement executed by ICCMIC, designating a
servicer for mortgage loans sold to ICCMIC and arranging for the monitoring
and administering of such servicers; (ix) counseling ICCMIC in connection with
policy decisions to be made by the board of directors; (x) engaging in hedging
activities on behalf of ICCMIC which are consistent with ICCMIC's status as a
real estate investment trust ("REIT") and with the guidelines; (xi) upon
request by and in accordance with the directions of ICCMIC's board of
directors, investing or reinvesting any money of ICCMIC; (xii) counseling
ICCMIC regarding the maintenance of its exemption from the Investment Company
Act and monitoring compliance with the requirements for maintaining exemption
from that Act; (xiii) counseling ICCMIC regarding the maintenance of its
status as a REIT and monitoring compliance with the various REIT qualification
tests and other rules set out in the Code and Treasury Regulations thereunder;
and (xiv) counseling ICCMIC as to compliance with all applicable laws,
including those that would require ICCMIC to qualify to do business in
particular jurisdictions.
ICCAMC will perform portfolio management services on behalf of ICCMIC
pursuant to the ICCMIC Management Agreement with respect to ICCMIC's
investments. Such services will include, but not be limited
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to, consulting ICCMIC on purchase, sale and other opportunities, collection of
information and submission of reports pertaining to ICCMIC's assets, interest
rates, and general economic conditions, periodic review and evaluation of the
performance of ICCMIC's portfolio of assets, acting as liaison between ICCMIC
and banking, mortgage banking, investment banking and other parties with
respect to the purchase, financing and disposition of assets, and other
customary functions related to portfolio management. ICCAMC may enter into
subcontracts with other parties, including ICII and its affiliates, to provide
any such services to ICCMIC.
ICCAMC will perform monitoring services on behalf of ICCMIC pursuant to the
ICCMIC Management Agreement with respect to loan servicing activities provided
by third parties and with respect to ICCMIC's portfolio of special servicing
rights. Such monitoring services will include, but not be limited to, the
following activities: negotiating special servicing agreements; acting as a
liaison between the servicers of ICCMIC's mortgage loans and ICCMIC; review of
servicers' delinquency, foreclosures and other reports on ICCMIC's mortgage
loans; supervising claims filed under any mortgage insurance policies; and
enforcing the obligation of any servicer to repurchase mortgage loans. ICCAMC
may enter into subcontracts with other parties, including its affiliates, to
provide any such services for ICCAMC.
ICCAMC will receive a base management fee calculated as a percentage of the
Average Invested Assets of ICCMIC for each calendar quarter and equal to 1%
per annum of the first $1 billion of such Average Invested Assets, .75% of the
next $250 million of such Average Invested Assets, and .50% of Average
Invested Assets above $1.25 billion. The term "Average Invested Assets" for
any period means the average of the aggregate book value of the assets of
ICCMIC, including the assets of all of its direct and indirect subsidiaries,
before reserves for depreciation or bad debts or other similar noncash
reserves, computed by taking the daily average of such values during such
period. ICCAMC will not receive any management fee for the period prior to the
sale of the shares in ICCMIC's initial public offering. The base management
fee is intended to compensate ICCAMC for its costs in providing management
services to ICCMIC. The board of directors of ICCMIC may adjust the base
management fee in the future if necessary to align the fee more closely with
the costs of such services.
ICCAMC shall be entitled to receive incentive compensation for each fiscal
quarter in an amount equal to the product of (A) 25% of the dollar amount by
which (1)(a) Funds from Operations of ICCMIC (before the incentive fee) per
share of common stock (based on the weighted average number of shares
outstanding) plus (b) gains (or minus losses) from debt restructuring and
sales of property per share of common stock (based on the weighted average
number of shares outstanding), exceed (2) an amount equal to (a) the weighted
average of the price per share at the initial offering and the prices per
share at any secondary offerings by ICCMIC multiplied by (b) the Ten-Year U.S.
Treasury Rate plus four percent per annum multiplied by (B) the weighted
average number of shares of common stock outstanding during such quarter.
"Funds from Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with
GAAP) excluding gains (or losses) from debt restructuring and sales of
property, plus depreciation and amortization on real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Funds from
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of ICCMIC's performance or to cash flows as a measure
of liquidity or ability to make distributions. As used in calculating ICCAMC's
compensation, the term "Ten-Year U.S. Treasury Rate" means the arithmetic
average of the weekly average yield to maturity for actively traded current
coupon U.S. Treasury fixed interest rate securities (adjusted to constant
maturities of ten years) published by the Federal Reserve Board during a
quarter, or, if such rate is not published by the Federal Reserve Board, any
Federal Reserve Bank or agency or department of the federal government
selected by ICCMIC. If ICCMIC determines in good faith that the Ten-Year U.S.
Treasury Rate cannot be calculated as provided above, then the rate shall be
the arithmetic average of the per annum average yields to maturities, based
upon closing asked prices on each business day during a quarter, for each
actively traded marketable U.S. Treasury fixed interest rate security with a
final maturity date not less than eight nor more than 12 years from the date
of the closing asked prices as chosen and quoted for each business day in each
such quarter in New York City by at least three recognized dealers in U.S.
government securities selected by ICCMIC.
ICCAMC will be reimbursed for (or charge ICCMIC directly for) ICCAMC's costs
and expenses in employing third-parties to perform due diligence tasks on
assets purchased or considered for purchase by ICCMIC.
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The above referenced management fees are payable in arrears. ICCAMC's base
and incentive fees and reimbursable costs and expenses shall be calculated by
ICCAMC within 45 days after the end of each quarter, and such calculation
shall be promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees,
costs and expenses within 60 days after the end of each fiscal quarter.
Right of First Offer
Pursuant to the ICCMIC Management Agreement, ICCAMC will not assume any
responsibility other than to render the services called for thereunder and
will not be responsible for any action of ICCMIC's board of directors in
following or declining to follow its advice or recommendations. ICCAMC, its
directors and its officers will not be liable to ICCMIC, any subsidiary of
ICCMIC, the independent directors, ICCMIC's stockholders or any subsidiary's
stockholders for acts performed in accordance with and pursuant to the ICCMIC
Management Agreement, except by reason of acts constituting bad faith, willful
misconduct, gross negligence or reckless disregard of their duties under the
ICCMIC Management Agreement. ICCMIC has agreed to indemnify ICCAMC, its
directors and its officers with respect to all expenses, losses, damages,
liabilities, demands, charges and claims arising from acts of ICCAMC not
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of duties, performed in good faith in accordance with and pursuant
to the ICCMIC Management Agreement.
The ICCMIC Management Agreement does not limit or restrict the right of
ICCAMC or any of its officers, directors, employees or affiliates to engage in
any business or to render services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet
ICCMIC's policies and criteria, except that ICCAMC may not manage or advise
another REIT or other entity that invests or intends to invest primarily in
commercial and multifamily mortgage loans or subordinated commercial or
multifamily mortgage-backed securities ("MBS"). Moreover, the directors and
certain of the executive officers of ICCAMC will execute non-compete
agreements that will preclude them from leaving ICCAMC and, under certain
circumstances, forming or joining another REIT that invests or intends to
invest primarily in commercial and multifamily mortgage loans or subordinated
CMBS interests.
ICII and its affiliates, including SPTL, expect to continue to originate
mortgage loans and MBS interests. SPTL will enter into an agreement granting
ICCMIC, as long as the ICCMIC Management Agreement is in effect, a right of
first offer to purchase, in addition to the initial investments made by
ICCMIC, not less than $150 million annually of multifamily and commercial
mortgage loans typical of those originated by SPTL. Although not contractually
committed to do so, ICCMIC intends to purchase mortgage loans offered to it
pursuant to the foregoing right of first offer, subject to compliance with the
guidelines and underwriting criteria as established and modified from time to
time by ICCMIC's independent directors.
ICCMIC expects to maintain a relationship with ICII and SPTL in which ICCMIC
will be a ready, willing and able purchaser of MBS interests that may be sold
from time to time by SPTL. Although no binding commitment will exist on the
part of ICII, SPTL or ICCMIC regarding the sale and purchase of MBS interests,
ICCMIC expects to be able to purchase MBS interests from SPTL at prices and on
terms meeting ICCMIC's investment criteria. ICCMIC expects that ICII and SPTL
will offer to sell assets to ICCMIC on terms and at prices that, in the
aggregate, will be fair to both parties, subject to compliance with the
guidelines. In deciding whether to acquire any such asset, ICCAMC may
consider, among other factors, whether acquisition of the asset will enhance
ICCMIC's ability to achieve or exceed ICCMIC's risk adjusted target rate of
return established for that period by ICCMIC's board of directors, whether the
asset otherwise is well-suited for ICCMIC and whether ICCMIC is financially
able to take advantage of the investment opportunity. If an asset that
otherwise meets all of ICCMIC's criteria for asset acquisition is being
offered to ICCMIC at a price that is greater, or on terms that are less
favorable, than would be required by third parties for similar assets in bona
fide arms' length transactions, ICCAMC would be expected to recommend that
ICCMIC decline to acquire that asset at the quoted price and terms,
notwithstanding the relationship among ICCMIC, ICII and SPTL.
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Other Transactions
From time to time, SPTL may act as the servicer for ICCMIC's loans. SPTL
will receive fees for such services pursuant to applicable pooling and
servicing agreements.
ICCMIC, on the one hand, and ICII and its affiliates, on the other, will
enter into a number of relationships other than those governed by the ICCMIC
Management Agreement, some of which may give rise to conflicts of interest.
Moreover, three of the members of the board of directors of ICCMIC and all of
its officers are also employed by ICCAMC or its affiliates.
The relationships between ICCMIC, on the one hand, and ICII and its
affiliates, on the other, will be governed by policy guidelines to be approved
by a majority of ICCMIC's independent directors. The guidelines establish
certain parameters for the operations of ICCMIC, including quantitative and
qualitative limitations on ICCMIC's assets that may be acquired. The
guidelines are to assist and instruct ICCAMC and to establish restrictions
applicable to transactions with ICII and its affiliates. A majority of the
independent directors will be required to approve the acquisition of the
initial investments by ICCMIC from ICII and SPTL. However, subsequent to the
acquisition of the initial investments, ICCAMC may enter into transactions on
behalf of ICCMIC with ICII and its affiliates based upon the guidelines
approved by the independent directors. Such transactions will be reviewed on a
quarterly basis to insure compliance with the guidelines.
Mortgage Loan and Other Asset Purchases
ICCMIC will acquire (subject to the consent of the independent directors)
its initial investments from ICII and SPTL for an aggregate purchase price of
approximately $206 million plus accrued interest, which will result in a book
gain to ICII and SPTL, subject to the terms of the definitive agreement to
purchase the initial investments, satisfaction of GAAP sale criteria, and
consummation of the transaction.
ICCMIC may acquire additional assets from ICII and its affiliates in the
future. Any such acquisitions will be in accordance with the guidelines to be
approved by a majority of ICCMIC's independent directors. The terms of a
particular transaction, however, will not be approved in advance by ICCMIC's
independent directors in all cases. The independent directors will review any
such transactions quarterly to insure compliance with the guidelines, but in
doing so they, by necessity, will rely primarily on information and analysis
provided to them by ICCAMC.
Equity Investment
ICII will purchase 1,980,000 shares of ICCMIC common stock on the closing
date of the ICCMIC initial public offering at a price equal to the public
offering price, net of any underwriting discounts or commissions. This
purchase will result in ICII's ownership of 9.9% of the total shares of ICCMIC
(assuming no exercise of the underwriters' over-allotment option). ICCAMC also
has received stock options pursuant to the ICCMIC Option Plan. ICII will
retain its shares of ICCMIC for at least two years after ICCMIC's initial
public offering of shares of common stock, but may dispose of its shares any
time thereafter. Notwithstanding the foregoing, if ICCMIC terminates the
ICCMIC Management Agreement, ICII may dispose of its shares at that time.
The market in which ICCMIC expects to acquire assets is characterized by
rapid evolution of products and services and, thus, there may in the future be
relationships between ICCMIC, ICCAMC, and affiliates of ICCAMC in addition to
those described herein.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
In connection with the sale of the Old Par Securities, the Company, the
Trust and the Subsidiary Guarantors (collectively, the "Registrants") entered
into a Registration Rights Agreement with the Initial Purchaser pursuant to
which the Registrants agreed to file a registration statement under the
Securities Act with respect to the New Par Securities and, upon the
effectiveness of such registration statement, offer to the holders of the Old
Par Securities the opportunity to exchange their Old Par Securities for a like
liquidation amount of New Par Securities, 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, each of the Registrants' obligations with
respect to the registration of the Old Par Securities and the New Par
Securities will terminate, except as provided below. A copy of the
Registration Rights Agreement delivered in connection therewith has been filed
as an exhibit to the Registration Statement of which this Prospectus is a
part. Following the completion of the Exchange Offer, holders of Old Par
Securities not tendered will not have any further registration rights, except
as provided below, and the Old Par Securities will continue to be subject to
certain restrictions on transfer. Accordingly, the liquidity of the market for
the Old Par Securities 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 Registrants believe that New Par
Securities issued pursuant to the Exchange Offer in exchange for Old Par
Securities may be offered for resale, resold and otherwise transferred by a
holder thereof (other than any such holder that is an "affiliate" of the
Registrants 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 Registrants that
(i) such New Par Securities 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 Par Securities and (iii) such holder has no
arrangement or understanding with any person to participate in the
distribution of such New Par Securities. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Par Securities 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 Par Securities for its own
account in exchange for Old Par Securities, where such Old Par Securities 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 Par Securities. See "Plan of Distribution."
In the event that any holder of Old Par Securities would not receive freely
tradeable New Par Securities 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 Par Securities registered in a "shelf"
registration statement on an appropriate form pursuant to Rule 415 under the
Securities Act.
In the event that the Registrants are obligated to file a "shelf"
registration statement, they 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 Par Securities 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
Registrants to register such holder's Par Securities under the Securities Act.
See "Procedures for Tendering Old Securities."
Pursuant to the Registration Rights Agreement, the Registrants (or, if the
Debentures have been distributed to holders of the Par Securities in
liquidation of the Trust, the Company only) agreed to file with the
Commission, on or prior to 30 days after the Closing Date, the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the New Par Securities, the New Guarantee and the New Debentures.
Upon the effectiveness of the Exchange Offer Registration Statement, the
Registrants will offer to the holders of Old Par Securities who are able to
make certain representations the opportunity to exchange their Transfer
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Restricted Old Par Securities for New Par Securities pursuant to the Exchange
Offer. If (i) the Registrants are not required to file the Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy,
(ii) the Company has received an opinion of independent tax counsel
experienced in such matters to the effect that, as a result of the
consummation of the Exchange Offer, there is more than an insubstantial risk
that (x) the Trust would be subject to United States federal income tax with
respect to income received or accrued on the Debentures or New Debentures, (y)
interest payable by the Company on such Debentures or New Debentures would not
be deductible by the Company, in whole or in part, for United States federal
income tax purposes, or (z) the Trust would be subject to more than a de
minimis amount of other taxes, duties or other governmental charges or
(iii) any holder of Old Par Securities notifies the Company and the Trust on
or before the 20th Business Day following the consummation of the Exchange
Offer that (A) it is prohibited by law or Commission policy from participating
in the Exchange Offer, (B) it may not resell the New Par Securities 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) it is a broker-dealer and
owns Old Par Securities acquired directly from the Trust or an affiliate of
the Trust or in the Remarketing, the Registrants will file with the Commission
a Shelf Registration Statement to cover resales of the Securities by the
holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement. The Company
and the Trust will use their respective best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means each Par Security, Guarantee or Debenture until (i) the date on which
such Par Security, Guarantee or Debenture has been exchanged by a person other
than a broker-dealer for a New Par Security, New Guarantee or New Debenture in
the Exchange Offer, (ii) following the exchange by a broker-dealer in the
Exchange Offer of an Old Par Security for a New Par Security , the date on
which such New Par Security is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on
which such Par Security, Guarantee or Debenture has been effectively
registered under the Securities Act and disposed of in accordance with the
Shelf Registration Statement or (iv) the date on which such Par Security,
Guarantee or Debenture is distributed to the public pursuant to Rule 144 under
the Securities Act.
The Registration Rights Agreement provides that (i) the Registrants will
file an Exchange Offer Registration Statement with the Commission on or prior
to 30 days after the Closing Date (unless not required to do so pursuant to
clause (x) or (y) of the fourth sentence of the preceding paragraph), (ii) the
Registrants will use their respective best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 90
days after the Closing Date, (iii) unless the Exchange Offer would not be
permitted by applicable law or Commission policy, the Registrants will
commence the Exchange Offer and use their 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 Commission, New Par Securities, New
Guarantees and New Debentures in exchange for all Old Par Securities, Old
Guarantees and Old Debentures tendered prior thereto in the Exchange Offer and
(iv) if obligated to file the Shelf Registration Statement, the Registrants
will use their best efforts to file the Shelf Registration Statement with the
Commission on or prior to 60 days after such filing obligation arises and to
cause the Shelf Registration to be declared effective by the Commission on or
prior to 30 days after such obligation arises. If (w) the Registrants fail to
file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (x) any of such
Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness (the "Effectiveness Target
Date"), (y) the Registrants fail to consummate the Exchange Offer within 30
Business Days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement or (z) 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 (w) through (z) above a
"Registration Default"), then the Company will pay additional interest
("Additional Interest") on the Debentures (including in respect of amount
occurring during any Extension Period) and corresponding Additional
Distributions (the "Additional Distributions") will become payable on the
Transfer Restricted
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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 liquidation or principal amount of Transfer Restricted Securities
held by such holder. The amount of the Additional Interest (and corresponding
Additional Distributions) will increase by an additional $.05 per week per
$1,000 liquidation or 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 Additional Interest (and corresponding
Additional Distributions) of $.50 per week per $1,000 liquidation or principal
amount of Transfer Restricted Securities. All accrued Additional Interest (and
corresponding Additional Distributions) will be paid by the Company on each
Distribution payment date to The Depositary Trust Company ("DTC") by wire
transfer of immediately available funds or by federal funds check and to
holders of definitive securities by wire transfer to the accounts specified by
them or by mailing checks to their registered addresses if no such accounts
have been specified. Following the cure of all Registration Defaults, the
accrual of Additional Interest (and corresponding Additional Distributions)
will cease.
Transfer Restricted Securities which have not been exchanged for New Par
Securities, New Debentures and New Guarantees pursuant to the Exchange Offer
are mandatorily redeemable by the Company on the Remarketing Settlement Date,
as described under "Description of Securities--Redemption--Transfer Restricted
Security Redemption."
Holders of Old Par Securities will be required to make certain
representations to the Company, the Trust and the Subsidiary Guarantors (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 Securities included in
the Shelf Registration Statement and benefit from the provisions regarding
Additional Interest set forth above.
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD PAR SECURITIES
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 Trust will accept for exchange Old Par Securities 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 Trust, 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,
$70,000,000 aggregate liquidation amount of the Old Par Securities is
outstanding. This Prospectus, together with the Letter of Transmittal, is
first being sent on or about , 1997, to all holders of Old Par Securities
known to the Trust. The Trust's obligation to accept Old Par Securities 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 Trust 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 Par Securities, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Par Securities previously tendered will
remain subject to the Exchange Offer and may be accepted for exchange by the
Trust. Any Old Par Securities 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 Par Securities tendered in the Exchange Offer must be in denominations
of principal amount of $1,000 or any integral multiple thereof. The Trust
expressly reserves the right to amend or terminate the Exchange Offer, and not
to accept for exchange any Old Par Securities 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 Trust
will give oral or written notice of any extension, amendment, non-acceptance
or termination to the holders of the Old Par Securities as promptly as
practicable, such notice in the case of any extension to be
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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 PAR SECURITIES
Only a registered holder of Old Par Securities may tender such Old Par
Securities in the Exchange Offer. The tender to the Trust of Old Par
Securities by a holder thereof as set forth below and the acceptance thereof
by the Trust will constitute a binding agreement between the tendering holder
and the Trust 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 Par Securities 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 Chase 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 Par
Securities 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 Par Securities, if such procedure is
available, into the Exchange Agent's account at DTC (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 PAR SECURITIES, 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 PAR SECURITIES SHOULD
BE SENT TO THE TRUST. 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 Par Securities 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 Par Securities, either make appropriate arrangements to
register ownership of the Old Par Securities 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 Par Securities surrendered
for exchange pursuant thereto are tendered (i) by a registered holder of the
Old Par Securities 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
Par Securities are registered in the name of a person other than a signer of
the Letter of Transmittal, the Old Par Securities 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 Trust 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 Par
Securities with the signature thereon guarantied by an Eligible Institution.
If the Letter of Transmittal or any Old Par Securities or powers of attorney
are signed by trustees, executors, administrators, guardians, attorneys-in-
fact, officers of corporations or others acting in a fiduciary or
representative capacity, such person should so indicate when signing, and,
unless waived by the Trust, proper evidence satisfactory to the Trust of their
authority to so act must be submitted with the Letter of Transmittal.
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All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Par Securities tendered for exchange will be
determined by the Trust in its sole discretion, which determination shall be
final and binding. The Trust reserves the absolute right to reject any and all
tenders of any particular Old Par Securities not properly tendered or not to
accept any particular Old Par Securities which acceptance might, in the
judgment of the Trust or its counsel, be unlawful. The Trust also reserves the
absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Old Par Securities either before or after
the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Old Par Securities in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Old Par Securities either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by the
Trust shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Par Securities for exchange
must be cured within such reasonable period of time as the Trust shall
determine. None of the Trust, 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 Par Securities for exchange, nor shall any of them incur
any liability for failure to give such notification.
By tendering, each holder will represent to the Trust that, among other
things, the New Par Securities acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the person receiving such
New Par Securities, 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 Par Securities. If any
holder or any such other person is an "affiliate," as defined under Rule 405
of the Securities Act, of the Trust, the Company or the Subsidiary Guarantors
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
Par Securities 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 Commission 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 Par Securities for
its own account in exchange for Old Par Securities, where such Old Par
Securities 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 Par Securities. 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 PAR SECURITIES FOR EXCHANGE; DELIVERY OF NEW PAR SECURITIES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Trust will accept, promptly after the Expiration Date, all Old Par
Securities properly tendered and will issue the New Par Securities promptly
after acceptance of the Old Par Securities. See "--Certain Conditions to the
Exchange Offer" below. For purposes of the Exchange Offer, the Trust will be
deemed to have accepted properly tendered Old Par Securities for exchange
when, as and if the Trust has given oral or written notice thereof to the
Exchange Agent.
For each Old Par Security accepted for exchange, the holder of such Old Par
Security will receive as set forth below under "Description of the
Securities--Book-Entry, Delivery and Form" a New Par Security having a
principal amount equal to that of the surrendered Old Par Security.
Accordingly, registered holders of New Par Securities 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 Par Securities or, if no interest has
been paid, from June 9, 1997. Old Par Securities accepted for exchange will
cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders whose Old Par Securities are accepted for exchange
will not receive any payment in respect of accrued interest on such Old Par
Securities otherwise payable on any interest payment date the record date for
which occurs on or after consummation of the Exchange Offer.
In all cases, issuance of New Par Securities for Old Par Securities 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
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Par Securities or a timely Book-Entry Confirmation of such Old Par Securities
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 Par Securities are not accepted for
any reason set forth in the terms and conditions of the Exchange Offer or if
Old Par Securities are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Par
Securities will be returned without expense to the tendering holder thereof
(or, in the case of Old Par Securities 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 Par
Securities 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 Par Securities 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 Par Securities by
causing the Book-Entry Transfer Facility to transfer such Old Par Securities
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 Par Securities 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 one of the addresses 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 Par Securities desires to tender such Old
Par Securities and the Old Par Securities are not immediately available, or
time will not permit such holder's Old Par Securities 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 Trust (by telegram, telex, facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of Old Par
Securities and the amount of Old Par Securities 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 Par
Securities, 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 Par Securities, 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 Par Securities 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 one of the addresses set forth below under "--Exchange Agent." Any
such notice of withdrawal must specify the name of the person having tendered
the Old Par Securities to be withdrawn, identify the Old Par Securities to be
withdrawn (including the principal amount of such Old Par Securities), and
(where certificates for Old Par Securities have been transmitted) specify the
name in which such Old Par Securities are
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registered, if different from that of the withdrawing holder. If certificates
for Old Par Securities 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 Par
Securities 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 Par Securities 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 Trust,
whose determination will be final and binding on all parties. Any Old Par
Securities so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Par Securities 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 Par Securities 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 Par Securities will be credited
to an account maintained with such Book-Entry Transfer Facility for the Old
Par Securities) as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Par Securities
may be retendered by following one of the procedures described under "--
Procedures for Tendering Old Par Securities" 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 Trust shall
not be required to accept for exchange, or to issue New Par Securities in
exchange for, any Old Par Securities and may terminate or amend the Exchange
Offer, if at any time before the acceptance of such New Par Securities for
exchange, any of the following events shall occur:
If (i) the Registrants are not required to file the Exchange Offer
Registration Statement or permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy,
(ii) the Company has received an opinion of independent tax counsel
experienced in such matters to the effect that, as a result of the
consummation of the Exchange Offer, there is more than an insubstantial risk
that (x) the Trust would be subject to United States federal income tax with
respect to income received or accrued on the Debentures or New Debentures, (y)
interest payable by the Company on such Debentures or New Debentures would not
be deductible by the Company, in whole or in part, for United States federal
income tax purposes, or (z) the Trust would be subject to more than a de
minimis amount of other taxes, duties or other governmental charges or (iii)
any holder of Transfer Restricted Securities notifies the Company and the
Trust on or before the 20th Business Day following the consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer, (B) it may not resell the New Par
Securities, the New Guarantees and the New Debentures 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) it is a broker-dealer and
owns Old Par Securities acquired directly from the Trust or an affiliate of
the Trust or in the Remarketing, the Registrants will file with the Commission
a Shelf Registration Statement to cover resales of the Par Securities by the
holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration Statement.
The foregoing conditions are for the sole benefit of the Registrants and may
be asserted by the Registrants in whole or in part at any time and from time
to time in their sole discretion. The failure by the Registrants 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 Trust will not accept for exchange any Old Par Securities
tendered, and no New Par Securities will be issued in exchange for any such
Old Par Securities, if at such time any stop order is threatened by the
Commission 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.
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The Exchange Offer is not conditioned on any minimum principal amount of Old
Par Securities being tendered for exchange.
EXCHANGE AGENT
Chase 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:
Chase Trust Company, Exchange Agent
By Hand/Overnight Courier/By Mail:
c/o The Chase Manhattan Bank
Attn: Mr. Carlos Estevez
55 Water Street
Second Floor, Room #234
New York, New York 10041
By Facsimile: (212) 638-7380
Confirm by Telephone (212) 638-0828
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 Property Trustee and Indenture Trustee.
FEES AND EXPENSES
The Trust 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
$200,000.
TRANSFER TAXES
Holders who tender their Old Par Securities for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that
holders who instruct the Trust to register New Par Securities in the name of,
or request that Old Par Securities 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 PAR SECURITIES
Holders of Old Par Securities who do not exchange their Old Par Securities
for New Par Securities pursuant to the Exchange Offer will continue to be
subject to the restrictions on transfer of such Old Par Securities as set
forth in the legend thereon as a consequence of the issuance of the Old Par
Securities 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 Par Securities may not be offered or
sold, unless registered under the Securities Act and applicable state
securities laws. None of the Trust, the Company nor the Subsidiary Guarantors
(collectively, the "Registrants") currently anticipate that it will register
Old Par Securities under the Securities Act. See "Description of Securities--
Exchange Offer; Registration Rights." Based on
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interpretations by the Staff of the Division of Corporation Finance of the
Commission, as set forth in no-action letters issued to third parties, the
Registrants believe that New Par Securities issued pursuant to this Exchange
Offer in exchange for Old Par Securities may be offered for resale, resold and
otherwise transferred by a holder thereof (other than a holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Par
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in a distribution (within the meaning of the
Securities Act) of such New Par Securities. However, any holder of Old Par
Securities who is an "affiliate" of the Registrants (within the meaning of
Rule 405 under the Securities Act) or who intends to participate in the
Exchange Offer for the purpose of distributing New Par Securities, or any
broker-dealer who purchased Old Par Securities from the Trust to resell them
pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the Staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Old Par Securities in the Exchange
Offer and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any sale or other
transfer of such Old Par Securities unless such sale is made pursuant to an
exemption from such requirements. In addition, as described below, if any
broker-dealer holds Old Par Securities acquired for its own account as a
result of market-making or other trading activities and exchanges such Old Par
Securities for New Par Securities, then such broker-dealer must deliver a
prospectus meeting the requirements of the Securities Act in connection with
any resales of such New Par Securities.
Each holder of Old Par Securities who wishes to exchange Old Par Securities
for New Par Securities in the Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the Registrants, (ii) any New Par
Securities to be received by it are being acquired in the ordinary course of
its business, (iii) it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
such New Par Securities, and (iv) if such holder is not a broker-dealer, such
holder is not engaged in, and does not intend to engage in, a distribution
(within the meaning of the Securities Act) of such New Par Securities. In
addition, the Registrants may require such holder, as a condition to such
holder's eligibility to participate in the Exchange Offer, to furnish to the
Registrants (or an agent thereof) in writing information as to the number of
"beneficial owners" (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934 (the "Exchange Act")) on behalf of whom such holder holds
the Par Securities to be exchanged in the Exchange Offer. Each broker-dealer
that receives New Par Securities for its own account pursuant to the Exchange
Offer must acknowledge that it acquired the Old Par Securities for its own
account as the result of market-making activities or other trading activities
and must agree that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such New Par Securities.
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. Based on the position
taken by the Staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Registrants believe that
broker-dealers who acquired Old Par Securities for their own accounts, as a
result of market-making activities or other trading activities ("Participating
Broker-Dealers") may fulfill their prospectus delivery requirements with
respect to the New Par Securities received upon exchange of such Old Par
Securities with this Prospectus, as it may be amended or supplemented from
time to time. Subject to certain exceptions, the Registrants have agreed that
this Prospectus, as it may be amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in connection with resales of such
New Par Securities for a period ending 180 days after the Registration
Statement of which this Prospectus constitutes a part is declared effective.
Any Participating Broker-Dealer who is an "affiliate" of the Registrants
(within the meaning of Rule 405 under the Securities Act) may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
Any Old Par Securities not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Declaration
(except for those rights relating to the Exchange Offer which terminate upon
consummation of the
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Exchange Offer). Following consummation of the Exchange Offer, the holders of
Old Par Securities will continue to be subject to all of the existing
restrictions upon transfer thereof and none of the Registrants will have any
further obligation to such holders (other than under certain limited
circumstances) to provide for registration under the Securities Act of the Old
Par Securities held by them. Any Old Par Securities which have not been
exchanged for New Par Securities pursuant to the Exchange Offer will be
mandatorily redeemed by the Company on the Remarketing Settlement Date, as
described under "Description of the Securities--Redemption--Transfer
Restricted Security Redemption." To the extent that Old Par Securities are
tendered and accepted in the Exchange Offer, a holder's ability to sell
untendered Old Par Securities could be adversely affected. See "Risk Factors--
Consequences of a Failure to Exchange Old Par Securities." In addition, to
comply with the securities laws of certain jurisdictions, if applicable, the
New Par Securities 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 Registrants have
agreed, pursuant to the Registration Rights Agreement, subject to certain
limitations specified therein, to register or qualify the New Par Securities
for offer or sale under the securities laws of such jurisdiction as any holder
reasonably requests in writing. Unless a holder so requests, the Registrants
do not currently intend to register or qualify the sale of the New Par
Securities in any such jurisdictions.
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THE TRUST
The Trust is a statutory business trust formed under the Delaware Business
Trust Act, as amended (the "Trust Act"), pursuant to (i) a declaration of
trust (as so amended and restated, the "Declaration") dated as of May 28,
1997, executed by the Company, as sponsor, and the trustees of the Trust and
(ii) a certificate of trust, dated as of May 28, 1997, filed with the
Secretary of State of the State of Delaware. The Company acquired Common
Securities in an aggregate liquidation amount equal to at least 3% of the
total capital of the Trust, at the same time as the Par Securities were sold.
The Trust used all the proceeds derived from the issuance of the Trust
Securities to purchase the Debentures and, accordingly, the assets of the
Trust consist solely of the Debentures. The Trust exists for the exclusive
purpose of (i) issuing and selling the Trust Securities representing undivided
beneficial ownership interests in the assets of the Trust, (ii) investing the
gross proceeds from such sales in the Debentures and (iii) engaging in only
those other activities necessary or incidental thereto.
Pursuant to the Declaration, there are five trustees (the "Trustees") for
the Trust. Three of the Trustees (the "Regular Trustees") are individuals who
are employees or officers of or who are affiliated with the Company. The
fourth trustee is a financial institution that is unaffiliated with the
Company (the "Property Trustee"). The fifth trustee is an entity that
maintains its principal place of business in the State of Delaware (the
"Delaware Trustee"). Initially, Chase Trust Company of California, a state
banking corporation, will act as Property Trustee, and its affiliate, Chase
Manhattan Bank, a Delaware corporation, will act as Delaware Trustee until, in
each case, removed or replaced by the Company as holder of the Common
Securities. Chase Trust Company of California will also act as trustee under
the Guarantee (the "Guarantee Trustee").
The Property Trustee holds title to the Debentures for the benefit of the
holders of the Trust Securities and, as the holder of the Debentures, the
Property Trustee has the power to exercise all rights, powers and privileges
of a holder of Debentures under the Indenture. In addition, the Property
Trustee maintains exclusive control of a segregated non-interest bearing bank
account (the "Property Account") to hold all payments made in respect of the
Debentures for the benefit of the holders of the Trust Securities. The
Guarantee Trustee holds the Guarantee for the benefit of the holders of the
Par Securities. The Company, as the holder of all the Common Securities, has
the right to appoint, remove or replace any of the Trustees and to increase or
decrease the number of Trustees, provided that the number of Trustees will be
at least three; provided further that at least one Trustee will be a Delaware
Trustee, at least one Trustee will be the Property Trustee and at least one
Trustee will be a Regular Trustee. The Company will pay all fees and expenses
related to the organization and operations of the Trust (including any taxes,
duties, assessments or governmental charges of whatever nature (other than
withholding taxes) imposed by the United States or any other domestic taxing
authority upon the Trust) and will be responsible for all debts and
obligations of the Trust (other than with respect to the Par Securities).
For so long as the Par Securities remain outstanding, the Company has
covenanted (i) to maintain directly or indirectly 100% ownership of the Common
Securities, (ii) to cause the Trust to remain a statutory business trust and
not to voluntarily dissolve, wind-up, liquidate or be terminated, except as
permitted by the Declaration, (iii) to use its commercially reasonable efforts
to ensure that the Trust will not be an "investment company" for purposes of
the 1940 Act and (iv) to take no action that would be reasonably likely to
cause the Trust to be classified as an association or a publicly traded
partnership taxable as a corporation for United States federal income tax
purposes.
The rights of the holders of the Par Securities, including economic rights,
rights to information and voting rights, are set forth in the Declaration and
the Trust Indenture Act. See "Description of Securities." The Declaration and
the Guarantee also incorporate by reference the terms of the Trust Indenture
Act.
The location of the principal executive office of the Trust is c/o the
Company, 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance,
California, 90505, and its telephone number is (310) 373-1704.
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DESCRIPTION OF SECURITIES
DESCRIPTION OF THE COMMON SECURITIES
The Company owns all of the non-transferable, beneficial ownership interests
represented by the Common Securities of the Trust. The Common Securities of
the Trust have an aggregate liquidation amount of $2,165,000. The Common
Securities are subordinated to the Par Securities in certain limited
circumstances with respect to Distributions and the amount payable on
redemption or liquidation, as described below and in the Declaration. This
summary of certain provisions of the Common Securities and the Declaration
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Declaration (as
supplemented or amended from time to time), including the definitions therein
of certain terms.
GENERAL
Except as described under "--Subordination of Common Securities" below, the
Common Securities will rank on a parity, and payments of distributions on, and
amounts payable on redemption of, the Common Securities will be made thereon
pro rata, with the Par Securities.
VOTING RIGHTS
Except as provided below and as otherwise required by law and the
Declaration, the Common Securities holder will have no voting rights.
The Common Securities holder has the right to vote to appoint, remove or
replace any Trustee or to increase or decrease the number of Trustees, subject
to certain limitations as provided in the Declaration. In addition, the Common
Securities holder has voting rights substantially similar to the voting rights
of the holders of Par Securities. See "Description of Securities--Voting
Rights; Amendment of the Declaration." However, the Common Securities holder
has the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or to direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, only after all Trust Enforcement Events with respect to the Par
Securities have been cured, waived or otherwise eliminated. If the Property
Trustee fails to enforce its rights under the Debentures after the Common
Securities holder has made a written request, such Common Securities holder
may directly institute a legal proceeding against the Company to enforce the
Property Trustee's rights under the Debentures without first instituting any
legal proceeding against the Property Trustee or any other person or entity.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and amounts payable on redemption of, the
Common Securities shall be made pro rata with payments of Distributions on,
and the Redemption Price of, the Par Securities, based on the liquidation
amount of such Common Securities and Par Securities; provided, however, that
if on any Distribution Date or redemption date an Indenture Event of Default
shall have occurred and be continuing, no payment of any Distribution on, or
Redemption Price of, any of the Common Securities, and no other payment on
account of the redemption, liquidation or other acquisition of such Common
Securities, shall be made unless payment in full in cash of all accumulated
and unpaid Distributions on all of the outstanding Par Securities for all
Distribution periods terminating on or prior thereto, or in the case of
payment of the Redemption Price the full amount of such Redemption Price of
all of the outstanding Par Securities then called for redemption, shall have
been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or Redemption Price of, the Par Securities then due and payable.
DESCRIPTION OF THE PAR SECURITIES
The Par Securities represent undivided beneficial ownership interests in the
assets of the Trust and the holders thereof are entitled to a preference in
certain circumstances with respect to Distributions and amounts payable on
redemption or liquidation over the Common Securities, as well as other
benefits as described in the
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Declaration. This summary of certain provisions of the Par Securities and the
Declaration does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Declaration, including the definitions therein of certain terms, and the Trust
Indenture Act. Wherever particular defined terms of the Declaration (as
supplemented or amended from time to time) are referred to herein, the
definitions of such defined terms are incorporated herein by reference. For
purposes of this summary, the term "Company" refers only to ICII and not to
any of its Subsidiaries.
GENERAL
The Par Securities rank on a parity, and payments will be made thereon pro
rata, with the Common Securities except as described under "--Subordination of
Common Securities." Legal title to the Debentures is held by the Property
Trustee in trust for the benefit of the holders of the Trust Securities. The
Guarantee executed by the Company for the benefit of the holders of the Par
Securities is a guarantee with respect to the Par Securities but does not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of the Par Securities when the Trust does not have sufficient
funds available to make such payments. See "Description of Guarantee." The
Company's obligations under the Guarantee, taken together with its obligations
under the Debentures and the Indenture, including its obligation to pay all
costs, expenses and liabilities of the Trust (other than with respect to the
Par Securities), constitute a full and unconditional guarantee of all of the
Trust's obligations under the Par Securities.
Holders of the Par Securities have no preemptive or similar rights.
DISTRIBUTIONS
From the date of original issuance to but excluding the Remarketing
Settlement Date, distributions will accumulate at the Initial Distribution
Rate of the stated liquidation amount of $1,000 per Par Security. From the
Remarketing Settlement Date to but excluding the date of redemption of the Par
Securities, holders of Par Securities will be entitled to receive
Distributions at the Adjusted Distribution Rate that results from the
Remarketing consummated on the Remarketing Settlement Date. The Adjusted
Distribution Rate will not exceed the Maximum Adjusted Distribution Rate. See
"--Remarketing--Remarketing Procedures."
As used herein:
(i) "Scheduled Remarketing Date" means the third Business Day prior to any
Scheduled Remarketing Settlement Date;
(ii) "Scheduled Remarketing Settlement Date" means June 14, 2002, or such
other date determined pursuant to this definition, unless a Trust
Enforcement Event has occurred and is continuing on the 25th Business Day
prior to such Scheduled Remarketing Settlement Date, in which case the
Scheduled Remarketing Settlement Date will be the 30th Business Day after
the date of cure or waiver of such Trust Enforcement Event; provided that
if (x) purchases and sales of Par Securities pursuant to a Remarketing are
not consummated on any Scheduled Remarketing Settlement Date for any reason
(including the Company's failure to make the deposit required in the event
of a Special Mandatory Redemption) other than the occurrence and
continuance of any other Trust Enforcement Event or if (y) the Company
fails to redeem Debentures in connection with a Tax Opinion Redemption
after cancelling the Remarketing, the next Scheduled Remarketing Settlement
Date will be the 30th Business Day after such Scheduled Remarketing
Settlement Date;
(iii) "Remarketing Settlement Date" means the Scheduled Remarketing
Settlement Date on which purchases and sales of Par Securities pursuant to
a Remarketing are consummated;
(iv) "Maximum Adjusted Distribution Rate" means the rate per annum,
determined on the Scheduled Remarketing Date by the Remarketing Agent in
its discretion, equal to the greater of (a) the 30-year Treasury Rate plus
600 basis points and (b) a nationally-recognized high-yield index rate for
similarly-rated issues, plus 100 basis points; and
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(v) "30-year Treasury Rate" means the rate per annum equal to the semi-
annual equivalent yield to maturity of the U.S. Treasury security used, in
accordance with customary financial practice, as the benchmark pricing bond
in pricing new issues of corporate debt securities of 30-year maturities on
the Scheduled Remarketing Date.
Distributions are payable semi-annually in arrears on June 15th (June 14 in
2002) and December 15th of each year, commencing December 15, 1997, and on the
Scheduled Remarketing Settlement Date. In the event that any date on which
Distributions are payable on the Par Securities is not a Business Day, then
payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional
Distributions or other payment in respect of any such delay), except that, if
such Business Day is in the next succeeding calendar year, such payment will
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on the date such payment was originally payable
(each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). A "Business Day" means any day other than a
Saturday or a Sunday, or a day on which banking institutions in The City of
New York are authorized or required by law or executive order to remain closed
or a day on which the principal corporate trust office of the Property Trustee
or the Indenture Trustee (as defined herein) is closed for business. The
amount of Distributions payable for any period will be computed (i) for any
full 180-day semi-annual distribution period, on the basis of a 360-day year
of twelve 30-day months and (ii) for any period shorter than a full 180-day
semi-annual distribution period for which distributions are computed, on the
basis of a 30-day month and for periods less than a month, the actual number
of days elapsed per 30-day-month.
Distributions on the Par Securities (other than distributions on a
redemption date) will be payable to the holders thereof as they appear on the
register of the Trust as of the close of business on the relevant record
dates, which, as long as the Par Securities are represented by one or more
global certificates ("Global Certificates"), will be the close of business on
the June 1 or December 1 next preceding the Distribution Date. Distributions
payable on any Par Securities that are not punctually paid on any Distribution
Date will cease to be payable to the person in whose name such Par Securities
are registered on the relevant record date, and such defaulted Distribution
will instead be payable to the person in whose name such Par Securities are
registered on the special record date or other specified date determined in
accordance with the Declaration.
At all times, the Applicable Distribution Rate, the distribution payment
dates and other payment dates for the Par Securities will correspond to the
interest rate, interest payment dates and other payment dates on the
Debentures, which will be the sole assets of the Trust.
Distributions on the Par Securities must be paid on the dates payable to the
extent that the Trust has funds available for the payment of such
Distributions. The revenue of the Trust available for distribution to holders
of its Par Securities will be limited to payments under the Debentures in
which the Trust has invested the proceeds from the issuance and sale of the
Trust Securities. See "Description of Debentures." If the Company does not
make interest payments on the Debentures, the Property Trustee will not have
funds available to pay Distributions on the Par Securities.
Following the Remarketing Settlement Date, the Company will have the right
under the Indenture to defer the payment of interest on the Debentures at any
time or from time to time for a period not exceeding 10 consecutive semi-
annual periods (each, an "Extension Period"), provided that no Extension
Period may extend beyond the Stated Maturity of the Debentures. Accordingly,
there could be multiple Extension Periods of varying terms throughout the term
of the Debentures. As a consequence of any such extension, semi-annual
Distributions on the Par Securities will be deferred by the Trust during any
such Extension Period. Distributions to which holders of the Par Securities
are entitled will accumulate and compound semi-annually at the Adjusted
Distribution Rate from the relevant payment date for such Distributions. The
term Distributions as used herein includes any such compounded amounts unless
the context otherwise requires. During any such Extension Period, the Company
may not, and may not permit any subsidiary of the Company to, (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
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repurchase or redeem any debt securities of the Company that rank on a parity
with or junior to the Debentures or make any guarantee payments with respect
to any guarantee by the Company of the debt securities of any subsidiary of
the Company if such guarantee ranks on a parity with or junior in interest to
the Debentures (other than (a) dividends or distributions in common stock of
the Company, (b) payments under the Guarantee, (c) any declaration of a
dividend in connection with the implementation of a stockholders' rights plan,
or the issuance of stock under any such plan in the future, or the redemption
or repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). Prior to the termination of any such Extension
Period, the Company may further extend the Extension Period, provided that no
Extension Period may exceed 10 consecutive semi-annual periods or extend
beyond the Stated Maturity of the Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period, subject
to the foregoing requirements. See "Description of Debentures--Option to
Extend Interest Payment Period" and "United States Federal Income Tax
Consequences--Interest Income and Original Issue Discount." The Company has no
current intention of exercising its right, following the Remarketing
Settlement Date, to defer payments of interest by extending the interest
payment period of the Debentures.
REDEMPTION
Upon the repayment or redemption, in whole or in part, of the Debentures
held by the Trust, whether at Stated Maturity or upon earlier redemption as
provided in the Indenture, the proceeds from such repayment or redemption will
be applied by the Property Trustee to redeem the Trust Securities. See
"Description of Debentures--Redemption" for a description of the Company's
options to redeem the Debentures. If less than all of the Debentures held by
the Trust are to be repaid or redeemed on a redemption date, then the proceeds
from such repayment or redemption will be allocated pro rata to the redemption
of the Trust Securities. In addition, if the Remarketing Agent is unable to
remarket all of the Par Securities tendered or deemed tendered for purchase in
the Remarketing, the Company will be required to redeem the Debentures as
described under "--Remarketing--Special Mandatory Redemption."
Special Event Redemption or Distribution of Debentures; Shortening of Stated
Maturity
If, at any time, either a Tax Event or an Investment Company Event (each, a
"Special Event") shall occur and be continuing, the Regular Trustees may,
within 90 days following the occurrence of such Special Event, elect to
dissolve the Trust upon not less than 30 nor more than 60 days' notice and,
after satisfaction of liabilities to creditors, if any, cause the Debentures
to be distributed to the holders of the Trust Securities in liquidation of the
Trust. If an Investment Company Event shall occur and be continuing, the
Company also has the option, after the Remarketing Settlement Date, to redeem
the Debentures, in whole but not in part (and thereby cause a mandatory
redemption of the Securities), at any time within 90 days following the
occurrence of such an Investment Company Event at a redemption price equal to
100% of the aggregate principal amount thereof, plus accrued and unpaid
interest to the date of redemption. In addition, if a Tax Event shall occur
and be continuing and in the opinion of independent tax counsel to the Trust
experienced in such matters, there would in all cases, after effecting the
termination of the Trust and the distribution of the Debentures to the holders
of the Trust Securities in exchange therefor upon liquidation of the Trust, be
more than an insubstantial risk that the Tax Event would continue to exist,
then the Company will have the right (a) to shorten the Stated Maturity of the
Debentures to a date not earlier than June 14, 2012 (a "Maturity Advancement")
such that, in the opinion of such independent tax counsel, after advancing the
Stated Maturity of the Debentures, interest paid on the Debentures will be
deductible by the Company for United States federal income tax purposes or (b)
after the Scheduled Remarketing Date, to redeem the Debentures, in whole but
not in part (and thereby cause a mandatory redemption of the Par Securities),
at any time within 90 days following the occurrence of a Tax Event at a
redemption price equal to 100% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of redemption. Under current United
States federal income tax law and interpretations thereof and assuming that,
as expected, the Trust is treated as a grantor trust, a distribution of the
Debentures should not be a taxable event to holders of the Par Securities.
Should there be a change in law, a change in legal interpretation,
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certain Tax Events or other circumstances, however, the distribution could be
a taxable event to holders of the Par Securities. See "United States Federal
Income Tax Consequences--Distribution of Debentures or Cash upon Liquidation
of the Trust."
If the Company does not elect any of the options described above, the Par
Securities will remain outstanding until the repayment of the Debentures,
whether at maturity or redemption, and in the event a Tax Event has occurred
and is continuing, the Company will be obligated to pay any additional taxes,
duties, assessments and other governmental charges (other than withholding
taxes) to which the Trust has become subject as a result of a Tax Event. See
"Description of Debentures."
A "Tax Event" means the receipt by the Company of an opinion of independent
tax counsel to the Company, experienced in such matters, to the effect that,
as a result of any amendment to, change in or announced proposed change in the
laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is adopted or
which proposed change, pronouncement or decision is announced on or after the
date of original issuance of the Par Securities, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued on the Debentures, (ii) interest payable by the
Company on such Debentures is not, or within 90 days of the date of such
opinion, will not be, deductible by the Company, in whole or in part, for
United States federal income tax purposes, or (iii) the Trust is, or will be
within 90 days of the date of such opinion, subject to more than a de minimis
amount of other taxes, duties or other governmental charges. "Investment
Company Event" means the receipt by the Trust of an opinion of counsel,
rendered by a law firm having a recognized national securities practice, to
the effect that, as a result of the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law"), the Trust is or will be considered an "investment
company" that is required to be registered under the Investment Company Act of
1940, as amended (the "1940 Act"), which Change in 1940 Act Law becomes
effective on or after the date of original issuance of the Securities.
Tax Opinion Redemption
If the Company receives a Tax Opinion at least 35 business days prior to the
Election Date, the Remarketing may be cancelled at the option of the Company,
in which case the Debentures (and, thus, the Securities) would be redeemed by
the Company on the Scheduled Remarketing Settlement Date, in whole but not in
part, at a redemption price equal to 100% of the principal amount of such
Debentures plus accrued and unpaid interest thereon to such Scheduled
Remarketing Settlement Date.
As used herein, "Tax Opinion" means an opinion of an independent tax counsel
to the Company experienced in such matters to the effect that, as a result of
(a) any amendment to, or change (including any announced proposed change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or (b) any official
administrative pronouncement or judicial decision interpreting or applying
such laws or regulations, or which amendment or change is effective or such
proposed change, pronouncement or decision is announced on or after the date
of original issuance of the Par Securities, that it is more likely than not
that (i) the Trust will be, following the Remarketing Settlement Date, subject
to United States federal income tax with respect to interest accrued or
received on the Debentures, (ii) the Trust will be, following the Remarketing
Settlement Date, subject to more than a de minimis amount of taxes, duties or
other governmental charges, or (iii) interest payable to the Trust on the
Debentures, following the Remarketing Settlement Date, will not be deductible,
in whole or in part, by the Company for United States federal income tax
purposes.
Transfer Restricted Security Redemption
Upon consummation of the Exchange Offer, the Company will be required, on
the Remarketing Settlement Date, to redeem, in whole (but not in part),
certain Debentures (the ownership of which is represented by the Par
Securities) which were not exchanged pursuant to the Exchange Offer (a
"Transfer Restricted Security
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Redemption"). As part of a Transfer Restricted Security Redemption, on the
Schedule Remarketing Settlement Date such Old Par Securities will be exchanged
with the Trust for Debentures having an aggregate principal amount equal to
the aggregate liquidation of such Old Par Securities and such Debentures shall
immediately be redeemed by the Company at a redemption price equal to 100% of
the principal amount thereof plus accrued and unpaid interest (including
Additional Interest), if any, to the date of redemption.
REDEMPTION PROCEDURES
Set forth below are procedures applicable to a redemption of Par Securities
other than a Special Mandatory Redemption of all of the Par Securities.
Procedures applicable to a Special Mandatory Redemption are set forth under
"--Remarketing--Special Mandatory Redemption."
Par Securities redeemed on each redemption date will be redeemed at the
redemption price in respect of the Debentures plus an amount equal to accrued
and unpaid Distributions thereon through the date of redemption (the
"Redemption Price") with the applicable proceeds from the contemporaneous
redemption or payment of the Debentures. Redemptions of the Par Securities
will be made and the Redemption Price will be payable on each redemption date
only to the extent that the Trust has sufficient funds available for the
payment of such Redemption Price. See also "--Subordination of Common
Securities."
Notice of any redemption (other than a Special Mandatory Redemption) will be
mailed at least 30 days but not more than 60 days before the redemption date
to each holder of Par Securities to be redeemed at its registered address. If
the Trust gives a notice of redemption in respect of the Par Securities or if
the Par Securities are to be redeemed following a Special Mandatory Redemption
of all of the Debentures, then, by 12:00 noon, New York City time, on the
redemption date (including the Remarketing Settlement Date), to the extent
funds are available, the Property Trustee will deposit irrevocably with DTC
funds sufficient to pay the applicable Redemption Price for all securities
held in DTC and will give DTC irrevocable instructions and authority to pay
the Redemption Price to the holders of the Par Securities. See "Book-Entry
Issuance." If any Par Securities are not represented by one or more Global
Certificates, the Trust, to the extent funds are available, will irrevocably
deposit with the Paying Agent (as defined herein) for such Par Securities
funds sufficient to pay the applicable Redemption Price and will give the
paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing
the Par Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the redemption date for any Par Security called for redemption will
be payable to the holders of such Par Security on the relevant record dates
for the related Distribution Dates. If notice of redemption shall have been
given and funds deposited as required, then immediately prior to the close of
business on the date of such deposit, all rights of the holders of such Par
Securities so called for redemption will cease, except the right of the
holders of such Par Securities to receive the Redemption Price, but without
interest on such Redemption Price, and such Par Securities will cease to be
outstanding. In the event that any date fixed for redemption of Par Securities
is not a Business Day, then payment of the Redemption Price payable on such
date will be made on the next succeeding day which is a Business Day (and
without any interest or other payment in respect of any such delay), except
that, if such Business Day falls in the next calendar year, such payment will
be made on the immediately preceding Business Day, in each case with the same
force and effect as if made on the date such payment was originally payable.
In the event that payment of the Redemption Price in respect of Par
Securities called for redemption is improperly withheld or refused and not
paid either by the Trust or by the Company pursuant to the Guarantee as
described under "Description of Guarantee," Distributions on such Par
Securities will continue to accumulate at the then Applicable Distribution
Rate in effect at the beginning of the related interest period, or increased,
to the extent permitted by applicable law, if the Remarketing has not occurred
on a Scheduled Remarketing Date, from the redemption date originally
established by the Trust for the Par Securities to the date such Redemption
Price is actually paid, in which case the actual payment date will be the date
fixed for redemption for purposes of calculating the Redemption Price. See "--
Distributions."
The Trust may not redeem fewer than all of the outstanding Par Securities
unless all accrued and unpaid distributions have been paid on all Par
Securities for all semi-annual distribution periods terminating on or prior
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to the date of redemption. If fewer than all of the Trust Securities issued by
the Trust are to be redeemed on a redemption date, then the aggregate amount
of such Trust Securities to be redeemed will be allocated pro rata among the
Par Securities and the Common Securities. If Par Securities are represented by
one or more Global Certificates, they will be redeemed as described below
under "Book-Entry Issuance." The particular Par Securities to be redeemed will
be selected on a pro rata basis not more than 60 days prior to the redemption
date by the Property Trustee from the outstanding Par Securities not
previously called for redemption, by such method as the Property Trustee shall
deem fair and appropriate and which may provide for the selection for
redemption of portions (equal to $1,000 or integral multiples of $1,000 in
excess thereof) of the liquidation preference of Par Securities of
denominations larger than $1,000. The Property Trustee will promptly notify
the Trust registrar in writing of the Par Securities selected for redemption
and, in the case of any Par Security selected for partial redemption, the
liquidation amount thereof to be redeemed. For all purposes of the
Declaration, unless the context otherwise requires, all provisions relating to
the redemption of Par Securities shall relate, in the case of any Par Security
redeemed or to be redeemed only in part, to the portion of the aggregate
liquidation amount of Par Securities which has been or is to be redeemed.
Subject to applicable law (including, without limitation, United States
federal securities law), the Company or its subsidiaries may at any time and
from time to time purchase outstanding Par Securities by tender, in the open
market or by private agreement.
Change of Control
The Declaration provides that upon the occurrence of a Change of Control on
or prior to the Remarketing Settlement Date, each holder of Par Securities
will have the right to require the Trust to cause all or any part (equal to
$1,000 liquidation amount or any integral multiple thereof) of the Par
Securities to be exchanged for an equivalent principal amount of Debentures.
Promptly thereafter, such Debentures will be repurchased by the Company
pursuant to the Indenture, as 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 thereon to the date of purchase (the
"Change of Control Payment").
Within 10 days following any Change of Control, the Company will notify the
Trust of such Change of Control and the Trust will mail a notice to each
holder describing the transaction or transactions that constitute the Change
of Control and offering to exchange the Par Securities for the Debentures
pursuant to the procedures required by the Declaration and described in such
notice. The Trust and 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 exchange of the Par Securities and the repurchase of the
Debentures 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 Trust
will accept all Par Securities tendered in response to the Change of Control
Offer and the Company will repurchase all Debentures exchanged for such Par
Securities. Payment for the Debentures exchanged for any Par Securities so
accepted will be made in the same manner as interest payments are made.
On the Change of Control Purchase Date, the Trust will, to the extent
lawful, (a) accept for exchange all Par Securities or portions thereof
properly tendered pursuant to the Change of Control Offer, (b) deliver or
cause to be delivered to the Property Trustee the Par Securities so accepted
together with a certificate of the Regular Trustees stating the aggregate
liquidation amount of Par Securities or portions thereof being exchanged by
the Trust and (c) the Trust will then exchange, for such Par Securities,
Debentures having an equivalent aggregate principal amount. The Company will
promptly deposit with the Indenture Trustee an amount equal to the Change of
Control Payment in respect of all Par Securities or portions thereof so
exchanged. The Indenture Trustee will promptly mail to each holder of Par
Securities so exchanged the Change of Control Payment for such Par
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Securities, and the Trust will promptly authenticate and mail (or cause to be
transferred by book entry) to each holder a new Par Security equal in
liquidation amount to any unexchanged portion of the Par Securities
surrendered, if any; provided that each such new Par Securities will be in a
liquidation amount of $1,000 or an integral multiple thereof. The Trust and
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.
Asset Sales
The Declaration provides that if the Trust owns all of the Debentures and if
the aggregate amount of Excess Proceeds under the covenant entitled
"Description of Debentures--Certain Covenants of the Company--Asset Sales"
exceeds $5.0 million, the Trust will be required to make an offer to all
holders of Par Securities (an "Asset Sale Offer") to exchange, for such Par
Securities the maximum principal amount of Debentures that may be exchanged
under such covenant out of the Excess Proceeds, which Debentures shall then be
repurchased by the Company at a price equal to 100% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of purchase, in
accordance with the procedures set forth in the Declaration and the Indenture.
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 Trust will accept for exchange up to the
liquidation amount of Par Securities required to be exchanged pursuant to this
covenant (the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer
Amount has been tendered, all Par Securities tendered in response to the Asset
Sale Offer.
On or before the Asset Sale Purchase Date, the Trust will, to the extent
lawful, accept for exchange, on a pro rata basis to the extent necessary, the
Asset Sale Offer Amount of Par Securities or portions thereof tendered
pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer Amount
has been tendered, all Par Securities tendered, and the Regular Trustees will
deliver to the Property Trustee a certificate stating that such Par Securities
or portions thereof were accepted for exchange by the Trust in accordance with
the terms of this covenant. Promptly following such exchange, the Company will
(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 Debentures exchanged with such holder by the Trust, and the Trust will
promptly issue a new Par Security, and the Trust will authenticate and mail or
deliver such new Par Security to such holder, in a liquidation amount equal to
any unexchanged portion of the Par Security surrendered. Any Par Security not
so accepted will be promptly mailed or delivered by the Trust to the holder
thereof. The Trust and the Company will publicly announce the results of the
Asset Sale Offer on the Asset Sale Purchase Date.
REMARKETING
Remarketing Procedures
Set forth below is a summary of the procedures to be followed in connection
with the Remarketing of the Par Securities (or, if the Debentures have been
distributed to holders of the Par Securities in liquidation of the Trust, the
Debentures):
If the Company receives a Tax Opinion at least 35 Business Days prior to the
Election Date, the Company has the option to cancel the Remarketing by giving,
to the Property Trustee, DTC and the Remarketing Agent written notice of such
cancellation. In such event, all of the Debentures (and, thus, the Par
Securities) are subject to a Tax Opinion Redemption by the Company on the
Scheduled Remarketing Date. See "--Redemption--Tax Opinion Redemption."
If the Company does not receive such a Tax Opinion or if the Company does
not elect to cancel the Remarketing after receiving such a Tax Opinion, not
less than 20 nor more than 35 Business Days prior to the Election Date, the
Trust is required to give a Notice of Remarketing of the Securities to DTC.
Such notice will
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describe the Remarketing and will be accompanied by (i) an offering memorandum
relating to the Par Securities and to the Remarketing and (ii) a Notice of
Election to be completed and delivered by the holders of Par Securities. In
addition, if the Company is required to redeem Debentures (and, thus, Par
Securities) in connection with a Transfer Restricted Security Redemption,
holders of such Par Securities will receive notice of such redemption at or
prior to the time when the Notice of Remarketing of the Par Securities is
given to DTC. Such holders may not tender their Par Securities for repurchase
in the Remarketing.
Not later than 4:00 P.M., New York City time, on the Election Date, each
holder of Par Securities may give, through the facilities of DTC, a notice to
the Property Trustee of its election ("Notice of Election") (i) to retain and
not to have all or any portion of the Par Securities owned by it remarketed in
the Remarketing to be conducted on the Scheduled Remarketing Date or (ii) to
tender all or any portion of such Par Securities for purchase in the
Remarketing (such portion, in either case, is required to be in the
liquidation amount of $1,000 or any integral multiple thereof). Any Notice of
Election given to the Property Trustee will be irrevocable and may not be
conditioned upon the level at which the Adjusted Distribution Rate is
established in the Remarketing. Promptly after 4:30 P.M., New York City time,
on the Election Date, the Property Trustee, based on the Notices of Election
received by it through DTC prior to such time, will notify the Trust, the
Company and the Remarketing Agent of the number of Par Securities to be
retained by holders of Par Securities and the number of Par Securities
tendered for purchase in the Remarketing.
If any holder of Par Securities gives a Notice of Election to tender Par
Securities as described in clause (ii) in the prior paragraph, the Par
Securities so subject to such Notice of Election will be deemed tendered for
purchase in the Remarketing, notwithstanding any failure by such holder to
deliver or properly deliver such Par Securities to the Remarketing Agent for
purchase.
IF ANY HOLDER OF PAR SECURITIES FAILS TIMELY TO DELIVER A NOTICE OF
ELECTION, AS DESCRIBED ABOVE, SUCH PAR SECURITIES WILL BE DEEMED TENDERED FOR
PURCHASE IN THE REMARKETING, NOTWITHSTANDING SUCH FAILURE OR THE FAILURE BY
SUCH HOLDER TO DELIVER OR PROPERLY DELIVER SUCH PAR SECURITIES TO THE
REMARKETING AGENT FOR PURCHASE.
The right of each holder of Par Securities to have Par Securities tendered
for purchase shall be limited to the extent that (i) the Remarketing Agent
conducts a remarketing pursuant to the terms of the Remarketing Agreement (as
defined herein), (ii) Par Securities tendered have not been called for
redemption, (iii) the Remarketing Agent is able to find purchasers for the
tendered Par Securities at an Adjusted Distribution Rate that does not exceed
the Maximum Distribution Rate and (iv) such purchaser or purchasers deliver
the purchase price therefor to the Remarketing Agent.
If a holder of Par Securities has indicated by timely delivery of a Notice
of Election that it wishes to tender securities held by it for purchase in the
Remarketing and such holder desires to purchase Par Securities in the
Remarketing at or above a specified rate, such holder should separately notify
the Remarketing Agent in accordance with the procedures specified in the
Notice of Remarketing and indicate the specified rate per annum at or above
which such holder will purchase Par Securities. In such case, the Remarketing
Agent will give priority to a holder's purchase of a number of Securities
equal to the number of Par Securities tendered by such holder in the
Remarketing, provided that the Adjusted Distribution Rate is not less than the
specified rate.
If holders of Par Securities submit Notices of Election to retain all of the
Par Securities then outstanding, the Adjusted Distribution Rate will be the
rate determined by the Remarketing Agent in its sole discretion, as the rate
that would have been established had a Remarketing been held on the Scheduled
Remarketing Date.
On the Scheduled Remarketing Date, the Remarketing Agent will use
commercially reasonable efforts to remarket, at a price equal to 100% of the
liquidation amount thereof, Par Securities tendered or deemed tendered for
purchase. Prior to 4:00 P.M., New York City time, on the Scheduled Remarketing
Date, the Remarketing Agent will determine the Adjusted Distribution Rate,
which will be the rate per annum (rounded to the nearest one-thousandth
(0.001) of one percent per annum) which the Remarketing Agent determines, in
its sole
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judgment, to be the lowest rate per annum, if any, not exceeding the Maximum
Adjusted Distribution Rate, that will enable it to remarket all Par Securities
tendered or deemed tendered for remarketing at a price of $1,000 per Security.
Notwithstanding the foregoing, if the Remarketing Agent is able to remarket
some, but is unable to remarket all, of the Par Securities tendered or deemed
tendered for purchase in the Remarketing, the Adjusted Distribution Rate will
be the highest rate, not exceeding the Maximum Adjusted Distribution Rate,
required to remarket the Par Securities sold in the Remarketing.
If the Remarketing Agent is unable to remarket by 4:00 P.M., New York City
time, on the Scheduled Remarketing Date, all Par Securities tendered or deemed
tendered for purchase at a price of $1,000 per Security, each holder that
tendered Par Securities for sale shall sell a number of Par Securities on a
pro rata basis, to the extent practicable, or by lot, as determined by the
Remarketing Agent in its sole discretion, based on the number of orders to
purchase Par Securities in the Remarketing. If the allocation procedures
described in the preceding sentence would result in the sale of a fraction of
a Par Security, the Remarketing Agent will, in its sole discretion, round up
or down the number of Par Securities sold by each holder in the Remarketing so
that each Security sold in the Remarketing will be a whole Security and the
total number of Par Securities sold equals the total number of Par Securities
purchased in the Remarketing.
By approximately 4:30 P.M., New York City time, on the Scheduled Remarketing
Date, the Remarketing Agent will advise, by telephone (i) DTC, the Property
Trustee, the Indenture Trustee, the Trust and the Company of the Adjusted
Distribution Rate determined in the Remarketing and the number of Par
Securities sold in the Remarketing, (ii) each purchaser (or the DTC
Participant thereof) of the Adjusted Distribution Rate determined in the
Remarketing and the number of Par Securities such purchaser is to purchase and
(iii) each purchaser to give instructions to its DTC Participant to pay the
purchase price on the Scheduled Remarketing Settlement Date in same day funds
against delivery of the Par Securities purchased through the facilities of
DTC.
All Par Securities tendered or deemed tendered in the Remarketing will be
automatically delivered to the account of the Remarketing Agent through the
facilities of DTC against payment of the purchase price therefor on the
Scheduled Remarketing Settlement Date. The Remarketing Agent will make payment
to the DTC Participant of each tendering holder of Par Securities in the
Remarketing through the facilities of DTC by the close of business on the
Scheduled Remarketing Settlement Date.
In accordance with DTC's normal procedures, on the Remarketing Settlement
Date, the transactions described above with respect to each Par Security
tendered for purchase and sold in the Remarketing will be executed through DTC
and the accounts of the DTC Participants will be debited and credited and such
Par Securities delivered by book entry as necessary to effect purchases and
sales of such Par Securities. DTC is expected to make payment in accordance
with its normal procedures.
If any holder selling Par Securities in the Remarketing fails to deliver
such Par Securities, the DTC Participant of such selling holder and of any
other person that was to have purchased Par Securities in the Remarketing may
deliver to any such other person a number of Par Securities that is less than
the number of Par Securities that otherwise was to be purchased by such
person. In such event, the number of Par Securities to be so delivered will be
determined by such DTC Participant and delivery of such lesser number of Par
Securities will constitute good delivery.
The Remarketing Agent is not obligated to purchase any Par Securities that
would otherwise remain unsold in the Remarketing. Neither the Trust, any
Trustee, the Company nor the Remarketing Agent shall be obligated in any case
to provide funds to make payment upon tender of Par Securities for
Remarketing.
Special Mandatory Redemption
If, by 4:00 P.M., New York City time, on any Scheduled Remarketing Date, the
Remarketing Agent is unable to remarket, at a price of $1,000 per Par
Security, all of the Par Securities tendered or deemed tendered for purchase
in the Remarketing on such Scheduled Remarketing Date, then (i) such unsold
Par Securities shall
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be exchanged on the related Scheduled Remarketing Settlement Date with the
Trust for Debentures having an aggregate principal amount equal to the
aggregate liquidation amount of such unsold Par Securities and such Debentures
shall be immediately redeemed, unless (ii) as a result of such redemption,
less than $25.0 million principal amount of Debentures would remain
outstanding. In such latter event, the Company is required to redeem on such
Scheduled Remarketing Settlement Date all of the Debentures (thereby causing
the Trust to redeem all of the outstanding Par Securities) and the Remarketing
will be cancelled. In either case of (i) or (ii) above, the redemption price
of the Debentures shall be 100% of the principal amount of the outstanding
Debentures so redeemed. Because the Remarketing Settlement Date will also be a
Distribution Date, Distributions to be paid on such Distribution Date for the
Par Securities will be paid to the person in whose name the Par Securities are
registered on the corresponding record date.
AS A RESULT OF THE SPECIAL MANDATORY REDEMPTION, ALL PAR SECURITIES TENDERED
OR DEEMED TENDERED FOR PURCHASE IN THE REMARKETING WILL BE PURCHASED IN THE
REMARKETING, OR MANDATORILY REDEEMED, ON THE REMARKETING SETTLEMENT DATE.
If the Company is required to redeem the Debentures on the Scheduled
Remarketing Settlement Date as part of a Special Mandatory Redemption, by
12:00 Noon, New York City time, on the Business Day prior to the Scheduled
Remarketing Settlement Date, the Company is required to deposit irrevocably
with the Indenture Trustee funds sufficient to pay the redemption price with
respect to the Debentures to be redeemed.
Remarketing Agent
The Company and the Trust have entered into a Remarketing Agreement (the
"Remarketing Agreement") with the Remarketing Agent which provides, among
other things, that Lehman Brothers Inc. will act as exclusive Remarketing
Agent and will use commercially reasonable efforts to remarket Par Securities
tendered or deemed tendered for purchase in the Remarketing at a price of
$1,000 per Par Security and determine the Adjusted Distribution Rate. Under
certain circumstances, some portion of the Par Securities tendered in the
Remarketing may be purchased by the Remarketing Agent. See "--Remarketing
Procedures."
The Remarketing Agreement provides that the Remarketing Agent shall incur no
liability to the Company or to any holder of Par Securities in its individual
capacity or as Remarketing Agent for any action or failure to act in
connection with a Remarketing or otherwise, except as a result of gross
negligence or willful misconduct on its part.
The Company has agreed to indemnify the Remarketing Agent against certain
liabilities, including liabilities under the Securities Act, arising out of or
in connection with its duties under the Remarketing Agreement.
The Remarketing Agreement also provides that any Remarketing Agent may
resign and be discharged from its duties and obligations thereunder; provided,
however, that no such resignation will become effective until the Company has
appointed at least one nationally recognized broker-dealer as successor
Remarketing Agent and such successor Remarketing Agent has entered into a
remarketing agreement with the Company on terms no less favorable than those
set forth in the Remarketing Agreement. In such case, the Company will use its
best efforts to appoint a successor Remarketing Agent and enter into such a
remarketing agreement with such person as soon as reasonably practicable.
SUBORDINATION OF COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Trust
Securities, as applicable, shall be made pro rata based on the liquidation
amount of such Trust Securities; provided, however, that if on any
Distribution Date or redemption date an Indenture Event of Default shall have
occurred and be continuing, no payment of any Distribution on, or Redemption
Price of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of such Common Securities, shall
be made unless payment in full in cash of all accumulated and unpaid
Distributions on all of the outstanding Par Securities for all
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Distribution periods terminating on or prior thereto, or in the case of
payment of the Redemption Price the full amount of such Redemption Price on
all of the outstanding Par Securities then called for redemption, shall have
been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or Redemption Price of the Par Securities then due and payable.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
Pursuant to the Declaration, the Trust shall automatically dissolve on the
first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of the Company; (ii) the distribution of the Debentures to the
holders of the Trust Securities; (iii) the redemption of all of the Par
Securities in connection with the maturity or redemption of all of the
Debentures and (iv) the entry by a court of competent jurisdiction of an order
for the dissolution of the Trust.
If an early dissolution occurs as described in clause (i), (ii) or (iv)
above, the Trust shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of the Trust as provided by applicable law, to the
holders of the Trust Securities their pro rata interest in the Debentures,
unless such distribution is determined by the Property Trustee not to be
practical, in which event such holders will be entitled to receive out of the
assets of the Trust available for distribution to holders, after satisfaction
of liabilities to creditors of the Trust as provided by applicable law, an
amount equal to, in the case of holders of Par Securities, the aggregate of
the liquidation amount plus accrued and unpaid Distributions thereon to the
date of payment (such amount being the "Liquidation Distribution"). If such
Liquidation Distribution can be paid only in part because the Trust has
insufficient assets available to pay in full the aggregate Liquidation
Distribution, then the amounts payable directly by the Trust on the Par
Securities shall be paid on a pro rata basis. The holder(s) of the Common
Securities will be entitled to receive distributions upon any such liquidation
pro rata with the holders of the Par Securities, except that if an Indenture
Event of Default has occurred and is continuing, the Par Securities shall have
a priority over the Common Securities.
After the liquidation date is fixed for any distribution of Debentures to
holders of the Par Securities (i) the Par Securities will no longer be deemed
to be outstanding, (ii) DTC or its nominee, as a record holder of Par
Securities, will receive a registered Global Certificate or Certificates
representing the Debentures to be delivered upon such distribution and (iii)
any certificates representing Par Securities not held by DTC or its nominee
will be deemed to represent Debentures having a principal amount equal to the
liquidation amount of such Par Securities, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on such
Par Securities until such certificates are presented for cancellation
whereupon the Company will issue to such holder, and the Indenture Trustee
will authenticate, a certificate representing such Debentures.
TRUST ENFORCEMENT EVENTS
An Indenture Event of Default that has occurred and is continuing
constitutes a "Trust Enforcement Event" under the Declaration with respect to
the Trust Securities, provided that pursuant to the Declaration, the holder of
the Common Securities will be deemed to have waived any Trust Enforcement
Event with respect to the Common Securities until all Trust Enforcement Events
with respect to the Par Securities have been cured, waived or otherwise
eliminated. Until such Trust Enforcement Event with respect to the Par
Securities has been so cured, waived or otherwise eliminated, the Property
Trustee will be deemed to be acting solely on behalf of the holders of the Par
Securities and only the holders of the Par Securities will have the right to
direct the Property Trustee with respect to certain matters under the
Declaration, and therefore the Indenture.
Upon the occurrence of a Trust Enforcement Event, the Indenture Trustee or
the Property Trustee as the holder of the Debentures will have the right under
the Indenture to declare the principal of and interest on the Debentures to be
immediately due and payable. Each of the Company and the Trust is required to
file annually with the Property Trustee an officers' certificate as to its
compliance with all conditions and covenants under the Declaration.
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If the Property Trustee fails to enforce its rights with respect to the
Debentures, any holder of Par Securities may institute a legal proceeding
directly against the Company to enforce the Property Trustee's rights under
such Debentures without first instituting any legal proceeding against the
Property Trustee or any other person or entity. In addition, if a Trust
Enforcement Event has occurred and is continuing and such event is
attributable to the failure of the Company to pay interest, principal or other
required payments on the Debentures on the date such interest, principal or
other payment is otherwise payable, then a holder of Par Securities may, on or
after the respective due dates specified in the Debentures, institute a
proceeding directly against the Company under the Indenture for enforcement of
payment on Debentures having a principal amount equal to the aggregate
liquidation amount of the Par Securities held by such holder (a "Direct
Action"). In connection with such Direct Action, the rights of the Company
will be subrogated to the rights of such holder of Par Securities to the
extent of any payment made by the Company to such holder of Par Securities.
VOTING RIGHTS; AMENDMENT OF THE DECLARATION
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Declaration, the holders
of the Securities will have no voting rights.
So long as any Debentures are held by the Property Trustee, the holders of a
majority in liquidation amount of the Par Securities shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee, or to direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as holder of the Debentures, to (i)
exercise the remedies available to it under the Indenture as a holder of the
Debentures, (ii) consent to any amendment or modification of the Indenture or
the Debentures where such consent shall be required or (iii) waive any past
default and its consequences that is waivable under the Indenture; provided,
however, that if an Indenture Event of Default has occurred and is continuing,
then the holders of 25% of the aggregate liquidation amount of the Par
Securities may direct the Property Trustee to declare the principal of and
interest on the Debentures due and payable; provided, further, that where a
consent or action under the Indenture would require the consent or act of the
holders of more than a majority of the aggregate principal amount of
Debentures affected thereby, only the holders of the percentage of the
aggregate stated liquidation amount of the Par Securities which is at least
equal to the percentage required under the Indenture may direct the Property
Trustee to give such consent to take such action. The Property Trustee shall
notify each holder of the Par Securities of any notice of any Indenture Event
of Default which it receives from the Company with respect to the Debentures.
Except with respect to directing the time, method, and place of conducting a
proceeding for a remedy, the Property Trustee shall be under no obligation to
take any of the actions described in clauses (i) and (ii) above unless the
Property Trustee has obtained an opinion of independent tax counsel to the
effect that the Trust will not fail to be classified as a grantor trust for
United States federal income tax purposes, as a result of such action, and
each holder will be treated as owning an undivided beneficial ownership
interest in the Debentures.
The Declaration may be amended from time to time by the Company and a
majority of the Regular Trustees (and in certain circumstances the Property
Trustee and the Delaware Trustee), without the consent of the holders of the
Par Securities, (i) to cure any ambiguity, correct or supplement any
provisions in the Declaration that may be defective or inconsistent with any
other provision, or to make any other provisions with respect to matters
or questions arising under the Declaration that shall not be inconsistent with
the other provisions of the Declaration, or (ii) to modify, eliminate or add
to any provisions of the Declaration to such extent as shall be necessary to
ensure that the Trust will be classified for United States federal income tax
purposes as a grantor trust at all times that any Trust Securities are
outstanding or to ensure that the Trust will not be required to register as an
"investment company" under the 1940 Act, provided, however, that such action
shall not adversely affect in any material respect the interests of any holder
of Trust Securities, and any amendments of the Declaration shall become
effective when notice thereof is given to the holders of Trust Securities. The
Declaration may be amended by the Company and a majority of the Regular
Trustees with (i) the consent of holders representing not less than a majority
in liquidation amount of the outstanding Trust Securities and (ii) receipt by
the Regular Trustees of an opinion of counsel to the effect that such
amendment or the exercise of
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any power granted to the Regular Trustees in accordance with such amendment
will not affect the Trust's status for United States federal income tax
purposes as a grantor trust or the Trust's exemption from status as an
"investment company" under the 1940 Act, provided, further that without the
consent of each holder of Trust Securities affected thereby, the Declaration
may not be amended to (i) change the amount or timing of any Distribution on
the Trust Securities or otherwise adversely affect the amount of any
Distribution required to be made in respect of the Trust Securities as of a
specified date or (ii) restrict the right of a holder of Trust Securities to
institute suit for the enforcement of any such payment on or after such date.
Any required approval or direction of holders of Par Securities may be given
at a meeting of holders of Par Securities convened for such purpose or
pursuant to written consent. The Regular Trustees will cause a notice of any
meeting at which holders of Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
given to each holder of record of Par Securities in the manner set forth in
the Declaration.
No vote or consent of the holders of Par Securities will be required for the
Trust to redeem and cancel its Par Securities in accordance with the
Declaration.
Notwithstanding that holders of Par Securities are entitled to vote or
consent under any of the circumstances described above, any of the Par
Securities that are owned by the Company, the Trustees or any affiliate of the
Company or any Trustees, shall, for purposes of such vote or consent, be
treated as if they were not outstanding.
EXPENSES AND TAXES
In the Indenture, the Company, as borrower, has agreed to pay all debts and
other obligations (other than with respect to the Par Securities) and all
costs and expenses of the Trust (including costs and expenses relating to the
organization of the Trust, the fees and expenses of the Trustees and the costs
and expenses relating to the operation of the Trust) and to pay any and all
taxes and all costs and expenses with respect thereto (other than United
States withholding taxes) to which the Trust might become subject. The
foregoing obligations of the Company under the Indenture are for the benefit
of, and shall be enforceable by, any person to whom any such debts,
obligations, costs, expenses and taxes are owed (a "Creditor") whether or not
such Creditor has received notice thereof. Any such Creditor may enforce such
obligations of the Company directly against the Company, and the Company has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Company has also agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give full effect to
the foregoing.
REGISTRAR AND TRANSFER AGENT
The Property Trustee acts as registrar and transfer agent for the Par
Securities.
Registration of transfers or exchanges of Par Securities will be effected
without charge by or on behalf of the Trust, but upon payment of any tax or
other governmental charges that may be imposed in connection with any transfer
or exchange, the Trust may charge a sum sufficient to cover any such payment.
The Trust will not be required (i) to issue, register or cause to be
registered the transfer or exchange of any Par Securities during a period
beginning at the opening of business 15 days before the day of the mailing of
the relevant notice of redemption and ending at the close of business on the
day of such mailing or (ii) to register or cause to be registered the transfer
or exchange of any Par Securities so selected for redemption, except in the
case of any Par Securities being redeemed in part, any portion thereof not to
be redeemed.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than during the occurrence and continuance of a
Trust Enforcement Event, undertakes to perform only such duties as are
specifically set forth in the Declaration and, after such Trust Enforcement
Event (which has not been cured or waived), must exercise the same degree of
care and skill as a
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prudent person would exercise or use in the conduct of his or her own affairs.
Subject to this provision, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of
any holder of Par Securities unless it is offered reasonable security and
indemnity against the costs, expenses and liabilities that might be incurred
thereby. If no Trust Enforcement Event has occurred and is continuing and the
Property Trustee is required to decide between alternative causes of action,
construe ambiguous provisions in the Declaration or is unsure of the
application of any provision of the Declaration, and the matter is not one on
which holders of Par Securities are entitled under the Declaration to vote,
then the Property Trustee may, but shall be under no duty to, take such action
as is directed by the Company and, if not so directed, shall take such action
as it deems advisable and in the best interests of the holders of the Trust
Par Securities and will have no liability except for its own bad faith,
negligence or willful misconduct.
PAYMENT AND PAYING AGENCY
Payments in respect of the Global Certificates shall be made to DTC, which
shall credit the relevant accounts at DTC on the applicable Distribution Dates
or, if the Par Securities are not represented by one or more Global
Certificates, such payments shall be made by check mailed to the address of
the holder entitled thereto as such address shall appear on the register in
respect of the registrar. The paying agent (the "Paying Agent") shall
initially be the Property Trustee and any co-paying agent chosen by the
Property Trustee and acceptable to the Regular Trustees and the Company. The
Paying Agent shall be permitted to resign as Paying Agent upon 30 days'
written notice to the Property Trustee and the Company. In the event that the
Property Trustee shall no longer be the Paying Agent, the Regular Trustees
shall appoint a successor (which shall be a bank or trust company acceptable
to the Regular Trustees and the Company) to act as Paying Agent.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF THE TRUST
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person (as defined in
the Declaration), except as described below. The Trust may, at the request of
the Company, with the consent of the Regular Trustees and without the consent
of the holders of the Par Securities, the Delaware Trustee or the Property
Trustee merge with or into, consolidate, amalgamate, be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to a
trust organized as such under the laws of any State; provided that (i) such
successor entity (if not the Trust) either (a) expressly assumes all of the
obligations of the Trust with respect to the Par Securities or (b) substitutes
for the Securities other securities having substantially the same terms as the
Par Securities (the "Successor Securities") so long as the Successor
Securities rank the same as the Par Securities rank in priority with respect
to distributions and payments upon liquidation, redemption and otherwise, (ii)
if the Trust is not the successor entity, the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee as the holder of the Debentures, (iii) the Par Securities or
any Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
with any other organization on which the Par Securities are then listed or
quoted; (iv) such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease does not cause the Par Securities (including any
Successor Securities) to be downgraded by any nationally recognized
statistical rating organization, (v) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the
rights, preferences and privileges of the holders of the Par Securities
(including any Successor Securities) in any material respect, (vi) such
successor entity has a purpose identical to that of the Trust, (vii) prior to
such merger, consolidation, amalgamation, replacement, conveyance, transfer,
or lease, the Company has received an opinion from independent counsel to the
Trust experienced in such matters to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does
not adversely affect the rights, preferences and privileges of the holders of
the Par Securities (including any Successor Securities) in any material
respect and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, (1) neither the Trust nor such
successor entity will be required to register as an investment company under
the Investment Company Act and (2) the Trust or the successor entity will
continue to be classified as a grantor trust for United States federal income
tax purposes, (viii) the Company or any permitted successor or assignee owns
all of the Common Securities of such
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successor entity and guarantees the obligations of such successor entity under
the Successor Securities at least to the extent provided by the Guarantee and
(ix) such successor entity expressly assumes all of the obligations of the
Trust with respect to the Trustees. Notwithstanding the foregoing, the Trust
shall not, except with the consent of holders of 100% in aggregate liquidation
amount of the Par Securities, consolidate, amalgamate, merge with or into, be
replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any other entity or permit any other entity to
consolidate, amalgamate, merge with or into, or replace it if such
consolidation, amalgamation, merger, replacement, conveyance, transfer or
lease would cause the Trust or the successor entity to be classified as other
than a grantor trust for United States federal income tax purposes and each
holder of the Par Securities not to be treated as owning an undivided interest
in the Debentures.
MERGER OR CONSOLIDATION OF TRUSTEES
Any corporation into which the Property Trustee, the Delaware Trustee or any
Regular Trustee that is not a natural person may be merged or converted or
with which such Trustee may be consolidated, or any corporation resulting from
any merger, conversion or consolidation to which such Trustee shall be a
party, or any corporation succeeding to all or substantially all the corporate
trust business of such Trustee, shall be the successor of such Trustee under
the Declaration, provided such corporation shall be otherwise qualified and
eligible.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the Investment Company
Act or classified as other than a grantor trust for United States federal
income tax purposes and so that the Debentures will be treated as indebtedness
of the Company for United States federal income tax purposes. In this
connection, the Company and the Regular Trustees are authorized to take any
action, not inconsistent with applicable law, the Certificate of Trust or the
Declaration, that the Company and the Regular Trustees determine in their
discretion to be necessary or desirable for such purposes, as long as such
action does not materially adversely affect the interests of the holders of
the Par Securities.
The Trust may not borrow money, issue debt, reinvest proceeds derived from
investments, mortgage or pledge any of its assets. In addition the Trust may
not undertake any activity that would cause the Trust not to be classified as
a grantor trust for United States federal income tax purposes.
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DESCRIPTION OF DEBENTURES
The Debentures were issued under an Indenture (the "Indenture"), between the
Company and Chase Trust Company of California, as trustee (the "Indenture
Trustee"). This summary of certain terms and provisions of the Debentures and
the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Indenture. For purposes of this
summary, the term "Company" refers only to ICII and not to any of its
subsidiaries.
GENERAL
Concurrently with the issuance of the Par Securities, the Trust invested the
proceeds thereof and the consideration paid by the Company for the Common
Securities in the Debentures issued by the Company. The Debentures are in the
principal amount equal to the aggregate liquidation amount of the Par
Securities plus the Company's concurrent investment in the Common Securities.
The Debentures accrue interest at the Applicable Interest Rate of the
principal amount thereof, payable semi-annually in arrears on June 15th (June
14 in 2002) and December 15th of each year, commencing December 15, 1997, and
on the Scheduled Remarketing Settlement Date (each, an "Interest Payment
Date"). From the date of original issuance of the Par Securities (the "Closing
Date") to but excluding the Remarketing Settlement Date, the "Applicable
Interest Rate" will be 10 1/4% per annum (the "Initial Interest Rate"). From
the Remarketing Settlement Date to but excluding the date of redemption of the
Debentures, the Applicable Interest Rate will equal the Adjusted Distribution
Rate that results from the Remarketing consummated on the Remarketing
Settlement Date.
Interest on the Debentures is payable to the person in whose name the
Debentures are registered, at the close of business on the June 1 or December
1 next preceding the relevant Interest Payment Date. It is anticipated that,
until the liquidation, if any, of the Trust, each Debenture will be held in
the name of the Property Trustee in trust for the benefit of the holders of
the Trust Securities. The amount of interest payable for any period will be
computed (i) for any full 180-day semi-annual interest payment period, on the
basis of a 360-day year consisting of twelve 30-day months and (ii) for any
period shorter than a full 180-day semi-annual interest payment, a 30-day
month and for periods of less than a month, the actual number of days elapsed
per 30-day month. In the event that any date on which interest is payable on
the Debentures is not a Business Day, then payment of the interest payable on
such date will be made on the next succeeding day that is a Business Day (and
without any additional interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on the date such payment
was originally payable. Accrued interest that is not paid on the applicable
Interest Payment Date will bear additional interest on the amount thereof (to
the extent permitted by law) at the Applicable Interest Rate in effect at the
beginning of such period, compounded semi-annually. The term "interest" as
used herein shall include interest payments, Additional Interest and interest
on interest payments not paid on the applicable Interest Payment Date.
The Debentures will mature on June 15, 2032, or earlier, in certain
circumstances, upon the occurrence and continuation of a Tax Event. See
"Description of Securities--Special Event Redemption or Distribution of
Debentures; Shortening of Stated Maturity."
Until the Remarketing Settlement Date, the Debentures will be jointly and
severally and fully and unconditionally guaranteed on a senior unsecured basis
by each of the Subsidiary Guarantors, which consist of all of the Company's
Restricted Subsidiaries other than the Trust, SPTL and the Special Purpose
Subsidiaries. The Subsidiary Guarantees will be released on the Remarketing
Settlement Date.
Until the Remarketing Settlement Date, the Debentures will be general
unsecured obligations of the Company ranking on a parity with all Indebtedness
of the Company, if any, that is not subordinated to the Debentures and senior
to any Indebtedness of the Company that is subordinated to the Debentures.
Until the Remarketing Settlement Date, when the Subsidiary Guarantees will be
released, the Subsidiary Guarantees will rank on a parity with all
Indebtedness of the Subsidiary Guarantors, if any, that is not subordinated to
the
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Subsidiary Guarantees and senior to any Indebtedness of the Subsidiary
Guarantors that is subordinated to the Subsidiary Guarantees. After the
Remarketing Settlement Date, the Debentures will be subordinated and junior in
right of payment to all Senior Debt of the Company. After the Remarketing
Settlement Date, the Indenture does not limit the incurrence or issuance of
other secured or unsecured debt of the Company, whether under the Indenture or
any existing or other indenture that the Company may enter into in the future
or otherwise. See "--Ranking."
OPTION TO EXTEND INTEREST PAYMENT PERIOD
Following the Remarketing Settlement Date, so long as no Indenture Event of
Default has occurred and is continuing, the Company has the right under the
Indenture to defer the payment of interest and Additional Interest, if any, at
any time or from time to time for a period not exceeding 10 consecutive semi-
annual periods with respect to each Extension Period, provided that no
Extension Period may extend beyond the Stated Maturity of the Debentures. At
the end of such Extension Period, the Company must pay all interest and
Additional Interest, if any, then accrued and unpaid (together with interest
thereon at the Applicable Interest Rate in effect at the beginning of such
period, compounded semi-annually, to the extent permitted by applicable law).
During an Extension Period, interest and Additional Interest, if any, will
continue to accrue and holders of Debentures (or holders of Par Securities
while the Par Securities are outstanding) will be required to accrue interest
income (as OID) for United States federal income tax purposes. See "United
States Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
During any such Extension Period, the Company may not, and may not permit
any subsidiary of the Company to, (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock or (ii) make any payment
of principal, interest or premium, if any, on or repay, repurchase or redeem
any debt securities of the Company that rank on a parity with or junior in
interest to the Debentures or make any guarantee payments with respect to any
guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu or junior in interest to the
Debentures (other than (a) dividends or distributions in common stock of the
Company, (b) payments under the Guarantee, (c) any declaration of a dividend
in connection with the implementation of a stockholders' rights plan, or the
issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (d) purchases of common
stock related to the issuance of common stock or rights under any of the
Company's benefit plans). Prior to the termination of any such Extension
Period, the Company may further extend the Extension Period, provided that no
Extension Period may exceed 10 consecutive semi-annual periods or extend
beyond the Stated Maturity of the Debentures. Upon the termination of any such
Extension Period and the payment of all amounts then due on any Interest
Payment Date, the Company may elect to begin a new Extension Period subject to
the above requirements. No interest or Additional Interest shall be due and
payable during an Extension Period, except at the end thereof. The Company
must give the Property Trustee, the Regular Trustees and the Indenture Trustee
notice of its election of such Extension Period not less than one Business Day
prior to such record date. The Property Trustee shall give notice of the
Company's election to begin a new Extension Period to the holders of the
Securities.
REDEMPTION
Optional Redemption. The Debentures are redeemable at the option of the
Company, in whole or in part, at any time or from time to time through and
including June 15, 2001 at a redemption price (the "Initial Optional
Redemption Price") equal to the greater of (i) 100% of the principal amount of
such Debentures and (ii) as determined by a Quotation Agent (as defined
herein), the sum of the present values of the principal amount of such
Debentures as if redeemed on June 14, 2002, together with scheduled
prepayments of interest from the prepayment date to but excluding June 14,
2002, discounted to the prepayment date on a semi-annual basis (assuming a
360-day year consisting of 30-day months) at the Adjusted Treasury Rate, plus,
in each case, accrued and unpaid interest and Additional Interest, if any, to
the date of redemption.
In addition, if certain circumstances are met, the Debentures are redeemable
at any time after the Remarketing Settlement Date in whole (but not in part),
within 90 days of the occurrence and continuation of a
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Special Event, at a redemption price equal to 100% of the principal amount of
such Debentures, plus, in each case, accrued and unpaid interest and
Additional Interest, if any, thereon to the date of redemption. See
"Description of Securities--Redemption--Special Event Redemption or
Distribution of Debentures; Shortening of Stated Maturity."
On and after June 15, 2012, the Debentures are redeemable prior to maturity
at the option of the Company, in whole or in part, at any time at the
redemption prices described in the next sentence, plus accrued and unpaid
interest and Additional Interest, if any, to the date of redemption. The
redemption price (expressed as a percentage of principal amount) shall be
equal to 100% plus the product of (x) the Adjusted Distribution Rate and (y)
the applicable Factor (as defined below) if redeemed during the twelve-month
period beginning on June 15th of the years indicated below, the applicable
"Factor" shall equal:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2012.......................................................... 50%
2013.......................................................... 45%
2014.......................................................... 40%
2015.......................................................... 35%
2016.......................................................... 30%
2017.......................................................... 25%
2018.......................................................... 20%
2019.......................................................... 15%
2020.......................................................... 10%
2021.......................................................... 5%
</TABLE>
On and after June 15, 2022, the redemption price will be 100% of the
principal amount of the Debentures to be redeemed, plus accrued and unpaid
interest and Additional Interest, if any, to the date of redemption.
If the Debentures are redeemed, the Trust must redeem the Trust Securities
having an aggregate liquidation amount equal to the aggregate principal amount
of Debentures so redeemed. See "Description of Securities--Redemption."
Notice of any redemption (other than a redemption of Debentures in
connection with a Special Mandatory) will be mailed at least 30 days but not
more than 60 days before the redemption date to each holder of Debentures to
be redeemed at its registered address. Unless the Company defaults in payment
of the redemption price, on and after the redemption date interest ceases to
accrue on such Debentures or portions thereof called for redemption.
As used herein, "Adjusted Treasury Rate" means, with respect to any
prepayment date, the Treasury Rate plus 0.50%.
"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently
published statistical release designated "H.15(519)" or any successor
publication which is published weekly by the Federal Reserve and which
establishes yields on actively traded United States Treasury securities
adjusted to constant maturity under the caption "Treasury Constant
Maturities", for the maturity corresponding to the Remaining Life (if no
maturity is within three months before or after the Remaining Life, yields for
the two published maturities most closely corresponding to the Remaining Life
shall be determined and the Treasury Rate shall be interpolated or
extrapolated from such yields on a straight-line basis, rounding to the
nearest month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not contain
such yields, the rate per annum equal to the semi-annual equivalent yield to
maturity of the Comparable Treasury Issue, calculated using a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the Comparable Treasury Price for such prepayment date. The Treasury
Rate shall be calculated on the third business day preceding the prepayment
date.
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"Comparable Treasury Issue" means with respect to any prepayment date the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time
of selection and in accordance with customary financial practice, in pricing
new issues of corporate debt securities of comparable maturity to the
Remaining Life. If no United States Treasury security has a maturity which is
within a period from three months before to three months after the last day of
the Remaining Life, the two most closely corresponding United States Treasury
securities shall be used as the Comparable Treasury Issue, and the Treasury
Rate shall be interpolated or extrapolated on a straight-line basis, rounding
to the nearest month using such securities.
"Quotation Agent" means Lehman Brothers Inc. and their respective
successors; provided, however, that if the foregoing shall cease to be a
primary United States Government securities dealer in New York City (a
"Primary Treasury Dealer"), the Company shall substitute therefor another
Primary Treasury Dealer.
"Comparable Treasury Price" means (A) the average of five Reference Treasury
Dealer Quotations for such prepayment date, after excluding the highest and
lowest such Reference Treasury Dealer Quotations, or (B) if the Indenture
Trustee obtains fewer than three such Reference Treasury Dealer Quotations,
the average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any prepayment date, the average, as determined by the
Indenture Trustee, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted
in writing to the Indenture Trustee by such Reference Treasury Dealer at 5:00
p.m. New York City time, on the third business day preceding such prepayment
date.
Special Mandatory Redemption
If the Remarketing Agent is unable to remarket all of the Par Securities
tendered or deemed tendered for purchase in the Remarketing, the Company will
be required to redeem Debentures as described under "Description of
Securities--Remarketing--Special Mandatory Redemption."
Tax Opinion Redemption
If the Company receives a Tax Opinion at least 35 business days prior to the
Election Date, the Company has the option to cancel the Remarketing by giving,
to the Property Trustee, DTC and the Remarketing Agent written notice of such
cancellation. In such event, all of the Debentures (and, thus, the Par
Securities) are subject to a Tax Opinion Redemption by the Company on the
Scheduled Remarketing Date.
Transfer Restricted Security Redemption
In addition, upon consummation of the Exchange Offer, the Company will be
required , on the Remarketing Settlement Date, to redeem, in whole (but not in
part), all of the Debentures (and, thus, the Par Securities) which were not
exchanged pursuant to the Exchange Offer pursuant to a Transfer Restricted
Security Redemption. As part of a Transfer Restricted Security Redemption, on
the Scheduled Remarketing Settlement Date such Old Par Securities will be
exchanged with the Trust for Debentures having an aggregate principal amount
equal to the aggregate liquidation amount of such Old Par Securities and such
Debentures shall immediately be redeemed by the Company at a redemption price
equal to 100% of the principal amount thereof plus accrued and unpaid interest
(including Additional Interest), if any, to the date of redemption.
REMARKETING
If the holders of Par Securities receive Debentures upon the liquidation or
dissolution of the Trust, the Debentures will be subject to the remarketing
procedures that would have been applicable to the Securities. See "Description
of Securities--Remarketing."
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RANKING
Until the Remarketing Settlement Date, the Debentures will be general
unsecured obligations of the Company ranking on a parity with all Indebtedness
of the Company, if any, that is not subordinated to the Debentures or
Guarantee and senior to any Indebtedness of the Company that is subordinated
to the Debentures or Guarantee. Until the Remarketing Settlement Date, when
the Subsidiary Guarantees will be released, the Subsidiary Guarantees will
rank on a parity with all 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. Until the Remarketing Settlement Date, the Debentures
will be effectively subordinated to all Indebtedness and other liabilities of
SPTL and any Special Purpose Subsidiaries, and the Debentures, and the
Subsidiary Guarantees will be effectively subordinated to secured Indebtedness
of the Company and the Subsidiary Guarantors. As of June 30, 1997, on a pro
forma basis after giving effect to the Offering and the application of
proceeds thereof, the Debentures and Guarantee would have been effectively
subordinated to approximately $1.3 billion of deposits and other borrowings at
SPTL and the Debentures, the Guarantee and the Subsidiary Guarantees would
have been effectively subordinated to approximately $358.1 million of secured
Indebtedness of the Subsidiary Guarantors.
After the Remarketing Settlement Date, the Debentures will be subordinated
and junior in right payment to all Senior Debt of the Company. Upon any
distribution to creditors of the Company in a liquidation or dissolution of
the Company or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to the Company or its property, an assignment for
the benefit of creditors or any marshalling of the Company's assets and
liabilities, the holders of Senior Debt will be entitled to receive payment in
full of all Obligations due in respect of such Senior Debt (including interest
after the commencement of any such proceeding at the rate specified in the
applicable Senior Debt) before the holders of Debentures will be entitled to
receive any payment with respect to the Debentures, and until all Obligations
with respect to Senior Debt are paid in full, any distribution to which the
holders of Debentures would be entitled shall be made to the holders of Senior
Debt (except that holders of Debentures may receive Permitted Junior
Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Debentures (except in Permitted Junior Securities or from the trust described
under "--Legal Defeasance and Covenant Defeasance") if (i) a default in the
payment of the principal of, premium, if any, or interest on Designated Senior
Debt occurs and is continuing beyond any applicable period of grace or (ii)
any other default occurs and is continuing with respect to Designated Senior
Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from the Company or the holders
of any Designated Senior Debt. Payments on the Debentures may and shall be
resumed (a) in the case of a payment default, upon the date on which such
default is cured or waived and (b) in case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt has been
accelerated. No new period of payment blockage may be commenced unless and
until (i) 360 days have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice and (ii) all scheduled payments of principal,
premium, if any, and interest on the Debentures that have come due have been
paid in full in cash. No nonpayment default that existed or was continuing on
the date of delivery of any Payment Blockage Notice to the Trustee shall be,
or be made, the basis for a subsequent Payment Blockage Notice.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Debentures is accelerated because of an Event of
Default.
In addition to the subordination provision described above, the Debentures
will be effectively subordinated to secured Indebtedness of the Company and
will be effectively subordinated to all Indebtedness and other liabilities of
all of the Subsidiaries of the Company. As of June 30, 1997, on a pro forma
basis after giving effect to the Offering and the application of proceeds
thereof, the Debentures would have been subordinated to
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approximately $219.8 million of Senior Debt of the Company and would have been
effectively subordinated to approximately $1.6 billion of Indebtedness of the
Company's Subsidiaries (including approximately $1.3 billion of deposits and
other borrowings at SPTL and approximately $358.1 million of secured
Indebtedness of the Company's subsidiaries but not including the Trust's
guarantee of $200.0 million of the 9 7/8% Senior Notes). See "Risk Factors--
Ranking of Obligations under the Debentures, the Guarantee and the Subsidiary
Guarantees of Note to Investors."
INDENTURE EVENTS OF DEFAULT
The Indenture provides that, on or prior to the Remarketing Settlement Date,
any one or more of the following described events with respect to the
Debentures that has occurred and is continuing constitutes an "Indenture Event
of Default" with respect to the Debentures: (i) default for 30 days in the
payment when due of interest on the Debentures; (ii) default in payment when
due of the principal of or premium, if any, on the Debentures; (iii) failure
by the Company to comply with the provisions described under the captions
"Certain Covenants of the Company--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 Debentures;
(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 Subsidiaries (or the payment of
which is guaranteed by the Company or any of its 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
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 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, 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 Subsidiaries. After the
Remarketing Settlement Date, only the events described in subparagraphs (i),
(ii), (iv) and (vii) will constitute "Indenture Events of Default."
If an Indenture Event of Default occurs and is continuing, the Indenture
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Debentures may declare all the Debentures 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 Debentures will become due and
payable without further action or notice. Holders of the Debentures 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 Debentures may direct the Indenture Trustee in its
exercise of any trust or power. The Indenture Trustee may withhold from
holders of the Debentures notice of any continuing Indenture Default or Event
of Default (except a Default or Indenture 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 Indenture 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 Debentures
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 Debentures. If an Event of
Default occurs prior to June 14, 2012 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 after the Remarketing
Settlement Date
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of the Debentures prior to June 14, 2012, 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
Debentures.
The holders of a majority in aggregate principal amount of the Debentures
then outstanding by notice to the Indenture Trustee may on behalf of the
holders of all of the Debentures waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default
or Indenture Event of Default in the payment of interest or Additional
Interest on, the principal of the Debentures.
The Company is required to deliver to the Indenture Trustee annually a
statement regarding compliance with the Indenture, and the Company is required
upon becoming aware of any Default or Indenture Event of Default, to deliver
to the Indenture Trustee a statement specifying such Default or Indenture
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 Debentures, the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder of Debentures by accepting a Debenture waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Debenture. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of
the Commission that such waiver is against public policy.
SUBSIDIARY GUARANTEES
On or prior to the Scheduled Remarketing Settlement Date, the Company's
obligations under the Indenture and the Debentures will be jointly and
severally and fully and unconditionally 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 under
the Indenture and the Debentures, including payment of principal and interest
on the Debentures. 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.
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 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 Indenture Default or Indenture
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
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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 of the Company--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.
CERTAIN COVENANTS OF THE COMPANY
Fees and Expenses
The Company has covenanted in the Indenture that if and so long as the Trust
is the holder of all Debentures, the Company, as borrower, will pay to the
Trust all fees and expenses related to the Trust and the offering of the Par
Securities and will pay, directly or indirectly, all ongoing costs, expenses
and liabilities of the Trust (including any taxes, duties, assessments or
governmental charges of whatever nature (other than withholding taxes) imposed
by the United States or any domestic taxing authority upon the Trust but
excluding obligations under the Securities).
Change of Control
The Indenture provides that upon the occurrence of a Change of Control on or
prior to the Remarketing Settlement Date, each holder of Debentures 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 Debentures 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 Additional Interest, if any, thereon to the date of
purchase (the "Change of Control Payment"). If at the time of the Change of
Control the Trust is the owner of all of the Debentures, the Trust shall make
the Change of Control Offer for the Par Securities as set forth in
"Description of Securities--Redemption Procedures--Change of Control," and the
Company will repurchase the Debentures exchanged by the Trust for the Par
Securities as set forth in the Declaration. Accordingly, the description of
the Change of Control Offer set forth in this section only applies to a Change
of Control Offer when the Trust is not the owner of all of the Debentures.
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 Debentures
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 Debentures 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 Debentures tendered in response to the Change of Control
Offer. Payment for any Debentures 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 Debenture is
registered at the close of business on such record date, and no additional
interest or Additional Interest, if any, will be payable to holders who tender
Debentures 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 Debentures 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
Debentures or portions thereof so tendered and (c) deliver or cause to be
delivered to the Trustee the Debentures so accepted together with an officers'
certificate stating the aggregate principal amount of Debentures or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each holder of Debentures so tendered the Change of Control Payment for such
Debentures, and the Trustee will promptly authenticate and mail (or cause to
be transferred by book entry) to each holder a new Debenture equal in
principal amount to any unpurchased portion of the Debentures surrendered, if
any; provided that each such new Debenture 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 Debentures to require
that the Company repurchase or redeem the Debentures in the event of a
takeover, recapitalization or other restructuring.
Asset Sales
The Indenture provides that, on or prior to the Remarketing Settlement Date,
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 Debentures or the 9
7/8% Senior Notes or the Subsidiary Guarantees thereof) 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 Debentures and, at
the Company's election, the 9 7/8% Senior Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Debentures (and, if applicable, the 9
7/8% Senior 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 Additional Interest, if any, thereon to
the date of purchase, in accordance with the procedures set forth in the
Indenture and in the indenture governing the 9 7/8% Senior Notes. If at the
time of the Asset Sale Offer the Trust is the owner of all of the Debentures,
the Trust shall make the Asset Sale Offer for the Par Securities as set forth
in "Description of Securities--Asset Sales," and the Company will repurchase
the Debentures exchanged by the Trust for the Securities as set forth in the
Declaration. Accordingly, the description of the Asset Sale Offer set forth in
this section only applies to an Asset Sale Offer when the Trust is not the
owner of all the Debentures.
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To the extent that the aggregate amount of Debentures (and, if applicable,
the 9 7/8% Senior 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 Debentures (and, if applicable, the 9 7/8% Senior 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 Debentures (and,
if applicable, the 9 7/8% Senior Notes) tendered in response to the Asset Sale
Offer. Payment for any Debentures (and, if applicable, the 9 7/8% Senior
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 and Additional Interest, if any, will be paid to the Person in whose
name a Debenture is registered at the close of business on such record date,
and no additional interest will be payable to holders who tender Debentures
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 Debentures (and, if applicable, the 9 7/8% Senior
Notes) or portions thereof tendered (and, if applicable, the 9 7/8% Senior
Notes) pursuant to the Asset Sale Offer, or if less than the Asset Sale Offer
Amount has been tendered, all Debentures (and, if applicable, the 9 7/8%
Senior Notes) tendered, and will deliver to the Trustee an officers'
certificate stating that such Debentures (and, if applicable, the 9 7/8%
Senior 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 Debentures (and,
if applicable, the 9 7/8% Senior Notes) tendered by such holder and accepted
by the Company for purchase. The Company will promptly issue a new Debenture,
and the Trustee, upon written request from the Company will authenticate and
mail or deliver such new Debenture to such holder, in a principal amount equal
to any unpurchased portion of the Debenture surrendered. Any Debenture 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, on or prior to the Remarketing Settlement Date,
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 Debentures (other than Debentures), 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:
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(a) no Indenture Default or Indenture 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 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
Indenture Default or Indenture 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
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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.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that, on or prior to the Remarketing Settlement Date,
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
Debentures 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
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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 $10.0 million.
Liens
The Indenture provides that, on or prior to the Remarketing Settlement Date,
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 Debentures, 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 Debentures, then the Debentures are
secured on an equal and ratable basis or (ii) if such lien secures
Indebtedness which is junior to the Debentures, any such lien shall be junior
to a lien granted to the holders of the Debentures. 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, on or prior to the Remarketing Settlement Date,
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 Debentures,
(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
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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 nonassignment 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.
Transactions with Affiliates
The Indenture provides that, on or prior to the Remarketing Settlement Date,
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 Indenture provides that, on or prior to the Remarketing Settlement Date,
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
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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 Commission, so long as any Debentures are outstanding, the
Company will furnish to the holders of Debentures (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission 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 Commission 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 Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless
the Commission 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 Debentures 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, on or prior to the Remarketing Settlement Date,
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 Debentures and the Indenture pursuant to
a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Indenture Default or Indenture
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."
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Debentures may be amended or supplemented with the consent of the holders
of at least a majority in principal amount of the Debentures then outstanding
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Debentures), and any
existing default or compliance with any provision of the Indenture or the
Debentures may be waived with the consent of the holders of a majority in
principal amount of the then outstanding Debentures (including consents
obtained in connection with a tender offer or exchange offer for Debentures).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Debentures held by a non-consenting holder): (i) reduce
the principal amount of Debentures whose holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed
maturity of any Debenture or alter the provisions with respect to the
redemption of the Debentures; 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 on any Debenture; (iv)
waive an Indenture Default or Indenture Event of Default in the payment of
principal of or premium, if any, or interest the Debentures (except a
rescission of acceleration of the Debentures by the holders of at least a
majority in aggregate principal amount of the Debentures and a waiver of the
payment default that resulted from such acceleration); (v) make any Debenture
payable in money other than that stated in the Debentures; (vi) make any
change in the provisions of the Indenture relating to waivers of past Defaults
or the rights of holders of Debentures to receive payments of principal of or
premium, if any, or interest on, the Debentures; (vii) waive a redemption
payment with respect to any Debenture; or (viii) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of
Debentures, the Company and the Trustee may amend or supplement the Indenture
or the Debentures to cure any ambiguity, defect or inconsistency, to provide
for uncertificated Debentures in addition to or in place of certificated
Debentures, to provide for the assumption of the Company's obligations to
holders of Debentures in the case of a merger or consolidation, to make any
change that would provide any additional rights or benefits to the holders of
Debentures or that does not adversely affect the legal rights under the
Indenture of any such holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act. For purposes of the foregoing, any amendment or
supplement which extends period of time during which the Debentures may not be
redeemed at the option of the Company shall not be deemed to adversely affect
the legal rights under the Indenture of any holders.
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 Debentures ("Legal
Defeasance") except for (i) the rights of holders of outstanding Debentures to
receive payments in respect of the principal of, premium, if any, and interest
and Additional Interest, if any, on such Debentures when such payments are due
from the trust referred to below, (ii) the Company's obligations with respect
to the Debentures concerning issuing temporary Debentures, registration of
Debentures, mutilated, destroyed, lost or stolen Debentures 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 an Indenture Default or Indenture Event of
Default with respect to the Debentures. 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 Indenture Event of Default with respect to the
Debentures.
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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 Debentures, cash in U.S. 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
Additional Interest, if any, on the outstanding Debentures on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Debentures 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 Debentures 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 Debentures 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 Indenture Default
or Indenture Event of Default shall have occurred and be continuing on the
date of such deposit (other than an Indenture Default or Indenture 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 Debentures 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.
DISTRIBUTIONS OF DEBENTURES; BOOK-ENTRY ISSUANCE
Under certain circumstances involving the termination of the Trust,
Debentures may be distributed to the holders of the Securities in liquidation
of the Trust after satisfaction of liabilities to creditors of the Trust as
provided by applicable law. If distributed to holders of Securities in
liquidation, the Debentures will initially be issued in the form of Global
Certificates and, if distributed after the Remarketing Settlement Date,
certificated securities not represented by Global Certificates. DTC, or any
successor depositary, will act as depositary for such Global Certificates. It
is anticipated that the depositary arrangements for such Global Certificates
would be substantially identical to those in effect for the Securities.
There can be no assurance as to the market price of any Debentures that may
be distributed to the holders of Securities.
PAYMENT AND PAYING AGENTS
The Company initially will act as Paying Agent with respect to the
Debentures except that, if the Debentures are distributed to the holders of
the Securities in liquidation of such holders' interests in the Trust, the
Indenture Trustee will act as the Paying Agent. The Company at any time may
designate additional Paying Agents or
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rescind the designation of any Paying Agent or approve a change in the office
through which any Paying Agent acts, except that the Company will be required
to maintain a Paying Agent at the place of payment.
Any moneys deposited with the Indenture Trustee or any Paying Agent, or then
held by the Company in trust, for the payment of the principal of and premium,
if any, or interest or Additional Interest, if any, on any Debentures and
remaining unclaimed for two years after such principal and premium, if any, or
interest has become due and payable shall, at the request of the Company, be
repaid to the Company and the holder of such Debentures shall thereafter look,
as a general unsecured creditor, only to the Company for payment thereof.
GOVERNING LAW
The Indenture and the Debentures are governed by and construed in accordance
with the laws of the State of New York.
CONCERNING THE INDENTURE TRUSTEE
The Indenture contains certain limitations on the rights of the Indenture
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 Indenture 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 Commission for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
Debentures will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Indenture
Trustee, subject to certain exceptions. The Indenture provides that in case an
Indenture Event of Default shall occur (which shall not be cured), the
Indenture 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 Indenture Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any holder
of Debentures, unless such holder shall have offered to the Indenture 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.
"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.
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"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 of the Company--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.
"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
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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.
"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
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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.
"Designated Senior Debt" means any Senior Debt permitted under the Indenture
the principal amount of which is $25.0 million or more and that has been
designated by the Company as "Designated Senior Debt."
"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 Debentures.
"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 than 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.
"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
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(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 account 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.
"Indenture Default" means any event that is or with the passage of time or
the giving of notice or both would be an Indenture Event of Default.
"Investments" means, with respect to any Person, all investment 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
Interest 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 the covenant entitled "--
Restricted Payment") 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 is Equity Interests under the
Securities Act.
"Issue Date" means the date on which the Debenture are originally issued.
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"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 Debentures 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 labilities payable under
the documentation governing any Indebtedness.
"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 noncash portion of the consideration received for an Asset Sale
as permitted pursuant to the covenant described
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under "--Certain Covenants of the Company--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 of the Company--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 of the Company--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% 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;
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(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
(1); 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 (1), 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 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 the covenant described under "--
Certain Covenants of the Company--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 Debentures, 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 Debentures
on terms at least as favorable to the Holders of Debentures 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.
"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
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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.
"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 Debt" means all Indebtedness permitted to be incurred by the Company
under the terms of the Indenture, unless the instrument under which such
Indebtedness is incurred expressly provides that it is on a parity with or
subordinated in right of payment to the Debentures and all Obligations with
respect to the foregoing. Notwithstanding anything to the contrary in the
foregoing, Senior Debt will not include (i) any liability for federal, state,
local or other taxes owed or owing by the Company, (ii) any Indebtedness of
the
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Company to any of its Subsidiaries or other Affiliates, (iii) any trade
payables or (iv) any Indebtedness that is incurred in violation of the
Indenture.
"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 Debentures or the Subsidiary Guarantees, respectively.
"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."
"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
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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 of the Company--
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 "--Certain Covenants of the Company--
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 of the Company--Incurrence of
Indebtedness and Issuance of Preferred Stock," (ii) such Subsidiary becomes a
Subsidiary Guarantor, and (iii) no Indenture Default or Indenture 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
product obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment
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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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DESCRIPTION OF GUARANTEE
The Guarantee was executed and delivered by the Company concurrently with
the issuance by the Trust of the Par Securities for the benefit of the holders
from time to time of such Securities. Chase Trust Company of California acts
as Guarantee Trustee under the Guarantee. This summary of certain provisions
of the Guarantee does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Guarantee, including the definitions therein of certain terms. The Guarantee
Trustee holds the Guarantee for the benefit of the holders of the Securities.
GENERAL
The Company has irrevocably and unconditionally agreed to pay in full, to
the extent set forth herein, the Guarantee Payments (as defined below) to the
holders of the Securities, as and when due, regardless of any defense, right
of set-off or counterclaim that the Trust may have or assert. The following
payments or distributions with respect to the Par Securities, to the extent
not paid by or on behalf of the Trust (the "Guarantee Payments"), will be
subject to the Guarantee: (i) any accumulated and unpaid Distributions
required to be paid on the Par Securities, to the extent that the Trust has
sufficient funds available therefor at the time, (ii) the Redemption Price
with respect to any Par Securities called for redemption, to the extent that
the Trust has sufficient funds available therefor at such time, or (iii) upon
a voluntary or involuntary dissolution, winding up or liquidation of the Trust
(unless the Debentures are distributed to holders of the Par Securities), the
lesser of (a) the aggregate liquidation amount of the Par Securities and all
accrued and unpaid Distributions thereon to the date of payment and (b) the
amount of assets of the Trust remaining available for distribution to holders
of Par Securities. The Company's obligation to make a Guarantee Payment may be
satisfied by direct payment of the required amounts by the Company to the
holders of the applicable Par Securities or by causing the Trust to pay such
amounts to such holders.
The Company's guarantee of the Par Securities is irrevocable and
unconditional pursuant to Section 3a-5(a) of the Investment Company Act.
Although the guarantee is considered irrevocable and unconditional for
purposes of the Investment Company Act, the Guarantee will apply only to the
extent that the Trust has sufficient funds available to make such payments.
If the Company does not make interest payments on the Debentures held by the
Trust, the Trust will not be able to pay Distributions on the Par Securities
and will not have funds legally available therefor. Until the Remarketing
Settlement Date, the Guarantee will rank on a parity with all senior unsecured
obligations of the Company and, thereafter, the Guarantee will rank
subordinate and junior in right of payment to all Indebtedness of the Company.
See "--Status of the Guarantee." The Guarantee does not limit the incurrence
or issuance of other secured or unsecured debt of the Company, whether under
the Indenture or any existing or other indenture that the Company may enter
into in the future or otherwise.
The Company has, through the Guarantee, the Debentures and the Indenture,
taken together, fully and unconditionally guaranteed all of the Trust's
obligations under the Par Securities. No single document standing alone or
operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these
documents that has the effect of providing a full and unconditional guarantee
of the Trust's obligations under the Securities. See "Relationship Among the
Par Securities, the Debentures and the Guarantee."
STATUS OF THE GUARANTEE
Until the Remarketing Settlement Date, the Guarantee will be a general
unsecured obligation of the Company ranking on a parity with all Indebtedness
of the Company, if any, that is not subordinated to the Guarantee and senior
to any Indebtedness of the Company that is subordinated to the Guarantee.
After the Remarketing Settlement Date, the Guarantee will be subordinated and
junior in right of payment to all Senior Debt of the Company. The Guarantee
does not place a limitation on the amount of additional Indebtedness that may
be incurred by the Company.
The Guarantee constitutes a guarantee of payment and not of collection
(i.e., the guaranteed party may institute a legal proceeding directly against
the Guarantor to enforce its rights under the Guarantee without first
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instituting a legal proceeding against any other person or entity). The
Guarantee is held by the Guarantee Trustee for the benefit of the holders of
the Par Securities. The Guarantee will not be discharged except by payment of
the Guarantee Payments in full to the extent not paid by the Trust or upon
distribution of the Debentures to the holders of the Par Securities in
exchange for all of the Par Securities.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of the Par Securities (in which case no consent of such
holders will be required), the Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate
liquidation amount of the outstanding Par Securities. The manner of obtaining
any such approval will be as set forth under "Description of Securities--
Voting Rights; Amendment of the Declaration." All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Par Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate liquidation amount of the Par
Securities have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Guarantee Trustee in respect of
the Guarantee or to direct the exercise of any trust or power conferred upon
the Guarantee Trustee under the Guarantee.
If the Guarantee Trustee fails to enforce the Guarantee, then any holder of
the Par Securities may institute a legal proceeding directly against the
Company to enforce the Guarantee Trustee's rights under the Guarantee without
first instituting a legal proceeding against the Trust, the Guarantee Trustee
or any other person or entity.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with
all the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee (that has not been cured or waived) that
is actually known to a responsible officer of the Guarantee Trustee, must
exercise the same degree of care and skill as a prudent person would exercise
or use under the circumstances in the conduct of his or her own affairs.
Subject to this provision, the Guarantee Trustee is under no obligation to
exercise any of the powers vested in it by the Guarantee at the request of any
holder of any Par Security unless it is offered reasonable indemnity against
the costs, expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price of all of the Par Securities, upon full
payment of the amounts payable upon liquidation of the Trust or upon
distribution of Debentures to the holders of the Par Securities in exchange
for all of the Par Securities. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of the Par
Securities must restore payment of any sums paid under the Par Securities or
the Guarantee.
GOVERNING LAW
The Guarantee is governed by and construed and interpreted in accordance
with the laws of the State of New York.
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RELATIONSHIP AMONG THE PAR SECURITIES,
THE DEBENTURES AND THE GUARANTEE
Payments of Distributions and other amounts due on the Par Securities (to
the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of Guarantee." If and to the extent that the
Company does not make payments under the Debentures, the Trust will not pay
Distributions or other amounts due on the Par Securities. The Guarantee does
not cover payment of Distributions when the Trust does not have sufficient
funds to pay such Distributions. In such event, a holder of Par Securities may
institute a legal proceeding directly against the Company to enforce payment
of such Distributions to such holder after the respective due dates. Taken
together, the Company's obligations under the Debentures, the Indenture and
the Guarantee provide, in the aggregate, a full and unconditional guarantee of
payments of distributions and other amounts due on the Par Securities. No
single document standing alone or operating in conjunction with fewer than all
of the other documents constitutes such guarantee. It is only the combined
operation of these documents that has the effect of providing a full and
unconditional guarantee of the Trust's obligations under the Par Securities.
Following the Remarketing Settlement Date, the obligations of the Company
under the Guarantee and the Debentures will be subordinate and junior in right
of payment to all Senior Debt of the Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest, principal and other payments are made when
due on the Debentures, such payments will be sufficient to cover Distributions
and other payments due on the Par Securities, primarily because (i) the
aggregate principal amount of the Debentures will be equal to the sum of the
aggregate stated liquidation amount of the Trust Securities; (ii) the interest
rate and interest and other payment dates on the Debentures will match the
Distribution rate and Distribution and other payment dates for the related Par
Securities; (iii) the Company will pay for all and any costs, expenses and
liabilities of the Trust except the Trust's obligations under the Par
Securities; and (iv) the Declaration further provides that the Trust will not
engage in any activity that is not consistent with the limited purposes of the
Trust.
Notwithstanding anything to the contrary in the Indenture, the Company has
the right to set-off any payment it is otherwise required to make thereunder
with and to the extent the Company has theretofore made, or is concurrently on
the date of such payment making, a related payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF PAR SECURITIES
A holder of Par Securities may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other person or entity.
Following the Remarketing Settlement Date, a default or event of default
under any Senior Debt of the Company will not constitute a default or
Indenture Event of Default. In addition, in the event of payment defaults
under, or acceleration of, Senior Debt of the Company, the subordination
provisions of the Indenture provide that no payments may be made in respect of
the Debentures until such Senior Debt has been paid in full or any payment
default thereunder has been cured or waived. Failure to make required payments
on the Debentures would constitute an Indenture Event of Default under the
Indenture.
LIMITED PURPOSE OF TRUST
The Par Securities evidence a beneficial ownership interest in the Trust,
and the Trust exists for the sole purpose of issuing the Trust Securities and
investing the proceeds thereof in Debentures. A principal difference between
the rights of a holder of Par Securities and a holder of Debentures is that a
holder of Debentures is entitled to receive from the Company the principal
amount of and interest accrued on Debentures held, while a holder of Par
Securities is entitled to receive Distributions from the Trust (or from the
Company under the Guarantee) if and to the extent the Trust has funds
available for the payment of such Distributions.
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RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Trust involving the liquidation of the Debentures, the holders of the Par
Securities will be entitled to receive, out of assets held by the Trust, the
liquidation distribution in cash. See "Description of Securities--Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation
or bankruptcy of the Company on or prior to the Remarketing Settlement Date,
the Property Trustee, as holder of the Debentures, would be a senior unsecured
creditor of the Company, on a parity in right of payment to all other senior
unsecured indebtedness of the Company. Upon any voluntary or involuntary
liquidation or bankruptcy of the Company which commences following the
Remarketing Settlement Date, the Property Trustee, as holder of the
Debentures, would be a subordinated creditor of the Company, subordinated in
right of payment to all Indebtedness, but entitled to receive payment in full
of principal and interest before any stockholders of the Company receive
payments or distributions. Because the Company is the guarantor under the
Guarantee and has agreed to pay for all costs, expenses and liabilities of the
Trust (other than the Trust's obligations to the holders of the Par
Securities), the positions of a holder of Par Securities and a holder of the
Debentures relative to other creditors and to shareholders of the Company in
the event of liquidation or bankruptcy of the Company would be substantially
the same.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Simpson Thacher & Bartlett (a partnership which includes
professional corporations), special United States federal income tax counsel
to the Company and the Trust ("Tax Counsel"), the following summary describes
the material United States federal income tax consequences of the purchase,
ownership and disposition of the Par Securities. Unless otherwise stated, this
summary deals only with Par Securities held as capital assets by United States
Persons (defined below) who purchase the Par Securities upon original issuance
at their original issue price. As used herein, a "United States Person" means
(i) a person that is a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, or (iv) a trust if a court within the United States
is able to exercise primary supervision over the administration of such trust
and one or more United States fiduciaries have the authority to control all
the substantial decisions of such trust. The tax treatment of a holder may
vary depending on such holder's particular situation. This summary does not
address all the tax consequences that may be relevant to a particular holder
or to holders who may be subject to special tax treatment, such as banks, real
estate investment trusts, regulated investment companies, insurance companies,
dealers in securities or currencies, or tax-exempt investors. In addition,
this summary does not include any description of any alternative minimum tax
consequences or the tax laws of any state, local or foreign government that
may be applicable to a holder of Par Securities. This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations and the opinions of Tax
Counsel are not binding on the Internal Revenue Service ("IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought by the Company from the IRS with respect to the transactions
described herein. Accordingly, there can be no assurance that the IRS will not
challenge the opinions expressed herein or that a court would not sustain such
a challenge. Nevertheless, Tax Counsel has advised that it is of the view
that, if challenged, the opinions expressed herein would be sustained by a
court with jurisdiction in a properly presented case.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PAR
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN, AND
OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR
OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE PAR
SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS SEE "DESCRIPTION OF
SECURITIES--REDEMPTION--SPECIAL EVENT REDEMPTION OR DISTRIBUTION OF
DEBENTURES; SHORTENING OF STATED MATURITY."
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Par Securities, Tax Counsel is of the
opinion that under current law and assuming full compliance with the terms of
the Declaration, the Trust will not be taxable as a corporation. Accordingly,
for United States federal income tax purposes, each beneficial owner (each a
"holder") of Par Securities generally will be required to include in gross
income its allocable share of the income earned on or with respect to the
Debentures.
CLASSIFICATION OF THE DEBENTURES
The Company, the Trust and the holders of the Par Securities (by the
acceptance of a beneficial interest in a Par Security) will agree to treat the
Debentures as indebtedness for all United States tax purposes. Accordingly,
the Company intends to take the position that the Debentures will be
classified as indebtedness for United States federal income tax purposes. If
the Debentures were not classified as indebtedness for United States tax
purposes, such Debentures would be classified as equity and, as a result, the
holders of the Par Securities would be required
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to take the dividend payments thereon into income in accordance with their
regular method of tax accounting. The following discussion is based on the
classification of the Debentures as indebtedness for United States tax
purposes.
EXCHANGE OF PAR SECURITIES
The Exchange will not constitute a taxable event for United States federal
income tax purposes. Consequently, no gain or loss should be recognized by a
holder upon receipt of a New Par Security, the holding period of the New Par
Security should include the holding period of the Old Par Security and the
adjusted tax basis of the New Par Security should be the same as the adjusted
tax basis of the Old Par Security immediately before the Exchange.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Because the Company has the right to defer the payment of stated interest on
the Debentures, the stated interest on the Debentures will be considered to be
original issue discount ("OID") (within the meaning of Section 1273(a) of the
Code). Consequently, holders must include such stated interest in gross income
on a daily economic accrual basis (using the constant-yield-to-maturity method
of accrual described in Section 1272 of the Code), regardless of their regular
method of tax accounting and in advance of receipt of the cash attributable to
such income. The application of these OID accrual rules may accelerate the
timing of a holder's recognition of such income in certain situations. Actual
payments of stated interest on the Debentures, however, will not be separately
reported as taxable income. Any amount of OID included in a holder's gross
income with respect to a Par Security will increase such holder's adjusted tax
basis in such Security, and the amount of Distributions received by a holder
in respect of such OID will reduce such holder's adjusted tax basis in such
Par Security.
Corporate holders of Par Securities will not be entitled to a dividends-
received deduction with respect to any income recognized by such holders with
respect to the Par Securities.
DISTRIBUTION OF DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
As described under the caption "Description of Debentures--Distribution of
Debentures; Book-Entry Issuance," Debentures may be distributed to holders in
exchange for the Par Securities and in liquidation of the Trust. Under current
law, such a distribution would be non-taxable, and will result in the holder
receiving directly its pro rata share of the Debentures previously held
indirectly through the Trust, with a holding period and aggregate tax basis
equal to the holding period and aggregate tax basis such holder had in its Par
Securities before such distributions. If, however, the liquidation of the
Trust were to occur because the Trust is subject to United States federal
income tax with respect to income accrued or received on the Debentures, the
distribution of the Debentures to holders would be a taxable event to the
Trust and to each holder and a holder would recognize gain or loss as if the
holder had exchanged its Par Securities for the Debentures it received upon
liquidation of the Trust.
A holder would accrue interest in respect of the Debentures received from
the Trust in the manner described above under "--Interest Income and Original
Issue Discount."
Under certain circumstances described herein (see "Description of
Securities--Redemption--Special Event Redemption or Distribution of
Debentures; Shortening of Stated Maturity"), the Debentures may be redeemed
for cash, with the proceeds of such redemption distributed to holders in
redemption of their Par Securities. Under current law, such a redemption would
constitute a taxable disposition of the redeemed Par Securities for United
States federal income tax purposes, and a holder would recognize gain or loss
as if it sold such redeemed Par Securities for cash. See "--Sales of
Securities."
SALES OF PAR SECURITIES
A holder that sells Par Securities (pursuant to the Remarketing or
otherwise) will recognize gain or loss equal to the difference between the
amount realized by the holder on the sale or redemption of the Par Securities
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(except to the extent that such amount realized is characterized as a payment
in respect of accrued but unpaid interest on such holder's allocable share of
the Debentures which such holder has not previously included in gross income)
and the holder's adjusted tax basis in the Securities sold or redeemed. Such
gain or loss generally will be a capital gain or loss and generally will be a
long-term capital gain or loss if the Par Securities have been held for more
than one year. Under recently enacted legislation, capital gains of
individuals derived in respect of capital assets held for at least one year
are eligible for reduced rates of taxation depending upon the holding period
of such capital assets. Prospective investors should consult their own tax
advisors with respect to the tax consequences of the new legislation. Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for United States federal income tax purposes.
A holder will be required to add any accrued and unpaid OID to its adjusted
tax basis for its Par Securities. To the extent the selling price of such
holder's Par Securities is less than the adjusted tax basis (which will
include any accrued and unpaid OID), a holder will recognize a capital loss.
NON-UNITED STATES HOLDERS
Prospective purchasers of Par Securities that are Non-United States Holders
should consult their tax advisors with respect to the tax consequences, United
States federal and otherwise, of the purchase, ownership and disposition of
Par Securities. A "Non-United States Holder" includes any person that is not a
United States Person.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Income on the Par Securities held of record by holders (other than
corporations and other exempt holders) will be reported annually to such
holders and to the IRS. The Regular Trustees currently intend to deliver such
reports to holders of record prior to January 31 following each calendar year.
It is anticipated that persons who hold Par Securities as nominees for
beneficial holders will report the required tax information to beneficial
holders on Form 1099.
"Backup withholding" at a rate of 31% will apply to payments of interest to
non-exempt United States holders unless the holder furnishes its taxpayer
identification number in the manner prescribed in applicable Treasury
regulations, certifies that such number is correct, certifies as to no loss of
exemption from backup withholding and meets certain other conditions.
Payment of the proceeds from disposition of Par Securities to or through a
United States office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner establishes an
exemption from information reporting and backup withholding.
Any amounts withheld from a holder of the Par Securities under the backup
withholding rules will generally be allowed as a refund or a credit against
such holder's United States federal income tax liability, provided the
required information is furnished to the IRS.
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ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code ("Plans"), may purchase Securities, subject to the investing
fiduciary's determination that the investment in Securities satisfies ERISA's
fiduciary standards and other requirements applicable to investments by the
Plan.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) (the "DOL Regulation") concerning the definition of what
constitutes the assets of a Plan. The DOL Regulation provides that as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a plan makes an
"equity" investment will be deemed for purposes of ERISA to be assets of the
investing plan unless certain exceptions apply.
There can be no assurance that any of the exceptions set forth in the DOL
regulation will apply to the purchase of Securities offered hereby and, as a
result, an investing Plan's assets could be considered to include an undivided
interest in the Debentures held by the Trust. In the event that assets of the
Trust are considered assets of an investing Plan, the Company, the Trustees
and other persons, in providing services with respect to the Debentures, may
be considered fiduciaries to such Plan and subject to the fiduciary
responsibility provisions of Title I of ERISA (including the prohibited
transaction provisions thereof). In addition, the prohibited transaction
provisions of Section 4975 of the Code could apply with respect to
transactions engaged in by any "disqualified person," as defined below,
involving such assets unless a statutory or administrative exemption applies.
Even if they are not fiduciaries, the Company and/or any of its affiliates
may be considered a "party in interest" (within the meaning of ERISA) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to certain Plans. The acquisition and ownership of Securities by a
Plan (or by an individual retirement arrangement or other plan described in
Section 4975(e)(1) of the Code) may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Securities
are acquired pursuant to and in accordance with an applicable exemption. As a
result, Plans with respect to which the Company or any of its affiliates is a
party in interest or a disqualified person should not acquire Securities
unless such Securities are acquired pursuant to and in accordance with an
applicable prohibited transaction exemption. Any purchaser or holder of the
Securities or any interest therein will be deemed to have represented by its
purchase and holding thereof that either (i) the purchaser and holder is not a
Plan or any entity whose underlying assets include "plan assets" by reason of
any Plan's investment in the entity and is not purchasing such securities on
behalf of or with "plan assets" of any Plan or (ii) the purchase and holding
of the Securities is covered by an applicable prohibited transaction
exemption.
Notwithstanding the foregoing, it is possible that the New Securities may
qualify as "publicly offered securities" under the DOL Regulation if, in
addition to an effective registration statement filed in connection with the
Exchange Offer, they are also "widely held" and "freely transferable" at the
time of the Exchange Offer. Under the DOL Regulation, a class of securities is
"widely held" only if it is a class of securities owned by 100 or more
investors independent of the issuer and each other. Although it is possible
that at the time of the Exchange Offer the New Securities will be "widely
held", no assurances can be given that will be true. If the New Securities are
"publicly offered securities" at the time of the Exchange Offer, the assets of
the Trust would not be assets of the Investing Plans as of such time. If the
New Securities did not qualify
as "publicly offered securities", the foregoing discussion about plan assets
in the preceding paragraphs would also be available to the New Securities.
Any Plans or other entities whose assets include Plan assets subject to
ERISA or Section 4975 of the Code proposing to acquire Securities or New
Securities should consult with their own counsel.
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PLAN OF DISTRIBUTION
The Company will not receive any proceeds from any sale of New Par
Securities by broker-dealers. New Par Securities 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 Par Securities 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 Par
Securities. Any broker-dealer that resells New Par Securities 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 Par
Securities may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Par Securities and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. Each broker-dealer that
receives New Par Securities 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 Par Securities. 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 Par Securities received in exchange for Old Par Securities
where such Old Par Securities were acquired as a result of market-making
activities or other trading activities. 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. The Company has agreed that, for a period
of one year from the date hereof, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale.
For a period of one year from the date hereof, 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.
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Securities
will be passed upon for the Trust by Richards, Layton & Finger, P.A., special
Delaware counsel to the Company and the Trust. The validity of the Debentures
and the Guarantee will be passed upon for the Company and the Trust by
Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly Hills,
California. Certain United States federal income taxation matters also will be
passed upon for the Company and the Trust by Simpson Thacher & Bartlett, (a
partnership which includes professional corporations), New York, New York.
Freshman, Marantz, Orlanski, Cooper & Klein and Simpson Thacher & Bartlett
will rely on the opinion of Richards, Layton & Finger, P.A. as to matters of
Delaware Law.
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EXPERTS
The consolidated financial statements of Imperial Credit Industries, Inc.
and subsidiaries as of December 31, 1996 and 1995, and for each of the years
in the three-year period ended December 31, 1996, 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 contains an explanatory paragraph regarding the adoption of Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" in 1995.
The financial statements of Franchise Mortgage Company LLC as of December
31, 1996 and 1995, and for the year ended December 31, 1996 and for the period
from June 30, 1995 (inception) through 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.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Additional Distributions.................................................. 128
Additional Interest....................................................... 128
Adjusted Distribution Rate................................................ 15
Adjusted Treasury Rate.................................................... 156
Advanta................................................................... 114
Affiliate................................................................. 37
Affiliate Transaction..................................................... 167
ALD....................................................................... 3
AMN....................................................................... Cover
APB 15.................................................................... 67
APB 25.................................................................... F-13
Applicable Distribution Rate.............................................. 7
Applicable Interest Rate.................................................. 154
Acquired Debt............................................................. 171
ARMs...................................................................... 30
Asset Sale................................................................ 172
Asset Sale Offer.......................................................... 145
Asset Sale Offer Amount................................................... 145
Asset Sale Offer Period................................................... 145
Asset Sale Purchasse Date................................................. 145
Auto Lend................................................................. 3
Avco Acquisition.......................................................... 44
Average Invested Assets................................................... 124
Awards.................................................................... 108
Bancorp................................................................... 101
Benton.................................................................... 83
BHCA...................................................................... 100
BIF....................................................................... 99
Book-Entry Confirmation................................................... 130
Book-Entry Transfer Facility.............................................. 130
Business Day.............................................................. 1
Capital Lease Obligation.................................................. 172
Capitalized Excess Servicing Fees Receivables............................. 172
Capital Stock............................................................. 172
Cash Equivalents.......................................................... 172
CBC....................................................................... 3
CBCC...................................................................... 44
CCD....................................................................... 3
CEBA...................................................................... 100
CERCLA.................................................................... 93
Change in 1940 Act Law.................................................... 142
Change of Control......................................................... 173
Change of Control Offer................................................... 31
Change of Control Offer Period............................................ 144
Change of Control Payment................................................. 144
Change of Control Purchase Date........................................... 144
Closing Date.............................................................. 154
CMBS...................................................................... 125
CMO....................................................................... 123
CNAI...................................................................... 58
Code...................................................................... 108
</TABLE>
195
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Commission................................................................ i
Commissioner.............................................................. 15
Committee................................................................. 108
Common Securities......................................................... Cover
Common Stock.............................................................. 107
Company................................................................... Cover
Comparable Treasury Issue................................................. 157
Comparable Treasury Price................................................. 157
Consolidated Leverage Ratio............................................... 173
Consolidated Net Income................................................... 173
Consolidated Net Worth.................................................... 174
Covered Loans............................................................. 92
Creditor.................................................................. 151
Debentures................................................................ Cover
Declaration............................................................... 1
Deconsolidation........................................................... 45
Delaware Trustee.......................................................... 1
Designated Senior Debt.................................................... 174
DFI....................................................................... 93
Direct Action............................................................. 32
Disqualified Person....................................................... 190
Disqualified Stock........................................................ 174
Distribution Date......................................................... 1
Distributions............................................................. 6
DLJ....................................................................... 57
DOL....................................................................... 190
DOL Regulation............................................................ 190
DRI....................................................................... 4
DTC....................................................................... 129
Duff...................................................................... 172
ECOA...................................................................... 92
Effective Date............................................................ 115
Effectiveness Target Date................................................. 128
Election Date............................................................. 15
Eligible Institution...................................................... 130
EPS....................................................................... 67
Equity Interests.......................................................... 174
Equity Offering........................................................... 174
ERISA..................................................................... 190
Excess Proceeds........................................................... 162
Exchange.................................................................. Cover
Exchange Act.............................................................. i
Exchange Agent............................................................ 11
Exchange Offer............................................................ Cover
Expiration Date........................................................... ii
Existing Indebtedness..................................................... 174
Extension Period.......................................................... 8
FASB...................................................................... 67
FCAC...................................................................... 3
</TABLE>
196
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FDIC...................................................................... 14
FDICIA.................................................................... 14
FHLB...................................................................... 5
FICO...................................................................... 100
FIRREA.................................................................... 99
Fitch..................................................................... 172
FMAC...................................................................... Cover
FMAC Corporation.......................................................... F-64
FMC....................................................................... 5
Funds Act................................................................. 99
Funds from Operations..................................................... 124
GAAP...................................................................... 45
Global Certificates....................................................... 140
Greenwich................................................................. 69
Guarantee................................................................. 174
Guarantee Payments........................................................ 183
Guarantee Trustee......................................................... 137
Hedging Obligations....................................................... 174
IBC....................................................................... Cover
ICAI...................................................................... Cover
ICCAMC.................................................................... 123
ICIFC..................................................................... 5
ICII...................................................................... 1
ICCMIC.................................................................... 5
ICCMIC Management Agreement............................................... 123
IFG....................................................................... 102
IMH....................................................................... 4
IMH Services Agreement.................................................... 116
IMH Tax Agreement......................................................... 116
Indebtedness.............................................................. 174
Indenture................................................................. Cover
Indenture Default......................................................... 175
Indenture Event of Default................................................ 159
Indenture Trustee......................................................... 154
Initial Distribution Rate................................................. 6
Initial Interest Rate..................................................... 154
Initial Optional Redemption Price......................................... 155
Initial Purchaser......................................................... 10
Interest Payment Date..................................................... 8
Investment Company Act.................................................... 13
Investment Company Event.................................................. 142
Investments............................................................... 175
IPLD...................................................................... 3
IRS....................................................................... 187
ISOs...................................................................... 108
Issue Date................................................................ 175
Knyal..................................................................... F-64
LCPI...................................................................... 115
Letter of Transmittal..................................................... Cover
LIBOR..................................................................... 52
Lien...................................................................... 176
Liquidation Distribution.................................................. 149
</TABLE>
197
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
LPIG...................................................................... 3
Management Agreement...................................................... 117
Maturity Advancement...................................................... 141
Maximum Adjusted Distribution Rate........................................ 15
MBS....................................................................... 125
Moody's................................................................... 172
Net Income................................................................ 176
Net Proceeds.............................................................. 176
New Debentures............................................................ Cover
New Par Securities........................................................ Cover
New Securiites............................................................ Cover
New Subsidiary Guarantees................................................. Cover
New Trust Guarantee....................................................... Cover
Non-Compete Agreement..................................................... 115
Non-Recourse Debt......................................................... 176
Non-United States Holder.................................................. 189
Notice of Election........................................................ 16
NPAs...................................................................... 60
NQSO...................................................................... 108
NYSE...................................................................... 132
Obligations............................................................... 176
OCC....................................................................... 96
Offering.................................................................. 7
OID....................................................................... 17
Old Debentures............................................................ Cover
Old Par Securities........................................................ Cover
Old Securities............................................................ Cover
Old Subsidiary Guarantees................................................. Cover
Old Trust Guarantee....................................................... Cover
OMSRs..................................................................... 46
OREO...................................................................... F-13
Other Guarantor Subsidiaries.............................................. F-37
Par Securities............................................................ Cover
Participating Broker-Dealers.............................................. i
Paying Agent.............................................................. 152
Payment Blockage Notice................................................... 158
Payment Default........................................................... 159
Permitted Investments..................................................... 176
Permitted Liens........................................................... 177
Permitted Refinancing Indebtedness........................................ 178
Permitted SPTL Preferred Stock............................................ 178
Permitted Warehouse Indebtedness.......................................... 178
Person.................................................................... 152
Plans..................................................................... 190
PMSRs..................................................................... 46
Primary Treasury Dealer................................................... 157
Pro Forma Transactions.................................................... 19
Property Account.......................................................... 137
Property Trustee.......................................................... 1
Purchase Facility......................................................... 179
Qualified Securitization Transaction...................................... 179
</TABLE>
198
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Quotation Agent........................................................... 157
Receivables............................................................... 179
Redemption Price.......................................................... 143
Reference Treasury Dealer Quotations...................................... 157
Registrants............................................................... i
Registration Default...................................................... 128
Registration Rights Agreement............................................. 10
Registration Statement.................................................... iii
Regular Trustee........................................................... 1
REIT...................................................................... 123
Related Business.......................................................... 179
Remaining Life............................................................ 9
Remarketing............................................................... 7
Remarketing Agent......................................................... 9
Remarketing Agreement..................................................... 148
Remarketing Settlement Date............................................... 6
Residual Certificates..................................................... 179
RESPA..................................................................... 103
Restricted Investment..................................................... 179
Restricted Payment........................................................ 159
Restricted Subsidiary..................................................... 179
Retained Interest......................................................... 179
Rule 144A................................................................. i
SAIF...................................................................... 99
Scheduled Remarketing Date................................................ 139
Scheduled Remarketing Settlement Date..................................... 6
Securities Act............................................................ Cover
Securitization Related Assets............................................. 179
Senior Debt............................................................... 7
Senior Indebtedness....................................................... 180
Servicing Contracts....................................................... F-64
SFAS...................................................................... 67
SFAS 107.................................................................. F-32
SFAS 122.................................................................. 19
SFAS 123.................................................................. F-13
SFAS 125.................................................................. 67
SFAS 128.................................................................. 67
SFAS 129.................................................................. 67
Significant Subsidiary.................................................... 180
S&P....................................................................... 172
Special Event............................................................. 141
Special Mandatory Redemption.............................................. 9
Special Purpose Subsidiary................................................ 180
SPFC...................................................................... 2
SPFC Tax Agreement........................................................ 113
SPSAC..................................................................... 59
SPTL...................................................................... 7
Stated Maturity........................................................... 8
Strategic Investor Repurchase Transaction................................. 180
</TABLE>
199
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Subsidiary................................................................ 180
Subsidiary Guarantors..................................................... Cover
Successor Securities...................................................... 152
Summerwood Partnerships................................................... 121
Tax Counsel............................................................... 187
Tax Event................................................................. 6
Tax Opinion............................................................... 142
Tender Offer.............................................................. 5
Ten-Year U.S. Treasury Rate............................................... 124
TILA...................................................................... 91
Transfer Restricted Securities............................................ 128
Transfer Restricted Security Redemption................................... 142
Treasury Rate............................................................. 156
Trust..................................................................... Cover
Trust Act................................................................. 1
Trust Indenture Act....................................................... 1
Trustee................................................................... 1
Trust Enforcement Event................................................... 149
Trust Securities.......................................................... Cover
United States Person...................................................... 187
Unrestricted Subsidiary................................................... 181
Warehouse Facility........................................................ 181
Warehouse Indebtedness.................................................... 181
Weighted Average Life to Maturity......................................... 181
Wholly Owned Restricted Subsidiary........................................ 182
1940 Act.................................................................. 142
9 7/8% Senior Notes....................................................... 8
9 3/4% Senior Notes....................................................... 5
1992 Stock Option Plan.................................................... 108
1996 Stock Option Plan.................................................... 108
30-year Treasury Rate..................................................... 140
</TABLE>
200
<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-49
Consolidated Statements of Income........................................ F-50
Consolidated Statements of Cash Flows.................................... F-51
Notes to Consolidated Financial Statements............................... F-52
</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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, 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
January 29, 1997
F-2
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ 74,247 $ 39,166
Interest bearing deposits................................ 3,369 267,776
Investment in Federal Home Loan Bank stock............... 17,152 22,750
Trading securities, at market............................ 25,180 --
Securities available for sale, at market................. 59,116 5,963
Loans held for sale ..................................... 940,096 1,341,810
Loans held for investment, net........................... 1,068,599 668,771
Purchased and originated servicing rights................ 14,887 18,428
Capitalized excess servicing fees receivable............. 23,142 33,181
Retained interest in loan and lease securitizations...... 49,548 14,251
Interest-only and residual certificates.................. 87,017 10,840
Accrued interest on loans................................ 13,847 10,164
Premises and equipment, net.............................. 12,442 11,369
Other real estate owned, net............................. 12,214 7,179
Goodwill................................................. 38,491 20,346
Other assets............................................. 31,292 38,641
---------- ----------
Total assets......................................... $2,470,639 $2,510,635
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Deposits................................................. $1,069,184 $1,092,989
Borrowings from Imperial Bank............................ -- 5,000
Borrowings from Federal Home Loan Bank................... 140,500 190,000
Other borrowings......................................... 694,352 875,815
Bonds.................................................... -- 111,995
Senior notes............................................. 88,209 80,472
Convertible subordinate debentures....................... 75,000 --
Accrued interest payable................................. 14,034 14,494
Income taxes payable..................................... 55,327 12,962
Minority interest in consolidated subsidiaries........... 54,936 1,452
Other liabilities........................................ 39,589 31,354
---------- ----------
Total liabilities.................................... 2,231,131 2,416,533
---------- ----------
Commitments and contingencies (note 27)
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding................................. -- --
Common stock, no par value. Authorized 80,000,000
shares; 38,291,112 and 14,578,481 shares issued and
outstanding at December 31, 1996 and 1995,
respectively.......................................... 145,521 51,981
Retained earnings...................................... 88,977 38,910
Unrealized gain on securities available for sale, net.. 5,010 3,211
---------- ----------
Total shareholders' equity........................... 239,508 94,102
---------- ----------
Total liabilities and shareholders' equity........... $2,470,639 $2,510,635
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
REVENUE:
Gain on sale of loans............................. $ 88,156 $ 39,557 $ 8,628
-------- -------- -------
Interest on loans................................. 188,242 120,244 79,173
Interest on investments........................... 10,807 6,630 3,610
Interest on other finance activities.............. 8,422 2,608 --
-------- -------- -------
Total interest income........................... 207,471 129,482 82,783
Interest expense.................................. 135,036 95,728 61,674
-------- -------- -------
Net interest income............................. 72,435 33,754 21,109
Provision for loan and lease losses............... 9,773 5,450 5,150
-------- -------- -------
Net interest income after provision for loan and
lease losses..................................... 62,662 28,304 15,959
-------- -------- -------
Loan servicing income............................. 1,680 12,718 16,332
Gain on sale of servicing rights.................. 7,591 3,578 30,837
Gain on sale of SPFC stock........................ 51,243 -- --
Gain on sale of stock by subsidiary............... 31,447 -- --
Management fees................................... 3,347 38 --
Other income...................................... 10,807 1,114 1,048
-------- -------- -------
Total other income.............................. 106,115 17,448 48,217
-------- -------- -------
Total revenue..................................... 256,933 85,309 72,804
-------- -------- -------
EXPENSES:
Personnel expense................................. 48,355 34,053 33,477
Amortization of PMSRs and OMSRs................... 1,121 3,986 3,176
Occupancy expense................................. 4,653 3,904 3,399
Data processing expense........................... 2,163 1,461 1,323
Net expenses of other real estate owned........... 7,014 1,913 969
Professional services............................. 9,559 2,769 1,528
FDIC insurance premiums........................... 327 1,137 2,170
Telephone and other communications................ 2,917 2,509 2,820
Restructuring provision--exit from former mortgage
banking operations............................... 3,800 -- --
General and administrative expense................ 19,140 9,448 12,652
-------- -------- -------
Total expenses.................................. 99,049 61,180 61,514
-------- -------- -------
Income before income taxes........................ 157,884 24,129 11,290
Income taxes...................................... 69,874 10,144 4,685
Minority interest in income (loss) of consolidated
subsidiaries..................................... 12,026 (208) --
-------- -------- -------
Income before extraordinary item.................. 75,984 14,193 6,605
Extraordinary item--repurchase of 9 3/4% Senior
Notes due 2004, net of income taxes.............. -- -- 919
-------- -------- -------
Net income...................................... $ 75,984 $ 14,193 $ 7,524
======== ======== =======
INCOME PER SHARE:
Primary:
Income before extraordinary item................ $ 1.96 $ 0.41 $ 0.19
Extraordinary item--repurchase of 9 3/4% Senior
Notes due 2004................................. -- -- 0.03
-------- -------- -------
Net Income...................................... $ 1.96 $ 0.41 $ 0.22
======== ======== =======
Fully Diluted:
Income before extraordinary item................ $ 1.95 $ 0.40 $ 0.19
Extraordinary item--repurchase of 9 3/4% Senior
Notes due 2004................................. -- -- 0.03
-------- -------- -------
Net Income...................................... $ 1.95 $ 0.40 $ 0.22
======== ======== =======
</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
NUMBER OF SECURITIES TOTAL
SHARES COMMON RETAINED AVAILABLE SHAREHOLDERS'
OUTSTANDING STOCK EARNINGS FOR SALE, NET EQUITY
----------- -------- -------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 9,607 $ 51,060 $ 17,193 $ -- $ 68,253
Exercise of stock
options................ 14 96 -- -- 96
Net income, 1994........ -- -- 7,524 -- 7,524
------ -------- -------- ------ --------
Balance, December 31,
1994................... 9,621 51,156 24,717 -- 75,873
Exercise of stock
options................ 147 825 -- -- 825
3-for-2 stock split..... 4,810 -- -- -- --
Unrealized gain on
securities available
for sale, net.......... -- -- -- 3,211 3,211
Net income, 1995........ -- -- 14,193 -- 14,193
------ -------- -------- ------ --------
Balance, December 31,
1995................... 14,578 51,981 38,910 3,211 94,102
Exercise of stock
options................ 868 1,671 -- -- 1,671
1-for-10 stock dividend. 1,460 25,917 (25,917) -- --
2-for-1 stock split..... 18,952 -- -- -- --
Issuance of common
stock.................. 2,440 59,228 -- -- 59,228
Unrealized gain on
securities available
for sale, net.......... -- -- -- 1,799 1,799
Tax benefit from
exercise of stock
options................ -- 6,851 -- -- 6,851
Retirement of stock..... (7) (127) -- -- (127)
Net income, 1996........ -- -- 75,984 -- 75,984
------ -------- -------- ------ --------
Balance, December 31,
1996................... 38,291 $145,521 $ 88,977 $5,010 $239,508
====== ======== ======== ====== ========
</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,
-----------------------------------
1996 1995 1994
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 75,984 $ 14,193 $ 7,524
Adjustments to reconcile net income to
net cash (used in)provided by operating
activities:
Provision for loan and lease losses.... 9,773 5,450 5,150
(Recovery) provision for operational
losses................................ -- (1,819) 2,000
Restructuring Provision................ 3,800 -- --
Depreciation........................... 3,483 2,657 1,846
Amortization........................... 2,996 3,725 2,921
Accretion of discount.................. (8,350) (2,608) --
Gain on sale of servicing rights....... (7,591) (3,578) (30,837)
Gain on sale of loans.................. (88,156) (39,557) (8,628)
Gains on sale of SPFC stock............ (64,625) -- --
Loss on sale of OREO................... 2,843 -- --
Writedowns of capitalized excess
servicing............................. 4,675 -- --
Writedowns of fixed assets............. 886 -- --
Stock option compensation expense...... -- 653 436
Writedowns on other real estate owned.. 3,252 2,085 369
Provision for deferred income taxes.... 22,104 2,120 2,678
Gain on repurchase of senior notes..... -- -- (1,538)
Originations of loans held for sale.... (1,939,200) (2,813,378) (4,260,200)
Purchases of loans held for sale....... -- (159,122) --
Sales and collections on loans held for
sale.................................. 2,159,055 1,923,733 5,243,028
Net change in accrued interest on
loans................................. (3,683) (4,247) (1,342)
Net change in retained interest in loan
and lease securitizations............. (21,481) (14,012) (239)
Net change in capitalized excess
servicing............................. 33,234 (37,500) (3,790)
Net change in other assets............. (210,969) (51,062) (11,925)
Net change in other liabilities........ 15,888 (1,436) 14,126
---------- ---------- -----------
Net cash provided by (used in) operating
activities.............................. (6,082) (1,173,703) 961,579
---------- ---------- -----------
Cash flows from investing activities:
Net change in interest bearing
deposits.............................. 264,407 (257,176) 79,400
Purchase of servicing rights........... -- (8,128) (14,764)
Proceeds from sale of servicing rights. 10,011 12,815 26,899
Proceeds from sale of other real estate
owned................................. 1,202 7,072 1,174
Purchase of trading securities......... (25,180) -- --
Purchase of securities available for
sale.................................. (48,553) -- --
Net change in loans held for
investment............................ (27,651) 566,693 (882,390)
Purchases of premises and equipment.... (5,442) (1,367) (6,140)
Purchases of Federal Home Loan Bank
stock................................. (7,652) (3,933) --
Sales of Federal Home Loan Bank stock.. 13,250 -- --
Cash utilized for acquisitions......... (20,020) (175,015) --
Other.................................. -- -- (817)
---------- ---------- -----------
Net cash used in investing activities.... 154,372 140,961 (796,638)
---------- ---------- -----------
Cash flows from financing activities:
Net change in deposits................. (23,805) 158,368 (66,847)
Net change in borrowings from Imperial
Bank.................................. (5,000) 5,000 (20,000)
Advances from Federal Home Loan Bank... 434,000 347,000 988,000
Repayments of advances from Federal
Home Loan Bank........................ (483,500) (452,000) (1,013,000)
Proceeds from issuance of convertible
subordinated debentures............... 72,162 -- --
Net change in other borrowings......... (181,463) 875,815 (147,611)
Issuance of bonds...................... -- 111,995 --
Repayment of bonds..................... (111,995) -- --
Proceeds from offering of 9 3/4% Senior
Notes due 2004 ....................... -- -- 88,593
Repurchase of 9 3/4% Senior Notes due
2004.................................. -- -- (6,545)
Proceeds from resale of 9 3/4% Senior
Notes due 2004........................ 7,384 -- --
Proceeds from sale of SPFC stock....... 64,625 -- --
Proceeds from issuance of common stock. 59,228 -- --
Net change in minority interest........ 53,484 -- --
Proceeds from exercise of stock
options............................... 1,671 826 96
---------- ---------- -----------
Net cash (used in) provided by financing
activities (113,209) 1,047,004 (177,314)
Net change in cash....................... 35,081 14,262 (12,373)
Cash at beginning of year................ 39,166 24,904 37,277
---------- ---------- -----------
Cash at end of year...................... $ 74,247 $ 39,166 $ 24,904
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 24.5% 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"), 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"). SPFC is owned 51.2% by the Company and 48.8% by public
investors. FMAC is owned two-thirds by the Company and one-third 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. ("IMH"), 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 and income producing loans; business lending--
equipment leasing and asset-based lending; consumer loans--sub-prime auto
loans and Title I home improvement loans. The Company solicits loans and
leases from brokers on a wholesale and portfolio basis and 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 IMH, 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 common stock of IMH. At December 31, 1996, the
Company owned approximately 5.0% of the common stock of IMH. This investment
is included in securities available for sale on the consolidated balance
sheet. Additionally, ICAI entered into a management agreement with IMH
pursuant to which it advises upon the day-to-day operations of IMH 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.
Additionally, the Company has transferred all servicing rights related to its
residential non-conforming mortgage banking business to independent
subservicers. 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.
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
F-7
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 or
financing of home improvements and educational expenditures.
In May 1995, the Company substantially expanded its existing equipment
leasing business, through the acquisition of First Concord Acceptance
Corporation ("FCAC"). IBC conducts its business equipment leasing operations
from its headquarters in Rancho Bernardo, California.
In June 1995, the Company established FMAC which acquired the Franchise
Mortgage Acceptance Company division of Greenwich Financial Capital Products,
Inc. 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 is headquartered in Los
Angeles, California.
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"). The net purchase price for AVCO's net assets was approximately
$94.8 million.
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 presented.
Significant balance sheet items which could be materially effected by such
estimates include: loans held for investment, which is presented net of the
allowance for loan and lease losses and the valuation of the Company's
securitization related assets. Actual results could differ significantly from
management's estimates.
Prior years' consolidated financial statements have been reclassified to
conform to the 1996 presentation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment Securities
The Company classifies investments as held-to-maturity, trading securities,
and/or available-for-sale securities. Held-to-maturity investments are
reported at amortized cost, trading securities are reported at fair value,
with unrealized gains and losses included in operations, and available-for-
sale securities are reported at fair value with unrealized gains and losses,
net of related income taxes, included as a separate component of shareholders'
equity.
Investment securities held-to-maturity are those securities that management
has the positive intent and ability to hold to maturity.
Trading securities include mortgage-backed securities resulting from certain
mortgage banking related activities.
F-8
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Investment securities available-for-sale are those securities which are not
held in the trading portfolio and are not held in the held-to-maturity
portfolio.
Realized gains and losses on securities available-for-sale are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market.
Loans which are ineligible for sale, generally those 90 days past due, are
transferred to loans held for investment at the lower of cost or market on the
day of transfer.
Loans Held for Investment
Loans held for investment are stated at the principal amount outstanding.
Interest income is recorded on the accrual basis in accordance with the terms
of the loans, 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. Additionally,
unearned income on installment contracts and leases is recognized in interest
income over the life of the related loans using the interest method.
On an ongoing basis, management monitors the loan portfolio and evaluates
the adequacy of the allowance for loan and lease losses. In determining the
adequacy of the allowance for loan and lease losses, management 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 and lease 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.
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. The value of
impaired loans is 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. 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.
F-9
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Purchased and Originated Servicing Rights
The Company adopted Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" ("SFAS 122") starting in 1995. SFAS 122 requires
that a mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are
acquired. 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.
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 tranche 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 rates for comparable variable rate loans. In addition, the
Company uses market comparables for estimates of the cost of servicing per
loan, an inflation rate, ancillary income per loan and default rates. Amounts
capitalized are recorded at cost, net of accumulated amortization and
valuation allowance.
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 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 over the sum of: (1) the coupon in the pass through
certificates, (2) a base servicing fee paid to the loan or lease servicer, (3)
expected losses to be incurred on the portfolio of loans or leases sold 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 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
F-10
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in loan and lease securitizations 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 and is presented net of an allowance for credit losses.
Retained Interest in Loan and Lease Securitizations
Loan and lease securitizations have specific credit enhancement requirements
in the form of overcollateralization which must be met before the Company
receives cash flows due. As the securitized assets generate 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 begins to
receive the excess servicing fees and a portion of the retained interest on a
monthly basis.
Interest-only and Residual Certificates
Assets reflected in the accompanying balance sheet as interest-only and
residual certificates in real estate mortgage investment conduits are recorded
as a result of SPFC's securitization of loans through various trust vehicles.
SPFC is subject to certain recourse provisions in connection with its
securitizations which are measured using a risk free rate. SPFC estimates
future cash flows from these interest-only and residual certificates and
values them utilizing assumptions that it believes are consistent with those
that would be utilized by an unaffiliated third party purchaser and records
them as trading securities at fair value in accordance with SFAS No. 115,
"Accounting for Certain Debt and Equity Securities." Unrealized gains and
losses are included in other income in the accompanying consolidated financial
statements. To SPFC's knowledge, there is no active market for the sale of
these interest-only and residual certificates.
The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2) a
base servicing fee paid to the loan servicer, (3) expected losses to be
incurred on the portfolio of loans sold over the lives of the loans, and (4)
fees payable to the trustee and monoline insurer. Prepayment assumptions used
in the present value computation are based on recent evaluations of the actual
prepayments of SPFC's servicing portfolio or on market prepayment rates on new
portfolios, taking into consideration the current interest rate environment
and its expected impact on prepayment rates. The cash flows expected to be
received by SPFC, not considering the expected losses, are discounted at an
interest rate that SPFC 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 sold and a
discounted recourse liability is recorded. The undiscounted recourse liability
relating to interest-only and residual certificates as of December 31, 1996
and 1995 was $11.2 million and $3.9 million, respectively. The overall effect
of discounting the cash flows expected to be received by SPFC using an
interest rate that SPFC believes an unaffiliated third party purchaser would
require, and a rate equivalent to a risk-free rate for expected credit losses
is a discount rate of approximately 15%. To the extent that actual future
excess cash flows are different from estimated excess cash flows, the fair
value of SPFC's interest-only and residual certificates will be adjusted
quarterly with corresponding adjustments made to earnings in that period.
F-11
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In certain of its securitizations, SPFC provided an initial
overcollateralization on the securities sold and in all its securitizations
SPFC builds overcollateralization as cash flows projected as described above
are used by the trustee to reduce the outstanding balance of the securities
sold by SPFC. The amount of overcollateralization is recorded by SPFC as part
of its interest-only and residual certificates.
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 securitization gains. 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 originated mortgage servicing rights. 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 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 loan is funded and
sold, and recorded as a part of the gain on sale of the loan in the same
percentage as such 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-12
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Real Estate Owned
Foreclosed real estate is transferred from the loan portfolio at fair value
and classified as other real estate owned ("OREO"). The excess carrying value,
if any, of the loan over the estimated fair value of the collateral 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 all of its subsidiaries except
SPFC, ICIFC, and FMAC. 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. At
December 31, 1996, Goodwill is presented net of accumulated amortization of
$2.2 million.
Stock Based Compensation
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. 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 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
stock issuances to employees and directors. Issuance of stock to non-
employees, however, must be measured at fair value. 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 consolidated financial statements are
required to include pro-forma disclosures in the notes to the consolidated
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. During 1996, the Company adopted the proforma disclosure
requirements set forth in SFAS 123 for purposes of preparing its consolidated
financial statements.
F-13
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Per Share
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.
Sale of Stock in Subsidiary
The issuance of common stock by SPFC, a subsidiary of the Company, to the
public in 1996 was recorded in the Company's consolidated statement of income
as a "Gain on sale of stock by subsidiary" of $31.4 million at the time the
stock was sold. In SPFC's initial public offering, ICII sold 3.5 million
shares of SPFC Common Stock for a price of $11.33 per share, with SPFC selling
5.2 million shares of Common Stock to the public for $11.33 per share. In a
secondary offering ICII sold a total of 1.5 million shares of SPFC Common
Stock for $19.83 per share. The gain represents the difference between the
benefit received by the Company relating to the price paid for the stock in
the offering in excess of book value, offset by the Company's ownership
dilution. The Company has adopted the provisions of Staff Accounting Bulletin
Topic 5H for the accounting of SPFC stock.
The sale of a portion of the Company's shares of stock in SPFC in 1996 is
recorded as "Gain on sale of SPFC stock" of $51.2 million in the accompanying
consolidated statement of income. The gain represents the actual proceeds of
$64.6 million from the sale of 5.0 million shares of SPFC stock at an average
price of $13.88 per share, reduced by the Company's recorded investment in
those shares and expenses related to the sale. All SPFC share data have been
adjusted for a 3 for 2 stock dividend on April 1, 1997. Deferred income taxes
were provided for by the Company in conjunction with the gains recognized on
the sale of SPFC stock.
After the sales of SPFC's common stock by the Company, its ownership
percentage in SPFC was approximately 51.2% of 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 due 2006 issued in November 1996.
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.
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
F-14
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Under the provisions of SFAS 125, management has determined that mortgage
backed securities retained by the Company as a result of securitization
transactions will be classified as trading securities. All other retained
securities will be classified as available for sale or trading as determined
at the time of securitization.
Changes in market value are included in operations, if classified as trading
securities, or in shareholders' equity as unrealized gains or losses, net of
the related tax effect, if classified as available for sale. SFAS 125 was
effective for the Company on January 1, 1997. Management has determined that
the implementation of SFAS 125 will not have a material impact on the
Company's financial condition or results of operations.
4. ACQUISITIONS
AVCO Leasing Services
The Avco 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 $94.8 million and no
liabilities assumed 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 $12.5 million.
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 Company's results of operations as if CBCC had been acquired by the
Company as of January 1, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1995 1994
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Total revenue............................................... $93,317 $83,321
Net income.................................................. 17,183 11,480
Fully diluted net income per share.......................... $ 0.49 $ 0.34
</TABLE>
FMAC
On June 30, 1995, the Company completed the acquisition of certain net
assets of FMAC for a net purchase price of $7.6 million which included $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.
F-15
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
First Concord Acceptance Corp.
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.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest....................................... $134,251 $ 93,223 $ 51,844
Income taxes................................... 24,134 8,283 4,016
Significant non-cash activities:
Loans transferred from held for investment to
held for sale................................. -- 505,037 --
Loans transferred to OREO...................... 14,203 12,302 3,431
Loans transferred from held for sale to held
for investment................................ 197,141 83,398 787,902
Loans to facilitate the sale of OREO........... 1,871 1,315 2,357
Retained interest in loan and lease
securitizations............................... 6,908 14,002 239
Unrealized gain on securities available for
sale.......................................... 3,112 5,443 --
</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. SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of asset backed securities and equity
securities of $50.0 million and $9.1 million, respectively, at December 31,
1996.
Securities available for sale consist of equity securities of $6.0 million
at December 31, 1995. There were unrealized gains of $5.4 million as of
December 31, 1995.
8. TRADING SECURITIES
Trading securities consist of mortgage backed securities of $25.2 million at
December 31, 1996. There were no unrealized gains or losses as of December 31,
1996.
There were no securities held for trading at December 31, 1995.
F-16
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LOANS HELD FOR SALE
Loans held for sale consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4..................................... $562,002 $1,083,038
Multi-family.......................................... 186,391 171,199
-------- ----------
748,393 1,254,237
Leases.................................................. 8,547 17,787
Commercial loans........................................ 183,156 69,786
-------- ----------
$940,096 $1,341,810
======== ==========
</TABLE>
10. LOANS HELD FOR INVESTMENT, NET
Loans held for investment consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.................................... $ 375,476 $228,721
Multi-family......................................... 2,527 7,028
Commercial........................................... 11,011 133,189
---------- --------
389,014 368,938
Leases................................................. 99,717 7,297
Installment loans...................................... 34,248 1,900
Franchise loans........................................ 115,910 46,766
Asset based loans...................................... 288,528 154,252
Commercial loans....................................... 173,932 110,104
---------- --------
1,101,349 689,257
Unearned income........................................ (6,336) (5,217)
Deferred loan fees..................................... (6,415) (1,540)
---------- --------
1,088,598 682,500
Allowance for loan and lease losses.................. (19,999) (13,729)
---------- --------
$1,068,599 $668,771
========== ========
</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.
F-17
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year........................ $13,729 $ 7,054 $ 3,255
Provision for loan and lease losses............... 9,773 5,450 5,150
Business acquisitions and bulk loan purchases..... 4,500 4,320 --
Loans charged off................................. (8,326) (3,106) (1,436)
Recoveries on loans previously charged off........ 323 11 85
------- ------- -------
Net charge-offs................................... (8,003) (3,095) (1,351)
------- ------- -------
Balance, end of period............................ $19,999 $13,729 $ 7,054
======= ======= =======
</TABLE>
As of December 31, 1996 and 1995 and 1994, non-accrual loans totaled $50.1
million, $31.0 million, and $13.1 million, respectively. Interest income
foregone on nonaccrual loans was $1.1 million and $492,000 for the years ended
December 31, 1996 and 1995, respectively. Interest foregone on loans for the
year ended December 31, 1994 was not material.
At December 31, 1996 and 1995, impaired loans recognized in accordance with
SFAS No. 114 and the related specific allowance for loan and lease losses were
as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------- -----------------------------
SPECIFIC SPECIFIC
ALLOWANCE ALLOWANCE
RECORDED FOR CARRYING RECORDED FOR CARRYING
INVESTMENT LOSSES VALUE INVESTMENT LOSSES VALUE
---------- --------- -------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $38,297 $3,671 $34,626 $30,988 $5,616 $25,372
Restructured loans 800 4 796 870 3 867
------- ------ ------- ------- ------ -------
Total impaired loans $39,097 $3,675 $35,422 $31,858 $5,619 $26,239
======= ====== ======= ======= ====== =======
</TABLE>
Impaired loans averaged $33.3 million and $21.1 million during 1996 and
1995, respectively. During 1996, total interest income recognized on impaired
loans was $2.0 million. There were no impaired loans without a related
allowance for losses at December 31, 1996 and 1995. For 1995, total interest
income recognized on impaired loans was not material.
11. RESTRUCTURING
Restructuring charges of $3.8 million were recognized during the year ended
December 31, 1996. The charge represents those costs incurred in connection
with the Company's exit from the conforming mortgage banking business. 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 1996, the Company sold the
majority of its wholesale mortgage origination offices and disposed of fixed
assets related to its former conforming residential mortgage lending business.
The Company believes that significant changes to the exit plan are not likely,
and that the exit plan should be completed in the second quarter of 1997.
F-18
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity in the allowance for restructuring charges during 1996 was as
follows:
<TABLE>
<CAPTION>
ALLOWANCE CHARGES REMAINING
PROVIDED INCURRED BALANCE
--------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Disposition of Wholesale Mortgage Origination
Offices ..................................... $2,500 $2,354 $146
Disposal of Fixed Assets...................... 1,000 886 114
Other......................................... 300 -- 300
------ ------ ----
Total....................................... $3,800 $3,240 $560
====== ====== ====
</TABLE>
12. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE
Changes in capitalized excess servicing fees receivable were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance............................... $ 33,181 $ 4,319 $ 529
Present value of excess servicing fees on loans
sold........................................... 19,448 40,353 4,261
Amortization.................................... (24,812) (11,491) (471)
Writedowns...................................... (4,675) -- --
-------- -------- ------
Ending balance.................................. $ 23,142 $ 33,181 $4,319
======== ======== ======
</TABLE>
Capitalized excess servicing fees receivable include an allowance for credit
losses of $4.5 million and $6.7 million at December 31, 1996 and 1995,
respectively.
13. PURCHASED AND ORIGINATED SERVICING RIGHTS
Changes in purchased and originated servicing rights were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance................................ $ 18,428 $16,746 $ 9,966
Additions........................................ 10,970 7,340 8,781
Increase as a result of the FMAC acquisition..... -- 3,805 --
Bulk purchase of servicing....................... -- 757 5,983
Sales of servicing rights........................ (13,390) (6,234) (4,808)
Amortization--accelerated........................ -- (1,176) (313)
Amortization--scheduled.......................... (1,121) (2,810) (2,863)
-------- ------- -------
Ending balance................................... $ 14,887 $18,428 $16,746
======== ======= =======
</TABLE>
The servicing portfolio associated with purchased and originated servicing
rights at December 31, 1996 and 1995 was $1.0 billion and $2.6 billion,
respectively.
F-19
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Premises and equipment..................................... $19,606 $17,295
Leasehold improvements..................................... 1,394 706
------- -------
21,000 18,001
Less accumulated depreciation and amortization............. (8,558) (6,632)
------- -------
$12,442 $11,369
======= =======
</TABLE>
15. DEPOSITS
Deposits of $100,000 and over totaled approximately $220.8 million, $286.8
million, and $382.3 million at December 31, 1996, 1995, and 1994,
respectively. Interest expense associated with certificates of deposit of
$100,000 and over was approximately $13.6 million, $15.4 million, and $16.8
million for the years ended December 31, 1996, 1995, and 1994, respectively.
16. BORROWINGS FROM IMPERIAL BANK
In November 1995, the Company renewed a $10 million line of credit with
Imperial Bank. At December 31, 1996 and 1995, $0 million and $5 million,
respectively, was outstanding, which accrues interest at the prime lending
rate. This line expired and was not renewed during 1996.
17. 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, 1996, all
of the outstanding borrowings from the Federal Home Loan Bank were scheduled
to mature within one year. The FHLB advances are secured by the investment in
stock of the FHLB and certain real estate loans with a carrying value of
$228.5 million and $275.0 million at December 31, 1996 and 1995. At December
31, 1996 and 1995 FHLB borrowings are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at year end...................................... $140,500 $190,000
Maximum outstanding at any month end..................... 338,000 435,000
Average balance during the year.......................... 188,765 292,000
Weighted average rate during the year.................... 6.10% 6.26%
Weighted average rate at year end........................ 6.30% 6.10%
</TABLE>
18. OTHER BORROWINGS
Other borrowings primarily consist of revolving warehouse lines of credit to
fund the Company and its subsidiaries lending activities. At December 31,
1996, approximately $700 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 with which the Company was in
compliance at December 31, 1996.
F-20
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ICII and its subsidiaries have various revolving warehouse lines of credit
available at December 31, 1996, as follows:
<TABLE>
<CAPTION>
INTEREST
RATE COMMITMENT OUTSTANDING
-------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
PaineWebber (ICII)........................ 6.81% $ 200,000 $ 5,686
Banco Santander (FMAC).................... 7.63 50,000 16,229
First Boston (FMAC)....................... 7.31 200,000 48,773
Greenwich Capital Markets (FMAC).......... 7.36 unspecified 35,158
Lehman Brothers (SPFC).................... -- 200,000 --
Imperial Warehouse Lending Group (ICIFC).. 8.25 600,000 337,380
Core States (IBC)......................... 7.61 10,000 1,111
Conti (IBC)............................... 7.50 100,000 87,657
Morgan Stanley Mortgage Capital (SPFC).... 6.16 150,000 152,681
Imperial Warehouse Lending Group (ICII)... 8.00 20,000 5,077
Warehouse Lending Corporation of America
(ICII)................................... 7.94 20,000 4,600
------------ --------
7.55 $ 1,550,000 $694,352
============ ========
</TABLE>
ICII and its subsidiaries had various revolving warehouse lines of credit
available at December 31, 1995, as follows:
<TABLE>
<CAPTION>
INTEREST
RATE COMMITMENT OUTSTANDING
-------- ---------- -----------
(DOLLARS 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
---------- --------
7.72 $1,495,000 $875,815
========== ========
</TABLE>
19. 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. In March 1996, the Company sold its interest in the SPE and
deconsolidated the SPE from the Company's consolidated balance sheet and
income statement. As a result of the sale, the Company recognized a $3.6
million gain on sale of loans.
F-21
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. SENIOR NOTES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Senior notes............................................... $90,000 $81,500
Unamortized discount....................................... (1,791) (1,028)
------- -------
Net balance, senior notes.................................. $88,209 $80,472
======= =======
</TABLE>
In January 1994, the Company issued $90.0 million of senior notes with a
stated interest rate of 9 3/4% which mature on January 15, 2004 (the "9 3/4%
Senior Notes"). In October 1994, the Company repurchased $8.5 million of the
senior notes, recognizing a pre-tax gain of $1.5 million, and recording an
extraordinary gain, net of taxes of $919,286. In March 1996, the Company sold
the $8.5 million of the 9 3/4% Senior Notes repurchased in 1994. At December
31, 1996 and 1995, $90.0 million and $81.5 million of the Senior Notes were
outstanding, respectively. The 9 3/4% 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 9 3/4% 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 9 3/4% 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, 1996, the Company was in
compliance with the debt covenants related to the 9 3/4% Senior Notes. Total
interest expense on the 9 3/4% Senior Notes for the years ended December 31,
1996 and 1995 was $8,602,344 and $8,380,115 respectively.
During December 1996, the Company announced that it commenced a cash tender
offer and consent solicitation for all $90 million principal amount of its 9
3/4% Senior Notes at $1,040 per note. Subsequent to December 31, 1996, the
Company successfully completed a $200.0 million offering of 9 7/8% senior
notes offering due 2007, (the "9 7/8% Senior Notes"). A portion of the
proceeds from the offering were used to repurchase $69.8 million of the
outstanding 9 3/4% Senior Notes. The remaining proceeds will be used to make
capital contributions to subsidiaries, strategic acquisitions, investments,
and for general corporate purposes. The effective interest rate on the
tendered notes was approximately 10.8% after the amortization of original
issue discount and deferred bond issue costs. The effective interest rate on
the new notes is approximately 10.4% after the amortization of deferred bond
issue costs. The Company engaged in the tender offer and new issuance in order
to obtain a more favorable debt covenant package, and to raise new capital to
support its growing businesses.
F-22
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. CONVERTIBLE SUBORDINATED DEBENTURES
Convertible subordinated debentures at December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
SPFC convertible subordinated debentures, interest at 6.75%,
due semi-annually, principal due October 15, 2006........... $75,000
</TABLE>
The convertible subordinated debentures are convertible into 3,151,125
shares of common stock of the Company's subsidiary, SPFC, at a conversion
price of $23.80 per share, at any time prior to maturity. Interest on the
convertible subordinated debentures is payable semi-annually. Debt issuance
costs of $2.8 million associated with the convertible subordinated debentures
are being amortized over ten years using the effective interest method.
Total interest expense on the convertible subordinated debentures for the
year ended December 31, 1996 was $887,093.
22. 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.
During 1996, the Company issued an additional 2.4 million shares to the
public generating net proceeds of $59.2 million, which is net of expenses of
$891,000.
On October 22, 1996, the Company effected a 2-for-1 stock split to
shareholders of record as of October 15, 1996.
On February 26, 1996, the Company paid a stock dividend to shareholders of
record as of February 12, 1996. One new share of Common Stock was issued for
each, 10 shares currently held by shareholders.
On October 24, 1995, the Company effected a 3-for-2 stock split to
shareholders of record as of October 10, 1995.
Per Share Information:
The weighted average number of shares including common stock equivalents was
38,699,954 in 1996, 34,458,268 in 1995, and 33,581,134 in 1994 for primary
income per share, and 38,974,834 in 1996, 35,121,662 in 1995, and 33,582,030
in 1994 for fully diluted income per share.
F-23
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
23. INCOME TAXES
The Company's income taxes for the years ended December 31, 1996, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-----------------------
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $31,138 $ 7,803 $1,483
State.............................................. 12,210 2,452 524
------- ------- ------
Total current.................................... 43,348 10,255 2,007
------- ------- ------
Deferred:
Federal............................................ 16,009 1,846 2,079
State.............................................. 6,095 274 599
------- ------- ------
Total deferred................................... 22,104 2,120 2,678
------- ------- ------
Taxes credited (charged) to shareholders' equity..... 4,422 (2,231) --
------- ------- ------
Taxes on income before extraordinary item............ 69,874 10,144 4,685
Current taxes--extraordinary item.................... -- -- 619
------- ------- ------
Income taxes......................................... $69,874 $10,144 $5,304
======= ======= ======
</TABLE>
The Company's current income taxes payable totaled approximately $25.7
million and $5.5 million at December 31, 1996 and 1995, respectively.
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax receivables:
Allowance for loan losses.............................. $ 4,365 $ 5,295
Unrealized gain on loans and securities................ 1,671 3,871
State taxes............................................ 5,677 --
Executive stock options................................ 548 738
Other.................................................. 1,309 299
-------- --------
Total................................................ 13,570 10,203
-------- --------
Valuation allowance.................................... -- --
-------- --------
Deferred tax receivable, net of valuation allowance.... 13,570 10,203
-------- --------
Deferred tax liabilities:
Investment in majority owned subsidiaries.............. (12,934) --
Purchased and originated servicing rights.............. (5,222) (5,809)
Gain on sale of servicing.............................. (8,934) (1,027)
Excess servicing gains................................. (6,162) (5,069)
Leases................................................. (3,930) (2,509)
Deferred loan fees..................................... (510) (1,902)
Depreciation........................................... (468) --
Debt Securities........................................ (3,473) --
Other.................................................. (1,522) (1,368)
-------- --------
Total................................................ (43,155) (17,684)
-------- --------
Net deferred tax liability............................... $(29,585) $ (7,481)
======== ========
</TABLE>
F-24
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and future taxable
income, in making this assessment. Based upon the schedule of reversals,
future taxable income 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 statutory Federal corporate income tax rate of 35%
to the effective income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995 1994
---- ---- ----
<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............... 7.5 7.3 7.2
Other, net............................................... 1.8 (0.3) (0.7)
---- ---- ----
Effective income tax rate.................................. 44.3% 42.0% 41.5%
==== ==== ====
</TABLE>
24. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
Under the Company's 401(k) plan, employees may elect to enroll on the first
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 $305,000, $208,991, and $218,984 for the years ended
December 31, 1996, 1995 and 1994, 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 $350,000, $200,000, and $200,000
were charged to operations in each of the years ending December 31, 1996 and
1995, and 1994.
Company matching contributions are made as of December 31st each year.
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 1,550,673 options were outstanding at December 31,
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
F-25
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1,038,200 options
were outstanding at December 31, 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.
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
F-26
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
A summary of changes in outstanding stock options follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995 1994
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Options outstanding, beginning of year.................. 1,637 1,758 1,233
Options granted......................................... 1,609 394 835
Options exercised....................................... (295) (323) (46)
Options canceled........................................ (362) (192) (264)
----- ----- -----
Options outstanding, end of year........................ 2,589 1,637 1,758
===== ===== =====
</TABLE>
There were 2,013,250 options available for future grants at December 31,
1996.
Information as to stock option activity and prices of shares is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF PRICE RANGE AVERAGE
SHARES PER SHARE OPTION PRICE
--------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Shares under option at:
December 31, 1996...................... 2,589 $2.09-$10.56 $8.58
December 31, 1995...................... 1,637 $2.09-$ 8.56 $2.94
December 31, 1994...................... 1,758 $2.09-$ 3.33 $2.45
Options exercised during the year:
December 31, 1996...................... 295 $2.09-$ 6.10 $2.61
December 31, 1995...................... 323 $2.09-$ 3.33 $2.55
December 31, 1994...................... 46 $2.09 $2.09
Options exercisable at:
December 31, 1996...................... 551 $2.09-$ 7.56 $2.47
December 31, 1995...................... 467 $2.09-$ 3.33 $2.24
December 31, 1994...................... 379 $2.09-$ 3.03 $2.24
</TABLE>
The stock option information presented in the above tables reflects the 2-
for-1 stock split and 1-for-10 stock dividend in 1996, 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.
F-27
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1996, The Company adopted the disclosure requirements
of SFAS 123, and continued to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no compensation
expense has been recognized for the stock option plan. Had compensation
expense for the Company's stock option plan been determined based on the fair
value at the grant date for awards in 1996 and 1995 consistent with the
provisions of SFAS 123, the Company's net income and income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net income:
As reported.................................................. $75,984 $14,193
Pro forma.................................................... 74,733 14,089
Primary income per share:
As reported.................................................. $ 1.96 $ 0.41
Pro forma.................................................... 1.93 0.41
Fully diluted income per share:
As reported.................................................. $ 1.95 $ 0.40
Pro forma.................................................... 1.90 0.40
</TABLE>
The weighted average fair value at date of grant of options granted during
1996 and 1995 was $6.22 and $3.09 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
31,
------------
1996 1995
----- -----
<S> <C> <C>
Expected life (years)............................................. 3.40 3.43
Interest rate..................................................... 5.48% 5.14%
Volatility........................................................ 57.51 60.80
Dividend yield.................................................... 0.00% 0.00%
</TABLE>
25. 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, options were granted to three senior officers of the
Company to purchase a total of 2,292,628 shares, adjusted for stock dividends
and splits, of the Company's Common Stock. The exercise price of these options
is $0.89 per share of common stock for one-half of the options, with the other
half exercisable at $1.40 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.
F-28
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
1996, 1995, and 1994 related to the stock options was $0, $871,200, and
$435,600, respectively.
26. INTEREST RATE SWAPS
The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk. The contract or notional amounts do not
represent exposure to credit loss. Risk originates from the inability of
counterparties to meet the terms of the contracts and from market movements in
securities values and interest rates. The Company controls the credit risk of
its interest rate cap, floor and swap agreements through credit approvals,
limits and monitoring procedures.
As a part of the SPTL securitization of $277.0 million of multi-family and
commercial mortgage loans, the Company delivered subordinate bonds of
approximately $22 million into a total rate of return swap with JP Morgan. The
provisions for the swap entitle the Company to receive the total return on the
subordinate bonds delivered in exchange for a floating payment of Libor plus a
spread of 1.95%. The termination date of the swap, September 30, 1997, could
be accelerated in the event the securities delivered into the swap decline in
value more than $3.0 million over a three month period. In the event of the
early termination of the swap, the Company would be required to pay a fee
representing 1.95% of the calculated value of the underlying securities over
the period from the accelerated termination date to September 30, 1997. The
remaining deposit associated with the swap was $3.7 million at December 31,
1996. The swap is an off balance sheet instrument.
27. COMMITMENTS AND CONTINGENCIES
Loan Servicing
As of December 31, 1996 and 1995 the Company was servicing loans for others,
directly and through sub-servicing arrangements, totaling approximately $2.1
billion and $4.6 billion, respectively.
Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $1.3 million and $36.1 million at December 31, 1996 and 1995,
respectively. These funds are segregated in special bank accounts and are held
as deposits at SPTL.
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, 1996, the Company retained servicing
rights on $35.1 million of mortgage loans sold through traditional secondary
market channels and $1.3 billion on loans and leases sold through
securitizations. Additionally, the Company released servicing rights to the
purchasers on $627.0 million of mortgage loans sold. During the year ended
December 31, 1995, the Company retained servicing rights on $794.9 million of
mortgage loans sold, and 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.
F-29
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loan Commitments
As of December 31, 1996 and 1995, the Company had unfunded open loan
commitments (excluding ICIFC) amounting to $642.8 million and $93.7 million,
respectively, to fund mortgage loan applications in process subject to credit
approval. 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.
ICIFC establishes mortgage loan purchase commitments (master commitments)
with sellers that, subject to certain conditions, entitle the seller to sell
and obligate ICIFC to purchase a specified dollar amount of non-conforming
mortgage loans over a period generally ranging from six months to one year.
The terms of each master commitment specify whether a seller may sell loans to
ICIFC on a mandatory, best efforts or optional basis, or a combination
thereof. Master commitments generally do not obligate ICIFC to purchase loans
at a specific price, but rather provide the seller with a future outlet for
the sale of its originated loans based on ICIFC's quoted prices at the time of
purchase.
As of December 31, 1996 and December 31, 1995, ICIFC had outstanding short
term master commitments with 68 and 18 sellers to purchase mortgage loans in
the aggregate principal amount of $826.5 million and $241.0 million over
periods ranging from six months to one year, of which $304.9 million and $35.7
million, respectively, had been purchased or committed to be purchased
pursuant to rate locks. These rate-locks were made pursuant to master
commitments, bulk rate-locks and other negotiated rate-locks. There is no
exposure to credit loss in this type of commitment until the loans are funded,
and interest rate risk associated with the short-term commitments is mitigated
by the use of forward contracts to sell loans to investors.
Forward Contracts
The Company sold mortgage-backed securities through forward delivery
contracts with major dealers in such securities, primarily through its former
mortgage banking operations. At December 31, 1996 and 1995, the Company had
$143.0 million and $279.2 million, respectively, in outstanding commitments to
sell mortgage loans through mortgage-backed securities. Included in the
outstanding commitments to sell mortgage loans through mortgage backed
securities are commitments relating to ICIFC of $141.0 million and $86.7
million for December 31, 1996 and 1995, respectively. 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 December 31, 1996 and 1995 in the amounts of $0 and $97.0
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.
The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling U.S. Treasury
securities short or in the forward market.
As of December 31, 1996, the Company had open positions of $183.7 million
related to the sales of United States Treasury securities in the forward
market. At December 31, 1996, the Company's unrealized loss on open positions
was $1.7 million.
F-30
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options
The Company may purchase put options or write 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 $70.0 million and $20.0 million notional amount of written
call option contracts outstanding at December 31, 1996 and 1995, respectively.
The Company received $366,000 and $82,600 in premiums related to the options
outstanding at December 31, 1996 and 1995, respectively. There were no option
contracts exercised during the year.
Lease Commitments
Minimum rental commitments under all noncancelable operating leases at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997............................................................. $ 3,868
1998............................................................. 3,109
1999............................................................. 2,186
2000............................................................. 1,736
2001............................................................. 1,515
Thereafter....................................................... 443
-------
Total.......................................................... $12,857
=======
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994 was $4.2
million, $3.6 million, and $3.1 million, respectively.
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.
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.
The Company is a defendant in Fortune Mortgage Corporation et al. vs. ICII
et al., filed in Orange County Superior Court on March 5, 1997. The complaint
alleges breach of contract, breach of implied covenant of good
F-31
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
faith and fair dealing, negligent misrepresentation, fraud, conspiracy to
commit fraud, aiding and abetting fraud, contractual indemnity and
reimbursement, money had and received, and unjust enrichment arising from the
Company's sale of a group of loan production offices to plaintiffs. The
plaintiffs seek rescission, restitution and general, specific and/or
consequential damages, and also exemplary and punitive damages as relate to
the claims regarding fraud. The plaintiffs are seeking approximately $3.5
million in general damages and approximately $10.0 million in punitive
damages.
In Agoura Willow Creek, Ltd. vs. SPTL, filed on February 27, 1997, the
plaintiff seeks damages of approximately $3.6 million from SPTL for alleged
breach of written contract and breach of fiduciary duty arising out of a loan
commitment agreement.
The Company is involved in additional litigation arising in the normal
course of business.
All of the above referenced actions are being actively defended and although
the ultimate outcome can not be estimated, management believes based in part
upon the advice of legal counsel, none of these proceedings will have a
material effect on the Company's financial condition or results of operations.
28. 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 and securitization related assets, 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.
Investment Securities: 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.
F-32
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Interest-only and residual certificates: Fair value is determined using
estimated discounted future cash flows taking into consideration anticipated
prepayment rates and loss experience.
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.
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.
Convertible subordinated debentures: Fair values of SPFC's convertible
subordinated debentures 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
approximate the unamortized premium. Fair values of loan commitments to extend
credit are based on fees currently charged to enter into similar agreements.
Fair values of the Company's interest rate swaps are based on quoted market
prices.
F-33
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash............................ $ 74,247 $ 74,247 $ 39,166 $ 39,166
Interest bearing deposits....... 3,369 3,369 267,776 267,776
Investment in Federal Home Loan
Bank stock..................... 17,152 17,152 22,750 22,750
Investment securities........... 91,204 91,204 5,963 5,963
Loans held for sale............. 940,096 954,299 1,341,810 1,345,509
Loans held for investment, net.. 1,068,599 1,081,053 668,771 672,025
Purchased and originated
servicing rights............... 14,887 14,887 18,428 18,428
Capitalized excess servicing
fees receivable................ 23,142 23,142 33,181 33,181
Retained interest in loan and
lease securitizations.......... 42,640 42,640 14,251 14,251
Interest only and residual
certificates................... 87,017 87,017 10,840 10,840
LIABILITIES:
Deposits........................ $1,069,184 $1,069,624 $1,092,989 $1,095,287
Borrowings from Imperial Bank... -- -- 5,000 5,000
Borrowings from Federal Home
Loan Bank...................... 140,500 140,500 190,000 190,000
Other borrowings................ 694,352 694,352 875,815 875,815
Bonds........................... -- -- 111,995 111,995
Senior notes.................... 88,209 93,150 80,472 76,610
Convertible subordinated
debentures..................... 75,000 75,000 -- --
OFF BALANCE SHEET ITEMS:
Mortgage loan applications in
process........................ $ -- $ -- $ -- $ 1,708
Mandatory forward commitments... -- -- -- (930)
Options......................... 366 366 83 83
Loan commitments................ -- 866 -- 3,641
Interest rate swap.............. -- 1,166 -- --
Forward treasury contracts...... (1,700) (1,700) -- --
</TABLE>
F-34
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
29. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Gain on sale of loans.............. $21,711 $19,166 $28,640 $18,639
Net interest income................ 12,737 13,405 22,163 24,130
Gain (loss) on sale of servicing... 8,065 (257) -- (217)
Other revenues..................... 3,212 65,843 2,987 26,482
Provision for loan losses.......... 1,500 2,025 2,617 3,631
Other expenses..................... 27,168 20,652 24,924 26,305
Net income......................... 8,616 43,041 9,433 14,894
Income per share:
Primary.......................... $ 0.24 $ 1.11 $ 0.23 $ 0.38
Fully diluted.................... $ 0.24 $ 1.11 $ 0.23 $ 0.37
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 servicing.......... 2,426 496 -- 656
Other revenues..................... 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.......................... $ 0.06 $ 0.06 $ 0.12 $ 0.17
Fully diluted.................... $ 0.06 $ 0.05 $ 0.12 $ 0.17
</TABLE>
30. SELECTED FINANCIAL INFORMATION OF SUBSIDIARIES
The following represents summarized financial information with respect to the
operations of SPTL, a significant wholly-owned subsidiary of ICII.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION 1996 1995 1994
-------------------------------------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets.................................. $1,384,008 $1,432,554 $1,367,130
Deposits...................................... 1,072,266 1,093,250 946,860
Borrowings from Federal Home Loan Bank........ 140,500 190,000 295,000
Equity........................................ 144,798 126,599 108,845
Interest income............................... 131,184 103,112 81,751
Interest expense.............................. 73,141 70,819 52,961
Operating income.............................. 15,149 17,790 10,215
Operating expense............................. 21,846 13,942 15,597
Provision for loan losses..................... 8,938 5,450 5,150
Income before taxes........................... 42,408 30,691 18,259
Net income.................................... 24,399 17,753 10,534
</TABLE>
F-35
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents summarized consolidating financial information as
of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995
and 1994 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. The 9 7/8% Senior Notes are guaranteed by two
of the Company's wholly-owned subsidiaries IBC and ICAI (the "Other Guarantor
Subsidiaries"), and the Company's 66 2/3% owned subsidiary, FMAC.
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 5,213 $ -- $ 7,973 $ 64,926 $ (3,865) $ 74,247
Interest bearing
deposits............... -- 2,594 163 -- 612 3,369
Investments in Federal
Home Loan Bank stock... -- -- -- 17,152 -- 17,152
Investment and trading
securities............. 8,802 39,349 887 35,824 (566) 84,296
Loans held for sale..... 4,839 98,915 8,547 853,023 (25,228) 940,096
Loans held for
investment, net........ 34,505 -- 86,214 948,567 (687) 1,068,599
Purchased and originated
servicing rights....... -- -- 637 14,250 -- 14,887
Capitalized excess
servicing fees
receivable............. -- -- -- 23,142 -- 23,142
Retained interest in
loan and lease
securitizations........ -- 6,908 19,646 22,994 -- 49,548
Interest-only and
residual certificates.. -- -- -- 87,017 -- 87,017
Accrued interest on
loans.................. 1,425 560 -- 11,862 -- 13,847
Premises and equipment,
net.................... 4,922 1,162 404 5,954 -- 12,442
Other real estate owned,
net.................... 3,508 -- -- 8,706 -- 12,214
Investment in
subsidiaries........... 269,651 -- -- -- (269,651) --
Goodwill................ -- 4,332 14,115 20,044 -- 38,491
Other assets............ 96,746 (11,372) (15,385) (36,855) (1,842) 31,292
-------- -------- -------- ---------- --------- ----------
Total assets........... $429,611 $142,448 $123,201 $2,076,606 $(301,227) $2,470,639
======== ======== ======== ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits................ $ -- $ -- $ -- $1,072,266 $ (3,082) $1,069,184
Borrowings from Federal
Home Loan Bank......... -- -- -- 140,500 -- 140,500
Other borrowings........ 15,363 125,240 88,768 480,103 (15,122) 694,352
Senior notes............ 88,209 -- -- -- -- 88,209
Convertible subordinated
debentures............. -- -- -- 75,000 -- 75,000
Minority interest in
consolidated
subsidiaries........... 45,149 -- -- -- 9,787 54,936
Other liabilities....... 41,382 2,751 9,222 68,854 (13,259) 108,950
-------- -------- -------- ---------- --------- ----------
Total liabilities....... 190,103 127,991 97,990 1,836,723 (21,676) 2,231,131
-------- -------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- -- 9,143 (9,143) --
Common stock............ 145,521 5,792 21,501 134,590 (161,883) 145,521
Retained earnings....... 88,977 8,665 3,525 96,150 (108,340) 88,977
Unrealized gain on
securities available
for sale............... 5,010 -- 185 -- (185) 5,010
-------- -------- -------- ---------- --------- ----------
Total shareholders'
equity................. 239,508 14,457 25,211 239,883 (279,551) 239,508
-------- -------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity... $429,611 $142,448 $123,201 $2,076,606 $(301,227) $2,470,639
======== ======== ======== ========== ========= ==========
</TABLE>
F-36
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans... $ (937) $18,671 $ 2,617 $ 67,419 $ 386 $ 88,156
------- ------- ------- -------- -------- --------
Interest income......... 14,877 16,130 3,811 177,833 (5,180) 207,471
Interest expense........ 16,696 14,489 1,901 112,692 (10,742) 135,036
------- ------- ------- -------- -------- --------
Net interest income..... (1,819) 1,641 1,910 65,141 5,562 72,435
Provision for loan
losses................. -- -- -- 9,625 148 9,773
------- ------- ------- -------- -------- --------
Net interest income
after provision for
loan loss............ (1,819) 1,641 1,910 55,516 5,414 62,662
------- ------- ------- -------- -------- --------
Loan servicing income... (3,706) 1,191 3,095 10,253 (9,153) 1,680
Gain (loss) on sale of
servicing rights....... 6,249 -- -- -- 1,342 7,591
Gains on sale of SPFC
stock.................. 82,690 -- -- -- -- 82,690
Dividends received from
subsidiaries........... 6,200 -- -- -- (6,200) --
Other income............ 741 63 3,214 6,099 4,037 14,154
------- ------- ------- -------- -------- --------
Total other income.... 92,174 1,254 6,309 16,352 (9,974) 106,115
------- ------- ------- -------- -------- --------
Total revenues........ 89,418 21,566 10,836 139,287 (4,174) 256,933
------- ------- ------- -------- -------- --------
EXPENSES:
Personnel expense....... 8,757 8,270 2,997 28,567 (236) 48,355
Amortization of PMSRs
and OMSRs.............. 402 -- 106 613 -- 1,121
Occupancy expense....... 1,994 310 229 2,042 78 4,653
Data processing expense. 1,094 49 62 958 -- 2,163
Net expenses of other
real estate owned...... 4,969 -- -- 765 1,280 7,014
General, administrative
and other expense...... 13,652 3,613 3,583 14,264 631 35,743
------- ------- ------- -------- -------- --------
Total expenses........ 30,868 12,242 6,977 47,209 1,753 99,049
------- ------- ------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company gains and
extraordinary item..... 58,550 9,324 3,859 92,078 (5,927) 157,884
Income taxes............ 28,830 -- 1,606 39,135 303 69,874
------- ------- ------- -------- -------- --------
Income before minority
interest, deferred
inter-company expense
and extraordinary item. 29,720 9,324 2,253 52,943 (6,230) 88,010
Minority interest in of
consolidated
subsidiaries........... 12,026 -- -- -- -- 12,026
------- ------- ------- -------- -------- --------
Income before deferred
inter-company expense.. 17,694 9,324 2,253 52,943 (6,230) 75,984
Deferred inter-company
expense, net of income
taxes.................. (1,383) -- -- -- 1,383 --
Income before equity in
undistributed income of
subsidiaries........... 19,077 9,324 2,253 52,943 (7,613) 75,984
Equity in undistributed
income of subsidiaries. 56,907 -- -- -- (56,907) --
------- ------- ------- -------- -------- --------
Net income.............. $75,984 $ 9,324 $ 2,253 $ 52,943 $(64,520) $ 75,984
======= ======= ======= ======== ======== ========
</TABLE>
F-37
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 141,655 $ 87,449 $ 28,499 $(284,920) $ 21,235 $ (6,082)
--------- --------- --------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits...... -- (2,594) (163) 267,800 (636) 264,407
Proceeds of sales of
servicing rights...... 31,799 -- -- -- (21,788) 10,011
Purchase of securities
available for sale.... -- (41,704) (887) -- (5,962) (48,553)
Net change in loans
held for investment... (5,310) -- (86,213) (37,354) 101,226 (27,651)
Cash utilized for
acquisitions.......... -- -- (20,020) -- -- (20,020)
Purchase of Trading
Securities............ -- -- -- (25,180) -- (25,180)
Net change in
investment in
Subsidiaries.......... (155,759) -- -- -- 155,759 --
Other, net............. 3,762 (5,573) (524) (852) 4,545 1,358
--------- --------- --------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (125,508) (49,871) (107,807) 204,414 233,144 154,372
--------- --------- --------- --------- --------- ---------
Cash flows from
financing activities:
Net change in deposits. -- -- 450 (20,984) (3,271) (23,805)
Advances from Federal
Home Loan Bank........ -- -- -- 434,000 -- 434,000
Repayments of advances
from Federal Home Loan
Bank.................. -- -- -- (483,500) -- (483,500)
Proceeds from
convertible
subordinated
debentures............ -- -- -- 72,162 -- 72,162
Net change in other
borrowings............ (196,363) 55,603 88,768 49,663 (184,134) (186,463)
Proceeds from sale of
SPFC stock............ 64,625 -- -- -- -- 64,625
Proceeds from issuance
of common stock....... 59,228 -- -- 53,798 (53,798) 59,228
Repayment of Bonds..... -- (111,995) -- -- -- (111,995)
Net change in minority
interest.............. 43,697 -- -- -- 9,787 53,484
Other, net............. 9,286 19,088 -- 7,312 (26,631) 9,055
--------- --------- --------- --------- --------- ---------
Net cash (used in)
provided by financing
activities............. (19,527) (37,304) 89,218 112,451 (258,047) (113,209)
--------- --------- --------- --------- --------- ---------
Net change in cash..... (3,380) 274 9,910 31,945 (3,668) 35,081
Cash at beginning of
period................ 8,593 (445) (1,937) 32,981 (26) 39,166
--------- --------- --------- --------- --------- ---------
Cash at end of period.. $ 5,213 $ (171) $ 7,973 $ 64,926 $ (3,694) $ 74,247
========= ========= ========= ========= ========= =========
</TABLE>
F-38
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 8,593 $ 526 $(1,937) $ 32,981 $ (997) $ 39,166
Interest bearing
deposits............... -- -- -- 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
investment, net........ 29,195 -- -- 541,390 98,186 668,771
Purchased and originated
servicing rights....... 13,718 -- 743 3,967 -- 18,428
Capitalized excess
servicing fees
receivable............. 7,259 -- -- 26,129 (207) 33,181
Retained interest in
loan and lease
securitizations........ 1,420 -- 220 10,377 2,234 14,251
Interest-only and
residual certificates.. -- -- -- 22,469 (11,629) 10,840
Accrued interest on
loans.................. 449 1,108 19 10,067 (1,479) 10,164
Premises and equipment,
net.................... 8,574 235 16 2,544 -- 11,369
Other real estate owned,
net.................... 2,419 -- -- 4,760 -- 7,179
Investment in
subsidiaries........... 135,316 -- -- -- (135,316) --
Goodwill................ -- 4,226 -- 16,024 96 20,346
Other assets............ 19,991 1,699 4,756 11,591 604 38,641
-------- -------- ------- ---------- --------- ----------
Total assets........... $413,129 $189,048 $ 3,817 $2,102,401 $(197,760) $2,510,635
======== ======== ======= ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C>
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 69,637 -- 655,504 (56,052) 875,815
Bonds................... -- 111,995 -- -- -- 111,995
Senior notes............ 80,472 -- -- -- -- 80,472
Minority interest in
consolidated
subsidiaries........... 1,452 -- -- -- -- 1,452
Other liabilities....... 25,377 3,643 1,996 23,285 4,509 58,810
-------- -------- ------- ---------- --------- ----------
Total liabilities.... 319,027 185,275 1,546 1,962,039 (51,354) 2,416,533
-------- -------- ------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- -- 1,015 (1,015) --
Common stock............ 51,981 4,432 1,000 81,251 (86,683) 51,981
Retained earnings
(accumulated deficit).. 38,910 (659) 1,271 58,096 (58,708) 38,910
Unrealized gain on
securities 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... $413,129 $189,048 $ 3,817 $2,102,401 $(197,760) $2,510,635
======== ======== ======= ========== ========= ==========
</TABLE>
F-39
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Gain on sale of loans... $ 12,999 $ -- $1,803 $ 36,051 $(11,296) $ 39,557
-------- ------ ------ -------- -------- --------
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
losses................. -- -- -- 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
servicing rights....... 4,889 31 -- 370 (1,712) 3,578
Other income............ (885) -- 2,465 2,676 (3,104) 1,152
-------- ------ ------ -------- -------- --------
Total other income.... 18,011 349 2,492 9,398 (12,802) 17,448
-------- ------ ------ -------- -------- --------
Total revenues........ 25,787 588 4,354 72,647 (18,067) 85,309
-------- ------ ------ -------- -------- --------
EXPENSES:
Personnel expense....... 20,281 356 1,606 12,433 (623) 34,053
Amortization of PMSRs
and OMSRs.............. 3,986 -- -- 2,892 (2,892) 3,986
Occupancy expense....... 2,874 94 54 971 (89) 3,904
Data processing expense. 1,191 -- 1 358 (89) 1,461
Net expense of other
real estate owned...... 191 -- -- 1,706 16 1,913
General, administrative
and other expense...... 9,938 797 493 8,480 (3,845) 15,863
-------- ------ ------ -------- -------- --------
Total expenses........ 38,461 1,247 2,154 26,840 (7,522) 61,180
-------- ------ ------ -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company gains and
extraordinary item..... (12,674) (659) 2,200 45,807 (10,545) 24,129
Income taxes............ (5,443) -- 929 19,212 (4,554) 10,144
-------- ------ ------ -------- -------- --------
(Loss) income before
minority interest,
deferred inter-company
gains and extraordinary
item................... (7,231) (659) 1,271 26,595 (5,991) 13,985
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
equity in undistributed
income of subsidiaries. (8,733) (659) 1,271 26,595 (4,281) 14,193
Equity in undistributed
income of subsidiaries. 22,926 -- -- -- (22,926) --
-------- ------ ------ -------- -------- --------
Net income (loss)....... $ 14,193 $ (659) $1,271 $ 26,595 $(27,207) $ 14,193
======== ====== ====== ======== ======== ========
</TABLE>
F-40
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC(1) SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $(258,380) $(181,915) $ 22,543 $(894,836) $138,885 $(1,173,703)
--------- --------- -------- --------- -------- -----------
Cash flows from
investing activities:
Net change in interest
bearing deposits...... -- -- -- (126,700) (130,476) (257,176)
Proceeds of sales of
servicing rights...... 12,815 3,805 -- 1,250 (5,055) 12,815
Net change in loans
held for investment... 51,784 -- -- 493,749 21,160 566,693
Cash utilized for
aquisitions........... -- -- (25,015) (150,000) -- (175,015)
Net change in
investment in
Subsidiaries.......... (15,581) -- -- -- 15,581 --
Other, net............. (8,310) (162) (15) 1,356 775 (6,356)
--------- --------- -------- --------- -------- -----------
Net cash provided by
(used in) investing
activities............. 40,708 3,643 (25,030) 219,655 (98,015) 140,961
--------- --------- -------- --------- -------- -----------
Cash flows from
financing activities:
Net change in deposits. -- -- (450) 146,390 12,428 158,368
Advances from Federal
Home Loan Bank........ -- -- -- 347,000 -- 347,000
Repayments of advances
from Federal Home Loan
Bank.................. -- -- -- (452,000) -- (452,000)
Net change in other
borrowings............ 211,725 69,637 -- 639,186 (39,733) 880,815
Issuance of Bonds...... -- 111,995 -- -- -- 111,995
Net change in minority
interest.............. -- -- -- -- -- --
Other, net............. 2,278 (3,805) 1,000 2,705 (1,352) 826
--------- --------- -------- --------- -------- -----------
Net cash provided by
(used in) financing
activities............. 214,003 177,827 550 683,281 (28,657) 1,047,004
--------- --------- -------- --------- -------- -----------
Net change in cash..... (3,669) (445) (1,937) 8,100 12,213 14,262
Cash at beginning of
period................ 12,262 -- -- 24,881 (12,239) 24,904
--------- --------- -------- --------- -------- -----------
Cash at end of period.. $ 8,593 $ (445) $(1,937) $ 32,981 $ (26) $ 39,166
========= ========= ======== ========= ======== ===========
</TABLE>
- --------
(1) For the period from June 30, 1995 (Inception) through December 31, 1995.
F-41
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
NON-
GUARANTOR
ICII SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE
Gain on sale of loans.......... $ (397) $19,417 $(10,392) $ 8,628
------- ------- -------- -------
Interest income................ 1,626 83,833 (2,676) 82,783
Interest expense............... 9,319 52,961 (606) 61,674
------- ------- -------- -------
Net interest income............ (7,693) 30,872 (2,070) 21,109
Provision for loan losses...... -- 5,150 -- 5,150
------- ------- -------- -------
Net interest income after
provision for loan losses... (7,693) 25,722 (2,070) 15,959
------- ------- -------- -------
Loan servicing income.......... 13,155 54 3,123 16,332
Gain on sale of servicing
rights........................ 30,028 -- 809 30,837
Other income................... 708 370 (30) 1,048
------- ------- -------- -------
Total other income........... 43,891 424 3,902 48,217
------- ------- -------- -------
Total revenues............... 35,801 45,563 (8,560) 72,804
------- ------- -------- -------
EXPENSES:
Personnel expense.............. 26,519 8,771 (1,813) 33,477
Occupancy expense.............. 2,884 980 (465) 3,399
Net expenses of other real
estate owned.................. -- 969 -- 969
FDIC insurance premiums........ -- 2,170 -- 2,170
General and administrative
expense....................... 13,367 7,010 1,122 21,499
------- ------- -------- -------
Total expenses............... 42,770 19,900 (1,156) 61,514
------- ------- -------- -------
(Loss) income before income
taxes and extraordinary item.. (6,969) 25,663 (7,404) 11,290
Income taxes................... (3,039) 10,797 (3,073) 4,685
------- ------- -------- -------
(Loss) income before
extraordinary item............ (3,930) 14,866 (4,331) 6,605
Extraordinary item - repurchase
of Senior Notes............... 919 -- -- 919
Equity in undistributed income
of subsidiaries............... 10,535 -- (10,535) --
------- ------- -------- -------
Net income .................... $ 7,524 $14,866 $(14,866) $ 7,524
======= ======= ======== =======
</TABLE>
F-42
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 114,536 $-- $-- $ 844,565 $ 2,478 $ 961,579
--------- ---- ---- ----------- -------- -----------
Cash flows from
investing activities:
Net change in interest
bearing deposits...... -- -- -- 79,400 -- 79,400
Proceeds of sale of
servicing rights...... 26,899 -- -- -- -- 26,899
Net change in loans
held for investment... (131) -- -- (880,109) (2,150) (882,390)
Purchase of servicing
rights................ (14,478) -- -- -- (286) (14,764)
Net change in
investment in
Subsidiaries.......... (25,000) -- -- -- 25,000 --
Other, net............. (4,949) -- -- 429 (1,263) (5,783)
--------- ---- ---- ----------- -------- -----------
Net cash (used in)
provided by investing
activities............. (17,659) -- -- (800,280) 21,301 (796,638)
--------- ---- ---- ----------- -------- -----------
Cash flows from
financing activities:
Net change in deposits. -- -- -- (58,311) (8,536) (66,847)
Advances from Federal
Home Loan Bank........ -- -- -- 988,000 -- 988,000
Repayments of advances
from Federal Home Loan
Bank.................. -- -- -- (1,013,000) -- (1,013,000)
Net change in other
borrowings............ (167,611) -- -- 25,000 (25,000) (167,611)
Proceeds from offering
of Senior Notes....... 88,593 -- -- -- -- 88,593
Net change in minority
interest.............. -- -- -- -- -- --
Other, net............. (6,449) -- -- (1,472) 1,472 (6,449)
--------- ---- ---- ----------- -------- -----------
Net cash (used in)
provided by financing
activities............. (85,467) -- -- (59,783) (32,064) (177,314)
--------- ---- ---- ----------- -------- -----------
Net change in cash..... 11,410 -- -- (15,498) (8,285) (12,373)
Cash at beginning of
period................ 852 -- -- 40,379 (3,954) 37,277
--------- ---- ---- ----------- -------- -----------
Cash at end of period.. $ 12,262 $-- $-- $ 24,881 $(12,239) $ 24,904
========= ==== ==== =========== ======== ===========
</TABLE>
F-43
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
31. SPTL 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
Federal Deposit Insurance Commission ("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."
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, 1996, SPTL was categorized as well capitalized.
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, 1996, 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.
Recent Development
The California Department of Corporations and the Federal Deposit Insurance
Commission ("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 the memorandum of understanding will have a material adverse
effect on the Company.
F-44
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Management believes SPTL has complied
fully with the terms of the memorandum of understanding at December 31, 1996.
SPTL is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory--and possibly additional discretionary-- actions by
regulators that, if undertaken, could have a direct material effect on SPTL's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, SPTL must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities and
certain off-balance sheet items as calculated under regulatory accounting
practices. SPTL's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require SPTL to maintain minimum amounts and ratios, set forth in the table
below, of total and Tier I capital to risk-weighted assets and Tier I capital
to average assets. Management believes, as of December 31, 1996, that SPTL
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized SPTL as well capitalized under the regulatory framework for prompt
and corrective action. To be categorized as well capitalized SPTL must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's category.
The following table presents SPTL's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of
December 31, 1996.
<TABLE>
<CAPTION>
WELL
MINIMUM CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Limitation... $144,798 13.50% $ 53,613 5.00% $ -- --
Risk-based Capital............... 145,018 10.87% 106,715 8.00% 133,393 10.00%
Risk-based Tier 1 Capital........ 129,497 9.71% 53,357 4.00% 80,036 6.00%
FDIC Leverage Ratio.............. 129,497 9.35% 55,397 4.00% 69,247 5.00%
</TABLE>
F-45
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
32. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C>
Cash......................................................... $ 5,213 $ 8,593
Securities available for sale................................ 8,802 5,963
Loans held for sale.......................................... 4,839 180,232
Loans held for investment, net............................... 34,505 29,195
Premises and equipment, net.................................. 4,922 8,574
Other real estate owned, net................................. 3,508 2,419
Capitalized excess servicing fees receivable................. -- 7,259
Retained interest in loan and lease securitizations.......... -- 1,420
Investment in subsidiaries................................... 269,651 135,316
Purchased and originated servicing rights.................... -- 13,718
Accrued interest on loans.................................... 1,425 449
Other assets................................................. 96,746 19,991
-------- --------
Total assets............................................. $429,611 $413,129
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Borrowings from Imperial Bank................................ $ -- $ 5,000
Other borrowings............................................. 15,363 206,726
Senior notes................................................. 88,209 80,472
Minority interest in consolidated subsidiaries............... 45,149 1,452
Accrued interest payable..................................... 4,022 3,642
Income taxes payable......................................... 28,301 7,755
Other liabilities............................................ 9,059 13,980
-------- --------
Total liabilities............................................ 190,103 319,027
-------- --------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none issued
or outstanding............................................ -- --
Common stock, no par value, authorized 40,000,000 shares;
38,291,112 and 14,578,481 shares issued and outstanding at
December 31, 1996 and 1995, respectively.................. 145,521 51,981
Retained earnings.......................................... 88,977 38,910
Unrealized gain on securities available for sale, net...... 5,010 3,211
-------- --------
Total shareholders' equity............................... 239,508 94,102
-------- --------
Total liabilities and shareholders' equity............... $429,611 $413,129
======== ========
</TABLE>
F-46
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
(Loss) gain on sale of loans...................... $ (937) $12,999 $ (397)
------- ------- -------
Interest income................................... 14,877 15,677 1,626
Interest expense.................................. 16,696 20,900 9,319
------- ------- -------
Net interest expense............................ (1,819) (5,223) (7,693)
------- ------- -------
Loan servicing (expense) income................... (3,706) 14,007 13,155
Gain on sale of servicing rights.................. 6,249 4,889 30,028
Gains on sale of SPFC stock....................... 82,690 -- --
Dividends received from subsidiaries.............. 6,200 -- --
Other income (loss)............................... 741 (885) 708
------- ------- -------
Total other income.............................. 92,174 18,011 43,891
------- ------- -------
Total revenue..................................... 89,418 25,787 35,801
------- ------- -------
Expenses:
Personnel expense................................. 8,757 20,281 26,519
Occupancy expense................................. 1,994 2,874 2,884
Other expense..................................... 20,117 15,306 13,367
------- ------- -------
Total expenses.................................. 30,868 38,461 42,770
------- ------- -------
Income (loss) before income taxes, minority
interest, deferred inter-company gains and
extraordinary item............................... 58,550 (12,674) (6,969)
Income taxes...................................... 28,830 (5,443) (3,039)
------- ------- -------
Income (loss) before minority interest, deferred
inter-company gains and extraordinary item....... 29,720 (7,231) (3,930)
Minority interest in income (loss) of consolidated
subsidiaries..................................... 12,026 (208) --
Deferred inter-company (expense) income, net of
income taxes..................................... (1,383) 1,710 --
------- ------- -------
Income (loss) before extraordinary item........... 19,077 (8,733) (3,930)
Extraordinary item--repurchase of Senior Notes.... -- -- 919
------- ------- -------
Income (loss) before equity in undistributed
income of subsidiaries........................... 19,077 (8,733) (3,011)
Equity in undistributed income of subsidiaries.... 56,907 22,926 10,535
------- ------- -------
Net income...................................... $75,984 $14,193 $ 7,524
======= ======= =======
</TABLE>
F-47
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities................................... $ 141,655 $(258,380) $ 114,536
--------- --------- ---------
Cash flows from investing activities:
Proceeds from bulk sale of servicing rights. 31,799 12,815 26,899
Purchase of servicing rights................ -- (8,128) (14,478)
Proceeds from sale of other real estate
owned...................................... 2,953 -- --
Net change in loans held for investment..... (5,310) 51,784 (131)
Net change in investment in subsidiaries.... (155,759) (15,581) (25,000)
Purchase of premises and equipment.......... 809 (182) (4,949)
--------- --------- ---------
Net cash provided by (used in) investing
activities (125,508) 40,708 (17,659)
--------- --------- ---------
Cash flows from financing activities:
Net change in borrowings from Imperial Bank. (5,000) 5,000 (20,000)
Proceeds from issuance of 9 3/4% Senior
Notes...................................... -- -- 88,593
Cash used to repurchase 9 3/4% Senior Notes. -- -- (6,545)
Proceeds from resale of 9 3/4% Senior Notes. 7,615 -- --
Proceeds from sale of SPFC stock............ 64,625 -- --
Proceeds from issuance of common stock...... 59,228 -- --
Proceeds from exercise of stock options..... 1,671 826 96
Net change in other borrowings.............. (191,363) 206,725 (147,611)
Net change in minority interest............. 43,697 1,452 --
--------- --------- ---------
Net cash (used in) provided by financing
activities (19,527) 214,003 (85,467)
--------- --------- ---------
Net change in cash............................ (3,380) (3,669) 11,410
Cash at beginning of year..................... 8,593 12,262 852
--------- --------- ---------
Cash at end of year........................... $ 5,213 $ 8,593 $ 12,262
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the condensed statements of cash flows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995 1994
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest............................................. $ 16,315 $20,898 $5,679
Significant non-cash activities:
Loans transferred to OREO............................ $ 8,479 $ 2,419 --
Loans transferred from held for sale to held for
investment.......................................... 197,141 83,398 --
Servicing rights transferred from subsidiary......... -- 3,774 --
Unrealized gain on securities available for sale,
net................................................. 3,112 5,443 --
Contribution of fixed assets to ICIFC................ -- 525 --
</TABLE>
Sale 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.
F-48
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
UNAUDITED CONDENSED FINANCIAL STATEMENTS
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Cash.................................................. $ 20,550 $ 74,247
Interest bearing deposits............................. 241,285 3,369
Investment in Federal Home Loan Bank stock............ 8,713 17,152
Trading securities, at market......................... 37,408 25,180
Securities available for sale, at market.............. 45,134 59,116
Securities held to maturity........................... 2,647 --
Loans held for sale................................... 573,965 940,096
Loans held for investment, net........................ 1,120,066 1,068,599
Purchased and originated servicing rights............. 6,504 14,887
Capitalized excess servicing fees receivable.......... -- 23,142
Retained interest in loan and lease securitizations... 34,327 49,548
Interest-only and residual certificates............... -- 87,017
Accrued interest on loans............................. 13,489 13,847
Premises and equipment, net........................... 9,404 12,442
Other real estate owned, net.......................... 16,954 12,214
Goodwill.............................................. 47,683 38,491
Investment in Southern Pacific Funding Corporation.... 54,941 --
Other assets.......................................... 44,666 31,292
---------- ----------
Total assets........................................ $2,277,736 $2,470,639
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.............................................. $1,260,991 $1,069,184
Borrowings from Federal Home Loan Bank................ -- 140,500
Other borrowings...................................... 358,129 694,352
Remarketed Par Securities............................. 70,000 --
Senior Notes.......................................... 219,792 88,209
Convertible subordinated debentures................... -- 75,000
Accrued interest payable.............................. 22,542 14,034
Accrued income taxes payable.......................... 32,815 55,327
Minority interest in consolidated subsidiaries........ 6,048 54,936
Other liabilities..................................... 43,389 39,589
---------- ----------
Total liabilities................................... 2,013,706 2,231,131
---------- ----------
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding................................ -- --
Common stock, no par value. Authorized 80,000,000
shares; 38,693,876 and 38,291,112 shares issued and
outstanding at June 30, 1997 and December 31, 1996,
respectively......................................... 147,208 145,521
Retained earnings..................................... 110,087 88,977
Unrealized gain on securities available for sale, net. 6,735 5,010
---------- ----------
Total shareholders' equity............................ 264,030 239,508
---------- ----------
Total liabilities and shareholders' equity............ $2,277,736 $2,470,639
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans and leases........... $28,558 $19,166 $37,224 $40,877
Interest on loans.......................... 53,512 43,089 96,442 88,282
Interest on investments.................... 1,129 204 6,754 2,389
Interest on other finance activities....... 734 1,067 1,391 3,209
------- ------- ------- -------
Total interest income.................... 55,375 44,360 104,587 93,880
Interest expense........................... 31,652 30,955 60,056 67,738
------- ------- ------- -------
Net interest income........................ 23,723 13,405 44,531 26,142
Provision for loan and lease losses........ 5,736 2,025 8,606 3,525
------- ------- ------- -------
Net interest income after provision for
loan and lease losses..................... 17,987 11,380 35,925 22,617
------- ------- ------- -------
Loan servicing income...................... 2,170 (448) 3,450 1,562
Gain on sale of servicing rights........... -- (257) -- 7,808
Gain on sale of SPFC stock................. -- 62,007 4,306 62,007
Loss on sale of investment................. -- -- (403) --
Equity in net income of Southern Pacific
Funding Corporation....................... 6,678 -- 12,931 --
Other income............................... 2,112 4,284 4,367 5,485
------- ------- ------- -------
Total other income....................... 10,960 65,586 24,651 76,862
------- ------- ------- -------
Total revenue.......................... 57,505 96,132 97,800 140,356
------- ------- ------- -------
Expenses:
Personnel expense.......................... 12,433 10,967 23,104 23,402
Amortization of PMSR's and OMSR's.......... 206 114 225 832
Occupancy expense.......................... 983 950 1,890 2,270
Data processing expense.................... 378 575 805 930
Net expenses of other real estate owned.... 3,480 1,218 4,237 3,986
Professional services...................... 3,615 2,535 6,203 3,681
FDIC insurance premiums.................... -- -- -- 45
Telephone and other communications......... 754 619 1,183 1,525
Restructuring provision--Exit from mortgage
banking operations........................ -- -- -- 3,800
General and administrative expense......... 7,215 3,674 12,551 7,349
------- ------- ------- -------
Total expenses........................... 29,064 20,652 50,198 47,820
------- ------- ------- -------
Income before income taxes, minority
interest and extraordinary item........... 28,441 75,480 47,602 92,536
Income taxes............................... 9,866 30,868 17,843 37,769
Minority interest in income of consolidated
subsidiaries.............................. 4,502 1,571 4,654 3,110
------- ------- ------- -------
Income before extraordinary item........... 14,073 43,041 25,105 51,657
------- ------- ------- -------
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes..................................... -- -- (3,995) --
------- ------- ------- -------
Net income................................. $14,073 $43,041 $21,110 $51,657
======= ======= ======= =======
Primary and fully diluted income per share:
Income before extraordinary item........... $ 0.35 $ 1.11 $ 0.62 $ 1.39
Extraordinary item--Loss on early
extinguishment of debt, net of income
taxes..................................... -- -- (0.10) --
------- ------- ------- -------
Net income per common share................ $ 0.35 $ 1.11 $ 0.52 $ 1.39
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, 1997 JUNE 30, 1996
-------------- -------------
<S> <C> <C>
Cash flows from operating activities: (IN THOUSANDS)
Net income...................................... $ 21,110 $ 51,657
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan and lease losses............. 8,606 3,525
Restructuring provision -- Exit from mortgage
banking operations............................. -- 3,800
Depreciation.................................... 2,278 1,958
Amortization.................................... 1,722 1,735
Accretion of discount........................... (1,391) (3,209)
Gain on sale of Southern Pacific Funding Corpo-
ration stock................................... (6,151) (62,007)
Gain on sale of servicing rights................ -- (7,808)
Gain on sale of loans and leases................ (37,224) (40,877)
Equity in net earnings of Southern Pacific Fund-
ing Corp....................................... (12,931) --
Loss on sale of OREO............................ 3,384 1,988
Writedowns of other real estate owned........... 147 2,088
Originations of loans held for sale............. (623,300) (940,600)
Sales and collections on loans held for sale.... 1,012,641 1,340,498
Net change in retained interest in loan and
lease securitizations.......................... 15,221 --
Net change in capitalized excess servicing...... 23,142 --
Net change in other assets...................... 4,283 (18,858)
Net change in other liabilities................. 88,991 23,430
--------- ---------
Net cash provided by operating activities: 500,528 357,320
--------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits......... (237,916) 137,300
Purchase of servicing rights.................... -- (4,500)
Proceeds from sale of servicing rights.......... -- 19,097
Proceeds from sale of other real estate owned... 1,027 3,249
Purchase of securities available for sale....... -- (154,777)
Sale of securities available for sale........... 15,176 242,238
Purchase of securities held to maturity......... (2,647) --
Net change in loans held for investment......... (68,180) (85,021)
Purchases of premises and equipment............. (3,130) (2,759)
Net change in investment in Southern Pacific
Funding Corporation............................ (42,010) --
Proceeds from sale of SPFC stock................ 6,151 36,362
Sales of Federal Home Loan Bank stock........... 8,439 --
Cash utilized for acquisitions.................. (14,699) --
--------- ---------
Net (used in) cash provided by investing activi-
ties: (337,789) 191,189
--------- ---------
Cash flows from financing activities:
Net change in deposits.......................... 191,807 (103,765)
Advances from Federal Home Loan Bank............ 30,000 470,000
Repayments of advances from Federal Home Loan
Bank........................................... (170,500) (365,000)
Net change in convertible subordinated deben-
tures.......................................... (75,000) --
Net change in other borrowings.................. (335,994) (465,848)
Proceeds form offering of Senior Notes due 2007. 194,500 --
Proceeds from offering of Remarketed Par Securi-
ties........................................... 70,000 --
Repayment of Senior Notes due 2004.............. (73,241) --
Sale of bonds................................... -- (111,995)
Net change in minority interest................. (48,888) 37,509
Issuance of common stock........................ -- 59,229
Proceeds from resale of Senior Notes............ -- 7,615
Proceeds from exercise of stock options......... 880 1,358
--------- ---------
Net cash used in financing activities: (216,436) (470,897)
--------- ---------
Net change in cash............................... (53,697) 77,612
Cash at beginning of year........................ 74,247 39,166
--------- ---------
Cash at end of period............................ $ 20,550 $ 116,778
========= =========
Supplemental disclosure of cash flow information:
Income taxes paid during the period............. $ 11,977 $ 8,468
Interest paid during the period................. 51,548 67,413
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Imperial Credit Industries, Inc. (the "Company" or "ICII"), incorporated in
1986 in the State of California, is 23.9% owned by Imperial Bank. Since its
initial capitalization in 1991 by Imperial Bank, the Company has transformed
itself from a full service mortgage banking operation to a diversified
commercial and consumer finance holding company.
The consolidated financial statements include ICII, its wholly owned
subsidiaries and a majority owned consolidated subsidiary (collectively the
"Company"). The wholly owned operating subsidiaries include Southern Pacific
Thrift and Loan Association ("SPTL"), Imperial Business Credit, Inc. ("IBC"),
Imperial Credit Advisors, Inc. ("ICAI") and Auto Marketing Network, Inc.
("AMN"). The majority-owned consolidated subsidiary is Franchise Mortgage
Acceptance Company, LLC ("FMAC"). FMAC is owned two-thirds by the Company and
one-third by the President of FMAC. The Company also has a 47.0% ownership
interest in Southern Pacific Funding Corporation ("SPFC") (NYSE: SFC). The
Company accounts for this investment using the equity method of accounting.
All material intercompany balances and transactions have been eliminated.
2. DECONSOLIDATION OF SOUTHERN PACIFIC FUNDING CORPORATION AND ICI FUNDING
CORPORATION
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of Southern Pacific Funding Corporation ("SPFC") at $16.63 per
share, generating net proceeds of $6.2 million, and resulting in a gain of
$4.3 million, reducing its ownership of SPFC from 51.2% at December 31, 1996
to 49.4% at March 31, 1997. Therefore, the results of SPFC operations are now
accounted for in the Company's financial statements under the equity method of
accounting. The equity investment in SPFC is carried at cost adjusted for
equity in SPFC's undistributed earnings. Deferred income taxes were provided
for by the Company at the time of the sale of SPFC stock.
During the first quarter of 1997, ICII disposed of its common stock interest
in ICI Funding Corporation ("ICIFC"), a subsidiary engaged in mortgage conduit
operations for Imperial Credit Mortgage Holdings ("ICMH"). At December 31,
1996, ICII owned 100% of the common stock of ICIFC which represented a 1%
economic interest since ICMH (AMEX: IMH) a former subsidiary and now a
separate publicly held mortgage real estate investment trust, owned all of the
nonvoting preferred stock of ICIFC, which gave ICMH a 99% economic interest in
ICIFC. The Company's disposal of its remaining economic interest in ICIFC
concluded its exit from the original mortgage banking business. The Company
did not receive any proceeds on the disposition of ICIFC common stock. The
Company recorded a loss of approximately $90,000 on the disposition.
3. 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. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1997 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1997. 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, 1996.
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 1997 presentation.
F-52
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. 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.
The weighted average number of shares including common stock equivalents for
the three months ended June 30, 1997 and 1996 was 40,789,101 and 38,904,088
for fully diluted income per share, respectively. The weighted average number
of shares including common stock equivalents for the six months ended June 30,
1997 and 1996 was 40,781,613 and 37,176,202 for fully diluted income per
share, respectively.
The weighted average number of shares including common stock equivalents for
the three months ended June 30, 1997 and 1996 was 40,622,579 and 38,846,540
for primary income per share, respectively. The weighted average number of
shares including common stock equivalents for the six months ended June 30,
1997 and 1996 was 40,768,917 and 37,055,292 for primary income per share,
respectively.
5. LOANS HELD FOR SALE
Loans held for sale consisted of the following at June 30, 1997 and December
31, 1996: (In thousands)
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1997 1996
----------- ---------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4.............................. $ 6,970 $452,533
Multi-family................................... 118,894 186,391
Commercial..................................... 87,554 109,469
-------- --------
213,418 748,393
Leases........................................... 24,723 8,547
Auto........................................... 127,811 --
Commercial loans............................... 208,013 183,156
-------- --------
$573,965 $940,096
======== ========
</TABLE>
6. REMARKETED PAR SECURITIES
During the second quarter, Imperial Credit Capital Trust I ("ICCTI"), a
subsidiary of the Company organized for the sole purpose of issuing trust
securities, issued $70.0 million of 10.25% Remarketed Par Securities ("ROPES")
due June 14, 2002. These securities can be redeemed at par upon their maturity
or remarketed as 30 year capital instruments at the Company's option upon the
occurrence of certain events. Under current tax law, the interest payments on
these securities are tax-deductible. The proceeds from the offering will be
used for capital contributions to subsidiaries, strategic acquisitions,
investments and general corporate purposes.
F-53
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
7. SUBSEQUENT EVENTS
On August 1, 1997, the Company announced that Imperial Credit Commercial
Mortgage Investment Corporation ("ICCMIC"), a Maryland corporation that has
elected to be treated as a Real Estate Investment Trust, has filed a
registration statement with the Securities and Exchange Commission covering a
proposed initial public offering of 20,000,000 shares of common stock. All of
the shares are being offered by ICCMIC. The net proceeds will be primarily
used to purchase initial investments. ICCMIC intends to invest primarily in
performing multifamily and commercial loans and in mortgage backed securities.
The offering is expected to close in the fourth quarter of 1997.
During July and August of 1997, the Company sold 500,000 shares of SPFC
common stock at an average price per share of $15.11, generating net proceeds
of $7.6 million and resulting in a gain of approximately $5 million. This sale
reduces the Company's ownership in SPFC stock to 47.0% from 49.4% at March 31,
1997.
On August 29, 1997, the Company announced that FMAC, an ICII subsidiary,
filed a registration statement with the Securities and Exchange Commission
covering a proposed public offering of 8,750,000 shares of common stock. Prior
to the closing of the proposed initial public offering FMAC will merge into
Franchise Mortgage Acceptance Company, a Delaware corporation ("FMC"). FMC was
incorporated in August 1997 for the purpose of succeeding to the business of
FMAC. FMC will issue 8,750,000 shares of common stock in the initial public
offering, 5,312,500 shares are being sold by FMC and 3,437,500 are being sold
by the Selling Stockholders. The net proceeds will be used by FMC to repay
certain indebtedness to the Company, to fund future loan and lease
originations and equity investments, and for general corporate purposes. This
offering is expected to close in the fourth quarter of 1997.
8. CONSOLIDATING BALANCE SHEET AND INCOME STATEMENTS
The following represents summarized consolidating financial information as
of June 30, 1997 and December 31, 1996, and for the six months ended June 30,
1997 and for 1996, with respect to the financial position and operations of
the Company 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 three of the Company's wholly-owned
subsidiaries, IBC, ICAI, and AMN (the "Other Guarantor Subsidiaries"), and the
Company's 66 2/3% owned subsidiary, FMAC. The non-guarantor subsidiaries are
SPTL and ICCTI. Each of the guarantees is full and unconditional and joint and
several. The summarized consolidated financial information is presented in
lieu of separate financial statements and other related disclosures of the
wholly-owned subsidiary guarantors as management has determined that such
information is not material to investors. FMAC has filed a Form 10-Q with the
SEC as of and for the quarter ended June 30, 1997. None of the subsidiary
guarantors are restricted from making distributions to the Company.
9. ACQUISITION
On March 14, 1997, ICII acquired for $750,000 all of the outstanding shares
of Auto Marketing Network, Inc. ("AMN") of Boca Raton, Florida, a sub prime
auto lender. AMN is a nationally recognized specialty finance company engaged
in financing the purchase of new and used motor vehicles. ICII, also advanced
AMN $11.5 million to repay amounts owed pursuant to operating lines of credit
and for working capital purposes. The acquisition was recorded using the
purchase method of accounting. Goodwill of approximately $14.7 million was
recorded and will be amortized on a straight line basis over its estimated
useful life of 15 years. The acquisition of AMN was not considered significant
to the operations of the Company.
F-54
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
10. THE FOLLOWING REPRESENTS SUMMARIZED FINANCIAL INFORMATION WITH RESPECT TO
THE OPERATIONS OF SPFC, AN EQUITY INVESTEE.
<TABLE>
<CAPTION>
AS OF AND FOR THE
PERIOD ENDED JUNE
SOUTHERN PACIFIC FUNDING CORPORATION 30, 1997
------------------------------------ -----------------
(IN THOUSANDS)
<S> <C>
Total assets.................................................. $442,180
Other borrowings.............................................. 191,974
Convertible subordinated debentures........................... 75,000
Equity........................................................ 111,298
Gain on sale of loans......................................... 61,938
Interest income............................................... 16,427
Interest expense.............................................. 9,395
Other income.................................................. 1,298
Other expense................................................. 25,698
Income before income taxes.................................... 44,570
Net income.................................................... 26,073
</TABLE>
F-55
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ (591) $ 15 $ 4,960 $ 16,166 $ -- $ 20,550
Interest bearing
deposits............... 112,354 2,667 264 126,000 -- 241,285
Investments in Federal
Home Loan Bank stock... -- -- -- 8,713 -- 8,713
Investment and trading
securities............. 33,866 2,581 1,023 46,928 791 85,189
Loans held for sale..... 6,970 208,014 152,534 206,447 -- 573,965
Loans held for
investment, net........ 110,719 -- 17,276 1,040,146 (48,075) 1,120,066
Purchased and originated
servicing rights....... -- -- 412 6,092 -- 6,504
Retained interest in
loan and lease
securitizations........ -- 7,002 27,325 -- -- 34,327
Investment in
subsidiaries........... 233,494 -- -- -- (178,553) 54,941
Goodwill................ -- 4,571 28,368 14,744 -- 47,683
Other assets............ 63,562 8,106 (122) 24,671 (11,704) 84,513
-------- -------- -------- ---------- --------- ----------
Total assets........... $560,374 $232,956 $232,040 $1,489,907 $(237,541) $2,277,736
======== ======== ======== ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits................ $ (5,606) $ -- $ -- $1,266,597 $ -- $1,260,991
Other borrowings........ -- 205,919 161,818 36,050 (45,658) 358,129
Remarketed Par
Securities............. 72,165 -- -- (2,165) -- 70,000
Senior notes............ 219,792 -- -- -- -- 219,792
Minority interest in
consolidated
subsidiaries........... 749 -- -- -- 5,299 6,048
Other liabilities....... 37,065 4,939 34,168 36,252 (13,678) 98,746
-------- -------- -------- ---------- --------- ----------
Total liabilities...... 324,165 210,858 195,986 1,336,734 (54,037) 2,013,706
-------- -------- -------- ---------- --------- ----------
Shareholders' equity:
Common stock............ 147,208 5,792 29,224 82,617 (117,633) 147,208
Retained earnings....... 83,314 16,306 6,566 70,556 (66,655) 110,087
Unrealized gain on
securities available
for sale............... 5,687 -- 264 -- 784 6,735
-------- -------- -------- ---------- --------- ----------
Total shareholders'
equity................ 236,209 22,098 36,054 153,173 (183,504) 264,030
-------- -------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity.. $560,374 $232,956 $232,040 $1,489,907 $(237,541) $2,277,736
======== ======== ======== ========== ========= ==========
</TABLE>
F-56
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
ASSETS
------
<S> <C> <C> <C> <C> <C> <C>
Cash.................... $ 5,213 $ -- $ 7,973 $ 64,926 $ (3,865) $ 74,247
Interest bearing
deposits............... -- 2,594 163 -- 612 3,369
Investments in Federal
Home Loan Bank stock... -- -- -- 17,152 -- 17,152
Investment and trading
securities............. 8,802 39,349 887 35,824 (566) 84,296
Loans held for sale..... 4,839 98,915 8,547 853,023 (25,228) 940,096
Loans held for
investment, net........ 34,505 -- 86,214 948,567 (687) 1,068,599
Purchased and originated
servicing rights....... -- -- 637 14,250 -- 14,887
Capitalized excess
servicing fees
receivable............. -- -- -- 23,142 -- 23,142
Retained interest in
loan and lease
securitizations........ -- 6,908 19,646 22,994 -- 49,548
Interest-only and
residual certificates.. -- -- -- 87,017 -- 87,017
Investment in
subsidiaries........... 269,651 -- -- -- (269,651) --
Goodwill................ -- 4,332 14,115 20,044 -- 38,491
Other assets............ 106,601 8,078 (14,981) (10,333) (19,570) 69,795
-------- -------- -------- ---------- --------- ----------
Total assets.......... $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639
======== ======== ======== ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C> <C>
Deposits................ $ -- $ -- $ -- $1,072,266 $ (3,082) $1,069,184
Borrowings from Federal
Home Loan Bank......... -- -- -- 140,500 -- 140,500
Other borrowings........ 15,363 143,139 88,768 480,103 (33,021) 694,352
Senior notes............ 88,209 -- -- -- -- 88,209
Convertible subordinated
debentures............. -- -- -- 75,000 -- 75,000
Minority interest in
consolidated
subsidiaries........... 45,149 -- -- -- 9,787 54,936
Other liabilities....... 41,382 2,580 9,222 68,854 (13,088) 108,950
-------- -------- -------- ---------- --------- ----------
Total liabilities....... 190,103 145,719 97,990 1,836,723 (39,404) 2,231,131
-------- -------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- -- 9,143 (9,143) --
Common stock............ 145,521 5,792 21,501 134,590 (161,883) 145,521
Retained earnings....... 88,977 8,665 3,525 96,150 (108,340) 88,977
Unrealized gain on
securities available
for sale............... 5,010 -- 185 -- (185) 5,010
-------- -------- -------- ---------- --------- ----------
Total shareholders'
equity............... 239,508 14,457 25,211 239,883 (279,551) 239,508
-------- -------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $429,611 $160,176 $123,201 $2,076,606 $(318,955) $2,470,639
======== ======== ======== ========== ========= ==========
</TABLE>
F-57
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Gain (loss) on sale of
loans and leases....... $(2,159) $19,808 $6,402 $12,770 $ 403 $37,224
------- ------- ------ ------- ------- -------
Interest income......... 11,271 10,767 13,017 73,750 (4,218) 104,587
Interest expense........ 10,971 9,394 4,512 39,397 (4,218) 60,056
------- ------- ------ ------- ------- -------
Net interest income..... 300 1,373 8,505 34,353 -- 44,531
Provision for loan
losses................. -- -- 2,981 5,625 -- 8,606
------- ------- ------ ------- ------- -------
Net interest income
after Provision for
loan loss............ 300 1,373 5,524 28,728 -- 35,925
------- ------- ------ ------- ------- -------
Loan servicing income
(expense).............. (1,756) 1,376 2,734 1,096 -- 3,450
Gain on sale of SPFC
stock.................. 4,306 -- -- -- -- 4,306
Equity in net income
SPFC................... 12,931 -- -- -- -- 12,931
Other income (expense).. (1,204) -- 3,771 1,800 (403) 3,964
------- ------- ------ ------- ------- -------
Total other income.... 14,277 1,376 6,505 2,896 (403) 24,651
------- ------- ------ ------- ------- -------
Total revenues...... 12,418 22,557 18,431 44,394 -- 97,800
------- ------- ------ ------- ------- -------
EXPENSES:
Personnel expense....... 1,216 4,665 6,740 10,483 -- 23,104
Amortization of PMSR's
and OMSR's............. -- -- 225 -- -- 225
Occupancy expense....... 510 277 281 822 -- 1,890
Data processing expense. 287 44 167 307 -- 805
Net expenses of other
real estate owned...... 2,652 -- -- 1,585 -- 4,237
Professional services... 2,226 1,176 696 2,105 -- 6,203
General, administrative
and other expense...... 2,674 2,432 5,045 3,583 -- 13,734
------- ------- ------ ------- ------- -------
Total expenses........ 9,565 8,594 13,154 18,885 -- 50,198
------- ------- ------ ------- ------- -------
Income before income
taxes, minority
interest, and
extraordinary item..... 2,853 13,963 5,277 25,509 -- 47,602
Income taxes............ 4,848 -- 2,236 10,759 -- 17,843
Minority interest in
income of consolidated
subsidiaries........... -- -- -- -- 4,654 4,654
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. (3,995) -- -- -- -- (3,995)
------- ------- ------ ------- ------- -------
Net income (loss)....... $(5,990) $13,963 $3,041 $14,750 $(4,654) $21,110
======= ======= ====== ======= ======= =======
</TABLE>
F-58
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED INCOME STATEMENT
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans
and leases............. $ 2,164 $12,520 $ 899 $25,052 $ 242 $40,877
------- ------- ------ ------- ------- -------
Interest income......... 7,462 1,257 12 86,084 (935) 93,880
Interest expense........ 10,861 955 317 55,711 (106) 67,738
------- ------- ------ ------- ------- -------
Net interest income
(expense).............. (3,399) 302 (305) 30,373 (829) 26,142
Provision for loan
losses................. -- -- -- 3,525 -- 3,525
------- ------- ------ ------- ------- -------
Net interest income
(expense) after
Provision for loan
loss................. (3,399) 302 (305) 26,848 (829) 22,617
------- ------- ------ ------- ------- -------
Loan servicing income
(expense).............. (863) 649 1,600 176 -- 1,562
Gain on sale of
servicing rights....... 6,466 -- -- -- 1,342 7,808
Gain on sale of SPFC
stock.................. 62,007 -- -- -- -- 62,007
Other income (expense).. 1,211 63 2,394 2,446 (629) 5,485
------- ------- ------ ------- ------- -------
Total other income.... 68,821 712 3,994 2,622 713 76,862
------- ------- ------ ------- ------- -------
Total revenues...... 67,586 13,534 4,588 54,522 126 140,356
------- ------- ------ ------- ------- -------
EXPENSES:
Personnel expense....... 5,487 3,901 1,749 12,938 (673) 23,402
Amortization of PMSR's
and OMSR's............. 401 -- 69 110 252 832
Occupancy expense....... 1,330 122 88 730 -- 2,270
Data processing expense. 502 -- 1 427 -- 930
Net expenses of other
real estate owned...... 2,904 -- -- 1,082 -- 3,986
Professional services... 1,830 602 216 860 173 3,681
General, administrative
and other expense...... 7,274 1,146 (205) 5,095 (591) 12,719
------- ------- ------ ------- ------- -------
Total expenses........ 19,728 5,771 1,918 21,242 (839) 47,820
------- ------- ------ ------- ------- -------
Income before income
taxes and minority
interest............... 47,858 7,763 2,670 33,280 965 92,536
Income taxes............ 22,181 -- 1,126 13,805 657 37,769
Minority interest in
income of consolidated
subsidiaries........... -- -- -- -- 3,110 3,110
------- ------- ------ ------- ------- -------
Net income (loss)....... $25,677 $ 7,763 $1,544 $19,475 $(2,802) $51,657
======= ======= ====== ======= ======= =======
</TABLE>
F-59
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities:............ $ 9,917 $(92,240) $(131,547) $641,971 $72,427 $500,528
-------- -------- --------- -------- ------- --------
Cash flows from
investing activities:
Net change in interest
bearing deposits...... (112,256) (73) (101) (125,486) -- (237,916)
Net change in
securities available
for sale.............. (5,310) 36,768 1,058 11,837 (29,177) 15,176
Net change in loans
held for investment... (82,240) -- 70,419 (99,925) 43,566 (68,180)
Net change in
investment in SPFC.... (42,010) -- -- -- -- (42,010)
Net change in
investment in
Subsidiaries.......... 91,098 -- -- -- (91,098) --
Other, net............. 5,146 (898) (16,401) 6,617 677 (4,859)
-------- -------- --------- -------- ------- --------
Net cash (used in)
provided by investing
activities............ (145,572) 35,797 54,975 (206,957) (76,032) (337,789)
-------- -------- --------- -------- ------- --------
Cash flows from
financing activities:
Net change in deposits. (2,525) -- -- 194,332 -- 191,807
Advances from Federal
Home Loan Bank........ -- -- -- 30,000 -- 30,000
Repayments of advances
from Federal Home Loan
Bank.................. -- -- -- (170,500) -- (170,500)
Net change in
convertible
subordinated
debentures............ -- -- -- (75,000) -- (75,000)
Net change in other
borrowings............ (15,363) 62,951 72,809 (454,010) (2,381) (335,994)
Proceeds from offering
of Senior Notes due
2007.................. 194,500 -- -- -- -- 194,500
Proceeds from offering
of Remarketed
Securities............ 70,000 -- -- -- -- 70,000
Repayment of senior
notes due 2004........ (73,241) -- -- -- -- (73,241)
Net change in minority
interest.............. (44,400) -- -- -- (4,488) (48,888)
Other, net............. 880 (6,322) 750 (8,596) 14,168 880
-------- -------- --------- -------- ------- --------
Net cash provided by
(used in) financing
activities............. 129,851 56,629 73,559 (483,774) 7,299 (216,436)
-------- -------- --------- -------- ------- --------
Net change in cash..... (5,804) 186 (3,013) (48,760) 3,694 (53,697)
Cash at beginning of
period................ 5,213 (171) 7,973 64,926 (3,694) 74,247
-------- -------- --------- -------- ------- --------
Cash at end of period.. $ (591) $ 15 $ 4,960 $ 16,166 $ -- $ 20,550
======== ======== ========= ======== ======= ========
</TABLE>
F-60
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII FMAC SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities:............ $ 52,587 $ 164,254 $ 6,099 $ 295,598 $(161,218) $ 357,320
--------- --------- ------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits...... -- (2,525) -- 137,300 2,525 137,300
Net change in
securities available
for sale.............. (17,111) (9,691) (604) 124,525 (9,658) 87,461
Net change in loans
held for investment... 3,908 -- -- (201,740) 112,811 (85,021)
Proceeds from sale of
servicing rights...... 19,097 -- -- -- -- 19,097
Proceeds from sale of
SPFC stock............ 36,362 -- -- -- -- 36,362
Net change in
investment in
Subsidiaries.......... (16,025) -- -- -- 16,025 --
Other, net............. (1,251) (638) (382) (2,569) 830 (4,010)
--------- --------- ------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. 24,980 (12,854) (986) 57,516 122,533 191,189
--------- --------- ------- --------- --------- ---------
Cash flows from
financing activities:
Net change in deposits. (46,311) -- -- (57,454) -- (103,765)
Advances from Federal
Home Loan Bank........ -- -- -- 470,000 -- 470,000
Repayments of advances
from Federal Home Loan
Bank.................. -- -- -- (365,000) -- (365,000)
Bonds.................. -- (111,995) -- -- -- (111,995)
Net change in other
borrowings............ (143,569) (39,393) -- (319,578) 36,692 (465,848)
Proceeds from offering
of Common Stock....... 59,229 -- -- -- -- 59,229
Net change in minority
interest.............. 37,509 -- -- -- -- 37,509
Other, net............. 8,973 144 -- (6,200) 6,056 8,973
--------- --------- ------- --------- --------- ---------
Net cash (used in)
provided by financing
activities............. (84,169) (151,244) -- (278,232) 42,748 (470,897)
--------- --------- ------- --------- --------- ---------
Net change in cash..... (6,602) 156 5,113 74,882 4,063 77,612
Cash at beginning of
period................ 8,593 (445) (1,937) 32,981 (26) 39,166
--------- --------- ------- --------- --------- ---------
Cash at end of period.. $ 1,991 $ (289) $ 3,176 $ 107,863 $ 4,037 $ 116,778
========= ========= ======= ========= ========= =========
</TABLE>
F-61
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements:
Independent Auditors' Report............................................. F-63
Balance Sheets........................................................... F-64
Statements of Operations................................................. F-65
Statements of Changes in Members' Equity................................. F-66
Statements of Cash Flows................................................. F-67
Notes to Financial Statements............................................ F-68
Unaudited Financial Statements:
Balance Sheets........................................................... F-78
Statements of Income..................................................... F-79
Statements of Cash Flows................................................. F-80
Statement of Changes in Members' Equity.................................. F-81
Notes to Financial Statements............................................ F-82
</TABLE>
F-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Managers
Franchise Mortgage Acceptance Company LLC:
We have audited the accompanying balance sheets of Franchise Mortgage
Acceptance Company LLC as of December 31, 1996 and 1995, and the related
statements of operations, changes in members' equity and cash flows for the
year ended December 31, 1996 and for the period from June 30, 1995 (inception)
through December 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our 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 financial statements referred to above present fairly,
in all material respects, the financial position of Franchise Mortgage
Acceptance Company LLC as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for the year ended December 31, 1996 and for
the period from June 30, 1995 (inception) through December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 29, 1997
F-63
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
------
Restricted cash.............................................. $ -- $ 526
Interest bearing deposits.................................... 2,594 --
Securities available for sale................................ 39,349 --
Loans and leases held for sale............................... 98,915 181,254
Retained interest in loan securitizations.................... 6,908 --
Premises and equipment, net.................................. 1,162 235
Goodwill..................................................... 4,332 4,226
Receivable from Southern Pacific Thrift & Loan............... -- 579
Receivable from Imperial Credit Industries, Inc.............. -- 924
Accrued interest receivable.................................. 560 1,108
Other investments............................................ 4,383 --
Other assets................................................. 1,973 196
-------- --------
Total assets............................................. $160,176 $189,048
======== ========
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Book overdraft............................................... $ 171 $ 445
Payable to Imperial Credit Industries, Inc. ................. 17,728 --
Borrowings................................................... 125,240 69,637
Bonds........................................................ -- 111,995
Accrued interest payable..................................... 148 1,062
Residual interest due to owner............................... -- 526
Other liabilities............................................ 2,432 1,610
-------- --------
Total liabilities........................................ 145,719 185,275
Commitments and contingencies (Note 14)
Members' equity:
Members' capital........................................... 5,792 4,432
Retained earnings (accumulated deficit).................... 8,665 (659)
-------- --------
Total members' equity.................................... 14,457 3,773
-------- --------
Total liabilities and members' equity.................... $160,176 $189,048
======== ========
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JUNE 30, 1995
YEAR ENDED (INCEPTION) THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------
<S> <C> <C>
Revenues:
Gain on sale of loans................... $18,671 $ --
------- ------
Interest income......................... 16,130 1,929
Interest charges........................ 14,489 1,690
------- ------
Net interest income................... 1,641 239
------- ------
Loan servicing income................... 1,191 318
Gain on sale of servicing rights........ -- 31
Other income............................ 63 --
------- ------
Total other income.................... 1,254 349
------- ------
Total revenue......................... 21,566 588
------- ------
Expenses:
Personnel............................... 8,270 356
Professional services................... 1,093 106
Travel.................................. 614 155
Business promotion...................... 450 96
Occupancy............................... 310 94
Messenger service....................... 115 15
Goodwill amortization................... 411 146
General and Administrative.............. 979 279
------- ------
Total expenses........................ 12,242 1,247
------- ------
Net income (loss)..................... $ 9,324 $ (659)
======= ======
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE PERIOD FROM JUNE 30, 1995
(INCEPTION) THROUGH DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
(DEFICIT) TOTAL
MEMBERS' RETAINED MEMBERS'
CAPITAL EARNINGS EQUITY
-------- ----------- --------
<S> <C> <C> <C>
Balance, June 30, 1995 (inception).............. $ -- $ -- $ --
Members' contribution--ICII..................... 7,592 -- 7,592
Members' contribution--Knyal.................... 645 -- 645
Return of capital--ICII......................... (3,805) -- (3,805)
Net loss........................................ -- (659) (659)
------- ------ -------
Balance, December 31, 1995...................... $ 4,432 $ (659) $ 3,773
Net income...................................... -- 9,324 9,324
Members' Contribution--ICII..................... 1,360 -- 1,360
------- ------ -------
Balance, December 31, 1996...................... $ 5,792 $8,665 $14,457
======= ====== =======
</TABLE>
See accompanying notes to financial statements.
F-66
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED FROM JUNE 30, 1995
DECEMBER 31, (INCEPTION) THROUGH
1996 DECEMBER 31, 1995
------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 9,324 $ (659)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............. 2,883 153
Loans originated.......................... (458,467) (130,314)
Gain on sale of loans..................... (18,761) --
Loans sold to (purchased from) affiliates. 222,462 (196,631)
Proceeds from loan sales and
securitizations.......................... 337,105 145,691
Decrease (increase) in interest
receivable............................... 548 (1,108)
Gain on sale of servicing rights.......... -- (31)
Net change in other liabilities........... (618) 3,198
Net change in other assets................ (7,027) (2,214)
--------- ---------
Net cash provided by (used in) operating
activities............................. 87,449 (181,915)
--------- ---------
Cash flows from investing activities:
Purchases of premises and equipment......... (1,190) (162)
Increase in interest bearing deposits....... (2,594) --
Purchase of securities available for sale... (41,704) --
Purchase of other investments............... (4,383) --
Sale of servicing rights.................... -- 3,805
--------- ---------
Net cash (used in) provided by investing
activities............................. (49,871) 3,643
--------- ---------
Cash flows from financing activities:
Issuance of bonds........................... -- 111,995
Repayment of bonds.......................... (111,995) --
Net change in borrowings from ICII.......... 17,728 --
Increase in borrowings...................... 55,603 69,637
Member (distributions) contributions........ 1,360 (3,805)
--------- ---------
Net cash (used in) provided by financing
activities............................. (37,304) 177,827
--------- ---------
Net change in cash...................... 274 (445)
Book overdraft at beginning of period......... (445) --
--------- ---------
Book overdraft at end of period............... $ (171) $ (445)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-67
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
On June 30, 1995, Imperial Credit Industries, Inc. ("ICII") acquired from
Greenwich Capital Financial Products, Inc. ("Greenwich"), certain assets of
Greenwich's Franchise Mortgage Acceptance Company division ("the FMAC
Division"), including all of Greenwich's rights under certain servicing
contracts entered into by the FMAC Division ("the Servicing Contracts"). The
Servicing Contracts pertain to the servicing of franchise loans that were
previously securitized by Greenwich through the FMAC Division and other
franchise loans owned by Greenwich not yet securitized. Concurrent with the
closing of the transactions described above, ICII entered into an operating
agreement with Wayne L. Knyal ("Knyal"), the former president of the FMAC
Division, for the formation of a California limited liability company named
Franchise Mortgage Acceptance Company, LLC ("the Company"). In connection with
the acquisition, the Company or 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
loans for a period of 24 months.
The Company was formed to originate, securitize and service franchise loans.
Under the terms of the operating agreement, in exchange for a 66 2/3%
ownership interest in the Company, ICII was obligated to contribute to the
Company $1.3 million in cash and all of the assets purchased from Greenwich.
In exchange for a 33 1/3% ownership interest in the Company, Knyal caused his
wholly owned company, Franchise Mortgage Acceptance Corporation ("FMAC
Corporation"), to contribute to the Company all of its rights under a
servicing contract pertaining to franchise loans that were previously
securitized by FMAC Corporation.
On June 30, 1995, ICII completed the acquisition of certain net assets of
the FMAC Division for a net purchase price of $7.6 million which included $3.8
million in contingent consideration based on loan originations after the date
of acquisition up to a maximum principal amount of such loans equal to
$250.0 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 (primarily purchased servicing rights) with
a fair value of $3.2 million at the date of the purchase transaction. The
excess of the purchase price over the fair value of the net assets acquired
was recorded as goodwill of $4.4 million.
2. BASIS OF PRESENTATION
The 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
sheet and revenues and expenses for the periods presented. Significant balance
sheet accounts which could be materially affected by such estimates include
securities available for sale and retained interest in loan securitizations.
Actual results could differ significantly from those estimates.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with maturities of three months or less at date of
acquisition to be cash equivalents. Restricted cash includes cash pledged as a
reserve account for the FLRT 1995-B securitization.
INVESTMENT SECURITIES
The Company classifies investments as held-to-maturity, trading, and/or
available-for-sale. Held-to-maturity investments are reported at amortized
cost, trading securities are reported at fair value, with unrealized gains and
F-68
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
losses included in operations, and available-for-sale securities are reported
at fair value with unrealized gains and losses included as a separate
component of members' equity.
Investments held-to-maturity are those securities that management has the
positive intent and ability to hold to maturity.
Investment securities available-for-sale are those securities which are not
held in the trading portfolio and are not held in the held-to-maturity
portfolio.
Realized gains and losses on securities available-for-sale are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
FRANCHISE LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or market.
RETAINED INTEREST IN LOAN SECURITIZATIONS
The Company may create retained interest in loan securitizations as a result
of the sale of loans into securitization trusts. Retained interest in loan
securitizations are carried at estimated fair value.
Each loan securitization has specific credit enhancement requirements in the
form of overcollateralization which must be met before the Company receives
cash flows due. As the securitized assets generate excess cash flows, 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 securitizations. After the
overcollateralization requirement and the other requirements specified in the
pooling and servicing agreement have been met, the Company begins to receive
the excess cash flows and a portion of the retained interest on a monthly
basis.
Retained interest in loan securitizations are amortized using the interest
method. To the extent that actual future performance results are less than the
Company's original performance estimates, the Company's retained interest in
loan securitizations will be written down through a charge to operations in
that period.
GAIN (LOSS) ON SALE OF LOANS
Loans are sold through securitizations with the servicing retained by the
Company. Securitizations typically require credit enhancements in the form of
cash reserves or overcollateralization which are reflected as retained
interest in loan securitizations on the balance sheet. Present value
computations are used to estimate the value of the retained interest and
considering such items as interest rates, prepayment, default and loss
assumptions that management believes market participants would use for similar
instruments. Gains are recognized to the extent that the sales price, less
selling costs, exceeds the allocated basis of the portion of the loans sold.
The Company recognizes 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.
SALES OF SERVICING RIGHTS
The Company recognizes gain or loss on the sale of servicing rights when the
sales contract has been executed, a substantial down payment has been made,
and the risks and rewards of ownership are determined to have passed to the
purchasing party.
F-69
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
LOAN ORIGINATION FEES
Origination fees received on franchise 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.
SERVICING FEES
Servicing fees are earned on the cash flow streams from various pools of
securitized loans serviced for others. Servicing fees are recognized as income
when received. At December 31, 1996 and 1995, the Company serviced loans of
$593.7 million and $207.7 million, respectively, for affiliates and others.
PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets
(three to seven years). Leasehold improvements are amortized over the terms of
their related leases or the estimated useful lives of improvements, whichever
is shorter.
INCOME TAXES
Under current Federal and applicable state limited liability company laws
and regulations, limited liability companies are treated as partnerships for
tax reporting purposes and, accordingly, are not subject to income taxes.
Therefore, no provision for income taxes has been made in the Company's
financial statements. For tax purposes, income or losses are included in the
tax returns of the members.
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.
HEDGING PROGRAM
The Company regularly securitizes and sells fixed and variable-rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge its
interest rate risk related to loans held for sale by selling U.S. Treasury
future contracts. Unrealized gains and losses on such positions are deferred
as an adjustment to the carrying value of loans and leases held for sale and
included in income as gain or loss on sale of loans when the related loans are
sold.
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 and which is
effective for the Company on January 1, 1997. 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
F-70
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
Management has determined that the implementation of SFAS 125 will not have
a material impact on the Company's financial condition or results of
operations. Under the provisions of SFAS 125, securitization interests
retained by the Company as a result of securitization transactions will be
held as either available for sale or trading.
Changes in market value are included in operations, if classified as trading
securities, or in members' equity as unrealized gains or losses, if classified
as available for sale.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash transactions included the contribution of all of the assets acquired
by ICII from Greenwich including $80,000 of premises and equipment, $11,000 of
prepaid expenses and approximately $3.1 million of servicing rights. In
addition, servicing rights totaling $645,000 were contributed by Wayne Knyal
for his interest in the Company. Cash paid for the period from June 30, 1995
(inception) through December 31, 1995, for interest totaled $1.4 million,
including approximately $1.0 million paid to Southern Pacific Thrift and Loan
(SPTL), an affiliate. During 1996, ICII contributed $1.4 million to the
Company by decreasing the balances of the outstanding payable to ICII by the
amount of the contribution. Cash paid for interest for the year ended
December 31, 1996 was $15.6 million, including approximately $10.0 million
paid to SPTL.
5. LOANS AND LEASES HELD FOR SALE
At December 31, 1996 and 1995, loans and leases held for sale consisted of
the following:
<TABLE>
<CAPTION>
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Franchise loans held for sale........................... $94,490 $174,879
Franchise equipment loans and leases held for sale...... 4,385 --
Premium on franchise loans held for sale................ -- 5,946
Net deferred loan fees.................................. (750) (203)
Unearned lease income................................... (497) --
Deferred hedging loss................................... 1,287 632
------- --------
Total loans and leases................................ $98,915 $181,254
======= ========
</TABLE>
The Company's loans and leases are primarily comprised of loans to
experienced franchisees of nationally recognized restaurant concepts. A
substantial portion of its debtors' ability to honor their contracts is
dependent upon the cash flows generated by the franchise restaurant units
themselves. The franchise loans generally are collateralized by the business
property, and the real estate on which the franchises are located. During the
year ended December 31, 1996 and the six-month period ending December 31,
1995, the Company originated or acquired $449.3 million and $163.5 million in
franchise loans, respectively. During the year ended December 31,
F-71
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1996 and the six month period ended December 31, 1995, the Company securitized
$325.1 million and $105.2 million of franchise mortgage loans, respectively.
As of December 31, 1996 and 1995, $125.4 million and $174.9 million,
respectively were pledged as collateral for the borrowings and bonds of the
Company.
As of December 31, 1996 and 1995, there were no nonaccrual, restructured or
impaired loans.
6. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------ ----
(IN
THOUSANDS)
<S> <C> <C>
Premises and equipment....................................... $1,286 $242
Less accumulated depreciation and amortization............. (124) (7)
------ ----
Ending balance............................................... $1,162 $235
====== ====
</TABLE>
7. SECURITIES AVAILABLE FOR SALE
On June 20, 1996, the Company purchased two interest-only strips related to
franchise loan securitizations completed by Greenwich Capital for a total
price of $2,947,292 to yield approximately 15%. The carrying values of these
securities was $2,778,110 at December 31, 1996. For the year ended December
31, 1996, discount accretion and cash received was $217,415 and $204,389,
respectively. As there is no active market for these securities, management
estimated their fair values by discounting estimated cash flows from these
securities at an interest rate determined by management to be the rate market
participants would use in similar circumstances.
On August 18, 1996, the Company purchased securitization certificates that
had been issued by Greenwich Capital through the FMAC Division in 1991 for a
total price of $38,756,339, which included a premium of $1,479,929. The
certificates paid principal and interest and have final maturities in 2002 and
2003. Premium amortized and cash received during the year ended December 31,
1996, totaled $181,990 and $2,003,769, respectively. The carrying value of the
certificates was $36,570,580 at December 31, 1996, and they were sold during
1997.
8. RETAINED INTEREST IN LOAN SECURITIZATIONS
Activity in retained interest in loan securitizations was as follows for the
year ended December 31, 1996:
<TABLE>
<CAPTION>
1996
------------
(IN THOUSANDS)
<S> <C> <C>
Balance, beginning of period............................ $ --
Additions............................................... 6,744
Accretion............................................... 503
Cash received........................................... (339)
------
Balance, end of period.................................. $6,908
======
The components of retained interest in loan securitizations were as follows
at:
<CAPTION>
DECEMBER 31,
1996
------------
(IN THOUSANDS)
<S> <C> <C>
Overcollateralization amounts........................... $5,208
Cash reserve deposit--restricted........................ 1,566
Residual interests...................................... 134
------
$6,908
======
</TABLE>
F-72
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. HEDGING
As of December 31, 1996, the Company had open positions of $94.1 million
related to the sales of United States Treasury securities in the forward
market. The proceeds from the short sale are shown net of the related
liability in the accompanying balance sheet at December 31, 1996. At December
31, 1996, the Company's unrealized loss on open positions was $1.3 million.
The Company used the hedging program in anticipation of the formation of the
FLRT 1995-B, a special purpose entity (SPE), into which the Company delivered
$105.2 million of franchise loans. The Company incurred a loss on the hedging
transaction of $632,000 which was recorded as an adjustment to the basis of
the loans collateralizing the pass-through certificates and entered into the
gain or loss on sale when the loans were sold in 1996.
10. BORROWINGS
Borrowings consisted of the following credit facilities available at
December 31, 1996, and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------------- ----------------------------------
INTEREST COMMITMENT PRINCIPAL INTEREST COMMITMENT PRINCIPAL
CREDIT FACILITY EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING RATE AMOUNT OUTSTANDING
--------------- ----------------- ------------- -------- ------------- ----------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Credit Suisse First December 31, 1997 Libor plus 7.31% $ 200,000 $ 48,673 -- $ -- $ --
Boston............ 125 basis
points
Banco Santander.... Under extension Libor plus 7.63% 50,000 16,181 8.00% 25,000 12,615
225 basis
points
Greenwich Capital 30 days on demand Libor plus 7.36% Not specified 35,158 7.25% Not specified 10,054
Financial Markets, 125 basis
Inc............... points
Southern Pacific Not specified Coupon less 9.17% 25,228 25,228 9.17% 46,968 46,968
Thrift & Loan..... approximately
50 basis
points
------------- -------- ------------- -------
$ 275,228 $125,240 $ 71,968 $69,637
============= ======== ============= =======
</TABLE>
The proceeds from the Greenwhich Financial Capital Products, Inc. credit
facility at December 31, 1996, were used to purchase asset backed securities
totaling $39.3 million which are included in securities availble for sale in
the accompanying balance sheets.
11. BONDS
In December 1995, the Company, through a special purpose entity (SPE),
issued pass-through certificates (the Bonds) secured by $105.2 million of
franchise loans included in franchise loans held for sale 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 $11.0 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.
On March 28, 1996, the Company sold its interest in the SPE to Imperial
Credit Mortgage Holdings, Inc. and affiliate, receiving proceeds from the sale
of $2.8 million. As a result of the sale, the Company removed from its balance
sheet the loans and related bonds of $111.2 million and $112.0 million,
respectively, resulting in a net gain of $3.6 million.
12. RESIDUAL INTEREST DUE TO OWNER AND RESTRICTED CASH
The SPE is required to maintain in a separate reserve account a cash balance
equal to .5% of the original outstanding principal balance of the mortgage
loans collateralizing the Bonds. The remaining balance in this account, if
any, is payable to the residual owner of the SPE at the date the Bonds mature.
The corresponding cash balance is reflected as restricted cash.
F-73
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. PROFIT SHARING AND 401(K) PLANS
Beginning July 1, 1993, ICII initiated a 401(k) plan in which employees of
the Company are eligible to participate. Under the plan, employees may elect
to enroll at the beginning of any month in which the employee has been
employed for at least six months. Employees may contribute up to 14% of their
salaries. The Company will match 50% of the employee's contribution up to 4%
of the employee's compensation. The Company may also make a discretionary
contribution on an annual basis to be allocated to participants who have
contributed in excess of 4% of their compensation. The allocation is based
upon a formula set by the plan and requires a five-year vesting period. All
forfeitures are allocated to the remaining participants in the plan.
Distribution of vested benefits to a terminated participant in the 401(k) is
made in accordance with the contribution allocation form signed by the
employee. Distributions are made, by election of the participant, in either
certificates of deposit, ICII common stock and stock or bond mutual funds or a
combination thereof.
The Company contributed $88,000 and $13,000 to the 401(k) plan in for the
year ended December 31, 1996 and from June 30, 1995 (inception) through
December 31, 1995, respectively.
14. TRANSACTIONS WITH AFFILIATES
In the ordinary course of business, the Company has conducted transactions
with affiliated companies. All such transactions are conducted at "arm's
length" in accordance with the Company's policies.
At December 31, 1995, the Company had a net receivable of principal and
interest on franchise loans from SPTL of $579,000. In July 1995, the Company
sold approximately $3.8 million of franchise servicing rights to SPTL,
resulting in a gain of $31,000. The Company also had a receivable from ICII, a
member, of $924,000 bearing interest at 10.4% as of December 31, 1995 and a
payable of $526,000 relating to ICII's residual interest in the Franchise Loan
Receivable Trust 1995-B (FLRT 1995-B).
The Company provides subservicing on a contractual basis for servicing
rights owned by SPTL. At December 31, 1996 and 1995, there was approximately
$183 million and $262 million of loans outstanding underlying this
subservicing arrangement. The Company receives approximately 13 basis points
for providing such services.
The Company purchased $55.3 million in franchise loans at a $6.0 million
premium from SPTL on December 29, 1995. These franchise loans were purchased
by SPTL from Greenwich on November 30, 1995. The selling price between the
Company and SPTL approximated SPTL's carrying value which approximated fair
value.
SPTL has provided warehouse facilities for the Company under which the loans
are closed under SPTL's name with the intent to resell the franchise loans to
the Company for inclusion into securitizations. The rate charged is equivalent
to the rate earned on the franchise loans less approximately 50 basis points,
or 9.17%. As of December 31, 1996 and December 31, 1995, the Company had an
outstanding balance of $25.2 million and $47.0 million, respectively with
respect to this facility. During the year ended December 31, 1996 and from
June 30, 1995 (inception) through December 31, 1995, the Company paid SPTL
$10.3 million and $1.2 million in interest expense associated with this
facility, respectively.
At December 31, 1996, the Company had borrowings from ICII outstanding of
$17.7 million. The Company pays interest at 15% on the outstanding balance.
F-74
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. OTHER INVESTMENTS
At December 31, 1996, the Company had approximately $4.4 million of equity
investments included in other assets. These investments represent interests in
limited liability companies ("LLCs") or limited partnerships (collectively,
the "investees") which were formed to own and operate restaurant franchise
concepts, and are owned through investor LLCs, the members of which consist of
the Company, the Company's chief executive officer, and ICII. Member ownership
percentages in the investor LLCs range from 50% to 100% for the Company, from
0% to 0.33% for the chief executive officer, and from 0.67% to 50% for ICII.
The investor LLC's ownership interests in the investees range from 32.5% to
49.0%. A director of the Company owns 60% of one investee and the investor LLC
owns 40%; such investor LLC is owned 50% by the Company and 50% by ICII.
Accordingly, the Company's ownership interests in the investees (through the
investor LLCs) range from 20% to 48.5%. These investments are accounted for by
the Company under the equity method. Management has determined that the
Company's equity in the net income or loss of the investees is not material at
this time.
Under the terms of the partnership and investment agreements, the investor
LLCs are committed under certain circumstances to make additional loans and
capital contributions of approximately $5.6 million.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include, interest bearing deposits, securities
available for sale, retained interest in loan securitizations, receivables
from and payables to affiliate, borrowings and bonds. 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:
Interest bearing deposits: The carrying values reported in the balance
sheets approximate fair values due to the short-term nature of the assets.
Franchise loans held for sale: 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.
Retained interest in loan securitizations and investments available for
sale: The carrying value reported in the 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.
Receivable due from SPTL and receivable due from ICII: The fair values of
these receivables approximate the carrying values due to their short-term
nature.
Payable due to Imperial Credit Industries: The fair values of these
receivables approximate the carrying values due to their short-term nature.
F-75
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Borrowings: The carrying value reported in the balance sheet approximates
fair value, due to the variable interest rates on these borrowings.
Bonds: The carrying value reported in the balance sheet approximates fair
value due to the proximity of issuance to year-end.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets:
Interest-bearing deposits......... $ 2,594 $ 2,594 $ -- $ --
Franchise loans held for sale..... 98,915 102,872 181,254 185,165
Retained interest in loan
securitizations.................. 6,908 6,908 -- --
Securities available for sale..... 39,349 39,349 -- --
Receivable due from affiliate..... -- -- 579 579
Receivable due from member........ -- -- 924 924
Forward Treasury contracts........ 1,287 1,287 632 632
Liabilities:
Payable due to Imperial Credit
Industries....................... $ 17,728 $ 17,728 $ -- $ --
Borrowings........................ 125,240 125,240 69,637 54,836
Bonds............................. -- -- 111,995 111,995
Residual interest due to member... -- -- 526 526
</TABLE>
17. COMMITMENTS AND CONTINGENCIES
Leases
Minimum rental commitments under all noncancelable operating leases at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997.......................................................... $ 498
1998.......................................................... 521
1999.......................................................... 534
2000.......................................................... 550
2001.......................................................... 524
------
Thereafter.................................................. 151
------
Total....................................................... $2,778
======
</TABLE>
Rent expense for the year and six months ended December 31, 1996 and 1995
was $292,000 and $94,000, respectively.
LITIGATION
The Company is involved in litigation arising from the normal course of
business. The Company is currently involved in a dispute with a vendor
regarding the value of services rendered. Management does not believe that an
adverse settlement, if any, would have a material impact on the Company's
financial condition or results of operations.
F-76
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The predecessor entity to the Company, and an officer of such entity and of
the Company, 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.
18. SUBSEQUENT EVENT
Effective January 19, 1997, the Company is a guarantor of ICII's $200
million 9 7/8% Senior Notes due January 15, 2007.
F-77
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
UNAUDITED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
ASSETS
------
<S> <C> <C>
Cash...................................................... $ 15 $ --
Interest bearing deposits................................. 2,667 2,594
Securities available for sale, at market.................. 2,581 39,349
Loans and leases held for sale, net of provisions......... 208,014 98,915
Retained interest in loan and lease securitizations....... 7,002 6,908
Premises and equipment, net............................... 1,433 1,162
Goodwill.................................................. 4,571 4,332
Accrued interest receivable............................... 1,137 560
Other assets.............................................. 5,536 6,356
-------- --------
Total assets............................................ $232,956 $160,176
======== ========
<CAPTION>
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
<S> <C> <C>
Book Overdraft............................................ $ -- $ 171
Payable to Imperial Credit Industries, Inc................ 9,997 17,728
Borrowings................................................ 195,922 125,240
Accrued interest payable.................................. -- 148
Other liabilities......................................... 4,939 2,432
-------- --------
Total liabilities....................................... $210,858 145,719
-------- --------
Members' equity:
Members' Capital.......................................... $ 5,792 $ 5,792
Retained earnings......................................... 16,306 8,665
-------- --------
Total members' equity................................... 22,098 14,457
-------- --------
Total liabilities and members' equity................... $232,956 $160,176
======== ========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- ---------------
1997 1996 1997 1996
------- ------ ------- -------
<S> <C> <C> <C> <C>
Revenue:
Gain on sale of loans and leases.............. $20,047 $5,852 $19,808 $12,520
Interest income............................... 6,770 601 10,767 1,257
Interest expense.............................. 6,040 322 9,394 955
------- ------ ------- -------
Net interest income......................... 730 279 1,373 302
Loan servicing income......................... 736 367 1,376 649
Other income.................................. -- -- -- 63
------- ------ ------- -------
Total other income.......................... 736 367 1,376 712
------- ------ ------- -------
Total revenue............................... 21,513 6,498 22,557 13,534
------- ------ ------- -------
Expenses:
Personnel expense............................. 2,067 1,250 4,665 3,901
Professional services......................... 698 470 1,176 602
Travel........................................ 347 121 524 202
Business promotion............................ 176 101 316 198
Occupancy..................................... 161 63 277 122
Goodwill amortization......................... 88 76 169 251
General and administrative expense............ 1,222 267 1,467 495
------- ------ ------- -------
Total expenses.............................. 4,759 2,348 8,594 5,771
------- ------ ------- -------
Net income.................................... $16,754 $4,150 $13,963 $ 7,763
======= ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................... $ 13,963 $ 7,763
Adjustments to reconcile net income to net
cash, provided by (used in) operating
activities:
Depreciation and Amortization............... 388 289
Loans originated............................ (300,617) (208,361)
Gain on sale of loans....................... (19,808) (12,520)
Loans sold to (purchased from) affiliates... 17,772 205,281
Proceeds from loan sales and
securitizations............................ 193,349 173,176
(Increase) decrease in accrued interest
receivable................................. (577) 952
Net change in other assets.................. 931 (1,497)
Net change in other liabilities............. 2,359 (829)
-------- ---------
Net cash provided by operating activities....... (92,240) 164,254
-------- ---------
Cash flows from investing activities:
Increase in interest bearing deposits......... (73) (2,525)
Sale of securities available for sale......... 36,768 --
Purchase of securities available for sale..... -- (9,691)
Purchases of premises and equipment........... (490) (638)
Cash utilized for acquisitions................ (408) --
-------- ---------
Net cash provided by (used in) investing
activities..................................... 35,797 (12,854)
-------- ---------
Cash flows from financing activities:
Net change in payable to Imperial Credit
Industries, Inc.............................. (7,731) 7,009
Increase in borrowings........................ 70,682 (46,402)
Repayment of bonds............................ -- (111,995)
Distribution to partners...................... (6,322) 144
-------- ---------
Net cash used in financing activities........... 56,629 (151,244)
-------- ---------
Net change in cash.............................. 186 156
Cash at beginning of year....................... (171) (445)
-------- ---------
Cash at end of period........................... $ 15 $ (289)
======== =========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
EARNINGS TOTAL
MEMBERS' (ACCUMULATED MEMBERS'
CAPITAL DEFICIT) EQUITY
-------- ------------ --------
<S> <C> <C> <C>
Balance, June 30, 1995 (inception).............. $ -- $ -- $ --
Members' Contribution--ICII..................... 7,592 -- 7,592
Members' Contribution--Knyal.................... 645 -- 645
Return of capital--LCII......................... (3,805) -- (3,805)
Net income...................................... -- (659) (659)
------ ------- -------
Balance, December 31, 1995...................... 4,432 (659) 3,773
Net income...................................... -- 9,324 9,324
Members' Contribution--ICI...................... 1,360 -- 1,360
------ ------- -------
Balance, December 31, 1996...................... 5,792 8,665 14,457
Tax Distribution--ICII.......................... -- (4,215) (4,215)
Tax Distribution--Knyal......................... -- (2,107) (2,107)
Net income...................................... -- 13,963 13,963
------ ------- -------
Balance, June 30, 1997 (unaudited).............. $5,792 $16,306 $22,098
====== ======= =======
</TABLE>
See accompanying notes to financial statements
F-81
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
On June 30, 1995, Imperial Credit Industries, Inc. ("ICII") acquired from
Greenwich Capital Financial Products, Inc. ("Greenwich"), certain assets of
Greenwich's Franchise Mortgage Acceptance Company division (the "FMAC
Division"), including all of Greenwich's rights under certain servicing
contracts entered into by the FMAC Division (the "Servicing Contracts"). The
Servicing Contracts pertain to the servicing of franchise loans that were
previously securitized by Greenwich through the FMAC Division. In connection
with the acquisition, the Franchise Mortgage Acceptance Company LLC (the
"Company") or its affiliates assumed certain liabilities related to the
Servicing Contracts and Greenwich agreed to act as the Company's exclusive
agent in connection with securitization of franchise loans for a period of 24
months. The net purchase price for these assets was approximately $7.8
million.
Concurrent with the closing of the transactions described above, ICII
entered into an operating agreement with Wayne L. Knyal ("Knyal"), the former
president of the FMAC Division, for the formation of a California Limited
Liability company. The Company was formed to originate, securitize and service
franchise mortgage loans. Under the terms of the operating agreement, in
exchange for a 66 2/3% ownership interest in the Company, ICII contributed to
the Company approximately $1.3 million in cash and all of the assets purchased
from Greenwich other than Servicing Contracts. In exchange for a 33 1/3%
ownership interest in the Company, Knyal caused his wholly owned company,
Franchise Mortgage Acceptance Corporation ("FMAC Corporation"), to contribute
to the Company all of its rights under a securitized by FMAC Corporation. The
Company's headquarters and operations center are located in Los Angeles,
California.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles and with the instructions to form 10-
Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997.
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 financial statements have been reclassified to
conform to the 1997 presentation.
F-82
<PAGE>
FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. LOANS HELD FOR SALE
Loans held for sale consisted of the following at June 30, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1997 1996
----------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Franchise loans held for sale, net of
provisions................................... $188,825 $94,490
Franchise equipment loans and leases held for
sale......................................... 21,184 4,385
Net deferred loan fees........................ (1,324) (750)
Unearned lease income......................... (3,270) (497)
Deferred hedging loss......................... 2,599 1,287
-------- -------
$208,014 $98,915
======== =======
</TABLE>
4. GUARANTEE OF ICII DEBT
Effective January 19, 1997, the Company is a guarantor of ICII's $200 million
9 7/8% Senior Notes due January 15, 2007.
Effective June 1997, the Company is a guarantor of ICII's $70 million
Remarketed Par Securities.
F-83
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE
TRUST OR THE SUBSIDIARY GUARANTORS. 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 TRUST, THE COMPANY OR THE
SUBSIDIARY GUARANTORS 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 SECU-
RITIES 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 SECURI-
TIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... ii
Incorporation by Reference................................................ iii
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 24
Use of Proceeds........................................................... 40
Accounting Treatment...................................................... 40
Capitalization............................................................ 41
Selected Consolidated Financial Data...................................... 42
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 45
Business.................................................................. 71
Management................................................................ 106
Security Ownership of Certain Beneficial Owners and Management............ 113
Certain Transactions...................................................... 114
The Exchange Offer........................................................ 129
The Trust................................................................. 139
Description of Securities................................................. 140
Description of Debentures................................................. 156
Description of Guarantee.................................................. 185
Relationship Among the Par Securities, the Debentures and the Guarantee... 187
United States Federal Income Tax Consequences............................. 189
ERISA Considerations...................................................... 192
Plan of Distribution...................................................... 193
Legal Matters............................................................. 193
Experts................................................................... 194
Index of Principal Definitions............................................ 195
Index to ICII Consolidated Financial Statements........................... F-1
Index to FMAC Financial Statements........................................ F-63
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$70,000,000
IMPERIAL CREDIT
CAPITAL TRUST I
REMARKETED REDEEMABLE PAR
SECURITIES, SERIES B
(Liquidation Amount $1,000 per Security)
Fully and unconditionally guaranteed,
to the extent that the Trust has assets available for distribution by
[LOGO OF IMPERIAL CREDIT INDUSTRIES, INC.]
-----------------
PROSPECTUS
, 1997
-----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Declaration of Imperial Credit Capital Trust I (the "Trust") provides
that no Regular Trustee, affiliate of the Regular Trustee, or any officers,
directors, shareholders, members, partners, employees, representatives or
agents of any Regular Trustee, or any employee or agent of the Trust or its
affiliates (each, an "Indemnified Person") shall be liable, responsible or
accountable in damages or otherwise to the Trust or any employee or agent of
the Trust or its affiliates for any loss, damage or claim incurred by reason
of any act or omission performed or omitted by such Indemnified Person in good
faith on behalf of the Trust and in a manner such Indemnified Person
reasonably believed to be within the scope of the authority conferred on such
Indemnified Person by such Declaration or by law, except that an Indemnified
Person shall be liable for any loss, damage or claim incurred by reason of
such Indemnified Person's gross negligence or willful misconduct with respect
to such acts or omissions. The Declaration also provides that to the fullest
extent permitted by applicable law, Imperial Credit Industries, Inc. shall
indemnify and hold harmless each Indemnified Person from and against any loss,
damage or claim incurred by such Indemnified Person by reason of any act or
omission performed or omitted by such Indemnified Person in good faith on
behalf of the Trust and in a manner such Indemnified Person reasonably
believed to be within the scope of the authority conferred on such Indemnified
Person by such Declaration or by law, except that an Indemnified Person shall
be liable for any loss, damage or claim incurred by reason of such Indemnified
Person's gross negligence or willful misconduct with respect to such acts or
omissions. The Declaration further provides that, to the fullest extent
permitted by applicable law, expenses (including legal fees) incurred by an
Indemnified Person in defending any claim, demand, action, suit or proceeding
shall, from time to time, be advanced by Imperial Credit Industries, Inc.,
prior to the final disposition of such claim, demand, action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Indemnified
Person to repay such amount if it shall be determined that the Indemnified
Person is not entitled to be indemnified for the underlying cause of action as
authorized by the Declaration.
Imperial Credit Industries, Inc., Imperial Business Credit, Inc. and
Imperial Credit Advisors, Inc. are California corporations, and Franchise
Mortgage Acceptance Company LLC is a California limited liability company
(collectively, the "California Registrants"), all of such entities are
governed by the California General Corporation Law (the "CGCL").
Under Section 317 of the CGCL, a California corporation 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 California Registrants), 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 California Registrants, if such
persons acted in good faith and in a manner they reasonably believed to be in
the best interests of the California Registrants, and with respect to any
criminal action or proceeding, had no reasonable cause to believe their
conduct was unlawful. In addition, the California Registrants 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 California
Registrants, 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 California Registrants and their 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 California Registrants provide that the California Registrants
are authorized to provide indemnification for their directors and officers for
breach of their duty to the California Registrants and their 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 California Registrants's By-laws each provide for
indemnification
II-1
<PAGE>
of its directors and officers to the maximum extent permitted by Section 317
of the CGCL. In addition, agreements entered into by each of the California
Registrants with its directors and its executive officers require the
California Registrants 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 California Registrants (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 California Registrants 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 each of the California Registrants provide
that the personal liability of the directors of the California Registrants 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.
Auto Marketing Network, Inc., a Florida corporation ("AMN"), is governed by
the Florida Business Corporation Act. Section 607.0850 of the Florida Business
Corporation Act, provides that a corporation may indemnify any person who was
or is a party (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against liability incurred in
connection with such proceeding, including any appeal thereof, if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 0850 further provides that a corporation similarly may indemnify any
such person serving in any such capacity who was or is a party in the right of
the corporation to procure a judgment in its favor, against the estimated
expense of litigating the proceeding to conclusion actually and reasonably
incurred in connection with the defense or settlement of such proceeding if he
acted in good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable unless, and only to
the extent that the court in which such proceeding was brought, or any other
court of competent jurisdiction, shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such other court shall deem proper.
Section 607.0831 of the Florida Business Corporation Act provides that a
director is not personally liable for monetary damages to the corporation or
any other person for any statement, vote, decision, or failure to act,
regarding corporate management or policy, by a director, unless (i) the
director breached or failed to perform his duties as a director, (ii) the
director's breach or failure to perform constitutes a violation of criminal
law unless the director had no reasonable cause to believe his conduct was
unlawful, the director derived an improper personal benefit directly or
indirectly, (iii) the director's conduct triggers the liability provisions of
Section 0834 (relating to unlawful distributions), (iv) the director's conduct
constitutes a conscious disregard for the best interest of the corporation, or
will misconduct in a proceeding by or in the right of the corporation or a
shareholder, or (v) the director's conduct constitutes recklessness or an act
or omission committed in bad faith or with malicious purpose or in a manner
exhibiting wanton and willful disregard of human rights, safety, or property
in a proceeding by or in the right of someone other than the corporation or a
shareholder.
II-2
<PAGE>
The AMN's Articles of Incorporation provide that it is authorized to
indemnify any director or officer, or former director or officer, in the
manner provided in it's bylaws and to the fullest extent permitted by the laws
of the State of Florida. There are no further provisions in AMN's bylaws for
indemnification of directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
3.1(a)* Articles of Incorporation, as amended, of Imperial Credit
Industries, Inc.
3.1(b)** Articles of Incorporation of Imperial Business Credit, Inc.
3.1(c)** Articles of Incorporation of Imperial Credit Advisors, Inc.
3.1(d)** Amended Articles of Organization of Franchise Mortgage
Acceptance Company LLC
3.1(e)** Amended and Restated Articles of Organization of Auto Marketing
Network, Inc.
3.2(a)* Bylaws of Imperial Credit Industries, Inc.
3.2(b)** Amended Bylaws of Imperial Business Credit, Inc.
3.2(c)** Bylaws of Imperial Credit Advisors, Inc.
3.2(d)** Operating Agreement of Franchise Mortgage Acceptance Company
3.2(e)** Amended and Restated Bylaws of Auto Marketing Network, Inc.
4.1*** Certificate of Trust of Imperial Credit Capital Trust I
4.2*** Amended and Restated Declaration of Trust of Imperial Credit
Capital Trust I, with form of Remarketed Redeemable Par
Securities, dated June 9, 1997.
4.3*** Indenture, by and among, Imperial Credit Industries, Inc.,
Imperial Business Credit, Inc., Imperial Credit Advisors, Inc.,
Franchise Mortgage Acceptance Company, LLC, Auto Marketing
Network, Inc., and the Chase Trust Company of California, dated
as of June 9, 1997, with forms of Resettable Rate Debentures
4.4*** Registration Rights Agreement, by and among, Imperial Credit
Capital Trust I, Imperial Credit Industries, Inc., Imperial
Business Credit, Inc., Imperial Credit Advisors, Inc., Franchise
Mortgage Acceptance Company, LLC, Auto Marketing Network, Inc.,
and Lehman Brothers, Inc., dated as of June 9, 1997
4.5*** Remarketing Agreement, by and among, Imperial Credit Capital
Trust I, Imperial Credit Industries, Inc., and Lehman Brothers,
Inc., dated as of June 9, 1997
4.6*** Form of Guarantee Agreement to be executed by Imperial Credit
Industries, Inc., for the benefit of the Holders of Remarketed
Redeemable Par Securities, Series B
5.1 Opinion of Richards, Layton & Finger, P.A., regarding the
legality of the Remarketed Redeemable Par Securities
5.2*** Opinion of Freshman, Marantz, Orlanski, Cooper & Klein regarding
the legality of the Resettable Rate Debentures
8.1*** Opinion of Simpson Thacher & Bartlett regarding tax matters
21.1*** Subsidiaries of Imperial Credit Industries, Inc.
23.1(a) Consent of KPMG Peat Marwick LLP regarding Imperial Credit
Industries, Inc.
23.1(b) Consent of KPMG Peat Marwick LLP regarding Franchise Mortgage
Acceptance Company LLC
23.2 Consent of Richards, Layton & Finger, P.A. (contained in Exhibit
5.1)
23.3*** Consent of Freshman, Marantz, Orlanski, Cooper & Klein
(contained in Exhibit 5.2)
23.4*** Consent of Simpson Thacher & Bartlett (contained in Exhibit 8.1)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
24.1*** Power of Attorney (included on signature page of Registration
Statement)
25.1*** Statement of Eligibility of Trustee under the Trust Indenture Act
of 1939, as amended, of the Chase Trust Company of California as
Property Trustee for the Amended and Restated Declaration of Trust
of Imperial Credit Capital Trust I
25.2*** Statement of Eligibility of Trustee under the Trust Indenture Act
of 1939, as amended, of the Chase Trust Company of California as
Trustee under the Indenture
25.3*** Statement of Eligibility of Trustee under the Trust Indenture Act
of 1939, as amended, of the Chase Trust Company of California as
Guarantee Trustee to the Guarantee Agreement
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 Imperial Credit
Capital Trust I and Chase Trust Company of California
</TABLE>
- --------
* Incorporated by reference to Imperial Credit Industries, Inc.'s
Registration Statement on Form S-1 (Registration No. 33-45606) declared
effective May 26, 1992.
** Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-22141) declared effective March 31, 1997.
*** Previously filed.
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 Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have 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
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrants 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 Registrants will, unless
in the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(b) The Registrants hereby undertake 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 Registrants hereby undertake 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-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS
HAVE DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF LOS ANGELES, STATE OF CALIFORNIA ON OCTOBER 10, 1997.
Imperial Credit Capital Trust I
By: /s/ IRWIN L. GUBMAN
-----------------------------------
REGULAR TRUSTEE (PRINCIPAL
EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ IRWIN L. GUBMAN Regular Trustee October 10, 1997
- ------------------------------------- (Principal
IRWIN L. GUBMAN Executive Officer)
* Regular Trustee October 10, 1997
- ------------------------------------- (Principal
KEVIN E. VILLANI Financial and
Accounting Officer)
* Regular Trustee October 10, 1997
- -------------------------------------
PAUL B. LASITER
By: /s/ IRWIN L. GUBMAN
---------------------------------
*Irwin L. Gubman
Attorney-in-fact
</TABLE>
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS
HAVE DULY CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO BE SIGNED
ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
LOS ANGELES, STATE OF CALIFORNIA ON OCTOBER 10, 1997.
Imperial Credit Industries, Inc.
*
By: _________________________________
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman, Chief October 10, 1997
- ------------------------------------- Executive Officer,
H. WAYNE SNAVELY President
(Principal
Executive Officer)
* Executive Vice October 10, 1997
- ------------------------------------- President and Chief
KEVIN E. VILLANI Financial Officer
(Principal
Financial and
Accounting Officer)
* Director October 10, 1997
- -------------------------------------
STEPHEN J. SHUGERMAN
* Director October 10, 1997
- -------------------------------------
JOSEPH R. TOMKINSON
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director October 10, 1997
- -------------------------------------
ROBERT S. MUEHLENBECK
* Director October 10, 1997
- -------------------------------------
G. LOUIS GRAZIADIO, III
* Director October 10, 1997
- -------------------------------------
PERRY A. LERNER
* Director October 10, 1997
- -------------------------------------
JAMES CLAYBURN LAFORCE, JR.
/s/ IRWIN L. GUBMAN
By: _________________________________
*Irwin L. Gubman
Attorney-in-fact
</TABLE>
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS
HAVE DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF LOS ANGELES, STATE OF CALIFORNIA ON OCTOBER 10, 1997.
Imperial Business Credit, Inc.
*
By: _________________________________
CHAIRMAN
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman October 10, 1997
- -------------------------------------
H. WAYNE SNAVELY
* Director and Chief October 10, 1997
- ------------------------------------- Executive Officer
PHILIP WALDEN (Principal
Executive Officer)
* Chief Financial October 10, 1997
- ------------------------------------- Officer (Principal
STEPHEN J. OLSON Financial and
Accounting Officer)
* Director October 10, 1997
- -------------------------------------
STEPHEN J. SHUGERMAN
/s/ IRWIN L. GUBMAN
By: _________________________________
*Irwin L. Gubman
Attorney-in-fact
</TABLE>
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS
HAVE DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF LOS ANGELES, STATE OF CALIFORNIA ON OCTOBER 10, 1997.
Imperial Credit Advisors, Inc.
*
By: _________________________________
CHAIRMAN
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman (Principal October 10, 1997
- ------------------------------------- Executive Officer)
H. WAYNE SNAVELY
* Director and Chief October 10, 1997
- ------------------------------------- Financial Officer
THOMAS MARKEL (Principal
Financial and
Accounting Officer)
* Director October 10, 1997
- -------------------------------------
STEPHEN J. SHUGERMAN
* Director October 10, 1997
- -------------------------------------
GLENN WILSON, JR.
/s/ IRWIN L. GUBMAN
By: _________________________________
*Irwin L. Gubman
Attorney-in-fact
</TABLE>
II-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS
HAVE DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF LOS ANGELES, STATE OF CALIFORNIA ON OCTOBER 10, 1997.
Franchise Mortgage Acceptance
Company LLC
*
By: _________________________________
CHAIRMAN AND MANAGER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman October 10, 1997
- -------------------------------------
H. WAYNE SNAVELY
* Manager and Chief October 10, 1997
- ------------------------------------- Executive Officer
WAYNE KNYAL (Principal
Executive Officer)
* Chief Financial October 10, 1997
- ------------------------------------- Officer (Principal
RAEDELLE WALKER Financial Officer)
Manager October , 1997
- -------------------------------------
RONALD V. DAVIS
* Manager October 10, 1997
- -------------------------------------
MICHAEL MATKINS
* Manager October 10, 1997
- -------------------------------------
STEPHEN J. SHUGERMAN
/s/ IRWIN L. GUBMAN
By: _________________________________
*Irwin L. Gubman
Attorney-in-fact
</TABLE>
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANTS
HAVE DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF LOS ANGELES, STATE OF CALIFORNIA ON OCTOBER 10, 1997.
Auto Marketing Network, Inc.
*
By: _________________________________
CHAIRMAN
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman October 10, 1997
- -------------------------------------
H. WAYNE SNAVELY
* Director and Chief October 10, 1997
- ------------------------------------- Executive Officer
STEPHEN S. RASKIN (Principal
Executive Officer)
* Chief Financial October 10, 1997
- ------------------------------------- Officer (Principal
GLENN YESNER Financial and
Accounting Officer)
* Director October 10, 1997
- -------------------------------------
PATRICIA MAGEE DALY
/s/ Irwin Gubman Director October 10, 1997
- -------------------------------------
IRWIN GUBMAN
* Director October 10, 1997
- -------------------------------------
KEVIN E. VILLANI
/s/ IRWIN L. GUBMAN
By: _________________________________
*Irwin L. Gubman
Attorney-in-fact
</TABLE>
II-11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<C> <S> <C>
3.1(a)* Articles of Incorporation, as amended, of Imperial
Credit Industries, Inc.
3.1(b)** Articles of Incorporation of Imperial Business Credit,
Inc.
3.1(c)** Articles of Incorporation of Imperial Credit Advisors,
Inc.
3.1(d)** Amended Articles of Organization of Franchise Mortgage
Acceptance Company LLC
3.1(e)** Amended and Restated Articles of Organization of Auto
Marketing Network, Inc.
3.2(a)* Bylaws of Imperial Credit Industries, Inc.
3.2(b)** Amended Bylaws of Imperial Business Credit, Inc.
3.2(c)** Bylaws of Imperial Credit Advisors, Inc.
3.2(d)** Operating Agreement of Franchise Mortgage Acceptance
Company
3.2(e)** Amended and Restated Bylaws of Auto Marketing Network,
Inc.
4.1*** Certificate of Trust of Imperial Credit Capital Trust
I
4.2*** Amended and Restated Declaration of Trust of Imperial
Credit Capital Trust I, with form of Remarketed
Redeemable Par Securities, dated June 9, 1997
4.3*** Indenture, by and among, Imperial Credit Industries,
Inc., Imperial Business Credit, Inc., Imperial Credit
Advisors, Inc., Franchise Mortgage Acceptance Company,
LLC, Auto Marketing Network, Inc., and the Chase Trust
Company of California, dated as of June 9, 1997, with
forms of Resettable Rate Debentures
4.4*** Registration Rights Agreement, by and among, Imperial
Credit Capital Trust I, Imperial Credit Industries,
Inc., Imperial Business Credit, Inc., Imperial Credit
Advisors, Inc., Franchise Mortgage Acceptance Company,
LLC, Auto Marketing Network, Inc., and Lehman
Brothers, Inc., dated as of June 9, 1997
4.5*** Remarketing Agreement, by and among, Imperial Credit
Capital Trust I, Imperial Credit Industries, Inc., and
Lehman Brothers, Inc., dated as of June 9, 1997
4.6*** Form of Guarantee Agreement to be executed by Imperial
Credit Industries, Inc., for the benefit of the
Holders of Remarketed Redeemable Par Securities,
Series B
5.1 Opinion of Richards, Layton & Finger, P.A., regarding
the legality of the Remarketed Redeemable Par
Securities
5.2*** Opinion of Freshman, Marantz, Orlanski, Cooper & Klein
regarding the legality of the Resettable Rate
Debentures
8.1*** Opinion of Simpson Thacher & Bartlett regarding tax
matters
21.1*** Subsidiaries of Imperial Credit Industries, Inc.
23.1(a) Consent of KPMG Peat Marwick LLP regarding Imperial
Credit Industries, Inc.
23.1(b) Consent of KPMG Peat Marwick LLP regarding Franchise
Mortgage Acceptance Company LLC
23.2 Consent of Richards, Layton & Finger, P.A. (contained
in Exhibit 5.1)
23.3*** Consent of Freshman, Marantz, Orlanski, Cooper & Klein
(contained in Exhibit 5.2)
23.4*** Consent of Simpson Thacher & Bartlett (contained in
Exhibit 8.1)
24.1*** Power of Attorney (included on signature page of
Registration Statement)
25.1*** Statement of Eligibility of Trustee under the Trust
Indenture Act of 1939, as amended, of the Chase Trust
Company of California as Property Trustee for the
Amended and Restated Declaration of Trust of Imperial
Credit Capital Trust I
</TABLE>
<PAGE>
INDEX TO EXHIBITS--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<C> <S> <C>
25.2*** Statement of Eligibility of Trustee under the Trust
Indenture Act of 1939, as amended, of the Chase Trust
Company of California as Trustee under the Indenture
25.3*** Statement of Eligibility of Trustee under the Trust
Indenture Act of 1939, as amended, of the Chase Trust
Company of California as Guarantee Trustee to the
Guarantee Agreement
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 Imperial
Credit Capital Trust I and Chase Trust Company of
California
</TABLE>
- -------
* Incorporated by reference to Imperial Credit Industries, Inc.'s
Registration Statement on Form S-1 (Registration No. 33-45606) declared
effective May 26, 1992.
** Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-22141) declared effective March 31, 1997.
*** Previously filed.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF RICHARDS, LAYTON & FINGER]
October 10, 1997
Imperial Credit Capital Trust I
c/o Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard, Bldg. 1, Suite 110
Torrance, CA 90505
Re: Imperial Credit Capital Trust I
-------------------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel for Imperial Credit Industries,
Inc., a California corporation (the "Company"), and Imperial Credit Capital
Trust I, a Delaware business trust (the "Trust"), in connection with the matters
set forth herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination of
documents has been limited to the examination of originals or copies of the
following:
(a) The Certificate of Trust of the Trust, dated as of May 28, 1997 (the
"Certificate"), as filed in the office of the Secretary of State of the State of
Delaware (the "Secretary of State") on May 28, 1997;
(b) The Declaration of Trust of the Trust, dated as of May 28, 1997, between
the Company and the trustees of the Trust named therein;
(c) The Registration Statement (the "Registration Statement") on Form S-4,
including a preliminary prospectus (the "Prospectus"), relating to an offer to
<PAGE>
Imperial Credit Capital Trust I
c/o Imperial Credit Industries, Inc.
July 3, 1997
Page 2
exchange (the "Exchange Offer") up to $70,000,000 aggregate liquidation amount
of its New Par Securities, Series B ("New Par Securities"), for a like
liquidation amount of its Old Par Securities, Series A ("Old Par Securities"),
as filed by the Company, certain of its subsidiaries and the Trust with the
Securities and Exchange Commission on June 27, 1997;
(d) The Amended and Restated Declaration of Trust, dated as of June 9, 1997
among the Company and the trustees named therein, and the holders, from time to
time, of undivided beneficial interests in the assets of the Trust (the
"Declaration") filed as an exhibit to the Registration Statement; and
(e) A Certificate of Good Standing for the Trust, dated October 10, 1997,
obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are used as
defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other than
the documents listed above, and we have assumed that there exists no provision
in any document that we have not reviewed that bears upon or is inconsistent
with the opinions stated herein. We have conducted no independent factual
investigation of our own but rather have relied solely upon the foregoing
documents, the statements and information set forth therein and the additional
matters recited or assumed herein, all of which we have assumed to be true,
complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Declaration
constitutes the entire agreement among the parties thereto with respect to the
subject matter thereof, including with respect to the creation, operation and
termination of the Trust, and that the Declaration and Certificate are in full
force and effect and have not been amended, (ii) except to the extent provided
in paragraph 1 below, the due creation or due organization or due formation, as
the case may be, and valid existence in good standing of each party to the
documents examined by us under the laws of the jurisdiction governing its
creation, organization or formation, (iii) the legal capacity of natural persons
who are parties to the documents examined by us, (iv) that, except to the extent
provided in paragraph 2 below, each of the
<PAGE>
Imperial Credit Capital Trust I
c/o Imperial Credit Industries, Inc.
July 3, 1997
Page 3
parties to the documents examined by us has the power and authority to execute
and deliver, and to perform its obligations under, such documents, (v) except as
provided in paragraph 2 below, the due authorization, execution and delivery by
all parties thereto of all documents examined by us, (vi) the receipt by each
Person to whom a New Par Security is to be issued by the Trust (collectively,
the "New Par Security Holders") of a New Par Security Certificate for such New
Par Security and the acceptance by the Trust of the outstanding Old Par Security
validly tendered for such New Par Security pursuant to the Exchange Offer, all
in accordance with the Declaration and the Prospectus, and (vii) that the New
Par Securities are issued and sold to the New Par Security Holders in accordance
with the Declaration and the Prospectus. We have not participated in the
preparation of the Prospectus and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good standing
as a business trust under the Delaware Business Trust Act, 12 Del. C. (S) 3801,
-------
et seq.
- -- ---
2. The New Par Securities to be issued to the New Par Security Holders have
been duly authorized by the Declaration and will be duly and validly issued and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable undivided beneficial interests in the assets of the Trust.
3. The New Par Security Holders, as beneficial owners of the Trust, will be
entitled to the same limitation of personal liability extended to stockholders
of private corporations for profit organized under the General Corporation Law
of the State of Delaware. We note that the New Par Security Holders may be
obligated, pursuant to the Declaration, to (i) provide indemnity and security in
connection with requests or directions to the Property Trustee under the
Declaration to exercise its rights and remedies under the Declaration, (ii)
provide indemnity and security in
<PAGE>
Imperial Credit Capital Trust I
c/o Imperial Credit Industries, Inc.
July 3, 1997
Page 4
connection with and pay taxes or governmental charges arising from transfers of
New Par Securities and the issuance of replacement New Par Security
Certificates, and (iii) undertake as a party litigant to pay costs in any suit
for the enforcement of any right or remedy under the Declaration or against the
Property Trustee under the Declaration, to the extent provided in the
Declaration.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement and to the reliance
thereon by the New Par Security Holders. In addition, we hereby consent to the
use of our name under the heading "Legal Matters" in the Prospectus. In giving
the foregoing consents, we do not thereby admit that we come within the category
of Persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder. We also consent to the reliance by Freshman, Marantz,
Orlanski, Cooper & Klein and Simpson Thacher & Bartlett as to matters of
Delaware law in connection with opinions to be rendered by it them pursuant to
the Exchange Offer.
Very truly yours,
/s/ Richards, Layton & Finger
WF/sem
<PAGE>
EXHIBIT 23.1A
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 Consolidated 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
October 15, 1997
<PAGE>
EXHIBIT 23.1B
CONSENT OF INDEPENDENT AUDITORS
The Board of Managers
Franchise Mortgage Acceptance Company LLC:
We consent to the inclusion of our report dated January 29, 1997, with respect
to the balance sheets of Franchise Mortgage Acceptance Company LLC as of
December 31, 1996 and 1995, and the related statements of operations, changes
in members' equity, and cash flows for the year ended December 31, 1996 and
for the period from June 30, 1995 (inception) through December 31, 1995, which
report appears in the Form S-4 of Imperial Credit Industries, Inc.
KPMG Peat Marwick LLP
Los Angeles, California
October 15, 1997
