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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19861
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IMPERIAL CREDIT INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 95-4054791
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
23550 HAWTHORNE BOULEVARD, BUILDING 1, SUITE 110 TORRANCE, CALIFORNIA 90505
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(310)-791-8020
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, no par value Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sales price of its Common Stock on March 31,
1998 on the Nasdaq National Market was approximately $921,724,234.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of Common Stock outstanding as of March 31, 1998:
38,748,331.
DOCUMENTS INCORPORATED BY REFERENCE (NOT APPLICABLE)
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IMPERIAL CREDIT INDUSTRIES, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE
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ITEM 1. BUSINESS..................................................... 3
ITEM 2. PROPERTIES................................................... 40
ITEM 3. LEGAL PROCEEDINGS............................................ 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 41
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 42
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA......................... 43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 46
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK... 70
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 143
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 143
ITEM 11. EXECUTIVE COMPENSATION....................................... 145
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 150
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 151
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 168
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FORWARD LOOKING STATEMENTS
When used in this Form 10-K or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially
from those anticipated or projected. The Company does not undertake, and
specifically disclaims any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
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ITEM 1. BUSINESS
GENERAL
Imperial Credit Industries, Inc. (the "Company" or "ICII"), with
consolidated assets of $2.1 billion as of December 31, 1997, is a diversified
commercial and consumer lending, financial services and investment holding
company, organized in 1986 with its headquarters located in Torrance,
California. Its principal business activities consist of the operation of six
significant wholly owned operating subsidiaries: Southern Pacific Bank
("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit Advisors, Inc.
("ICAI"), Auto Marketing Network Inc. ("AMN"), Imperial Credit Commercial
Asset Management Corporation ("ICCAMC") and Imperial Credit Worldwide, Ltd.
("ICW"), one significant majority owned consolidated operating subsidiary,
Imperial Capital Group, LLC ("ICG") and significant equity investments in two
publicly traded companies, Southern Pacific Funding Corporation ("SPFC") NYSE
Symbol: SFC and Franchise Mortgage Acceptance Company ("FMC") NASDAQ Symbol:
FMAX.
The Company and its subsidiaries and affiliates offer a wide variety of
financial services and investment products nationwide. Equity investments in
publicly traded companies are defined as investments accounted for by the
Company pursuant to the equity method of accounting which requires a minimum
of 20% ownership in the voting common stock of the investee company. The
Company's major business activities consist of the following subsidiaries,
investments and equity investments in publicly traded companies:
SIGNIFICANT WHOLLY-OWNED OPERATING SUBSIDIARIES
Southern Pacific Bank........ An industrial loan company specializing in
asset-based lending, loan participations,
lending to small businesses and consumers, and
income property lending. In October 1997,
Southern Pacific Thrift and Loan changed its
name to Southern Pacific Bank.
Imperial Business Credit,
Inc.......................... A commercial leasing company specializing in
equipment leasing to small businesses.
Auto Marketing Network,
Inc.......................... A company providing sub-prime auto financing.
Imperial Credit Advisors,
Inc.......................... A company providing management advisory
services.
Imperial Credit Worldwide, Majority owner of Credito Imperial Argentina, a
Ltd.......................... mortgage banking company conducting business in
Argentina.
Imperial Credit Commercial
Asset Management
Corporation.................. A company that manages the day to day
operations of Imperial Credit Commercial
Mortgage Investment Corporation ("ICCMIC")
NASDAQ Symbol: ICMI, a publicly traded real
estate investment trust with investments in
multifamily and commercial properties, loans,
and securities. As of December 31, 1997, the
Company owned 8.9% of ICCMIC's common stock.
SIGNIFICANT MAJORITY-OWNED OPERATING SUBSIDIARY
Imperial Capital Group, LLC.. The holding company for a registered investment
broker/dealer providing investment
opportunities and research to individuals and
institutional investors. The Company owns 60%
of ICG's equity.
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SIGNIFICANT EQUITY INVESTMENTS IN PUBLICLY TRADED COMPANIES
Franchise Mortgage
Acceptance Company........... A franchise lending company specializing in
lending to the restaurant and retail energy
industries. As of December 31, 1997, the
Company owned 38.4% of FMC's common stock.
Southern Pacific Funding
Corporation.................. A sub-prime mortgage banking company. As of
December 31, 1997, the Company owned 47.0% of
SPFC's common stock.
BUSINESS STRATEGY
In 1995, the Company began to reposition, transform and diversify its core
business activities from the traditional mortgage banking operations of
originating and selling conforming residential mortgage loans to offering
higher margin loan, lease, investment and financial services products. The
Company's core business has remained consistent in that it originates loans
and leases funded primarily by warehouse lines of credit, repurchase
facilities, securitizations and whole loan sales in the secondary market. The
Company accomplished its diversification through a business strategy that
emphasizes:
. Investing in and managing businesses in niche segments of the financial
services industry. The Company intends to retain a significant equity
investment in the companies to provide a source of future earnings and
cash flow for the Company.
. Conservative, disciplined underwriting and credit risk management.
. Loan and lease originations, where possible, on a wholesale basis.
. Securitization or sale in the secondary market of substantially all of
the Company's loans and leases, other than those held by SPB for
investment.
. Maintaining business and financial flexibility to take advantage of
changing market conditions with respect to specific financial services
businesses.
Strategic Focus and Acquisitions
The Company 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. The Company, through its repositioning and diversification
process from the traditional mortgage banking operations of originating and
selling conforming residential loans to a more diversified financial services
company has accomplished that goal by its acquisitions of businesses in niche
segments of the financial services industry.
For the years ended December 31, 1997, 1996 and 1995, the Company originated
or acquired $1.2 billion, $2.2 billion and $3.0 billion of loans and leases,
respectively. Such amounts include loan and lease originations through the
third quarter ended September 30, 1997 for Franchise Mortgage Acceptance
Company, LLC ("FMAC"). In August 1997, FMAC incorporated FMC, for the purpose
of succeeding to the business of FMAC. Immediately prior to FMC's initial
public offering of its common stock, FMAC merged into FMC (the
"Reorganization"). As of the fourth quarter ended December 31, 1997, FMAC is
no longer a majority owned subsidiary of the Company.
In addition, during the years ended December 31, 1997, 1996 and 1995, the
Company completed securitization transactions totaling $919.1 million, $1.3
billion and $1.0 billion, respectively.
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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 sub-prime residential mortgage
banking, commercial mortgage banking, business finance lending and consumer
lending.
The Company provides loan and lease products primarily in the following
sectors: sub-prime residential mortgage banking; commercial mortgage banking
income producing property loans; business lending--equipment leasing, loan
participations and asset-based lending; consumer lending--sub-prime auto loans
and Title I home improvement lending. The Company solicits loans and leases
from brokers on a wholesale and portfolio basis and originates loans directly
from borrowers. The majority of the Company's loans and leases, other than
those held by SPB for investment, are sold in secondary markets through
securitizations and whole loan sales.
During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortage Holdings, Inc. ("IMH") AMEX
Symbol IMH, formerly Imperial Credit Mortgage Holdings, Inc. In exchange for
these assets, the Company received approximately 11.8% of the common stock of
IMH. Additionally, ICAI entered into a management agreement with IMH pursuant
to which ICAI advised upon the day-to-day operations of IMH and for which it
was paid a management fee. During 1997, the Company sold its common stock
interest in IMH, receiving proceeds of $12.0 million and recording a gain of
approximately $11.5 million.
In December 1997, IMH and the Company negotiated a termination of the
management agreement (the "Termination Agreement"). The consideration received
by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now
known as Impac Funding Corporation and is the origination unit of IMH, in the
amount of $29.1 million. The IMH common stock and the securitization-related
assets were recorded by the Company at their fair values of approximately
$35.0 million and $13.1 million, respectively, for a total of $48.1 million.
This amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
During the first quarter of 1997, the Company disposed of its common stock
interest in ICIFC, resulting in a loss of $100,000. At December 31, 1996, the
Company owned 100% of the common stock of ICIFC which represented only a 1%
economic interest as IMH owned all of the non-voting preferred stock of ICIFC
which gave IMH a 99% economic interest in ICIFC. The Company's disposal of its
remaining economic interest in ICIFC concluded its exit from the former
mortgage banking operations.
Franchise Mortgage Acceptance Company
On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed FMAC, a
limited liability company, in which the Company had a 66.7% ownership
interest. The acquisition was accounted for as a purchase and the purchase
price of $7.6 million, which included $3.8 million in contingent consideration
for loans in the pipeline, was allocated to the net assets acquired based on
their fair value resulting in goodwill of approximately $4.0 million. The
Company's franchise lending business was conducted through FMAC until November
1997, at which time FMAC merged into FMC, a Delaware corporation formed for
the purpose of succeeding to the business of FMAC, and FMC completed an
initial public offering of its common stock. The Company sold into FMC's
initial public offering 3,568,175 shares at $18.00 per share generating net
proceeds of $59.7 million and a gain of $48.9 million. Additionally, the
Company recognized a gain of $43.2 million resulting from the adjustment in
the basis of its investment in FMC due to the offering and its reduced
ownership percentage. At the time of FMC's initial public offering and at
December 31, 1997, the Company's percentage ownership of FMC common stock was
38.4%. Accordingly, FMC's operating results are no longer consolidated with
those of the Company and the Company's investment in FMC is accounted for
under the equity method.
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Southern Pacific Funding Corporation
For the year ended December 31, 1996, a substantial portion of the Company's
operations were conducted through its sub-prime residential lending
subsidiary, SPFC. In June 1996, SPFC completed an initial public offering of
its common stock pursuant to which ICII was a selling shareholder. SPFC and
the Company sold 5.2 million shares and 3.5 million shares, respectively, at
$11.33 per share. In a secondary offering during 1996, the Company sold 1.5
million SPFC shares at $19.83 per share. The Company recognized a gain on sale
of the SPFC shares it owned of $51.2 million, which is net of offering
expenses and the Company's cost basis in the shares. The Company also
recognized a gain of $31.4 million related to the stock sold by SPFC. The gain
related to the stock sold by SPFC is based on the difference between the
Company's equity ownership in SPFC after the sale and such equity ownership
prior to the sale, using the Company's respective SPFC ownership percentages.
During the first quarter of 1997, the Company sold 370,000 shares of SPFC
common stock at $16.63 per share generating net proceeds of $6.2 million and a
gain of $4.3 million. Such transaction reduced the Company's ownership
percentage in SPFC from 51.2% at December 31, 1996, to 49.4% at March 31,
1997. Accordingly, SPFC's operating results are no longer consolidated with
those of the Company and the Company's investment in SPFC is accounted for
under the equity method. During the third quarter of 1997, the Company sold an
additional 500,000 shares of SPFC common stock generating net proceeds of $7.6
million and a gain of $5.2 million. At December 31, 1997, the Company's
ownership interest in SPFC was 47%.
Imperial Business Credit
IBC leases business equipment, including copying, data processing,
communication, printing and manufacturing equipment, exclusively to business
users. The Company expanded its commercial equipment leasing business
conducted by IBC through the acquisitions of substantially all of the assets
of First Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4
million in May 1995 and all of the assets of Avco Leasing Services, Inc. and
Avco Financial Services of Southern California, Inc. (together "Avco") for
approximately $94.8 million in October 1996. These acquisitions were accounted
for as purchases and the purchase prices were allocated to the net assets
acquired based on their fair value resulting in goodwill of $1.2 million and
$12.5 million for the FCAC and Avco transactions, respectively. For the years
ended December 31, 1997 and December 31, 1996, IBC originated $151.3 million
and $87.2 million of leases and securitized $213.6 million and $87.0 million
of leases, respectively.
Coast Business Credit
Coast Business Credit ("CBC") is an asset-based lender specializing in
lending to middle market manufacturing, distributing and high-technology
businesses. In September 1995, the Company began making asset-based loans to
middle market companies located mainly in California by acquiring CoastFed
Business Credit ("CBCC"), from Coast Federal Bank, a financial services
company engaged primarily in the asset-based commercial lending business. This
entity, now a division of SPB, was renamed CBC. The acquisition was accounted
for as a purchase and the purchase price of $150 million was allocated to the
net assets acquired based on their fair value resulting in goodwill of
approximately $16 million. At December 31, 1997 and 1996, CBC had total
commitments of $803.3 million and $547.7 million, of which $484.8 million and
$288.5 million of loans were outstanding, respectively.
Imperial Capital Group
During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm.
DRI was headquartered in Beverly Hills, California with offices in Chicago,
Illinois, Dallas, Texas, and Sun Valley, Idaho, and offered full service
investment banking, brokerage, and asset management services. DRI managed and
underwrote public offerings of securities, arranged private placements and
provided advisory and
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other services in connection with mergers, acquisitions, restructurings, and
other financial transactions. The Company acquired a 1% interest in DRI and
purchased a warrant to acquire an additional 48% interest.
During the fourth quarter of 1997, the Company formed a new subsidiary, ICG,
which includes a registered broker/dealer and an asset management company
offering individual and corporate investors a wide range of financial products
and services. In connection with the formation of ICG, the Company recognized
a pre-tax charge of $3.7 million relating to the restructuring of its loan to
DRI. As part of the DRI restructuring, substantially all of the assets and
personnel of DRI were acquired or hired by ICG. During the fourth quarter of
1997, ICG raised $323 million for corporate clients through private placement
debt and equity offerings generating investment banking fees of $7.7 million.
At December 31, 1997, the Company's ownership interest in ICG is 60%.
Auto Marketing Network
In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 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. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
PrinCap Mortgage Warehouse
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such
assets to a subsidiary. The acquisition was accounted for as a purchase, and
the purchase price of $123.7 million was allocated to the net assets acquired
based on their fair value resulting in goodwill of $6.8 million.
PrinCap's primary business is residential mortgage warehouse lending to
medium-sized brokers and mortgage bankers on a national basis. At December 31,
1997, PrinCap had commitments outstanding and loans of $124.6 million and
$122.5 million, respectively.
Imperial Credit Commercial Asset Management Corporation
The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to
day operations of ICCMIC, a real estate investment trust intending to invest
primarily in performing multi-family and commercial real estate loans and
mortgage-backed securities. In October 1997, ICCMIC completed its initial
public offering and sold approximately 34.5 million shares of common stock at
$15.00 per share resulting in net proceeds of approximately $481.2 million.
The Company purchased 2,970,000 shares of ICCMIC common stock in the offering
and an additional 100,000 shares in December 1997. As of December 31, 1997,
the Company owned 8.9% of the common stock of ICCMIC.
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LOAN AND LEASE PRODUCTS
The Company offers loan and lease products and provides other services in
the following sectors:
. BUSINESS FINANCE LENDING. Business finance lending is conducted through
IBC and three divisions of SPB: Coast Business Credit ("CBC"), the Loan
Participation and Investment Group ("LPIG") and the Auto Lend Group
("Auto Lend").
. COMMERCIAL MORTGAGE LENDING. The Company conducts its commercial
mortgage lending operations through the Income Property Lending Division
("IPLD") of SPB.
. CONSUMER LENDING. The Company conducts consumer lending operations
through the Auto Lending Division ("ALD") and Consumer Credit Division
("CCD") of SPB and through AMN.
. ADVISORY, INVESTMENT AND OTHER ACTIVITIES. The Company conducts advisory
services through its ICAI, ICCAMC, and ICG subsidiaries and has
substantial equity investments in SPFC, a publicly traded sub-prime
residential mortgage lender, and FMC, a publicly traded specialty
commercial finance company.
BUSINESS FINANCE LENDING
The Company, through IBC, and SPB'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 auto dealers.
IMPERIAL BUSINESS CREDIT, INC.
General
In May 1995, the Company expanded its existing commercial equipment leasing
business conducted by its wholly-owned subsidiary, IBC, through the
acquisition of the assets and the assumption of certain liabilities of 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 acquisition was
accounted for as a purchase and the purchase price of $21.4 million was
allocated to the net assets acquired based on their fair value resulting in
goodwill of approximately $1.2 million.
In October 1996 pursuant to the Avco Acquisition, 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 was accounted for as a purchase, and the
purchase price of $94.8 million was allocated to the net assets acquired based
on their fair value, resulting in goodwill of approximately $12.5 million.
IBC's corporate headquarters are located in Rancho Bernardo, California. IBC
carries out its business equipment leasing operations from both its
headquarters and its sales offices in Irvine, California, Denver, Colorado and
Atlanta, Georgia.
IBC's lease originations totaled $151.3 million and $87.2 million for the
years ended December 31, 1997 and December 31, 1996, respectively. During the
years ended December 31, 1997 and December 31, 1996, IBC securitized $213.6
million and $87.0 million of leases, respectively.
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
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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, 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>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
---------------------------------- ----------------------------------
NUMBER OF PRINCIPAL NUMBER OF PRINCIPAL
LEASES AMOUNT % OF TOTAL LEASES AMOUNT % OF TOTAL
ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS
---------- ---------- ------------ ---------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computers............... 1,981 $ 39,270 26.0% 857 $21,331 24.5%
Manufacturing/Machine
work................... 441 12,001 7.9 380 11,289 13.0
Restaurant.............. 1,047 13,072 8.6 395 6,238 7.2
Furniture and fixtures.. 984 18,407 12.2 242 5,963 6.8
Automotive.............. 1,843 15,879 10.5 475 4,279 4.9
Heavy equipment......... 430 9,449 6.2 163 3,938 4.5
Radio television
production equipment... 374 7,869 5.2 202 3,838 4.4
Print/Typeset equipment. 136 3,423 2.3 141 3,251 3.7
Health/Sports equipment. 152 4,005 2.6 125 3,069 3.5
Dry cleaning/Washing.... 102 2,385 1.6 102 2,387 2.7
Clothing manufacture.... 38 1,451 1.0 59 2,373 2.7
Other................... 1,251 24,057 15.9 1,204 19,251 22.1
----- -------- ----- ----- ------- -----
Total................. 8,779 $151,268 100.0% 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 compliance with governmental rules and regulations, (iii)
maintain and service the equipment, (iv) insure the equipment against casualty
losses and public liability, bodily injury and property damage and (v) pay
directly, or reimburse IBC for, any taxes associated with the equipment, its
use, possession or lease, except those relating to net income derived by IBC
therefrom.
The lease provides that IBC, in the event of a default by a lessee, may
declare the entire unpaid balance of rentals due and payable immediately, and
may seize and remove the equipment for subsequent sale, re-lease or other
disposition.
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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 of 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 solicit end user customers and vendors to
market their equipment lease transactions. In the future, 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 who are 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.
COAST BUSINESS CREDIT
General
CBC is a senior secured asset-based lender located in Los Angeles,
California, which has historically conducted its lending business activities
in the Western United States. During 1996 CBC executed an expansion plan which
increased its customer base outside of California.
CBC now operates four loan production centers in California and additional
loan production centers in Atlanta, Baltimore, Boston, Chicago, Cleveland,
Minneapolis, Phoenix, Portland, Providence and Seattle. At December 31, 1997
and December 31, 1996, CBC had outstanding loans totaling $484.8 million and
$288.5 million, respectively.
CBC had unused loan commitments of $318.4 million and $259.2 million at
December 31, 1997 and 1996, respectively.
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. At December 31, 1997 and 1996, CBC had outstanding loans to
technology companies totaling $201.8 million and $115.6 million, respectively.
At December 31, 1997 and December 31, 1996, CBC's loan portfolio represented
lending relationships with 142 and 105 customers, with an average outstanding
loan balance per customer of $3.4 million and $2.8 million, respectively. 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.
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<PAGE>
The Company believes that CBC's loan 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 loan advance under a loan to an
approved client within three weeks of CBC's receipt of required information
with respect to the client, and strives to fund future advances generally by
the next business day after CBC's receipt of required documentation.
Loan Products and Originations
CBC's loans are categorized based on the type of collateral securing the
loan. CBC makes revolving loans primarily secured by accounts receivable and
secondarily by inventory. It also makes term loans secured by real property,
equipment or other fixed assets.
CBC also periodically enters into participations with other commercial
finance companies. CBC's loans typically have maturities of two to five years,
providing borrowers with greater flexibility to manage their borrowing needs.
These loans have an automatic renewal for a one year period at the end of such
contract term unless terminated by either party (usually requiring 60 days
written notice prior to the end of such term). Equipment loans are term loans
typically with three- to five-year amortization periods, but are due and
payable upon termination of the master loan and security agreement.
Accounts receivable loans are revolving lines of credit that are
collateralized principally by accounts receivable. Each borrower's customers
normally remit their 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 are revolving lines of credit 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 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 outstanding
loans as of December 31, 1997 and December 31, 1996, and the percentage of
CBC's portfolio comprised of each loan type as of such date.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1997 1996
----------------- -----------------
OUTSTANDING % OF OUTSTANDING % OF
BALANCE TOTAL BALANCE TOTAL
----------- ----- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Accounts receivable loans................. $344.2 71.0% $208.1 72.1%
Inventory loans........................... 55.1 11.4 34.9 12.1
Participation loans(1).................... 85.5 17.6 45.5 15.8
------ ----- ------ -----
Total................................... $484.8 100.0% $288.5 100.0%
====== ===== ====== =====
</TABLE>
- --------
(1) Participation loans include $85.5 million purchased at December 31, 1997
and $48.4 million purchased and $2.9 million sold at December 31, 1996.
11
<PAGE>
The weighted average yield on CBC's loans outstanding was 12.79% and 12.41%
at December 31, 1997 and December 31, 1996, respectively.
CBC had commitments to make additional fundings on lines of credit with
existing borrowers totaling approximately $318.4 million and $259.2 million at
December 31, 1997 and December 31, 1996, respectively; however, each
additional funding is contingent upon the borrowers maintaining both
sufficient collateral and compliance with the terms and conditions of the loan
documents.
Underwriting
Before a credit line proposal letter is issued and a line of credit 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 records, legal documentation, samples of
invoices and related documentation, operational matters, accounts receivable
and payable.
In addition, 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 due diligence, CBC requires the prospective
borrower to provide a deposit for fees and orders appraisals if lending
against inventory, equipment or real estate and schedules an audit. CBC's
auditing 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 account debtors, especially with respect to privately held or non-
investment grade borrowers. When deemed necessary for credit approval, CBC may
obtain guarantees or other types of 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. 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 loan
funding, 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 any potential problems the borrower may be experiencing.
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<PAGE>
CBC monitors borrowers' accounts receivable using three forms. The first
form is an accounts receivable aging analysis report prepared monthly by the
loan processor and reviewed by the account executive, and which includes,
among other things, details pertaining to account concentrations and aging
trends. The second is an accounts receivable activity summary prepared weekly
by the loan processor and reviewed by the account executive, summarizing
borrowings, repayments and pledged collateral. The third is a daily report
prepared by the borrower and reviewed by the account executive to determine
credit availability for a particular day.
In addition to the foregoing monitoring procedures, interim audits of all
borrowers are scheduled as deemed appropriate. Also, each account is reviewed
on its anniversary date and revolving lines are reviewed and reconciled on a
monthly basis.
Where liquidation is required for repayment of an outstanding loan, CBC
attempts to effect a consensual possession of the subject collateral property
and joint collection of accounts receivable. In certain instances, court
action may be required to ensure collection of receivables and possession of
pledged assets. CBC has not experienced any loan losses since its acquisition
by the Company.
Marketing
CBC obtains business through referrals from banks, venture capitalists,
accounting firms, management consultants, existing borrowers, other finance
companies and independent brokers. CBC's marketing officers call on CBC's
referral sources to identify and receive introductions to potential clients
and to identify potential clients from database searches. CBC currently
compensates its marketing personnel with what it believes are competitive base
salaries and commissions based on funded transactions in order to motivate and
reward the creation of new business and the renewal of existing business. Such
commissions can be a significant portion of the total compensation paid to
CBC's marketing personnel. CBC's marketing personnel have no credit decision
authority.
The Company believes that CBC's marketing strengths are its rapid response
time and high level of service. The Company believes that, based on CBC's
experience with technology credits and valuation of their associated tangible
and intangible assets, CBC is able to quickly evaluate potential borrowers,
thus providing it with a competitive advantage over other lenders with less
experience providing loans to high technology companies.
The Company also believes that CBC's ability to quickly evaluate credit
requests and provide loans to borrowers who, for various reasons, have not
established relationships with traditional lenders, has resulted in a loyal
customer base.
LOAN PARTICIPATION AND INVESTMENT GROUP
LPIG was formed by SPB in September 1995 to invest in and purchase
syndicated commercial loan participations in the secondary market originated
by commercial banks. As of December 31, 1997 and December 31, 1996, LPIG had
total loan commitments of $483.7 million and $267.1 million, of which
$196.4 million and $160.7 million of loans were outstanding, respectively. At
December 31, 1997 and December 31, 1996, none of LPIG's loan participations
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 December 31,
1997 and December 31, 1996, loan participations held by LPIG ranged in size
from approximately $575,000 to $24.0 million and $900,000 to approximately
$15.0 million, respectively.
13
<PAGE>
LPIG believes that its purchase of senior secured loan participations allows
it to build and maintain a loan portfolio without costly direct customer loan
servicing and loan origination costs. In addition, such purchases facilitate
the maintenance of a portfolio which is diversified both geographically and by
industry.
LPIG's loan underwriting policy requires an analysis of the borrower's
ability to repay its debts, as well as an evaluation of the effects of general
economic and industry trends and various competitive factors affecting the
borrower.
LPIG's commitments/outstandings by industry type at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
% OF TOTAL % OF TOTAL
COMMITMENT COMMITMENT OUTSTANDING OUTSTANDING
AMOUNT AMOUNT AMOUNT AMOUNT
---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Manufacturing.................. $ 93,384 19.3% $ 34,470 17.5%
Hotels......................... 50,338 10.4 12,359 6.3
Waste disposal services........ 36,712 7.6 13,588 6.9
Outdoor advertising............ 31,600 6.5 20,568 10.5
Automobile rentals............. 25,000 5.2 -- --
Radio broadcasting............. 24,000 5.0 18,780 9.6
Air carrier.................... 23,000 4.8 7,820 4.0
Defense........................ 22,530 4.7 6,541 3.3
Automobile parts............... 21,646 4.5 1,646 0.8
Food processing................ 20,000 4.1 9,948 5.1
Food distribution.............. 16,441 3.4 -- --
Party goods distribution....... 15,000 3.1 3,000 1.5
Rail transportation............ 14,520 3.0 14,520 7.4
Telecommunications............. 14,440 3.0 5,036 2.6
Equipment rentals.............. 12,600 2.6 5,216 2.7
Healthcare..................... 10,750 2.2 6,615 3.4
Chemicals...................... 10,522 2.2 7,379 3.7
Collection services............ 10,275 2.1 8,067 4.1
Park management................ 10,000 2.1 7,000 3.6
Television broadcasting........ 5,000 1.0 3,575 1.8
Garment........................ 5,000 1.0 1,400 0.7
Supermarkets................... 4,900 1.0 4,900 2.5
Paper.......................... 3,030 0.6 1,010 0.5
Restaurants.................... 2,982 0.6 2,982 1.5
-------- ----- -------- -----
Total........................ $483,670 100.0% $196,420 100.0%
======== ===== ======== =====
</TABLE>
Auto Lend Group
Auto Lend was established in September 1996 as a division of SPB, to provide
automobile inventory financing for automobile dealers. The principal types of
loans originated are fixed-rate lines of credit. Auto Lend had $62.4 million
and $28.8 million of commitments and $14.1 million and $4.6 million of loans
outstanding at December 31, 1997 and December 31, 1996 respectively.
SPB believes that Auto Lend's products offer synergistic opportunities, when
offered in connection with SPB's sub-prime auto lending ability, to provide
car dealers a complete financing package. See "--Consumer Lending--Auto
Lending Division."
14
<PAGE>
COMMERCIAL MORTGAGE LENDING
Income Property Lending Division
The Company conducts its commercial mortgage lending operations through the
Income Property Lending Division ("IPLD") of SPB. 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 typically less than $2.5 million) for multi-family apartments and
commercial buildings. For the years ended December 31, 1997 and 1996, IPLD
funded approximately $295.9 million and $260.9 million in loans, respectively.
During the year ended December 31, 1997 and the year ended December 31,
1996, SPB completed securitizations of approximately $203.1 million and $277.0
million of multi-family and commercial mortgage loans originated or purchased
by IPLD, respectively. At December 31, 1997 and December 31, 1996, $497,000
and $1.9 million or 0.8% and 1.1%, respectively, of IPLD's outstanding loans
were 30 days or more delinquent.
At December 31, 1997 and December 31, 1996, $500,000 and $4.4 million,
respectively, of IPLD originated loans were held for investment by SPB. 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.
SPB 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 ALD and CCD, which are divisions of SPB, and AMN, the Company also
makes consumer loans consisting of sub-prime automobile finance loans, home
improvement loans and other consumer credit.
Auto Lending Division
ALD was formed in October 1994 to finance new and used automobile purchase
contracts. ALD's borrowers are generally credit-impaired and therefore are
unable to access traditional 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 year ended December 31, 1997 and December 31, 1996, ALD
originated approximately $74.2 million and $35.0 million, respectively, in
automobile loans. SPB currently generates automobile loans through three
Northern California retail offices.
Consumer Credit Division
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 and out of state. All loans
are centrally processed, approved and funded at CCD's headquarters in Irvine,
California.
15
<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, kitchen or bathroom remodeling.
During the years ended December 31, 1997 and December 31, 1996, CCD
originated $19.8 million and $22.0 million in loans, respectively, all of
which are held for investment. At December 31, 1997 and December 31, 1996,
$900,000 or 1.9% and 2.4%, respectively, of CCD's outstanding loans were 30
days or more delinquent.
Auto Marketing Network, Inc.
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
December 31, 1997, AMN was headquartered in Tulsa, Oklahoma and had certain
business development and administrative activities located in its Florida
office. For the period from its acquisition through December 31, 1997, AMN
originated $170.6 million and securitized $158.6 million in sub-prime auto
loans. Since the March 1997 acquisition date, AMN has posted operating losses
and experienced significant increases in non-performing assets, loan charge-
offs and loan loss provisions. In December 1997, the Company developed revised
operating projections which indicated that the goodwill resulting from the AMN
acquisition was not recoverable. Accordingly, the remaining goodwill of
$20.1 million was written off through accelerated amortization during the
fourth quarter of 1997.
General
AMN is engaged primarily in the indirect origination of sub-prime motor
vehicle receivables. As of December 31, 1997, AMN's receivables are originated
through a network of approximately 819 participating dealers. Approximately
87% of all originating dealers are new car franchised dealers or their
affiliates and the others are independent dealers.
AMN's direct dealer relationships generally begin with AMN's area dealer
representative contacting a dealer to explain AMN's financing program. AMN's
representative presents the dealer with a sales package, including promotional
material containing current rates being offered by AMN to dealerships, copies
of AMN's dealer agreement, information regarding AMN's special finance
training schools and samples of AMN's documentation requirements. A dealer
that decides to participate in AMN's financing program must enter into a non-
exclusive dealer agreement with AMN. As a condition to entering into an
agreement, a dealer must provide certain business information to AMN. A dealer
must also make representations and warranties to AMN with respect to the
receivables to be assigned. Upon execution of the dealer agreement, AMN's area
dealer representative provides the dealership with necessary documentation for
origination of receivables and conducts a two-day in-house training session at
the dealership for personnel responsible for the use of such documentation. In
addition, dealers are encouraged to send staff members to AMN's Alternative
Finance Training School within the first four months after their enrollment in
AMN's program. Since its formation, AMN has purchased receivables from dealers
generally at a 10% discount from the financed amount. AMN is in the process of
developing a risk-based tiered pricing program which AMN anticipates will be
implemented during 1998.
The program includes a wholesale advance rate (rather than a retail advance
rate currently used by AMN), and includes acquisition fees, annual percentage
rates and other criteria that differ depending upon the creditworthiness of
the borrowers. In addition, AMN has retained certain consultants to assist in
the development of a credit scoring model and a bankruptcy scorecard predictor
and in the development of portfolio risk management procedures associated with
its risk-based tiered pricing program.
16
<PAGE>
In addition, in June 1997, AMN entered into an agreement with Auction
Finance Group, Inc. pursuant to which AMN may obtain referral business from
certain independent used car dealers from whom AMN currently purchases
receivables from time to time at a 12% discount from the financed amount. All
dealers are obligated to repurchase any receivable identified by AMN if that
dealer's representations and warranties prove to have been false at the time
AMN purchased the receivable. The sales by the dealers of installment sale
contracts to AMN do not generally provide for recourse to the dealer for
unpaid amounts in the event of a default by a borrower thereunder, other than
in connection with the breach of the foregoing representations and warranties.
The dealers also indemnify and hold harmless AMN for any liabilities and costs
(including attorney fees) arising from any act or omission by the dealer
required to be performed under the dealer agreement for any receivable.
Underwriting
The credit guidelines applied by AMN in acquiring receivables are
considerably less stringent with respect to the credit of the obligor than
those generally applied by other lenders, such as banks and savings and loans
associations. The obligors on the acquired receivables are individuals who are
not typically able to obtain financing from such other lenders due to prior
credit problems, which may include bankruptcies, repossessions, foreclosures,
charge-offs, judgements or collection problems (or to a lessor extent,
qualifying first time borrowers). However, the prospective obligor is required
to be currently performing on all outstanding obligations reported to AMN
which AMN deems significant. Due to the lower credit quality of the obligors
and the resulting higher risks of loss, receivables have been originated with
Annual Percentage Rates ("APR's") which are higher than would be available to
prime borrowers. The following procedures describe AMN in underwriting retail
installment contracts secured by motor vehicles.
. AMN purchases retail installment sale contracts secured by new and used
automobiles, vans and light duty trucks from dealers who participate in
its motor vehicle financing program. The receivables purchased by AMN
were originated by dealers in accordance with AMN's requirements under
existing agreements with such dealers.
. Applications submitted to AMN are required to list sufficient
information to process the application, including the applicants'
income, employment status, residential status, monthly mortgage or rent
payment and other personal information. Upon receipt of an application,
AMN obtains at least one credit report from an independent credit
bureau. If no report is available due to insufficient credit or other
factors, the application is automatically denied. Each credit report is
reviewed by AMN to determine the applicant's current credit status and
past credit performance. Factors considered negative generally include
past due credit, repossessions, foreclosures, loans charged off by other
lenders, judgements and previous bankruptcy. Positive factors such as
amount of credit and favorable payment history are also considered.
Other considerations include income requirements and the ratio of total
debt to income and of monthly auto payment to income.
. Although AMN will consider various criteria in evaluating a loan
application. including but not limited to borrower's employment and
residence, ability to make loan payments and credit history, the amount
of the down payment , the value of the financed vehicle, the mileage of
the financed vehicle and the amount of the loan in relation to the value
of the vehicle, AMN may approve a loan application even if it has made
an evaluation that one or more of such criteria has not been met or
exceeded if in its judgement there are countervailing factors.
. Thus AMN may, in some cases, approve a loan even though its evaluation
of a borrowers' record of employment or ability to make loan payments,
or a borrowers' credit history, are different from its standard
underwriting guidelines
In June 1997, internal exception tolerances were tightened, which affected
most guideline limits in the program. AMN also implemented an internal audit
system whereby its internal auditor reviews a sample of each week's
originations for compliance with its underwriting guidelines. Furthermore, in
September 1997, several key guideline limits were changed.
17
<PAGE>
These included an increase in minimum income requirements for qualified
credit applicants, an increase in the minimum required credit score, and
decreases in allowable debt-to-income and payment-to-income ratios. Other
minor changes at that time included a limit on fees charged by dealers and a
reduction in allowable additions to vehicle value for options. The changes AMN
made to its underwriting guidelines were the result of its Credit Committee's
review of an analysis of all defaulted loans originated by AMN since April
1995.
In addition, AMN is in the process of developing a risk-based tiered pricing
program designed to improve further the credit quality of the receivables it
originates. There can be no assurance, however, that the tightening of AMN's
credit standards and implementation of the risk-based tiered pricing program
will result in improved credit quality in AMN's receivables portfolio.
Insurance on Financed Vehicles'
AMN's retail installment sale contract requires that borrowers maintain
specific levels and types of insurance coverage, including physical damage
insurance, to protect the related financed vehicle against loss. At the time
of purchase, the borrower signs a statement which indicates the customer has
or will have the necessary insurance, and which shows the name and address of
the insurance company along with a description of the type of coverage.
Although each receivable requires the related obligor to maintain insurance
covering physical damage to the financed vehicle, since the obligors may
select their own insurers to provide the requisite coverage, specific terms
and conditions of their policies may vary. A failure by an obligor to maintain
such physical damage insurance will constitute a default under the related
receivable, but will not cause such receivable to become a delinquent
receivable.
Guidelines and Procedures for Credit Evaluation
AMN's underwriting guidelines are designed to provide financing to people
with impaired credit, which may include bankruptcies, repossessions,
foreclosures, charge-offs, judgements and collection accounts. To a lesser
extent, AMN will purchase receivables from qualifying first-time borrowers.
AMN's underwriters will evaluate suitability based on their assessment of all
elements of the proposed credit (e.g. the borrower's credit, the deal
structure and the collateral). An underwriter may reject a contract in which
all of the elements of the proposed credit meet only the minimum requirements,
or the underwriter may grant conditional approval on the prospective borrowers
ability to meet additional conditions, such as a higher down payment, a lower
advance or purchase of a different vehicle. The underwriter may waive certain
requirements or grant exceptions, generally with the approval of the regional
credit manager. All credit decisions are made at the discretion of AMN.
Approval Process
When AMN approves the purchase of a finance contract, AMN notifies the
dealer by facsimile or telephone. Such notice specifies certain pertinent
information relating to the terms of the approval, including the maximum
monthly payment and the stipulations required for funding. Generally, a
borrower is required to make a down payment (which includes cash and/or
vehicle trade-in value) of at least 10% of the sales price.
Subject to limited exceptions, AMN's guidelines and procedures currently
require that the total amount financed cannot exceed 115% of the retail value
of the financed vehicle. Under the risk-based tiered pricing program, the
advance rate will vary depending upon the creditworthiness of the individual
borrower.
Receivable Purchase
Upon final confirmation of the terms by the borrower, the dealer completes
the sale of the automobile and the loan to the borrower. AMN receives all
funding packages from courier services or local delivery and sorts them for
pick up by appropriate departments. Data entry clerks in the contract
processing department then log each new or returned funding package into AMN's
database for tracking. The clerks then print the credit bureau reports
reviewed by AMN's underwriters for approval.
18
<PAGE>
The credit bureau reports are placed in the loan files and such files are
distributed to the appropriate territorial processor. The territory to which a
dealer's contracts are assigned is determined based upon the state in which
the dealer's business is located.
Contract processors sort the documentation received from the dealers and
check the items for authenticity and acceptability according to company
standards. Although pre-funding verifications of employment and insurance are
currently performed and obligors are contacted for completion of a collateral
audit, a substantial percentage of the receivables are verified using a book-
out sheet procedure requiring signature of the dealer and the obligor. After
the dealer delivers all required loan documentation to AMN, AMN purchases the
finance contract and remits the funds to the dealer, generally within 72
hours. Upon purchase of the finance contract, AMN acquires a perfected
security interest in the financed vehicle. Each finance contract requires that
the automobile be properly insured and AMN named as a loss payee. Compliance
with these requirements is verified prior to the remittance of funds to the
dealer. After the purchase of the finance contract, AMN contacts the borrower
to explain payment procedures.
Management Information Systems
AMN relies heavily upon its loan processing system to purchase contracts.
AMN's loan processing system enables AMN to handle a significant volume of
applications while maintaining integrity in the area of data entry, contract
processing, and underwriting procedures. The system is serviced on a monthly
basis, and daily data backup procedures are in place.
ADVISORY, INVESTMENT AND OTHER ACTIVITIES
The Company conducts advisory services through its ICAI, ICCAMC and ICG
subsidiaries and has substantial equity investments in SPFC, a publicly traded
sub-prime residential mortgage lender, FMC, a publicly traded specialty
commercial finance company, ICCMIC, a publicly traded REIT engaged in
commercial finance activities, IMH, a publicly traded REIT engaged in non
conforming residential mortgage lending and ICW, a holding company for
international finance activities.
Imperial Credit Advisors, Inc.
ICAI provides capital markets, portfolio management and research services to
the Company's subsidiaries and affiliates. Prior to December 1997, ICAI
oversaw the day-to-day operations of IMH pursuant to a management agreement,
recently terminated as more fully described in Item 13--"Certain Relationships
and Certain Transactions--Relationships with IMH--Other Arrangements and
Transactions with IMH." For the years ended December 31, 1997, 1996 and 1995,
ICAI earned $4.9 million, $3.3 million and $38,000, respectively, in
management fees and incentive payments pursuant to the management agreement.
Imperial Credit Commercial Asset Management Corporation
ICCAMC was formed in the third quarter of 1997 and oversees the day-to-day
operations of ICCMIC pursuant to a management agreement more fully described
in Item 13--"Certain Relationships and Certain Transactions--Relationships
with ICCMIC--ICCMIC Management Agreement." For the year ended December 31,
1997, ICCAMC earned $940,000 in management fees pursuant to the management
agreement.
Imperial Capital Group, LLC
ICG is a majority owned subsidiary formed in July 1997. ICG, together with
its subsidiaries Imperial Capital, LLC and Imperial Asset Management, LLC,
offer individual and institutional investors financial products and services.
Imperial Capital, LLC, is a registered broker/dealer with the United States
Securities and Exchange Commission and is a member of the National Association
of Securities Dealers, Inc. Imperial Capital, LLC, provides investment
opportunities and research to individual and institutional investors, raises
private and
19
<PAGE>
public capital for middle market companies, and trades debt, equity and asset
backed securities. Imperial Asset Management, LLC, is an investment advisor
registered with the United States Securities and Exchange Commission, and
provides investment management services to high net worth individuals and
institutional clients.
When ICG was initially capitalized in September 1997, the Company's
ownership percentage was 80%. Subsequently, on December 5, 1997, the Company's
ownership percentage was reduced to 60% in a restructuring of its loan to DRI
and the purchase of substantially all of the assets of DRI.
Southern Pacific Funding Corporation
SPFC is a publicly traded sub-prime mortgage banking company which
originates, purchases and sells high yielding, single family sub-prime
mortgage loans. Substantially all of SPFC's loans are secured by first or
second mortgages on owner occupied single family residences. The majority of
the originated and purchased loans are made to borrowers who do not qualify
for or are unwilling to obtain financing from conventional mortgage sources.
As of December 31, 1997, ICII owned 9,742,500 shares of SPFC common stock,
representing 47.0% of the outstanding common stock of SPFC, which, commencing
with the three months ended March 31, 1997, is reflected on the Company's
consolidated balance sheet as "Investment in Southern Pacific Funding
Corporation" and is accounted for pursuant to the equity method of accounting.
ICII's investment in SPFC constituted 3.1% of the Company's total assets and
contributed 8.4% of the Company's total revenue for the year ended
December 31, 1997.
Franchise Mortgage Acceptance Company
FMC is a publicly traded specialty commercial finance company engaged in the
business of originating and servicing loans and equipment leases to small
businesses, with a primary focus on established national and regional
franchise concepts. More recently, FMC has expanded its focus to include
retail energy licensees (service stations, convenience stores, truck stops,
car washes and quick lube businesses), funeral homes, cemeteries and golf
operating businesses (golf courses and golf practice facilities).
FMC originates long-term fixed and variable rate loan and lease products and
sells such loans and leases either through securitizations or whole loan sales
to institutional purchasers on a servicing retained basis. FMC also
periodically makes equity investments or receives contingent equity
compensation as part of its core lending and leasing business. For the nine
months ended September 30, 1997 and year ended December 31, 1996, FMAC
originated or acquired $510.8 million and $449.3 million of franchise loans
and securitized, $343.8 million and $325.1 million of loans, respectively.
During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. As a
result of the Company's participation in the public offering, the Company's
percentage ownership of FMC was reduced to 38.4%.
Consequently, commencing with the quarter ended December 31, 1997, the
financial statements of FMC are no longer consolidated with those of ICII.
ICII's investment in FMC is reflected on the Company's consolidated balance
sheet as "Investment in Franchise Mortgage Acceptance Company" and is
accounted for pursuant to the equity method of accounting. ICII's investment
in FMAC constituted 2.5% of the Company's total assets as of December 31,
1997.
Imperial Credit Commercial Mortgage Investment Corporation
In October 1997, the Company completed a public offering of the common stock
of ICCMIC. ICCMIC invests primarily in performing multifamily and commercial
loans and mortgage-backed securities. The Company purchased 2,970,000 shares
of ICCMIC common stock for $41.4 million in October 1997. In December 1997,
the Company purchased an additional 100,000 shares of ICCMIC common stock for
$1.5 million. The Company owned 8.9% of the outstanding common stock of ICCMIC
as of December 31, 1997.
20
<PAGE>
Impac 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 SPB's warehouse lending operations for 500,000 shares of IMH's
common stock. IMH is a publicly traded specialty finance company 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 ICIFC, which primarily purchases and sells or
securitizes non-conforming mortgage loans. As of September 30, 1997, the
Company sold its common stock interests in IMH. However, pursuant to a
termination agreement (the "Termination Agreement") entered into in December
of 1997, related to the management agreement between ICAI and IMH, the Company
received shares of IMH common stock and other consideration as more fully
described in "Item 13--Certain Relationships and Certain Transactions--
Relationships with IMH--Other Arrangements and Transactions with IMH."
Imperial Credit Worldwide, Ltd.
ICW is a holding company for the Company's international finance activities
and is a majority owner of Credito Imperial Argentina, a mortgage banking
company conducting residential mortgage business in Argentina.
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 SPB:
<TABLE>
<CAPTION>
AT DECEMBER 31
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans secured by real
estate:
One to four family...... $ 244,588 $ 375,476 $228,721 $ 897,494 $ 73,636
Multi-family............ 17,261 2,527 7,028 82,004 61,908
Commercial.............. 1,085 11,011 133,189 30,287 21,663
---------- ---------- -------- ---------- --------
262,934 389,014 368,938 1,009,785 157,207
Leases.................. 7,745 99,717 7,297 23,667 2,969
Installment loans....... 154,919 34,248 1,900 4,290 12
Franchise loans......... 62,219 115,910 46,766 -- --
Asset based loans....... 484,832 288,528 154,252 -- --
Commercial loans........ 344,882 173,932 110,104 5,882 247
---------- ---------- -------- ---------- --------
1,317,531 1,101,349 689,257 1,043,624 160,435
Unearned income......... (7,850) (6,336) (5,217) (5,900) (1,406)
Deferred loan fees...... (4,916) (6,415) (1,540) (1,114) (1,180)
---------- ---------- -------- ---------- --------
1,304,765 1,088,598 682,500 1,036,610 157,849
Allowance for loan
losses................. (38,047) (19,999) (13,729) (7,054) (3,254)
---------- ---------- -------- ---------- --------
Total................. $1,266,718 $1,068,599 $668,771 $1,029,556 $154,595
========== ========== ======== ========== ========
</TABLE>
The Company's loans held for investment are primarily comprised of first and
second lien mortgages secured by residential and income producing real
property in California, leases secured by equipment, installment loans to
consumers, loans to experienced franchisees of national and regional
restaurant franchises, asset-based loans to middle market companies mainly in
California and syndicated commercial loan participations. 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 SPB, a decline in
California real estate values
21
<PAGE>
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 SPB
at December 31, 1997 and December 31, 1996 were $122,000 and $18.8 million,
and $100,000 and $11.0 million, respectively. The largest loan held for
investment at December 31, 1997 and December 31, 1996 was a performing real
estate loan secured by a first deed of trust.
Non-performing assets ("NPA's") consist of nonaccrual loans, loans with
modified terms, other real estate owned ("OREO") and other repossessed assets.
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
$4.5 million and $5.0 million related to activities of its former mortgage
banking operations during the years ended December 31, 1997 and December 31,
1996, respectively. During the years ended December 31, 1997 and 1996, the
impact of loans repurchased as the result of borrower misrepresentations was
not material. In the fourth quarter of 1997, the Company recorded a provision
of $5.4 million for future losses on repurchases of former mortgage banking
loans.
22
<PAGE>
The following table sets forth the amount of NPA's attributable to the
Company's former mortgage banking operations and to all of its other lending
activities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------
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.......... $ 27,573 $ 6,874 $ 24,711 $19,928 $ 2,652 $ 20,990 $ 4,012 $ 5,697
Commercial
property........ 5,058 -- 3,052 -- 1,824 -- 2,201 --
Multi-family
property........ 1,837 -- 1,421 -- 5,522 -- 1,195 --
Leases and
installment..... 29,289 -- 997 -- -- -- -- --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total nonaccrual
loans............ 63,757 6,874 30,181 19,928 9,998 20,990 7,408 5,697
---------- ------- ---------- ------- ---------- -------- -------- ----------
OREO:
One to four
family.......... 2,552 5,774 6,639 3,508 1,937 4,173 1,217 1,277
Commercial
property........ 2,526 -- 1,200 -- 211 -- 445 --
Multi-family
property........ 53 -- 867 -- 858 -- 329 --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total OREO....... 5,131 5,774 8,706 3,508 3,006 4,173 1,991 1,277
---------- ------- ---------- ------- ---------- -------- -------- ----------
Loans with
modified terms:
One to four
family.......... -- -- 800 -- 870 -- 76 --
Commercial
property........ -- -- 456 -- -- -- -- --
Multi-family
property........ -- -- -- -- -- -- -- --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total loans with
modified terms... -- -- 1,256 -- 870 -- 76 --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Repossessed
property:
Equipment held
for sale........ 4,437 -- -- -- -- -- -- --
Repossessed
vehicles........ 4,563 -- -- -- -- -- -- --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total repossessed
property......... 9,000 -- -- -- -- -- -- --
---------- ------- ---------- ------- ---------- -------- -------- ----------
Total NPAs....... $ 77,888 $12,648 $ 40,143 $23,436 $ 13,874 $ 25,163 $ 9,475 $ 6,974
========== ======= ========== ======= ========== ======== ======== ==========
Total loans and
OREO............. $1,475,920 $24,087 $2,012,704 $40,955 $1,168,783 $869,463 $216,555 $1,094,144
Total NPA's as a
percentage of
loans and OREO... 5.27% 52.51% 1.99% 57.22% 1.19% 2.89% 4.38% 0.64%
<CAPTION>
1993
----------------------
FORMER
ALL OTHER MORTGAGE
LENDING BANKING
ACTIVITIES OPERATIONS
---------- -----------
<S> <C> <C>
Nonaccrual loans:
One to four
family.......... $ 1,124 $ 1,198
Commercial
property........ 1,481 --
Multi-family
property........ 1,136 --
Leases and
installment..... -- --
---------- -----------
Total nonaccrual
loans............ 3,741 1,198
---------- -----------
OREO:
One to four
family.......... 189 2,148
Commercial
property........ 358 --
Multi-family
property........ 781 --
---------- -----------
Total OREO....... 1,328 2,148
---------- -----------
Loans with
modified terms:
One to four
family.......... 47 --
Commercial
property........ 702 --
Multi-family
property........ 871 --
---------- -----------
Total loans with
modified terms... 1,620 --
---------- -----------
Repossessed
property:
Equipment held
for sale........ -- --
Repossessed
vehicles........ -- --
---------- -----------
Total repossessed
property......... -- --
---------- -----------
Total NPAs....... $ 6,689 $ 3,346
========== ===========
Total loans and
OREO............. $120,606 $1,281,313
Total NPA's as a
percentage of
loans and OREO... 5.55% 0.26%
</TABLE>
23
<PAGE>
The following table summarizes certain information regarding the Company's
allowance for loan losses and losses on OREO:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period.... $19,999 $13,729 $ 7,054 $3,255 $1,995
Provision for loan and lease losses. 38,951 9,773 5,450 5,150 2,350
Business acquisitions and bulk loan
purchases.......................... 11,161 4,500 4,320 -- --
Sale of leases...................... (900) -- -- -- --
Deconsolidation of ICIFC............ (687) -- -- -- --
Loans charged off................... (31,053) (8,326) (3,106) (1,436) (1,124)
Recoveries on loans previously
charged off........................ 576 323 11 85 34
------- ------- ------- ------ ------
Net charge-offs..................... (30,477) (8,003) (3,095) (1,351) (1,090)
Allowance at end of period.......... $38,047 $19,999 $13,729 $7,054 $3,255
======= ======= ======= ====== ======
OREO losses:
OREO writedowns................... 2,074 3,252 $ 2,085 $ 369 $ 406
Loss (gain) on sale of OREO....... 4,453 2,842 (957) (119) (62)
------- ------- ------- ------ ------
Total OREO losses............... $ 6,527 $ 6,094 $ 1,128 $ 250 $ 344
======= ======= ======= ====== ======
</TABLE>
The percentage of the allowance for loan losses to nonaccrual loans will not
remain constant due to the nature of the Company's portfolio of mortgage
loans. The collateral for each non-performing mortgage loan is analyzed by the
Company to determine potential loss exposure, and in conjunction with other
factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan losses. On an ongoing basis, management
monitors the loan portfolio and evaluates the adequacy of the allowance for
loan losses.
In determining the adequacy of the allowance for loan losses, management
considers such factors as historical loan loss experience, underlying
collateral values, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio. Loans deemed by management to be uncollectible are charged to
the allowance for loan losses. Recoveries on loans previously charged off are
credited to the allowance. Provisions for loan losses are charged to expense
and credited to the allowance in amounts deemed appropriate by management
based upon its evaluation of the known and inherent risks in the loan
portfolio. While management believes that the current allowance for loan
losses is sufficient, future additions to the allowance may be necessary.
FUNDING AND SECURITIZATIONS
The Company's liquidity requirements are met primarily by warehouse lines of
credit and repurchase facilities from financial institutions, securitizations,
whole loan sales, SPB customer deposits and FHLB borrowings. The Company has
also accessed the capital markets through equity and debt offerings.
As of December 31, 1997, the Company had warehouse lines of credit and
commitments and repurchase facilities of $434.6 million. Business operations
conducted through divisions of SPB are primarily financed through deposits,
capital contributions from ICII to SPB, a warehouse line of credit and FHLB
borrowings. At December 31, 1997 and December 31, 1996, SPB had total deposits
of approximately $1.2 billion and $1.1 billion, respectively, (excluding
deposits of the Company maintained with SPB).
24
<PAGE>
Repurchase and Warehouse Facilities
The Company is dependent upon its ability to access repurchase facilities
and warehouse lines of credit in order to fund new originations and purchases.
The Company had various warehouse lines and reverse repurchase facilities
available as follows at December 31, 1997:
<TABLE>
<CAPTION>
INTEREST INDEX
RATE COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE
-------- ---------- ----------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 7.25% $125,000 $ 20,058 Libor plus 125 March 10, 1998
Donaldson, Lufkin and
Jenrette (Corona Film
Finance Fund).......... 5.85 79,591 79,591 Fixed rate January 7, 1998
CoreStates Bank, N.A.
(IBC).................. 8.17 30,000 10,192 Libor plus 220 October 6, 1998
Morgan Stanley (SPB).... 6.51 200,000 35,000 Libor plus 50 October 1, 1998
-------- --------
6.37 $434,591 $144,841
======== ========
</TABLE>
Securitizations of Assets
As a fundamental part of its business and financing strategy, the Company
has sold substantially all of its loans and leases through securitization,
except for loans held for investment by SPB. The Company believes that
securitizations provide it with greater operating leverage and a reduced cost
of funds. In a securitization, the Company sells loans or leases that it has
originated or purchased to a trust or special purpose entity for a cash
purchase price and an interest in the loans or leases securitized. The cash
price is raised through an offering of pass-through certificates by the trust
or special purpose entity. Following the securitization, the purchasers of the
pass-through certificates receive the principal collected and the investor
pass-through interest rate on the principal balance of the loans or leases,
while the Company receives the balance of the cash flows generated by the
securitized assets in the form of principal and interest on any subordinate
bonds or residual interests retained. These cash flows represent the excess
cash flow collected after credit losses on loans or leases sold over the sum
of the pass-through interest rate plus a normal servicing fee, a trustee fee
and, where applicable, an insurance fee related to such loans or leases over
the life of the loans or leases.
Each loan or lease securitization may 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 cash
flows, they may be 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 principal and interest on any subordinate bonds or residual interests
retained.
A substantial portion of the Company's gross income is recognized as gain on
sales of loans or leases, which represent the present value of the estimated
cash flows on the subordinate bonds or residual interests retained, less
origination and underwriting costs. The Company may retain interests in loan
and lease securitizations in the form of subordinate bonds or residual
interests, which represent interests in the trust or special purpose entity to
which such loans or leases have been sold.
The Company recognizes such gain on sale of loans or leases in the year in
which such loans or leases are sold, although cash (representing the principal
and interest on any retained subordinate bonds or residual interests in loan
and lease securitizations) is received by the Company over the life of the
loans or leases. Concurrent with recognizing such a gain on sale, the Company
records any subordinate bonds or residual interests as an asset on its
consolidated balance sheet.
25
<PAGE>
The capitalized balance of any subordinate bonds or residual interest is
determined by computing the present value of the excess of the weighted
average coupon on the loans or leases sold over the sum of: (i) the coupon in
the pass-through certificates, (ii) a base servicing fee paid to the loan or
lease servicer and (iii) expected losses to be incurred on the portfolio of
loans or leases sold, and considering prepayment assumptions.
Prepayment assumptions are based on recent evaluations of the actual
prepayments of the Company's servicing portfolio or on market prepayment rates
on new portfolios and consideration of the current interest rate environment
and its potential impact on prepayment rates.
The cash flows expected to be received by the Company, net of expected
losses, are then discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on a
financial instrument with similar characteristics. Expected losses are
discounted using a rate equivalent to the risk-free rate for securities with a
duration similar to that estimated for the underlying loans or leases sold.
The excess cash flows may only be available to the Company to the extent that
there is no impairment of the credit enhancements established at the time the
loans or leases are sold. Interest-only and residual certificates in
securitizations of mortgage loans retained by the Company are held as trading
securities and are adjusted to their respective market value quarterly with
corresponding charges and credits made to income in the adjustment period.
Subordinate bonds retained by the Company are held as either trading or
available for sale securities in accordance with the Company's investment
objectives.
To the extent that actual results are different from the cash flows the
Company estimated, the Company's subordinate bonds, interest-only certificates
or residual interest will be adjusted quarterly with corresponding charges
made against income in that period. Upon completion and analysis of the
carrying values of the Company's subordinate bonds, interest-only certificates
or residual interest during 1996, the Company wrote down the balance of such
assets by $4.7 million. Any similar future charge against income may have a
material adverse effect on the Company's results of operations. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
On the Company's consolidated balance sheet, securitization-related assets
such as capitalized excess servicing fees receivable, subordinate bonds,
interest-only certificates and residual interests are reduced as cash is
received by the trust or special purpose entity holding the loans or leases
pooled and sold. Although the Company believes that it has made reasonable
assumptions, on a pool-by-pool basis, of its securitization-related assets
likely to be realized, it should be recognized that the rates of prepayment
and default or other assumptions utilized by the Company represent estimates.
Actual experience may vary from these estimates.
At December 31, 1997 and December 31, 1996, the Company's consolidated
balance sheet reflected retained interest in loan and lease securitizations of
$43.1 million and $49.5 million, respectively. At December 31, 1997 and
December 31, 1996, the Company's consolidated balance sheet reflected
capitalized excess servicing fees receivable of $0 and $23.1 million,
respectively. Retained interest in loan and lease securitizations and
capitalized excess servicing fees receivable are computed using prepayment,
default, discount rate and interest rate assumptions that the Company believes
market participants would use for similar instruments at the time of sale.
There is no liquid market for these assets; therefore, no assurance can be
given that all or any portion of these assets could be sold at their stated
value on the consolidated balance sheet.
During the year ended December 31, 1997, the Company completed five loan and
lease securitizations totaling $919.1 million. Multi-family and commercial
mortgage loans totaled $203.1 million, franchise loans totaled $343.8 million,
equipment leases totaled $213.6 million and auto loans totaled $158.6 million.
26
<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. ("SPSAC")
1995-1........................................ 55.3
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")
1995-B........................................ 105.2
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 and 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 and Loan 1997 C-1...... 203.1
June 1997 FMAC 1997-A.................................... 158.6
September 1997 FMAC 1997-B.................................... 185.2
December 1997 AMN 1997....................................... 158.6
--------
Total(1)....................................... $3,052.3
========
</TABLE>
- --------
(1) Excludes IBC's monthly deliveries to CAPMAC and CNAI securitization
vehicles totaling $129.0 million and $87.0 million for the years ended
December 31, 1997 and 1996, respectively.
SPB Deposits
SPB obtains its funds from depositors by issuing FDIC insured passbook
accounts and term certificates of deposit. SPB solicits both individual and
institutional depositors for new accounts through print advertisements and
computerized referral networks. SPB currently maintains two deposit gathering
facilities in Southern California. At such facilities, tellers provide banking
services to customers such as accepting deposits and permitting withdrawals.
However, customers are not offered check writing services or offered demand
deposit accounts. Generally, certificates of deposit are offered for terms of
one to 12 months. See "--Regulation--Thrift and Loan Operations--Limitations
on Types of Deposits" for a description of limitations on types of deposits
that SPB, as a thrift and loan, can accept.
27
<PAGE>
The following table sets forth the distribution of SPB's deposit accounts
(prior to intercompany elimination), and the weighted average nominal interest
rates on each category of deposits:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
% OF INTEREST % OF INTEREST
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook accounts....... $ 62,274 5.2% 4.81% $ 47,890 4.5% 4.73%
Time deposits of less
than $100,000.......... 891,102 74.9 6.00 803,556 74.9 5.84
Time deposits of
$100,000 and over...... 236,465 19.9 5.81 220,820 20.6 5.74
---------- ----- ---- ---------- ----- ----
Total................. $1,189,841 100.0% 5.80% $1,072,266 100.0% 5.77%
========== ===== ==== ========== ===== ====
</TABLE>
The following table sets forth the dollar amount of deposits by time
remaining to maturity:
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1997 1996
------------------- -------------------
% OF % OF
AMOUNT DEPOSITS AMOUNT DEPOSITS
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months or less.................... $ 449,414 37.8% $ 404,565 37.7%
Over three months through six months.... 296,512 24.9 279,397 26.1
Over six months through twelve months... 357,326 30.0 311,862 29.1
Over twelve months...................... 86,589 7.3 76,442 7.1
---------- ----- ---------- -----
Total................................. $1,189,841 100.0% $1,072,266 100.0%
========== ===== ========== =====
</TABLE>
Interest expense associated with certificates of deposit of $100,000 and
over was approximately $15.6 million, $13.6 million and $15.4 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
Since December 31, 1991, SPB has increased its deposits as necessary so that
deposits together with cash, liquid assets, FHLB borrowings and warehouse
borrowings, have been sufficient to provide SPB funding for its lending
activities. The weighted average interest rate of the deposit accounts was
5.80% at December 31, 1997 as compared to 5.77% at December 31, 1996 and 5.54%
at December 31, 1995.
The Company believes that SPB's local marketing strategies, as well as its
utilization of domestic money markets, have been the basis by which SPB has
been able to acquire new deposits at levels consistent with management's
financial targets. Certain levels of growth of SPB's assets and deposits
require notice to the FDIC.
As an additional source of funds, SPB was approved in 1991 to become a
member of the FHLB. Currently, SPB 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 December 31,
1997, $45.0 million was outstanding bearing an average interest rate of 6.71%.
As a second additional source of funds, SPB had available a $200 million
secured line of credit from Morgan Stanley, that is automatically adjusted
subject to applicable available collateral. At December 31, 1997, $35.0
million was outstanding bearing an average interest rate of 6.51%.
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.
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<PAGE>
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 SPB'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, finance and other charges, disclosure to
customers, the terms of secured transactions, the collection, repossession and
claims handling procedures utilized by the Company, multiple qualification and
licensing requirements for doing business in various jurisdictions, and other
trade practices. As a part of the financing and asset securitization business,
the Company is required to register as a broker-dealer with certain Federal
and state securities regulatory agencies and is a member of the NASD.
Truth in Lending
The Truth in Lending Act ("TILA") and Regulation Z promulgated thereunder
contain disclosure requirements designed to provide consumers with uniform,
understandable information with respect to the terms and conditions of loans
and credit transactions in order to give them the ability to compare credit
terms. TILA also guarantees consumers a three day right to cancel certain
credit transactions, including loans of the type originated by the Company.
The Company believes that it is in compliance with TILA in all material
respects. The enforcement provisions applicable to TILA grant broad powers to
the appropriate federal regulatory agencies or the Federal Trade Commission to
enforce TILA with respect to those entities not otherwise subject to federal
regulations, such as the Company. TILA also contains criminal penalties for
wilful violations and grants a private right of action with specified
statutory damage awards 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, TILA also requires additional disclosures in connection with
certain types of mortgage loans.
29
<PAGE>
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, 1998, the $400
figure was adjusted by the Board of Governors of the Federal Reserve System to
$435 until December 31, 1998, 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 after
October 1995 (the effective date of the requirements) 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 ("FERA"), as amended, requires lenders
to supply the applicant with the name and address of the reporting agency; the
FERA also imposes other reporting and disclosure requirements on creditors.
The Company is also subject to the Real Estate Settlement Procedures Act of
1974, as amended, and is required to file an annual report with the Department
of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act.
In addition, the Company is subject to various other Federal and state laws,
rules and regulations governing, among other things, the licensing of, and
procedures which must be followed by, mortgage lenders and servicers, and
disclosures which must be made to consumer borrowers. Failure to comply with
such laws may result in civil and criminal liability and may, in some cases,
give consumer borrowers the right to rescind their mortgage loans and to
demand the return of finance charges paid to the Company.
In addition, certain of the loans originated or purchased by the Company,
such as Title I home improvement loans, are insured by an agency of the
Federal government. Such loans are subject to extensive government regulation.
Environmental Liability
In the course of its business, the Company may foreclose on properties
securing loans that are in default. There is a risk that hazardous or toxic
substances or petroleum constituents could be on such properties.
30
<PAGE>
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
SPB is subject to regulation, supervision and examination under both Federal
and California law. SPB 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 SPB operates loan production offices,
SPB may be subject to certain state and local laws, including those governing
qualifications to do business. Neither the Company's mortgage banking
operations nor SPB'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
SPB, 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 SPB discussed below.
General
SPB 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, maximum maturities and
repayment terms 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 SPB's primary regulator, the DFI has broad
supervisory and enforcement authority with respect to SPB and its
subsidiaries. The enforcement authority of the DFI over thrift
31
<PAGE>
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.
SPB's investment certificates (hereinafter referred to as "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. SPB 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. Either notice to or approval by the
FDIC and the DFI is required before any merger, consolidation or change in
control, or the establishment, relocation or closure of a branch office of
SPB. However, only the DFI's approval is required to establish a loan
production office limited to the solicitation of loans. After January 1, 1998,
notice of intent to establish a branch office is required rather than
application for approval, subject to order or regulation of the DFI.
The FDIC, as insurer of SPB's deposits, also has broad enforcement authority
over and other insured 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.
The FDIC and DFI completed a joint examination of SPB for the period ended
April 14, 1997. As a result of the examination, the FDIC terminated a
memorandum of understanding, dated September 16, 1996 ("MOU"), acknowledging
that SPB had sufficiently satisfied most of the provisions of the MOU.
As part of the agreement for terminating the MOU, SPB's board of directors
adopted a resolution to address the issues remaining in the MOU, which include
(i) corrective actions to remedy the violations of law and regulations in the
FDIC's and DFI's most recent reports of examination and as were reflected in
the MOU, (ii) review by management of all existing written policies and
procedures, and enhancement and augmentation of them, so as to assure
continued compliance with all applicable federal and state laws and
regulations, (iii) development of additional staff training to assure
continued compliance with federal and state laws and
32
<PAGE>
regulations by all appropriate personnel, and (iv) senior management periodic
updates to the board of directors on all progress made with respect to these
matters.
The FDIC examination report also noted certain violations of applicable law
and regulations for which SPB is required to take remedial action. The FDIC
has the authority to take a variety of informal and formal remedial and other
enforcement actions with regard to violations of law, and unsafe and unsound
banking practices, including, among other things, the institution of
proceedings or actions imposing or seeking memoranda of understanding, cease
and desist orders, injunctions, criminal or civil penalties, removal from
office or the revocation of SPB's charter. Although the Company does not
believe that an enforcement action is warranted under the circumstances, any
such enforcement could have a material adverse effect on the Company.
Limitations on Investments
Subject to restrictions imposed by California law, SPB 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 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 DFI. California law contains requirements for the diversification of the
loan portfolios of thrift and loan companies. A thrift and loan with
outstanding deposits 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 paid up and
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; (vi)
have more than 70% of its total assets in loans that have remaining terms to
maturity in excess of seven years (as defined) and are secured solely or
primarily by real property; and (vii) have more than 40% of its loans to
borrowers who do not reside in or have a place of business in the state of
California; provided, however, that certain loans that are sold within 90 days
are excluded from the portfolio limitations described in (vi) and (vii). SPB
had paid-up and unimpaired capital stock and surplus not available for
dividends of $125.0 million and $80.5 million at December 31, 1997 and 1996,
respectively.
At December 31, 1997 and 1996, SPB was in compliance with its California
investment law restrictions. SPB 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. SPB 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.
33
<PAGE>
Effective January 1, 1997, as a result of changes in the California
Industrial Loan Law passed in 1996, SPB 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 subsidiary corporations upon receiving authorization
from the DFI.
Under federal law, SPB 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. In turn, 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").
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, SPB may not make loans to ICII or other
affiliates or purchase a contract, loan or chose in action of ICII or other
affiliates other than subsidiaries of SPB. Exemptions from these restrictions
are available for: (i) purchase of loans from affiliates which are licensed
mortgage brokers (such as ICII) or other certain types of licensed lenders,
subject to prior approval of the DFI; (ii) purchase of loans pursuant to a
sale and repurchase agreement. However, these purchases would be subject to
strict limitations under federal law.
Federal law also limits transactions between SPB 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
SPB, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated companies. In addition, SPB is prohibited from
engaging in "covered transactions" with an affiliate if the aggregate amount
of such transactions with any one affiliate would exceed 10% of SPB's capital
stock and surplus, or in the case of all affiliates, if the aggregate amount
of such transactions exceeds 20% of SPB'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. SPB also is prohibited from purchasing low-quality assets from its
affiliates, except under limited circumstances. SPB engages in many
transactions which involve its affiliates, including ICII and its other
subsidiaries. As such, many of the transactions between the Company and SPB
are subject to federal and state affiliate transaction regulations. Further,
under federal law, a transaction by SPB 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 SPB, unless the FDIC has determined by regulation or order not
to exclude such subsidiary. Absent such determination, transactions conducted
between SPB 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.
34
<PAGE>
Under the California Industrial Loan Law, unless the DFI has issued a permit
authorizing such sale, it is unlawful for SPB to offer or sell any security in
an issuer transaction which offer or sale is subject to applicable provisions
of the California Corporate Securities Act of 1968, as amended. Effective July
1, 1997, any offer to an affiliate or institutional or registered investor
under the California Corporate Securities Act of 1968, as amended, is exempt
from the permit requirement, subject to certain conditions. (See "--Recent
Legislation")
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 SPB
authorizing the maximum 20 times leverage standard.
Thrift and loan companies are not permitted to borrow, except by the
issuance of investment certificates, 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 SPB 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 SPB are
required to maintain capital to support activities that in the past did not
require capital. Because ICII, unlike SPB, 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
December 31, 1997, the Tier 2 capital of SPB consisted of its allowance for
loan losses and $35.0 million in term subordinated indebtedness.
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<PAGE>
The FDIC has adopted a 3% minimum leverage ratio that is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions, even those that invest predominantly in low risk assets,
continue to maintain a minimum level of core capital. A financial
institution's minimum leverage ratio is determined by dividing its Tier 1
capital by its quarterly average total assets, less intangibles not includable
in Tier 1 capital.
The FDIC rules provide that a minimum leverage ratio of 3% is required for
institutions that have been determined to be in the highest category used by
regulators to rate financial institutions. All other organizations are
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. At December 31, 1997, SPB 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, SPB is currently "well capitalized"; this classification,
however, is a regulatory capital classification used for internal regulatory
purposes, and is not necessarily indicative of SPB'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; are restricted from ongoing acquisitions, branching and
entering into new lines of business, and transactions with affiliates; and are
limited to the appointment of additional directors or senior executive
officers. 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
36
<PAGE>
bonuses. Critically undercapitalized institutions are subject to appointment
of a receiver or conservator. Effectively, the FDIC would have general
enforcement powers over SPB and the Company in the event that SPB is deemed
undercapitalized.
SPB's Capital Ratios. The following tables indicate SPB's capital ratios
under (i) the California leverage limitation, (ii) the FDIC risk-based capital
requirements, using rules effective December 31, 1997, and (iii) a 3% FDIC
minimum leverage ratio at each of December 31, 1997.
<TABLE>
<CAPTION>
WELL
MINIMUM CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- -------- -----
(IN THOUSANDS EXCEPT FOR RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
California Leverage Limitation... $157,082 13.20% $ 59,476 5.00% $ -- -- %
Risk-based Capital............... 190,673 12.25% 124,583 8.00% 155,729 10.00%
Risk-based Tier 1 Capital........ 136,206 8.75% 62,292 4.00% 93,437 6.00%
FDIC Leverage Ratio.............. 136,206 8.30% 65,644 4.00% 82,055 5.00%
</TABLE>
Limitations on Types of Deposits
Because of limitations contained in the Industrial Loan Law, and to maintain
the exemption from the BHCA (see "Holding Company Regulations," below), SPB
currently offers investment certificates in the form of passbook accounts and
certificates of deposit. SPB does not offer demand deposit 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. SPB's insurance premium for the year ended December 31, 1997 was
approximately $250,000.
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. SPB, an
industrial loan company, is subject to the jurisdiction of the DFI as its
state regulator. Certain administrative and most examination staff personnel
have transferred to the DFI from the California State Banking Department.
Former California Department of Banking senior staff personnel, including
persons in the office of general counsel and senior examination staff of the
DFI, who are unfamiliar with the Industrial Loan Law will be interpreting the
Industrial Loan Law. It is uncertain whether this will have any material
effect on SPB.
The 1996 California legislation that created the DFI also authorized the use
of the word "bank" by thrift and loan companies, such as SPB, in their names.
Effective October 8, 1997, Southern Pacific Thrift and Loan
37
<PAGE>
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.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds Act")
was enacted which, among other things, imposes on BIF-insured deposits a
special premium assessment on domestic deposits at one-fifth the premium rate
imposed on SAIF-insured deposits, which will be used to pay the interest on
Financial Corporation ("FICO") bonds issued by the federal government as part
of the savings association bailout provisions of the 1989 FIRREA legislation.
In the year 2000, however, the Funds Act requires BIF-insured institutions to
share in the payment of the FICO obligations on a pro-rata basis with all
savings institutions, with annual assessments expected to equal approximately
2.4 basis points until the year 2017, and to be completely phased out by 2019.
The Funds Act also prohibits the merger of the BIF and SAIF insurance funds
unless the savings institution charter has been eliminated on January 1, 1999.
In addition, on 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, and for succeeding semi-annual periods, 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. SPB's combined FDIC and FICO assessment
rate for 1998 was 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 BHCA. SPB remained exempt
from the definition of "bank" under the BHCA, and therefore ICII was exempt
from regulation as a bank holding company. SPB may cease to fall within those
exceptions if it engages in certain operational practices, including accepting
demand deposit accounts. SPB 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,
transactions with affiliates 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/or (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
38
<PAGE>
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
borrower. As of December 31, 1997 and 1996, $125.0 million and $80.5 million,
respectively, of SPB'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, SPB 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 SPB 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 SPB, 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 120 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.
Restrictions on Investments by Imperial Bank
At December 31, 1997, Imperial Bank owned 8,938,553 shares of Common Stock,
or 23.0% 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.
39
<PAGE>
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.
One director of the Company also serves on the board of directors of
Bancorp. See item 10, "Directors and executive officers of the registrant."
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 December 31, 1997, the Company had 784 employees, (55 at ICII, 317 at
SPB, 88 at IBC, 224 at AMN, 9 at ICCAMC, 80 at ICG, 10 at ICW and one at
ICAI). Management believes that its relations with these employees are
satisfactory. Neither ICII nor any of its subsidiaries is a party to any
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's executive offices occupy approximately 22,000 square feet of
space in Torrance, California at a current monthly rental of approximately
$31,400.
The Company's former administrative facilities occupy approximately 37,638
square feet of space in Santa Ana Heights, California. The Company leases
these facilities pursuant to a ten-year lease, commencing September 1, 1992
and subleases a portion of these premises to IMH resulting in a current net
monthly rental of approximately $39,200. See "Item 13--Certain Relationships
and Certain Transactions--Relationships with IMH."
The Company currently leases offices in San Diego, Walnut Creek, Newport
Beach, Woodland Hills, Sacramento, San Jose and Irvine, California, as well as
in Parsippany, New Jersey; Greenville, Delaware; Bellevue, Washington; Denver,
Colorado; Boca Raton, Florida; Allentown, Pennsylvania; and Lake Oswego and
Grants Pass, Oregon. SPB operates in California through branches and loan
production offices and in other states through loan production offices and
representatives.
ITEM 3. 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 under the auspices of the American
Arbitration Association. 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 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 plaintiffs are seeking approximately $3.5
million in general damages and approximately $10.0 million in punitive
damages.
40
<PAGE>
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 judgment, 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.
The Company and a Director are defendants in Judy L. Resnick v. Imperial
Credit Industries, Inc., et al originally filed on January 14, 1998, in Los
Angeles Superior Court, which was recently ordered removed to arbitration. The
complaint alleges conspiracies by the defendants to defraud, interfere with
advantageous business relationships, defame, and breach of fiduciary duty as
well as actual fraud, defamation, and breach of the implied covenant of good
faith and fair dealing arising out of ICG's acquisition of substantially all
of the assets of Dabney/Resnick/Imperial. The plaintiff is seeking actual,
consequential, incidental, general and punitive damages in a sum of not less
than $25 million.
The Company is involved in additional litigation arising in the normal
course of business.
All of the above referenced actions are being actively defended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
41
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Since May 18, 1992, the Company's Common Stock has been quoted in the over-
the-counter market on the Nasdaq National Market under the symbol "ICII". The
following table sets forth the high and low closing sales prices for the
Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997
First Quarter............................................. $27.38 $20.13
Second Quarter............................................ $21.00 $13.44
Third Quarter............................................. $26.88 $18.06
Fourth Quarter............................................ $28.50 $17.63
1996
First Quarter............................................. $13.09 $ 8.52
Second Quarter............................................ $16.69 $11.69
Third Quarter............................................. $18.44 $13.06
Fourth Quarter............................................ $21.25 $15.38
</TABLE>
At March 31, 1998, the closing sales price of the Common Stock as reported
by the Nasdaq National Market was $23.69. At March 31, 1998, there were
approximately 1,000 shareholders of record.
The Company has not paid cash dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The present policy of
the Company is to retain earnings for use in its operations and the expansion
of its business.
On October 22, 1996, the Company effected a two for one 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 ten shares currently held by shareholders.
On October 24, 1995, the Company effected a three for two stock split to
shareholders of record as of October 10, 1995. On December 30, 1993, the
Company paid a stock dividend to shareholders of record as of December 20,
1993. One new share of Common Stock was issued for each ten shares currently
held by shareholders.
42
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following schedules set forth selected consolidated financial data as of
or for each of the years in the five-year period ended December 31, 1997. Such
selected consolidated financial data should be read in conjunction with the
consolidated financial statements and notes thereto and Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gain on sale of loans and
leases.......................... $ 67,723 $ 88,156 $ 39,557 $ 8,628 $18,149
-------- -------- -------- ------- -------
Interest on loans and leases..... 201,728 188,242 120,244 79,173 51,612
Interest on investments.......... 23,531 10,807 6,630 3,610 1,972
Interest on other finance
activities...................... 2,678 8,422 2,608 -- --
-------- -------- -------- ------- -------
Total interest income.......... 227,937 207,471 129,482 82,783 53,584
Interest expense................. 126,594 135,036 95,728 61,674 29,811
-------- -------- -------- ------- -------
Net interest income............ 101,343 72,435 33,754 21,109 23,773
Provision for loan and lease
losses.......................... 38,951 9,773 5,450 5,150 2,350
-------- -------- -------- ------- -------
Net interest income after
provision for loan and lease
losses........................ 62,392 62,662 28,304 15,959 21,423
Loan servicing income............ 10,743 1,680 12,718 16,332 6,785
Equity in net income of SPFC..... 25,869 -- -- -- --
Equity in net loss of FMC........ (3,050) -- -- -- --
Gain on sale of servicing
rights.......................... -- 7,591 3,578 30,837 23,655
Gains on sale of SPFC stock...... 9,488 82,690 -- -- --
Gains on sale of FMC stock....... 92,137 -- -- -- --
Gain on termination of REIT
advisory agreement.............. 19,046 -- -- -- --
Investment banking fees.......... 7,702 -- -- -- --
Gain on sale of IMH stock........ 11,496 -- -- -- --
Other income..................... 6,014 14,154 1,152 1,048 1,414
-------- -------- -------- ------- -------
Total other income............. 179,445 106,115 17,448 48,217 31,854
-------- -------- -------- ------- -------
Total revenues................. 309,560 256,933 85,309 72,804 71,426
Expenses:
Personnel expense................ 60,830 48,355 34,053 33,477 24,520
Other expenses................... 89,554 50,694 27,127 28,037 15,433
-------- -------- -------- ------- -------
Total expenses................. 150,384 99,049 61,180 61,514 39,953
-------- -------- -------- ------- -------
Income before income taxes,
minority interest and
extraordinary item............ 159,176 157,884 24,129 11,290 31,473
Income taxes...................... 58,747 69,874 10,144 4,685 13,055
Minority interest in income (loss)
of consolidated subsidiaries..... 10,513 12,026 (208) -- --
-------- -------- -------- ------- -------
Income before extraordinary
item............................ 89,916 75,984 14,193 6,605 18,418
Extraordinary item-Loss on early
extinguishment of debt, net of
income taxes..................... (3,995) -- -- -- --
Extraordinary item-Repurchase of
Senior Notes, net of income
taxes............................ -- -- -- 919 --
-------- -------- -------- ------- -------
Net income....................... $ 85,921 $ 75,984 $ 14,193 $ 7,524 $18,418
======== ======== ======== ======= =======
BASIC INCOME PER SHARE(1):
Income before extraordinary
item............................ $ 2.33 $ 2.11 $ 0.45 $ 0.21 $ 0.58
Extraordinary item-Loss on early
extinguishment of debt, net of
income taxes.................... (0.10) -- -- -- --
Extraordinary item-Repurchase of
Senior Notes, net of income
taxes........................... -- -- -- 0.03 --
-------- -------- -------- ------- -------
Net income per common share.... $ 2.23 $ 2.11 $ 0.45 $ 0.24 $ 0.58
======== ======== ======== ======= =======
DILUTED INCOME PER SHARE(1):
Income before extraordinary
item............................ $ 2.20 $ 1.95 $ 0.40 $ 0.19 $ 0.54
Extraordinary item-Loss on early
extinguishment of debt, net of
income taxes.................... (0.10) -- -- -- --
Extraordinary item-Repurchase of
Senior Notes, net of income
taxes........................... -- -- -- 0.03 --
-------- -------- -------- ------- -------
Net income per common share.... $ 2.10 $ 1.95 $ 0.40 $ 0.22 $ 0.54
======== ======== ======== ======= =======
Weighted average diluted shares
outstanding..................... 40,855 38,975 35,122 33,582 33,880
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- ----------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............ $ 57,727 $ (31,262) $(1,173,703) $ 961,579 $ (903,050)
Net cash (used in)
provided by investing
activities............ (355,124) 244,177 140,961 (796,638) (145,701)
Net cash provided by
(used in) financing
activities............ 273,747 (177,834) 1,047,004 (177,314) 1,066,584
--------- --------- ----------- --------- ----------
Net (decrease)
increase in cash.... $ (23,650) $ 35,081 $ 14,262 $ (12,373) $ 17,833
========= ========= =========== ========= ==========
OPERATING AND FINANCIAL
DATA(2):
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Loans originated:
ICII................. $ -- $ 310 $ 1,816 $ 4,260 $ 6,019
ICW.................. 1 -- -- -- --
SPB.................. 398 531 724 NA(3) NA(3)
SPFC................. -- 790 288 190 --
FMAC................. 511 450 164 -- --
AMN.................. 171 -- -- -- --
IBC.................. 151 87 36 -- --
--------- --------- ----------- --------- ----------
Total.............. $ 1,232 $ 2,168 $ 3,028 $ 4,450 $ 6,019
========= ========= =========== ========= ==========
Loans securitized:
ICII................. $ -- $ -- $ 177 $ -- $ --
SPB.................. 203 277 511 46 --
SPFC................. -- 657 165 -- --
FMAC................. 343 325 105 -- --
AMN.................. 159 -- -- -- --
IBC.................. 214 87 85 -- --
--------- --------- ----------- --------- ----------
Total.............. $ 919 $ 1,346 $ 1,043 $ 46 $ --
========= ========= =========== ========= ==========
Outstanding balance of
loans and leases
securitized
(at end of
period)(4)............ $ 1,277 $ 2,118 $ 1,047 $ 45 $ --
SELECTED RATIOS:
Ratio of indebtedness
to total
capitalization
(at end of
period)(5)............ 47.2% 40.5% 46.1% 51.4% -- %
Average equity to
average assets........ 11.30 7.27 4.72 4.86 6.71
Return on average
common equity......... 34.95 45.55 17.59 10.57 31.76
Return on average
assets................ 3.95 3.31 0.82 0.51 2.13
SPB REGULATORY CAPITAL
RATIOS (AT END OF
PERIOD):
California leverage
limitation(6)......... 13.20% 13.50% 11.58% 11.50% 7.29%
Risk-based--Tier 1..... 8.75 9.71 11.72 14.21 10.27
Risk-based--Total...... 12.25 10.87 13.18 15.13 10.73
FDIC Leverage Ratio.... 8.30 9.35 8.04 8.08 9.47
ASSET QUALITY RATIOS (AT
END OF PERIOD):
Non-performing assets
as a percentage of
total assets.......... 4.31% 2.64% 1.55% 1.16% 0.64%
Allowance for loan and
lease losses as a
percentage of non-
performing loans...... 53.87 38.94 44.30 53.83 65.91
Net charge-offs as a
percentage of average
total loans
held for
investment(7)......... 2.72 0.94 0.36 0.23 0.89
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 50,597 $ 74,247 $ 39,166 $ 24,904 $ 37,277
Interest bearing
deposits.............. 103,738 3,369 267,776 10,600 90,000
Investment securities.. 228,631 84,296 5,963 18,817 18,000
Loans held for sale.... 162,571 940,096 1,341,810 263,807 1,238,006
Loans held for
investment, net....... 1,266,718 1,068,599 668,771 1,029,556 154,595
Securitization related
assets................ 43,105 159,707 58,272 4,558 529
Total assets........... 2,102,094 2,470,639 2,510,635 1,420,409 1,572,663
Deposits............... 1,156,022 1,069,184 1,092,989 934,621 1,001,468
Borrowings from FHLB... 45,000 140,500 190,000 295,000 320,000
Remarketed par
securities............ 70,000 -- -- -- --
Other borrowings....... 144,841 694,352 992,810 -- 147,611
Senior and convertible
subordinated notes.... 219,813 163,209 80,472 80,344 --
Total liabilities...... 1,778,161 2,231,131 2,416,533 1,344,536 1,504,411
Shareholders' equity... $ 323,933 $ 239,508 $ 94,102 $ 75,873 $ 68,253
</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. All per share amounts reflect the adoption of SFAS
No. 128.
(2) Does not include loans originated or securitized by ICIFC. Excludes SPFC
and FMAC loan origination and securitization activity for periods
subsequent to their respective deconsolidations.
(3) Information not available.
(4) Represents the outstanding balance of loans and leases securitized,
excluding loans held for sale and investment.
(5) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus
total shareholders' equity.
(6) Ratio of (i) SPB's total shareholders' equity to (ii) total deposits.
(7) Excluding charge-offs at AMN, the ratio of charge-offs to average loans
held for investment in 1997 was 1.16%.
45
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Organization
Imperial Credit Industries, Inc. ("ICII"), incorporated in 1986 in the State
of California, is 23.0% owned by Imperial Bank as of December 31, 1997. In
1991, Imperial Bank recapitalized the Company to conduct a full service
mortgage banking operation.
The consolidated financial statements include ICII, its significant wholly-
owned operating subsidiaries, significant majority-owned operating
subsidiaries and equity investments in two publicly traded companies
(collectively the "Company"). The significant wholly-owned subsidiaries
include: Southern Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"),
Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing Network ("AMN"),
Imperial Credit Commercial Asset Management Corporation ("ICCAMC") and
Imperial Credit Worldwide ("ICW"). The majority-owned significant operating
consolidated subsidiary is Imperial Capital Group ("ICG"), which is 60% owned
by the Company and 40% owned by ICG's management. The significant equity
investments in publicly traded companies are Southern Pacific Funding
Corporation ("SPFC") NYSE Symbol: SFC and Franchise Mortgage Acceptance
Company ("FMC") NASDAQ Symbol: FMAX. Both SPFC and FMC were former
consolidated subsidiaries of the Company. All material intercompany balances
and transactions with consolidated subsidiaries have been eliminated.
Strategic Focus and Acquisitions
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 sub-prime 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 sub-prime 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: business finance
lending, commercial mortgage lending, consumer lending. The Company also is a
provider of other financial services and investment products.
In 1995, the Company began to reposition, transform and diversify its core
business activities from the traditional mortgage banking operations of
originating and selling conforming residential mortgage loans to offering
higher margin loan, lease, investment and financial services products. The
Company's core business has remained consistent in that it originates loans
and leases funded primarily by warehouse lines of credit, repurchase
facilities, securitizations and whole loan sales in the secondary market. The
Company accomplished its diversification through a business strategy that
emphasizes:
. Investing in and managing businesses in niche segments of the financial
services industry. The Company intends to retain a significant equity
investment in the companies to provide a source of future earnings and
cash flow for the Company.
. Conservative, disciplined underwriting and credit risk management.
. Loan and lease originations, where possible, on a wholesale basis.
. Securitization or sale in the secondary market of substantially all of
the Company's loans and leases, other than those held by SPB for
investment.
46
<PAGE>
. Maintaining business and financial flexibility to take advantage of
changing market conditions with respect to specific financial services
businesses.
The Company 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. The Company, through its repositioning and diversification
process from the traditional mortgage banking operations of originating and
selling conforming residential loans to a more diversified financial services
company has accomplished that goal by its acquisitions of businesses in niche
segments of the financial services industry.
For the years ended December 31, 1997, 1996 and 1995, the Company originated
or acquired $1.2 billion, $2.2 billion and $3.0 billion of loans and leases,
respectively. In addition, during the years ended December 31, 1997, 1996 and
1995, the Company completed securitization transactions totaling $919.1
million, $1.3 billion and $1.0 billion, respectively.
Impac Mortgage Holdings, Inc. and Impac Funding Corporation
During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH") AMEX
Symbol: IMH, formerly Imperial Credit Mortgage Holdings. In exchange for these
assets, the Company received approximately 11.8% of the common stock of IMH.
Additionally, ICAI entered into a management agreement with IMH pursuant to
which ICAI advised upon the day-to-day operations of IMH and for which it was
paid a management fee. During 1997, the Company sold its common stock interest
in IMH, receiving proceeds of $12.0 million and recording a gain of
approximately $11.5 million.
In December 1997, IMH and the Company negotiated a termination of the
management agreement (the "Termination Agreement"). The consideration received
by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now
known as Impac Funding Corporation and is the origination unit of IMH., in the
amount of $29.1 million. The IMH common stock and the residual interests were
recorded by the Company at their estimated fair values of approximately $35.0
million and $13.1 million, respectively, for a total of $48.1 million. This
amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
During the first quarter of 1997, the Company disposed of its common stock
interest in ICIFC, a wholly-owned subsidiary engaged in mortgage conduit
operations for IMH, resulting in a loss of $100,000. At December 31, 1996, the
Company owned 100% of the common stock of ICIFC which represented only a 1%
economic interest as IMH owned all of the non-voting preferred stock of ICIFC
which gave IMH a 99% economic interest in ICIFC. The Company's disposal of its
remaining economic interest in ICIFC concluded its exit from the former
mortgage banking operations.
Franchise Mortgage Acceptance Company
On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed FMAC, a
limited liability company, in which the Company had a 66.7% ownership
interest. The acquisition was accounted for as a purchase and the purchase
price of $7.6 million, which
47
<PAGE>
included $3.8 million in contingent consideration for loans in the pipeline,
was allocated to the net assets acquired based on their fair value resulting
in goodwill of approximately $4.0 million. The Company's franchise lending
business was conducted through FMAC until November 1997, at which time FMAC
merged into FMC and FMC completed an initial public offering of its common
stock. The Company sold at FMC's initial public offering 3,568,175 shares at
$18.00 per share generating net proceeds of $59.7 million and a gain of
$48.9 million. Additionally, the Company recognized a gain of $43.2 million
resulting from the adjustment in the basis of its investment in FMC due to the
offering and its reduced ownership percentage. Immediately after FMC's initial
public offering and at December 31, 1997, the Company's percentage ownership
of FMC common stock was 38.4%. Accordingly, FMC is no longer consolidated in
the Company's consolidated financial statements and the Company's investment
in FMC is accounted for under the equity method.
Southern Pacific Funding Corporation
During the first quarter of 1997, the Company sold 370,000 shares of SPFC
common stock at $16.63 per share generating net proceeds of $6.2 million and a
gain of $4.3 million. Such transaction reduced the Company's ownership
percentage in SPFC to 49.4% at March 31, 1997 from 51.2% at December 31, 1996.
Accordingly, SPFC's operating results are no longer consolidated with those of
the Company and the Company's investment in SPFC is accounted for under the
equity method. During the third quarter of 1997, the Company sold an
additional 500,000 shares of SPFC common stock generating net proceeds of $7.6
million and a gain of $5.2 million. At December 31, 1997, the Company's
ownership interest in SPFC was 47%. For the year ended December 31, 1996, a
substantial portion of the Company's operations were conducted through its
sub-prime residential lending subsidiary, SPFC. In June 1996, SPFC completed
an initial public offering of its common stock pursuant to which ICII was a
selling shareholder. SPFC and the Company sold 5.2 million shares and
3.5 million shares, respectively, at $11.33 per share. In a secondary offering
during 1996, the Company sold 1.5 million SPFC shares at $19.83 per share. The
Company recognized a gain on sale of the SPFC shares it owned of $51.2
million, which is net of offering expenses and the Company's cost basis in the
shares. The Company also recognized a gain of $31.4 million related to the
stock sold by SPFC. The gain related to the stock sold by SPFC is based on the
difference between the Company's equity ownership in SPFC after the sale and
such equity ownership prior to the sale, using the Company's respective SPFC
ownership percentages.
Imperial Business Credit
The Company expanded its commercial equipment leasing business conducted by
IBC through the acquisitions of substantially all of the assets of First
Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million
in May 1995 and Avco Leasing Services, Inc. and Avco Financial Services of
Southern California, Inc. related to its business of originating and servicing
business equipment leases and agreed to assume certain liabilities in
connection therewith from Avco Financial Services, Inc. (the "Avco
Acquisition) for approximately $94.8 million in October 1996. These
acquisitions were accounted for as purchases and the purchase prices were
allocated to the net assets acquired based on their fair value resulting in
goodwill of $1.2 million and $12.5 million for the FCAC and Avco transactions,
respectively. IBC's lease originations were $151.3 million and $87.2 million,
and it securitized and sold $213.6 million and $87.0 million during the years
ended December 31, 1997, and 1996, respectively.
Coast Business Credit
In September 1995, the Company began making asset-based loans to middle
market companies located primarily in California by acquiring CoastFed
Business Credit. This business, now a division of SPB, was renamed Coast
Business Credit ("CBC").
The acquisition was accounted for as a purchase and the purchase price of
$150 million was allocated to the net assets acquired based on their fair
value resulting in goodwill of approximately $16 million. At December 31, 1997
and 1996, CBC had total commitments of $803.3 million and $547.7 million, of
which $484.8 million and $288.5 million of loans were outstanding,
respectively.
48
<PAGE>
Imperial Capital Group
During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm. DRI was headquartered in Beverly Hills, California
with offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and
offered full service investment banking, brokerage, and asset management
services. DRI managed and underwrote public offerings of securities, arranged
private placements and provided advisory and other services in connection with
mergers, acquisitions, restructurings, and other financial transactions. The
Company acquired a 1% interest in DRI and purchased a warrant to acquire an
additional 48% interest.
In July 1997, the Company formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of investment products and services.
During the fourth quarter, in connection with the formation of ICG, the
Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking fees of $7.7 million. The Company's ownership interest in
ICG is 60% as of December 31, 1997.
Auto Marketing Network
In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 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. The purchase price was allocated to
the net assets acquired based on their fair value, and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
PrinCap Mortgage Warehouse
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. and contributed such assets to its PMW Mortgage
Warehouse, Inc. subsidiary ("PrinCap"). The acquisition was accounted for as a
purchase, and the purchase price of $123.7 million was allocated to the net
assets acquired based on their fair value resulting in goodwill of $6.8
million. PrinCap's primary business is residential mortgage warehouse lending
to medium-sized brokers and mortgage bankers on a national basis. At December
31, 1997, PrinCap had commitments outstanding and loans of $126.4 million and
$122.5 million, respectively.
Imperial Credit Commercial Asset Management Corporation
The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to
day operations of ICCMIC, a real estate investment trust investing primarily
in performing multi-family and commercial real estate properties, loans and
mortgage-backed securities. In October 1997, ICCMIC completed its initial
public offering and sold approximately 34.5 million shares of common stock at
$15.00 per share resulting in net proceeds of approximately $481.2 million.
The Company purchased 2,970,000 shares of ICCMIC common stock for $41.4
million in October 1997. In December 1997, the Company purchased an additional
100,000 shares of ICCMIC common stock for $1.5 million. The Company owned 8.9%
of the outstanding common stock of ICCMIC as of December 31, 1997.
49
<PAGE>
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the "Year 2000" problem
concerning existing computer systems. The Year 2000 problem affects every
computer and subsystem the Company operates, both in-house and from
independent servicers and vendors. The issue is whether the Company's computer
systems will properly recognize the "00" date when the year changes to 2000.
Computer systems that do not properly recognize the "00" date could generate
erroneous data or cause a computer system to fail.
The Company is utilizing both internal and external resources to correct,
reprogram and test the computer systems for the Year 2000 compliance. It is
anticipated that all reprogramming changes will be completed by December 31,
1998, allowing adequate time for testing all data from the Company's in-house,
independent servicers and vendor computer systems. Management has assessed the
Year 2000 compliance costs and does not believe such costs will have a
material effect on the Company's consolidated financial statements.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
REVENUE
General
The Company's consolidated net income for the year ended December 31, 1997
was $85.9 million or $2.10 diluted income per share as compared to $76.0
million or $1.95 diluted income per share for the year ended December 31,
1996. Basic consolidated income per share for the year ended December 31, 1997
was $2.23 per share as compared to $2.11 per share for the previous year.
Consolidated net income for the year ended December 31, 1997, includes an
extraordinary loss on early extinguishment of debt of $4.0 million, or $0.10
per common share, net of tax. The increase in net income is attributable to
several factors including: gains on sale of stock in SPFC, FMC and IMH; a gain
on the termination of a Real Estate Investment Trust ("REIT") advisory
agreement; an 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.
Gain on Sale of Loans and Leases
Gain on sale of loans and leases decreased to $67.7 million for the year
ended December 31, 1997 from $88.2 million for 1996. Gain on sale of loans and
leases consists primarily of gains recorded upon the sale of loans and leases,
net of associated expenses, and to a lesser extent, fees received on the
origination of loans, and fees received for commitments to fund loans. Gains
on sale of loans and leases decreased during 1997 primarily as a result of the
impact of the deconsolidations of SPFC and ICIFC for the entire year of 1997
and the deconsolidation of FMAC for the fourth quarter of 1997 and a lower
volume of loan and lease securitizations as compared to 1996. During 1997, the
Company completed loan and lease securitizations totaling $919.1 million as
compared to $1.3 billion during 1996. For 1997 and 1996, total loan and lease
securitizations were as follows:
<TABLE>
<CAPTION>
1997 1996
------ --------
(IN MILLIONS)
<S> <C> <C>
Nonconforming residential loans......................... $ -- $ 656.9
Multifamily and commercial loans........................ 203.1 277.0
Franchise loans......................................... 343.8 325.1
Equipment leases........................................ 213.6 87.0
Auto loans.............................................. 158.6 --
------ --------
$919.1 $1,346.0
====== ========
</TABLE>
The Company also completed two bulk loan sales of loans with total principal
of $197.8 million for the year ended December 31, 1997.
50
<PAGE>
Total Interest Income
For the year ended December 31, 1997, total interest income increased to
$227.9 million from $207.5 million for the year ended December 31, 1996. The
increase in total interest income is primarily attributable to a 176 basis
point or 18% increase in the average yield on interest-earning assets offset
by a $148.8 million or 7% decrease in the average balance of interest-earning
assets. The increase in the average yield on interest-earning assets from 1996
is primarily attributable to increases in the average yields on loans held for
investment and sale reflecting a more diversified and higher-yielding mix of
loan products relative to 1996. The decrease in the average balance of
interest-earning assets compared to 1996 is primarily due to a decrease in the
average balance of loans held for sale of $543 million offset by an increase
in the average balance of loans held for investment of $340 million. The
comparison of total interest income for 1997 and 1996 is also impacted by the
deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's
interest income for all of 1996 and FMAC's interest income for the fourth
quarter of 1996, total interest income for the year ended December 31, 1996
would have been $158.0 million compared to actual of $207.5 million.
Total Interest Expense
For the year ended December 31, 1997, total interest expense decreased to
$126.6 million from $135.0 million for the year ended December 31, 1996. The
decrease in total interest expense is primarily attributable to a $161.4
million or 8% decrease in the average balance of interest-bearing liabilities
offset by a 13 basis point or 2% increase in the average cost of interest-
bearing liabilities. The decrease in the average balance of interest-bearing
liabilities relative to 1996 resulted primarily from a decrease in the average
balance of borrowings due to the deconsolidations of SPFC and ICIFC. This
decrease was partially offset by an $154.3 million increase in average
deposits. The increase in the average cost of interest-bearing liabilities is
primarily attributable to the relatively higher borrowing costs associated
with the Company's Remarketed Par Securities issued during 1997. The
comparison of total interest expense for 1997 and 1996 is also impacted by the
deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's
interest expense for all of 1996 and FMAC's interest expense for the fourth
quarter of 1996, total interest expense for the year ended December 31, 1996
would have been $93.8 million compared to actual of $135.0 million.
Net Interest Margin
For the year ended December 31, 1997, the consolidated net interest margin
increased to 5.11%, an increase of 171 basis points, as compared to the
consolidated net interest margin of 3.40% for the year ended December 31,
1996. The increase in net interest margin is due primarily to the
aforementioned increases in the average yields on loans held for investment
and sale due to a more diversified and higher-yielding mix of loan products
relative to 1996.
Provision for Loan and Lease Losses
The provision for loan and lease losses increased to $39.0 million for the
year ended December 31, 1997, as compared to $9.8 million for the year ended
December 31, 1996. The large increase in the provision for loan losses is
primarily the result of an increase in total nonaccrual loans and net charge-
offs of $20.5 million and $22.5 million, respectively. The increase in total
nonaccrual loans and net charge-offs came mainly from the AMN loan portfolio
and are reflective of the continuing change in the composition of the overall
loan portfolio to higher yielding loan products that carry higher relative
credit risk. For further discussion see "Business--Loans Held for Investment"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Asset Quality".
Loan Servicing Income
Loan servicing income for the year ended December 31, 1997, increased to
$10.7 million as compared to $1.7 million for the year ended December 31,
1996. Loan servicing income increased primarily due to a decrease
51
<PAGE>
in the level of foreclosure and liquidation costs associated with the
Company's former residential mortgage loan servicing portfolio and due to an
increase in the average outstanding balance of loans and leases serviced for
others.
Equity in Net Income of SPFC
Equity in the net income of SPFC for the year ended December 31, 1997 was
$25.9 million as compared to $0 for the year ended December 31, 1996, and
represents the Company's share of SPFC's net income based on the Company's
ownership percentage. The increase in the equity in net income of SPFC is due
to the difference in accounting methods used for the Company's investment in
SPFC at December 31, 1997 and 1996. At December 31, 1997, the Company's
ownership percentage in SPFC was 47.0%, and accordingly, the Company accounted
for its investment in SPFC using the equity method. At December 31, 1996, the
Company's ownership percentage in SPFC was 51.2%, and accordingly, SPFC's
operating results were consolidated with those of the Company.
Equity in Net Loss of FMAC
Equity in the net loss of FMAC was $3.1 million for the period commencing
October 1, 1997 through December 31, 1997, as compared to $0 for the year
ended December 31, 1996 and represents the Company's share of FMAC's net loss
for the quarter ended December 31, 1997, based on the Company's ownership
percentage. FMC's net loss resulted from the deferred tax charges associated
with converting to a fully taxable corporation from a limited liability
entity.
The increase in the equity in net loss of FMAC is due to the difference in
accounting methods used for the Company's investment in FMAC at December 31,
1997 and 1996. At December 31, 1997, the Company's ownership percentage in
FMAC was 38.4%, and accordingly, the Company accounted for its investment in
FMAC using the equity method. At December 31, 1996, the Company's ownership
percentage in FMAC was 66.7%, and accordingly, FMAC 's operating results were
consolidated with those of the Company. In conjunction with the FMC initial
public offering during the fourth quarter of 1997 discussed below, the Company
included in its consolidated operating results nine months of FMAC's operating
results for 1997.
Investment Banking Fees
Investment banking fees were $7.7 million for the year ended December 31,
1997, compared to $0 for the year ended December 31, 1996. During the fourth
quarter of 1997, the Company formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of financial products and services.
During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking fees of $7.7 million.
Gain on Sale of Servicing Rights
Gain on sale of servicing rights decreased to $0 for the year ended December
31, 1997, from $7.6 million for the year ended December 31, 1996. During 1996,
the Company sold mortgage loan servicing rights relating to $3.2 billion in
loans, resulting in pre-tax gains of $7.6 million. Gains on the sale of
servicing rights consist of the cash proceeds received on the "bulk" sale of
servicing rights, net of the related capitalized purchased or originated
servicing rights. The Company did not recognize any gain or loss on the sale
of servicing rights in 1997.
Gain on Sale of FMC Stock
The Company recognized a gain on sale of FMC stock of $92.1 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. The Company's franchise lending business was conducted through FMAC
until November 1997, at which time FMAC merged into FMC, a Delaware
corporation formed for the purpose of succeeding to the business of FMAC, and
FMC completed an initial public
52
<PAGE>
offering of its common stock. The Company sold into FMC's initial public
offering 3.6 million shares at $18.00 per share generating net proceeds of
$59.7 million and a corresponding gain of $48.9 million. Additionally, the
Company recognized a gain of $43.2 million resulting from the adjustment in
the basis of its investment in FMC due to the offering and its reduced
ownership percentage. At the time of FMC's initial public offering and at
December 31, 1997, the Company's percentage ownership of FMC common stock was
38.4%. Accordingly, FMC is no longer consolidated and the Company's investment
in FMC is accounted for under the equity method.
Gains on Sale of SPFC Stock
The Company recognized a gain on sale of SPFC stock of $9.5 million for the
year ended December 31, 1997, compared to $51.2 million for the year ended
December 31, 1996. The Company's nonconforming residential lending business
was conducted through SPFC until June 1996, at which time SPFC completed an
initial public offering of its common stock pursuant to which the Company was
a selling shareholder. During the first quarter of 1997, the Company sold
370,000 shares of SPFC common stock at $16.63 per share generating net
proceeds of $6.2 million and a gain of $4.3 million. This transaction reduced
the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to
49.4% at March 31, 1997. Accordingly, SPFC is no longer consolidated and the
Company's investment in SPFC is accounted for under the equity method. During
the third quarter of 1997, the Company sold an additional 500,000 shares of
SPFC common stock generating net proceeds of $7.6 million and a gain of $5.2
million. This transaction further reduced the Company's ownership interest in
SPFC to 47% at December 31, 1997. During the year ended December 31, 1996, the
Company sold a total of 5.0 million shares of SPFC in two separate offerings
resulting in gains totaling $51.2 million.
Additionally, during 1996, as part of its initial public offering, SPFC sold
5.2 million shares to the public, resulting in a corresponding gain to the
Company of $31.4 million based on the difference between the Company's equity
ownership in SPFC after the sale and such equity ownership prior to the sale,
using the Company's respective SPFC ownership percentages.
Gain on Sale of IMH Stock
The Company recognized a gain on sale of IMH stock of $11.5 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to IMH. In exchange for these assets, the Company
received approximately 11.8% of the common stock of IMH. During 1997, the
Company sold its common stock in IMH resulting in a gain of $11.5 million.
Gain on Termination of REIT Advisory Agreement
The Company recognized a nonrecurring gain on termination of a REIT advisory
agreement of $19.0 million for the year ended December 31, 1997. In
conjunction with the aforementioned exchange of Company assets for IMH stock,
ICAI entered into a management agreement with IMH pursuant to which ICAI
advised upon the day-to-day operations of IMH and for which it was paid a
management fee. In December 1997, IMH and the Company negotiated a termination
of the management agreement (the "Termination Agreement"). The consideration
received by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is now
known as Impac Funding Corporation and is the origination unit of IMH, in the
amount of $29.1 million. The IMH common stock and the securitization-related
assets were recorded by the Company at their fair values of approximately
$35.0 million and $13.1 million, respectively, for a total of $48.1 million.
This amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
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EXPENSES
Personnel Expense
Personnel expense increased to $60.8 million for the year ended December 31,
1997 as compared to $48.4 million for the year ended December 31, 1996. This
increase reflects the Company's acquisition and expansion activities. The
comparison of personnel expense for 1997 and 1996 is also impacted by the
deconsolidations of SPFC, ICIFC and FMAC. Excluding SPFC's and ICIFC's
personnel expense for all of 1996 and FMAC's personnel expense for the fourth
quarter of 1996, total personnel expense for the year ended December 31, 1996
would have been $29.8 million compared to actual of $48.4 million.
Amortization of PMSR's and OMSR's
Amortization of PMSR's and OMSR's increased to $3.1 million for the year
ended December 31, 1997 as compared to $1.1 million for the year ended
December 31, 1996. The increase primarily resulted from an increase in
prepayment rates on the underlying serviced loan portfolio. The comparison of
amortization of PMSR's and OMSR's for 1997 and 1996 is also impacted by the
deconsolidation of ICIFC.
Occupancy Expense
Occupancy expense decreased to $4.3 million for the year ended December 31,
1997 as compared to $4.7 million for the year ended December 31, 1996. This
decrease is a result of the deconsolidations of SPFC, ICIFC and FMAC.
Excluding SPFC's and ICIFC's occupancy expense for all of 1996 and FMAC's
occupancy expense for the fourth quarter of 1996, total occupancy expense for
the year ended December 31, 1996 would have been $3.8 million compared to
actual of $4.7 million.
Net Expenses of Other Real Estate Owned
Net expenses of other real estate owned ("OREO") decreased to $6.5 million
for the year ended December 31, 1997 as compared to $7.0 million for the year
ended December 31, 1996. The decreases in net expenses of OREO resulted from a
corresponding decline in OREO losses and writedowns related to the Company's
former mortgage banking operations.
Professional Services Expense
Professional services expense increased to $10.3 million for the year ended
December 31, 1997 as compared to $9.6 million for the year ended December 31,
1996. This increase reflects the Company's acquisition and expansion
activities. The comparison of professional services expense for 1997 and 1996
is also impacted by the deconsolidations of SPFC, ICIFC and FMAC. Excluding
SPFC's and ICIFC's professional services expense for all of 1996 and FMAC's
professional services expense for the fourth quarter of 1996, total
professional services expense for the year ended December 31, 1996 would have
been $7.9 million compared to actual of $9.6 million.
Restructuring Provision--Exit from Mortgage Banking Operations
Restructuring charges regarding mortgage banking operations were $3.8
million for the year ended December 31, 1996. The charges recognized during
1996 represented 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. The exit plan was completed during 1997, and there
were no additional restructuring charges recognized during 1997 relative to
the Company's exit from this business.
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Loss on Restructuring of Dabney/Resnick/Imperial, LLC ("DRI")
The Company recognized a loss on restructuring of its loan to DRI of $3.7
million for the year ended December 31, 1997, compared to $0 for the year
ended December 31, 1996. During the fourth quarter of 1996, the Company
announced the closing of its investment in DRI, an investment banking firm.
DRI offered full service investment banking, brokerage, and asset management
services. As discussed above, during the fourth quarter of 1997, the Company
formed a new subsidiary, ICG, which includes a registered broker/dealer and an
asset management company offering individual and corporate investors a wide
range of financial products and services. In connection with the formation of
ICG, the Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG.
Provision for Loss on Repurchase of Former Mortgage Banking Loans
The Company recognized a provision for loss on repurchase of mortgage
banking loans of $5.4 million for the year ended December 31, 1997, compared
to $0 for the year ended December 31, 1996. During 1997, the Company completed
an analysis of its potential exposure from losses on the repurchase of those
loans still remaining from its former mortgage banking operations. The
completion of this analysis resulted in the aforementioned $5.4 million charge
being taken during the fourth quarter of 1997.
Amortization of Goodwill
The Company's amortization of goodwill was $23.3 million for the year ended
December 31, 1997, compared to $1.9 million for the year ended December 31,
1996. The increase in amortization of goodwill is primarily attributable to
the write off of AMN's goodwill totaling $20.1 million. Since the March 1997
acquisition date of AMN, AMN posted operating losses and experienced
significant increases in nonperforming assets, loan charge-offs and loan loss
provisions. In December 1997, the Company developed revised operating
projections which indicated that the goodwill resulting from the AMN
acquisition was not recoverable. Accordingly, the remaining balance of AMN
goodwill of $20.1 million was written off through accelerated amortization
during the fourth quarter of 1997.
Other Expenses
All other expenses (including data processing expense, FDIC insurance
premiums, telephone and other communications, and general and administrative
expense) for the year ended December 31, 1997 totaled $32.9 million compared
to $22.7 million for the year ended December 31, 1996. This increase reflects
the Company's acquisition and expansion activities. The comparison of other
expenses for 1997 and 1996 is also impacted by the deconsolidations of SPFC,
ICIFC and FMAC. Excluding SPFC's and ICIFC's other expenses for all of 1996
and FMAC's other expenses for the fourth quarter of 1996, total other expenses
for the year ended December 31, 1996 would have been $15.5 million compared to
actual of $22.7 million.
Income Taxes
The Company's effective tax rate was 39% and 44% for the years ended
December 31, 1997 and 1996, respectively. The decrease in the effective tax
rate for 1997 primarily reflects the recovery of deferred taxes related to the
FMC initial public offering. For further information see Note 21 to the
consolidated financial statements.
Minority Interest in Income (Loss) of Consolidated Subsidiaries
The Company's minority interest in income (loss) of consolidated
subsidiaries was $10.5 million for the year ended December 31, 1997, compared
to $12.0 million for the year ended December 31, 1996. The comparison of the
Company's minority interest in income (loss) of consolidated subsidiaries for
1997 and 1996 is also impacted by the deconsolidations of SPFC, ICIFC and
FMAC. Excluding the Company's minority interest in income (loss) of SPFC and
ICIFC for all of 1996 and FMAC for the fourth quarter of 1996, total minority
interest in income (loss) of consolidated subsidiaries for the year ended
December 31, 1996 would have been $2.1 million compared to actual of $12.0
million.
Extraordinary Item--Loss on Early Extinguishment of Debt
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007. A portion of the
proceeds from the offering were used to repurchase
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$69.8 million of 9.75% Senior Notes due 2004 for which the Company recorded an
extraordinary after-tax charge of $4.0 million. The Company engaged in the new
issuance in order to obtain a more favorable debt covenant package and to
raise new capital to support its growing businesses.
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 or $1.95 per diluted share as compared to $14.2 million or
$0.40 per diluted share for the previous year, 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 the same period of the previous year.
Expenses for the year ended December 31, 1996 increased 62% to $99.0 million
as compared to $61.2 million for the previous year.
Total revenues for the Company included a pre-tax gain of $82.7 million from
the sale 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 specializing in sub-
prime residential mortgage lending. In the 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
$31.5 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. As a
result of this sale, ICII eventually reduced its ownership in SPFC to 51.2%.
As a result of the Company's requirement to record income tax expense on its
ownership interest in SPFC's after tax income, the Company only retained
approximately 30% of SPFC's net income or loss.
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 the previous year. Gain on
sale of loans consists primarily of gains recorded upon the sale of loans, net
of associated expenses, and to a lesser extent, fees received on the
origination of loans, and fees received for commitments to fund loans. The
increase was primarily the result of substantially increased volume and
profitability on the sale of various variable and fixed rate loan products
through securitizations.
Gain on sale of loans included $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 performance results differing from excess cash flows estimated by the
Company.
For the year ended December 31, 1996, net interest income, which consists of
interest income and fees net of interest expense, increased $38.6 million or
115% to $72.4 million as compared to $33.8 million for the previous year. The
increase in net interest income was due primarily to two factors. The increase
in interest income can be directly attributed to the acquisitions completed
throughout the last half of 1995, and the resultant change in the composition
of loans held for sale and investment from primarily conforming single family
residential mortgage loans to a more diversified mix of loan products. At
December 31, 1996, the product mix of the Company's interest earning assets
included a much larger percentage of higher-yielding loan and lease products
as compared to the previous year.
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For the year ended December 31, 1996, interest income increased $78.0 million
or 60% to $207.5 million from $129.5 million. 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 the year ended
December 31, 1995. The increase in interest expense for the quarter and for
the year 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
the year ended December 31, 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 the acquired CBCC as
well as the fourth quarter purchase of equipment leases totaling $85.0 million
with a weighted average interest rate of 15.5% pursuant to the Avco
Acquisition.
Loan servicing income for the year ended December 31, 1996 decreased 87% to
$1.7 million as compared to $12.7 million for the previous year. The decrease
in loan servicing income was primarily due to a decreased average balance of
conforming residential mortgage loans serviced for others, primarily as a
result of the Company's sale or transfer of substantially all of its
conforming residential mortgage servicing rights in connection with the
Company's exit from the conforming mortgage banking business.
Additionally, loan servicing income continues to be negatively affected by
increased direct servicing costs related to the loan foreclosure and property
liquidation process of the remaining delinquent conforming residential
mortgage servicing portfolio of the Company's former mortgage banking
operations.
During 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 the previous year as a result
of the Company's adoption of Statement of Financial Accounting Standards 122
("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 for the year ended December 31, 1996 increased to $14.2 million
as compared to $1.2 million for the previous year. This increase was primarily
due to fee income generated from the Company's advisory 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 SPB.
Personnel expenses increased 42% to $48.4 million for the year ended
December 31, 1996 as compared to $34.1 million for the previous year. This
increase was primarily the result of personnel expenses related to the
Company's acquisition and expansion activities throughout the second half of
1995, partially offset by reductions in personnel expense at the Company's
former mortgage banking operations.
Amortization of PMSR's and OMSR's decreased 72% to $1.1 million for the year
ended December 31, 1996 as compared to $4.0 million for the previous year. The
decrease was the result of a decreased outstanding
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balance of PMSR's and OMSR's as a result of the Company's sale of servicing
rights on conforming residential mortgage loans generated by the former
mortgage banking operations.
Occupancy expense increased 19% to $4.7 million for the year ended December
31, 1996 as compared to $3.9 million for the same period of the previous year.
The increase primarily reflected an increase in lease expenses as a result of
the Company's acquisition of FMAC, FCAC and CBCC in the second half of 1995,
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 the previous year. 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 the previous year. FDIC
insurance premiums decreased primarily as a result of a decrease in the rate
of the insurance premium charged to SPB 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 first quarter of 1996, the Company committed itself to, and began the
execution of, an exit plan that specifically identified the necessary actions
to be taken to complete the exit from the origination, sale and servicing of
conforming residential mortgage loans. During the year ended December 31,
1996, the Company incurred actual charges of approximately $3.2 million. 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, increased 109%
to $33.8 million for the year ended December 31, 1996 as compared to $16.2
million for the same period of the previous year. The increase in general and
administrative expenses was due primarily to the Company's acquisition of
FMAC, FCAC, and CBCC, as well as to the start up of ICAI in 1995, and the
continued expansion of SPFC throughout 1996.
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 the
year ended December 31, 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 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.
NPA's consist of nonaccrual loans, loans with modified terms and OREO. Total
NPA's 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 38.9% at December 31, 1996 from 44.3% at December 31, 1995. NPA's
as a percentage of total assets were 2.64% and 1.55% at December 31, 1996 and
1995, respectively.
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The Company believes the overall increase in NPA's was primarily a result of
the acquisition of a portfolio of sub-prime residential mortgage loans by SPB
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 NPA's 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.
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 and expenses
incurred in connection with its securitization programs, (iv)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold, (v) ongoing administrative and other operating
expenses and (vi) the costs of the Company's warehouse credit and repurchase
facilities with certain financial institutions.
The Company has financed its activities through warehouse lines of credit
and repurchase facilities with financial institutions, equity and debt
offerings in the capital markets, deposits or borrowings at SPB and
securitizations. The Company believes that such sources will be sufficient to
fund the Company's liquidity requirements for the foreseeable future. There
can be no assurance that the Company will have access to the capital markets
in the future or that financing will be available to satisfy the Company's
operating and debt service requirements or to fund its future growth.
SPB 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. At December 31, 1997 and 1996, SPB had maximum
FHLB borrowings available equal to $45.8 million and $212.7 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
SPB's option.
The highest FHLB advance outstanding during the year ended December 31, 1997
was $140.5 million, with an average outstanding balance of $56.8 million. The
outstanding balance of FHLB advances was $45.0 million at December 31, 1997.
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 FHLB advances are secured by the investment in FHLB stock and certain real
estate loans with a carrying value of $104.7 million and $228.5 million at
December 31, 1997 and 1996, respectively.
During 1993 and 1994, ICII contributed $26.0 million and $25.0 million,
respectively, to SPB's capital in order to provide SPB with adequate capital
to increase its deposits and borrowings. Since December 31, 1991, SPB has
increased deposits as necessary so that deposits, together with cash, liquid
assets, intercompany borrowings, borrowing under warehouse lines and FHLB
borrowings have been sufficient to provide the funding for its loans held for
sale and investment.
As of December 31, 1997, SPB's deposit portfolio which consists primarily of
certificate accounts increased approximately $100 million to $1.2 billion at
December 31, 1997 from $1.1 billion at December 31, 1996.
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SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest bearing deposits with financial
institutions. The Company tracks on a daily basis all new loan applications by
office and, based on historical closing statistics, estimates expected
fundings. Cash management systems at SPB allow SPB to anticipate both funding
and sales and adjust deposit levels and short-term investments against the
demands of the Company's lending activities. For a further description of
SPB's deposit generating activities and available funding, see Item 1,
"Business--Funding and Securitizations."
In addition to warehouse lines of credit and SPB borrowings, the Company has
also accessed the capital markets to fund its operations. In the second
quarter of 1992, the Company completed its initial public offering of
8,750,211 shares, raising net proceeds of $15.9 million. In April 1996, the
Company completed a stock offering of 4,879,808 shares of its common stock at
$13.00 per share for net proceeds of $59.2 million.
In January 1994, the Company issued $90.0 million principal amount of the
9.75% Senior Notes. In October 1994, the Company repurchased $8.5 million of
said notes. As of December 31, 1995, the Company was not in compliance with
certain debt covenants related to these notes. Subsequent to December 31,
1995, these defaults were corrected. In March 1996, the Company reissued the
$8.5 million of the notes which it purchased in October 1994. At December 31,
1996, $90.0 million of these notes were outstanding.
In January 1997, the Company issued $200.0 million principal amount of the
9.875% Senior Notes and used a portion of the proceeds to purchase
approximately $69.8 million of the 9.75% Senior Notes. The Company contributed
$35.0 million of the proceeds to SPB in the form of subordinated indebtedness.
In June 1996, SPFC completed an initial public offering of its common stock
pursuant to which the Company was a selling shareholder. SPFC and the Company
received net proceeds from such offering of approximately $53.8 million and
$35.9 million, respectively. In November 1996, (i) SPFC issued $75.0 million
of convertible subordinated notes due 2006 and (ii) the Company sold 1.0
million shares of SPFC common stock held by the Company for net proceeds of
approximately $28.0 million.
During the first quarter of 1997, the Company sold 370,000 shares of the
common stock of SPFC at $16.63 per share, generating net proceeds of $6.2
million, resulting in a gain of $4.3 million, reducing its ownership of SPFC
from 51.2% at December 31, 1996 to 49.4% at March 31, 1997. Therefore, the
results of SPFC operations are now accounted for in the Company's financial
statements under the equity method of accounting. During the third quarter
ending September 30, 1997, the Company sold an additional 500,000 shares of
SPFC common stock, generating net proceeds of $7.6 million and resulting in a
gain of $5.2 million, further reducing its ownership percentage to 47.0%. As
of December 31, 1997, the Company's ownership in SPFC common stock was 47.0%,
excluding shares issuable upon exercise of options granted or to be granted
pursuant to SPFC's stock option plans and shares issuable upon conversion of
the $75.0 million of convertible subordinated notes, mentioned above.
During the second quarter of 1997, ICII issued $70.0 million of Senior Notes
under a proprietary product known as "ROPES." These securities can be redeemed
at par upon their maturity or remarketed as 30 year capital instruments. Under
current tax law, the interest payments on these securities are tax-deductible.
The proceeds from the offering are being used for capital contributions to
subsidiaries, strategic acquisitions, investments and general corporate
purposes.
During the fourth quarter of 1997, FMC completed an initial public offering
of its common stock pursuant to which ICII was a selling stockholder. FMC and
ICII and another selling stockholder received net proceeds from such offering
of approximately $114.3 million, $59.7 million and $18.5 million,
respectively. As of December 31, 1997, the Company's ownership percentage in
FMC was 38.4%.
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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 December 31, 1997 and December
31, 1996, $125.0 million and $80.5 million, respectively, of SPB'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, SPB 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 SPB 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 $435 million in financing at December 31, 1997.
Securitizations
The Company currently pools and sells through securitization a substantial
portion of the loans and leases which it originates or purchases, other than
loans sold in whole loan sales and loans held by SPB 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.
61
<PAGE>
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
all of the cash representing such gain until it receives cash flows generated
by the subordinate bonds or residual interests retained, which are payable
over the actual life of the loans or leases securitized. As a result, such
transactions may not generate cash flows to the Company for an extended
period.
In addition, in order to gain access to the secondary market for loans and
leases, the Company has relied on monoline insurance companies to provide
guarantees on outstanding senior interests in the special purpose entities to
which such loans and leases are sold to enable it to obtain investment grade
ratings for such interests. To a limited extent, the Company also relies on
overcollateralization to support outstanding senior interests.
However, any unwillingness of the monoline insurance companies to guarantee
the senior interests in the Company's loan or lease pools could have a
material adverse effect on the Company's financial position and results of
operations.
The pooling and servicing agreements that govern the distribution of cash
flows from the loans included in securitizations require either (i) the
establishment of a reserve account that may be funded with an initial cash
deposit by the Company or (ii) the overcollateralization of the senior
interests by using interest receipts on the loans to reduce the outstanding
principal balance of the senior interests.
The Company's interest in each reserve account and overcollateralized amount
is reflected in the Company's financial statements as Retained Interest in
Loan and Lease Securitizations. To the extent that a loss is realized on the
loans, the loss will either be paid out of the reserve account or the
overcollateralization amount or will be reduced to the extent that funds are
available and will result in a reduction in the value of the any subordinate
bonds or residual interests retained.
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.
Business Finance Lending.
IBC primarily funds its lease originations through the use of an interim
bank warehouse facility and a permanent revolving securitization facility. The
securitization facility utilizes a trust structure and has a five-year
revolving period, which expires in November 2002, and a three and one-half
year amortization period.
The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created pursuant
to a pooling and servicing agreement among IBC, as originator, IBC Funding
Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as seller, and
Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells its lease
originations to IFC under a sale and contribution agreement ("IBC Agreement"),
which simultaneously assigns its rights in the leases to the Trust in exchange
for trust certificates. The Class A certificates are sold to Triple-A One
Funding Corp., a special purpose corporation administered by Capital Markets
Assurance Corporation ("CAPMAC"), which issues commercial paper to fund its
acquisitions. The Class A purchase limit under the facility is $250 million
and as of December 31, 1997, there was approximately $173.9 million of Class A
Certificates outstanding.
62
<PAGE>
IFC assigns all receivables acquired pursuant to the IBC Agreement to the
1997-2 Trust. The transactions are accounted for as sales for reporting
purposes under generally accepted accounting principles ("GAAP") and as
financings for tax purposes. IFC assigns all its rights, title and interest in
the leases, together with a security interest in the underlying leased
equipment, which ownership and security interests have been perfected under
the Uniform Commercial Code. Payments of the purchase price are made directly
from payments by lessees on the lease receivables.
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 FCAC. In October 1996, IBC expanded its
business through the Avco Acquisition. For the years ended December 31, 1997
and December 31, 1996, IBC originated $151.3 million and $87.2 million of
leases and securitized $213.6 million and $87.0 million of leases,
respectively.
Commercial Mortgage Lending.
During the years ended December 31, 1997 and 1996, SPB securitized $203.1
million and $277.0 million of IPLD multi-family and commercial mortgage loans,
respectively.
Auto Marketing Network.
AMN has a warehouse lending agreement with Greenwich Capital Financial
Products ("GCFP") whereby GCFP provides warehouse funding for AMN's
receivables and obligations. AMN's receivables and obligations are guaranteed
by ICII. The warehouse lending agreement generally allows borrowings from GCFP
in respect of eligible receivables. To the extent that the receivable becomes
delinquent greater than 60 days or is defaulted on, the loan in respect of
such receivable must generally be repaid. The warehouse lending agreement is
AMN's principal source of financing. During the year ended December 31, 1997,
AMN securitized $158.6 million of auto loans.
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.
ASSET QUALITY
The provision for loan and lease losses increased to $39.0 million for the
year ended December 31, 1997, as compared to $9.8 million and $5.5 million for
the years ended December 31, 1996 and 1995, respectively. The increase in the
provision for loan losses was primarily the result of an increase in
nonaccrual loans and net charge-offs at AMN as well as the continuing change
in the composition of the investment loan portfolio to higher-yielding loan
products.
Total nonaccrual loans increased to $70.6 million at December 31, 1997, as
compared to $50.1 million and $31.0 million at December 31, 1996 and 1995,
respectively. Total nonaccrual loans as a percentage of loans held
63
<PAGE>
for investment were 5.36%, 4.55%, and 4.50% at December 31, 1997, 1996, and
1995, respectively. The following table summarizes net charge-offs by loan
type.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Residential mortgage......................... $ (5,920) $(2,485) $(2,013)
Multifamily.................................. (420) (1,095) (334)
Commercial................................... (955) (465) (169)
Leases....................................... (3,920) (3,142) (461)
Consumer..................................... (19,262) (816) (118)
-------- ------- -------
Net charge-offs............................ $(30,477) $(8,003) $(3,095)
======== ======= =======
</TABLE>
The allocation of the Company's allowance for loan and lease losses and the
percentage of loans and leases by loan type to total loans and leases as of
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
LOANS AND LEASES
ALLOCATED TO TOTAL LOANS
ALLOWANCE AND LEASES
--------- ----------------
<S> <C> <C>
Loans secured by real estate:
Single family 1-4............................ $ 8,077 18.6%
Multi-family................................. 779 1.3
Commercial................................... 312 0.1
------- -----
9,168 20.0
Leases......................................... 124 0.6
Installment loans.............................. 15,437 11.8
Franchise loans................................ 634 4.7
Asset based loans.............................. 4,840 36.8
Commercial loans............................... 3,656 26.1
------- -----
24,691 80.0
Unallocated.................................... 4,188 --
------- -----
$38,047 100.0%
======= =====
</TABLE>
Although the above table allocates the allowance for loan and lease losses
by loan types, the total allowance is available to absorb losses on all loans
and leases.
The ratio of the allowance for loan and lease losses to total loans held for
investment was 2.89%, 1.82%, and 1.99% at December 31, 1997, 1996, and 1995,
respectively. The ratio of the allowance for loan losses to nonaccrual loans
was 53.9%, 38.9%, and 44.3% at December 31, 1997, 1996, and 1995,
respectively. Although nonaccrual loans increased for the year ended December
31, 1997 from December 31, 1996, 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 and lease losses to be adequate.
The percentage of the allowance for loan and lease 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 and lease losses. On an ongoing basis,
management monitors the loan portfolio and evaluates the adequacy of the
allowance for loan losses.
64
<PAGE>
In determining the adequacy of the allowance for loan and lease 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. For further
information, see "Item 1 Business--Loans Held for Investment."
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
General
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 portfolio 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 December 31, 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 $306.2 million,
representing a positive cumulative gap ratio of 124.46%. 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.
65
<PAGE>
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 interest rates between the time it commits to
fund or purchase loans at a fixed price and the time it sells or securitizes
those 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.
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.
Forward Contracts
The Company sells mortgage-backed securities through forward delivery
contracts with major dealers in such securities. At December 31, 1997, 1996,
and 1995, the Company had $0, $143 million, and $279.2 million, respectively,
in outstanding commitments to sell mortgage loans through mortgage-backed
securities. These commitments allow the Company to enter into mandatory
commitments when the Company notifies the investor of its intent to exercise a
portion of the forward delivery contracts. The Company was obligated under
mandatory commitments to deliver loans to such investors at December 31, 1997,
1996, and 1995 in the amounts of $0, $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.
Options
The Company may purchase put options to hedge against adverse movements in
the value of the loans held for sale portfolio. The Company will realize a
gain or loss upon the expiration or closing of the option transaction.
When an option is exercised, the proceeds on sales for a written call
option, the purchase cost for a written put option or the cost of the security
for a purchased put or call option is adjusted by the amount of premium
received or paid. The risk in buying an option is limited to the cost of the
premium.
The Company had $0, $70 million, and $20 million notional amount of written
call option contracts outstanding at December 31, 1997, 1996, and 1995,
respectively. The Company received $0, $366,000, and $82,600 in premiums
related to the options outstanding at December 31, 1997, 1996, and 1995,
respectively. There were no option contracts exercised during the years ended
December 31, 1997, 1996, and 1995.
66
<PAGE>
Total Rate of Return Swaps
During the year ended December 31, 1997, the Company has entered into total
rate of return swap contracts for investment purposes with various investment
bank counterparties, the provisions of which entitle the Company to receive
the total return on various commercial loans in exchange for a floating
payment of one month LIBOR plus a spread. As of December 31, 1997, the Company
is party to total rate of return swap contracts with a total notional amount
of $150.6 million, under which the Company was obligated to pay one month
LIBOR plus a weighted average spread of 0.78%. The weighted average remaining
life of these contracts was 37.1 months as of December 31, 1997. These
contracts are off-balance sheet instruments. For the year ended December 31,
1997, the Company recognized $448,000 of interest income on total return
swaps.
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk
is managed by maintaining high average quality ratings and diversified sector
exposure within the securities and loan portfolios. In connection with its
investment and risk management objectives, the Company also uses financial
instruments whose market value is at least partially determined by, among
other things, levels of or changes in domestic interest rates (short-term or
long-term), prepayment rates, equity markets or credit ratings/spreads.
Using financial modeling and other techniques, the Company regularly
evaluates the appropriateness of investments relative to its management-
approved investment guidelines and the business objective of the portfolios.
The Company operated within these investment guidelines by maintaining a mix
of loans and investments that diversifies its assets.
The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties. Set
forth below are management's projections of hypothetical net losses in fair
value of shareholders' equity of the Company's market sensitive financial
instruments if certain assumed changes in market rates and prices were to
occur (sensitivity analysis). While the Company believes that the assumed
market rate changes are reasonably possible in the near term, actual results
may differ, particularly as a result of any management actions that would be
taken to mitigate such hypothetical losses in fair value of shareholders'
equity. Based on the Company's overall exposure to interest rate risk and
equity price risk, the Company believes that these changes in market rates and
prices would not materially affect the consolidated near-term financial
position, results of operations or cash flows of the Company.
Interest Rate Risk. Assuming immediate increases of 100 and 200 basis points
in interest rates the net hypothetical loss in fair value of shareholders'
equity related to financial and derivative instruments is estimated to be $3.9
million and $8.1 million (after tax), or 1.2% and 2.5%, of total shareholders'
equity, respectively, at December 31, 1997. The Company believes that an
interest rate shift of this magnitude represents a moderately adverse
scenario.
The effect of interest rate risk on potential near-term net income, cash
flow and fair value was determined based on commonly used models. The models
project the impact of interest rate changes on a wide range of factors,
including duration, prepayment, put options and call options. Fair value was
estimated based on the net present value of cash flows or duration estimates,
using a representative set of likely future interest rate scenarios.
Equity Price. Risk. The Company's available for sale equity securities
includes the common stock of ICCMIC and IMH. Assuming an immediate decrease of
10% in equity prices for such equity securities, the hypothetical loss in fair
value of shareholder's equity related equity securities is estimated to be
$4.7 million after tax, (1.4% of total shareholders' equity at December 31,
1997).
67
<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 December 31, 1997, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. The amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
earlier of term to repricing or the contractual terms of the asset or
liability.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
---------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN MORE THAN 3 YEARS 5 YEARS MORE NON
3 MONTHS 3 MONTHS TO 6 MONTHS TO 1 YEAR TO TO TO THAN INTEREST
OR LESS 6 MONTHS 1 YEAR 3 YEARS 5 YEARS 10 YEARS 10 YEARS BEARING TOTAL
---------- ----------- ----------- --------- --------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Cash.................. $ 50,597 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 50,597
Interest earning
deposits............. 103,738 -- -- -- -- -- -- -- 103,738
Trading securities.... 120,904 -- -- -- -- -- -- -- 120,904
Securities available
for sale............. 107,727 -- -- -- -- -- -- -- 107,727
FHLB stock............ 5,646 -- -- -- -- -- -- -- 5,646
Mortgage loans held
for sale............. 162,571 -- -- -- -- -- -- -- 162,571
Loans held for
investment, net of
unearned discount and
deferred loan
fees(1).............. 930,616 60,715 15,237 135,765 53,663 16,838 62,052 29,879 1,304,765
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total interest-earning
assets............... 1,481,799 60,715 15,237 135,765 53,663 16,838 62,052 29,879 1,855,948
Less:
Allowance for loan
losses............... -- -- -- -- -- -- -- (38,047) (38,047)
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Net interest-earning
assets............... 1,481,799 60,715 15,237 135,765 53,663 16,838 62,052 (8,168) 1,817,901
Non-interest-earning
assets............... -- -- -- -- -- -- -- 284,193 284,193
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total assets.......... $1,481,799 $ 60,715 $ 15,237 $135,765 $ 53,663 $ 16,838 $ 62,052 $276,025 $2,102,094
========== ========= ========= ======== ======== ========= ======== ======== ==========
Interest-bearing
liabilities:
Deposits.............. $ 408,146 $ 345,418 $ 308,157 $ 86,566 $ 24 $ -- $ 7,711 $ -- $1,156,022
Borrowings from FHLB.. 45,000 -- -- -- -- -- -- -- 45,000
Other borrowings...... 144,841 -- -- -- -- -- -- -- 144,841
Senior Notes.......... -- -- -- -- -- 219,813 -- -- 219,813
Remarketed Par
Securities........... -- -- -- -- 70,000 -- -- -- 70,000
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total interest-bearing
liabilities.......... 597,987 345,418 308,157 86,566 70,024 219,813 7,711 -- 1,635,676
Non-interest bearing
liabilities.......... -- -- -- -- -- -- -- 142,485 142,485
Shareholders' equity.. -- -- -- -- -- -- -- 323,933 323,933
---------- --------- --------- -------- -------- --------- -------- -------- ----------
Total liabilities and
shareholders' equity. $ 597,987 $ 345,418 $ 308,157 $ 86,566 $ 70,024 $ 219,813 $ 7,711 $466,418 $2,102,094
========== ========= ========= ======== ======== ========= ======== ======== ==========
Interest rate
sensitivity gap(2)... $ 883,812 $(284,703) $(292,920) $ 49,199 $(16,361) $(202,975) $ 54,341 $ 29,879 $ 220,272
Cumulative interest
sensitivity gap...... $ 883,812 $ 599,109 $ 306,189 $355,388 $339,027 $ 136,052 $190,393 $220,272
Cumulative interest
sensitivity gap as a
percentage of total
assets............... 42.04% 28.50% 14.57% 16.91% 16.13% 6.47% 9.06%
Cumulative net
interest earning
assets as a percent
of interest bearing
liabilities.......... 247.80% 163.50% 124.46% 126.56% 124.08% 108.36% 111.64% 113.47%
</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.
68
<PAGE>
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.
AVERAGE BALANCE SHEET
The following tables set forth certain information relating to the Company
for the year ended December 31, 1997, 1996, and 1995. 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. The
average balance of loans receivable includes loans on which the Company has
discontinued accruing interest. The yields and costs include fees which are
considered adjustments to yields.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
YIELD/ YIELD/ YIELD/
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Investments and
interest-earning
deposits.............. $ 225,122 $ 22,912 10.18% $ 143,067 $ 9,862 6.89% $ 131,277 $ 5,641 4.30%
FHLB stock............. 10,334 619 5.99 15,853 945 5.96 19,720 989 5.02
Loans held for sale.... 597,519 75,082 12.57 1,140,790 101,170 8.87 361,156 16,286 4.51
Loans held for
investment, net(1).... 1,119,940 126,646 11.31 779,522 87,072 11.17 1,091,536 103,958 9.52
Capitalized excess
servicing fees
receivable and
retained interest..... 30,619 2,678 8.75 53,052 8,422 15.87 22,257 2,608 11.72
---------- -------- ---------- -------- ---------- --------
Total interest-
earning assets...... 1,983,534 227,937 11.49 2,132,284 207,471 9.73 1,625,946 129,482 7.96
---------- -------- ---------- -------- ---------- --------
Non interest-earning
assets................. 191,573 163,055 45,167
---------- ---------- ----------
Total assets......... $2,175,107 $2,295,339 $1,671,113
========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits............... $1,218,123 $ 71,014 5.83% $1,063,799 $ 60,999 5.73% $ 867,162 $ 51,565 5.95%
Borrowings from
Imperial Bank......... -- -- -- 3,311 302 9.12 -- -- --
Borrowings from FHLB... 57,154 3,327 5.82 201,693 12,055 5.98 310,425 19,420 6.26
Other borrowings....... 327,076 26,277 8.03 645,313 52,050 8.07 251,684 16,363 6.50
Senior Notes........... 209,672 21,671 10.34 88,365 8,955 10.13 81,500 8,380 10.28
Remarketed Par
Securities............ 39,101 4,305 11.01 -- -- -- -- -- --
Convertible
subordinated
debentures............ -- -- -- 10,068 675 6.70 -- -- --
---------- -------- ---------- -------- ---------- --------
Total interest-
bearing
liabilities(2)...... 1,851,126 126,594 6.84 2,012,549 135,036 6.71 1,510,771 95,728 6.34
---------- -------- ---------- -------- ---------- --------
Non interest-bearing
liabilities............ 78,117 115,962 88,306
Shareholders' equity.... 245,864 166,828 72,036
---------- ---------- ----------
Total liabilities and
shareholders'
equity.............. $2,175,107 $2,295,339 $1,671,113
========== ========== ==========
Net interest rate
spread................. $101,343 4.65% $ 72,435 3.02% $ 33,754 1.62%
======== ======== ========
Net interest margin(2).. 5.11% 3.40% 2.08%
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 107.15% 105.95% 107.62%
</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 held at ICII and the convertible
subordinated debentures held at SPFC during the years ended December 31,
1997, 1996 and 1995 were 6.39% and 6.21%, 6.55% and 3.85%, 6.11% and
2.59%, respectively.
69
<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>
YEAR ENDED DECEMBER 31,
-----------------------
1997 OVER 1996 1996 OVER 1995
--------------------------------------- ---------------------------------------
VOLUME RATE RATE/VOLUME TOTAL VOLUME RATE RATE/VOLUME TOTAL
-------- ------- ----------- -------- -------- ------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(decrease) in:
Investments and
interest-bearing
deposits.............. $ 5,654 $ 4,707 $ 2,689 $ 13,050 $ 507 $ 3,400 $ 314 $ 4,221
FHLB stock............. (329) 5 (2) (326) (194) 185 (35) (44)
Loans held for sale.... (48,188) 42,209 (20,109) (26,088) 35,161 15,746 33,977 84,884
Loans held for
investment, net....... 38,025 1,091 458 39,574 (29,704) 18,010 (5,192) (16,886)
Capitalized excess
servicing fees
receivable............ (3,560) (3,777) 1,593 (5,744) 3,609 924 1,281 5,814
-------- ------- -------- -------- -------- ------- ------- --------
Total interest
income.............. (8,398) 44,235 (15,371) 20,466 9,379 38,265 30,345 77,989
-------- ------- -------- -------- -------- ------- ------- --------
Deposits............... 8,843 1,064 108 10,015 11,700 (1,908) (358) 9,434
Borrowings from
Imperial Bank......... (302) -- -- (302) 302 -- -- 302
FHLB borrowings........ (8,643) (323) 238 (8,728) (6,807) (869) 311 (7,365)
Other borrowings....... (25,682) (258) 167 (25,773) 25,586 3,951 6,150 35,687
Senior Notes........... 12,288 186 242 12,716 706 (122) (9) 575
Remarketed Par
Securities............ 4,305 -- -- 4,305 -- -- -- --
Convertible Notes...... (675) -- -- (675) 675 -- -- 675
-------- ------- -------- -------- -------- ------- ------- --------
Total interest
expense............. (9,866) 669 755 (8,442) 32,162 1,052 6,094 39,308
-------- ------- -------- -------- -------- ------- ------- --------
Change in net interest
income................. $ 1,468 $43,566 $(16,126) $ 28,908 $(22,783) $37,213 $24,251 $ 38,681
======== ======= ======== ======== ======== ======= ======= ========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted a new accounting standard on January 1, 1997, and
adopted additional accounting and disclosure standards on either December 31,
1997 or January 1, 1998. For a description of these standards and the effect,
if any, adoption has had or will have on the Company's consolidated financial
statements, see "Note 3 of Notes to Consolidated Financial Statements."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset/Liability Management and Market Risk."
70
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 72
Consolidated Balance Sheets............................................... 73
Consolidated Statements of Income......................................... 74
Consolidated Statements of Changes in Shareholders' Equity................ 75
Consolidated Statements of Cash Flows..................................... 76
Notes to Consolidated Financial Statements................................ 78
All supplemental schedules are omitted as inapplicable or because the required
information is included in the consolidated financial statements or notes
thereto.
Index to Southern Pacific Funding Corporation Consolidated Financial
Statements............................................................... 123
</TABLE>
71
<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, 1997 and 1996, 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, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 27, 1998
72
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ 50,597 $ 74,247
Interest bearing deposits................................ 103,738 3,369
Investment in Federal Home Loan Bank stock............... 5,646 17,152
Securities held for trading, at market................... 120,904 25,180
Securities available for sale, at market................. 107,727 59,116
Loans held for sale...................................... 162,571 940,096
Loans held for investment, net........................... 1,266,718 1,068,599
Purchased and originated servicing rights................ 4,731 14,887
Capitalized excess servicing fees receivable............. -- 23,142
Retained interest in loan and lease securitizations...... 43,105 49,548
Interest-only and residual certificates.................. -- 87,017
Accrued interest receivable.............................. 9,132 13,847
Premises and equipment, net.............................. 9,513 12,442
Other real estate owned, net............................. 10,905 12,214
Goodwill................................................. 35,607 38,490
Investment in Southern Pacific Funding Corporation ...... 65,303 --
Investment in Franchise Mortgage Acceptance Company...... 53,099 --
Other assets............................................. 52,798 31,293
---------- ----------
Total assets........................................... $2,102,094 $2,470,639
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Deposits................................................. $1,156,022 $1,069,184
Borrowings from Federal Home Loan Bank................... 45,000 140,500
Other borrowings......................................... 144,841 694,352
Remarketed Par Securities................................ 70,000 --
Senior Notes............................................. 219,813 88,209
Convertible subordinated debentures...................... -- 75,000
Accrued interest payable................................. 21,484 14,034
Accrued income taxes payable............................. 60,528 55,327
Minority interest in consolidated subsidiaries........... 3,174 54,936
Other liabilities........................................ 57,299 39,589
---------- ----------
Total liabilities...................................... 1,778,161 2,231,131
---------- ----------
Commitments and contingencies (note 25)
Shareholders' equity:
Preferred stock, 8,000,000 shares authorized; none issued
or outstanding.......................................... -- --
Common stock, no par value. Authorized 80,000,000 shares;
38,791,439 and 38,291,112 shares issued and outstanding
at December 31, 1997 and 1996, respectively ............ 147,109 145,521
Retained earnings........................................ 174,898 88,977
Unrealized gain on securities available for sale, net.... 1,926 5,010
---------- ----------
Total shareholders' equity............................. 323,933 239,508
---------- ----------
Total liabilities and shareholders' equity............. $2,102,094 $2,470,639
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
73
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUE:
Gain on sale of loans and leases................. $ 67,723 $ 88,156 $ 39,557
-------- -------- --------
Interest on loans and leases..................... 201,728 188,242 120,244
Interest on investments.......................... 23,531 10,807 6,630
Interest on other finance activities............. 2,678 8,422 2,608
-------- -------- --------
Total interest income.......................... 227,937 207,471 129,482
Interest on deposits............................. 71,014 60,999 51,565
Interest on other borrowings .................... 29,604 64,407 35,783
Interest on long term debt....................... 25,976 9,630 8,380
-------- -------- --------
Total interest expense......................... 126,594 135,036 95,728
-------- -------- --------
Net interest income............................ 101,343 72,435 33,754
Provision for loan and lease losses.............. 38,951 9,773 5,450
-------- -------- --------
Net interest income after provision for loan and
lease losses.................................... 62,392 62,662 28,304
-------- -------- --------
Loan servicing income............................ 10,743 1,680 12,718
Loss on sale of securities....................... (936) -- --
Equity in net income of Southern Pacific Funding
Corporation..................................... 25,869 -- --
Equity in net loss of Franchise Mortgage
Acceptance Company.............................. (3,050) -- --
Investment banking fees.......................... 7,702 -- --
Management fees.................................. 5,810 3,347 38
Gain on sale of servicing rights................. -- 7,591 3,578
Gain on sale of Franchise Mortgage Acceptance
Company stock................................... 48,924 -- --
Gain on sale of Southern Pacific Funding
Corporation stock............................... 9,488 51,243 --
Gain on sale of stock by subsidiary.............. 43,213 31,447 --
Gain on sale of Impac Mortgage Holdings stock.... 11,496 -- --
Gain on termination of REIT advisory agreement... 19,046 -- --
Other income..................................... 1,140 10,807 1,114
-------- -------- --------
Total other income............................. 179,445 106,115 17,448
-------- -------- --------
Total revenue.................................... 309,560 256,933 85,309
-------- -------- --------
EXPENSES:
Personnel expense................................ 60,830 48,355 34,053
Amortization of PMSR's and OMSR's................ 3,089 1,121 3,986
Occupancy expense................................ 4,319 4,653 3,904
Data processing expense.......................... 1,503 2,163 1,461
Net expenses of other real estate owned.......... 6,527 7,014 1,913
Professional services............................ 10,303 9,559 2,769
FDIC insurance premiums.......................... 250 327 1,137
Telephone and other communications............... 2,926 2,917 2,509
Restructuring provision--exit from mortgage
banking operations.............................. -- 3,800 --
Loss on restructuring of loan to
Dabney/Resnick/Imperial, LLC.................... 3,709 -- --
Provision for loss on repurchase of former
mortgage banking loans.......................... 5,400 -- --
Amortization of Goodwill......................... 23,260 1,875 321
General and administrative expense............... 28,268 17,265 9,127
-------- -------- --------
Total expenses................................. 150,384 99,049 61,180
-------- -------- --------
Income before income taxes, minority interest
and extraordinary item.......................... 159,176 157,884 24,129
Income taxes..................................... 58,747 69,874 10,144
Minority interest in income (loss) of
consolidated subsidiaries....................... 10,513 12,026 (208)
-------- -------- --------
Income before extraordinary item................. 89,916 75,984 14,193
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... (3,995) -- --
-------- -------- --------
Net income..................................... $ 85,921 $ 75,984 $ 14,193
======== ======== ========
BASIC INCOME PER SHARE:
Income before extraordinary item................. $ 2.33 $ 2.11 $ 0.45
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... (0.10) -- --
-------- -------- --------
Net Income per common share, basic............... $ 2.23 $ 2.11 $ 0.45
======== ======== ========
DILUTED INCOME PER SHARE:
Income before extraordinary item................. $ 2.20 $ 1.95 $ 0.40
Extraordinary item--Loss on early extinguishment
of debt, net of income taxes.................... (0.10) -- --
-------- -------- --------
Net Income per common share, diluted............. $ 2.10 $ 1.95 $ 0.40
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
74
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON 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,
1994................... 9,621 $ 51,156 $ 24,717 $ -- $ 75,873
Exercise of stock
options................ 147 825 -- -- 825
3-for-2 stock split..... 4,810 -- -- -- --
Increase in 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
Increase in 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
Exercise of stock
options................ 530 1,332 -- -- 1,332
Decrease in unrealized
gain on securities
available for sale,
net.................... -- -- -- (3,084) (3,084)
Tax benefit from
exercise of stock
options................ -- 807 -- -- 807
Retirement of stock..... (30) (551) -- -- (551)
Net income, 1997........ -- -- 85,921 -- 85,921
------ -------- -------- ------ --------
Balance, December 31,
1997................... 38,791 $147,109 $174,898 $1,926 $323,933
====== ======== ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
75
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 85,921 $ 75,984 $ 14,193
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Provision for loan and lease losses.. 38,951 9,773 5,450
Recovery for operational losses...... -- -- (1,819)
Restructuring Provision.............. -- 3,800 --
Loss on restructuring of
Dabney/Resnick/Imperial, LLC........ 3,709 -- --
Provision for loss on repurchase of
former mortgage banking loans....... 5,400 -- --
Depreciation......................... 4,523 3,483 2,657
Amortization of goodwill............. 23,260 1,875 321
Amortization of PMSR's and OMSR's.... 3,089 1,121 3,986
Accretion of discount................ (2,678) (8,350) (2,608)
Gain on sale of servicing rights..... -- (7,591) (3,578)
Gain on sale of loans and leases..... (67,723) (88,156) (39,557)
Gains on sale of SPFC stock.......... (9,488) (82,690) --
Gain on sale of FMC stock............ (92,137) -- --
Gain on sale of IMH stock............ (11,496) -- --
Gain on termination of REIT advisory
agreement........................... (19,046) -- --
Equity in net earnings of SPFC....... (25,869) -- --
Equity in net loss of FMC............ 3,050 -- --
Loss on sale of OREO................. 4,453 2,843 --
Loss on sale of securities........... 936 -- --
Writedowns of capitalized excess
servicing........................... -- 4,675 --
Writedowns of fixed assets........... -- 886 --
Stock option compensation expense.... -- -- 653
Writedowns on other real estate
owned............................... 892 3,252 2,085
Provision for deferred income taxes.. 6,191 22,104 2,120
Originations of loans held for sale.. (1,232,100) (1,939,200) (2,813,378)
Purchases of loans held for sale..... -- -- (159,122)
Purchase of trading securities....... (126,083) (25,180) --
Sales of trading securities.......... 48,369 -- --
Sales and collections on loans held
for sale............................ 1,309,323 2,159,055 1,923,733
Net change in accrued interest
receivable.......................... (311) (3,683) (4,247)
Net change in retained interest in
loan and lease securitizations...... -- (21,481) (14,012)
Net change in capitalized excess
servicing........................... -- 33,234 (37,500)
Net change in other assets........... 78,528 (210,969) (51,644)
Net change in other liabilities...... 28,063 33,953 (1,436)
----------- ----------- -----------
Net cash provided by (used in)
operating activities.................. 57,727 (31,262) (1,173,703)
----------- ----------- -----------
Cash flows from investing activities:
Net (increase) decrease in interest
bearing deposits.................... (100,369) 264,407 (257,176)
Purchase of servicing rights......... -- -- (8,128)
Proceeds from sale of servicing
rights.............................. 2,213 10,011 12,815
Proceeds from sale of other real
estate owned........................ 21,171 1,202 7,072
Purchase of securities available for
sale................................ (42,938) (48,553) --
Sales of securities available for
sale................................ 5,404 -- --
Net change in loans held for
investment.......................... (206,172) (27,651) 566,693
Purchases of premises and equipment.. (6,839) (5,442) (1,367)
Proceeds from sale of SPFC stock..... 13,707 64,625 --
Proceeds from sale of FMC stock...... 59,731 -- --
Proceeds from sale of IMH stock...... 11,950 -- --
Purchases of Federal Home Loan Bank
stock............................... (3,634) (7,652) (3,933)
Redemption of stock in Federal Home
Loan Bank .......................... 15,140 13,250 --
Cash utilized for acquisitions....... (124,488) (20,020) (175,015)
----------- ----------- -----------
Net cash (used in) provided by
investing activities.................. (355,124) 244,177 140,961
----------- ----------- -----------
</TABLE>
76
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits........ $ 86,838 $ (23,805) $ 158,369
Net increase (decrease) in borrowings from
Imperial Bank............................. -- (5,000) 5,000
Advances from Federal Home Loan Bank....... 50,000 434,000 347,000
Repayments of advances from Federal Home
Loan Bank................................. (145,500) (483,500) (452,000)
Proceeds from issuance of convertible
subordinated debentures................... -- 72,162 --
Net change in other borrowings............. 143,505 (181,463) 875,815
Issuance of bonds.......................... -- -- 111,995
Repayment of bonds......................... -- (111,995) --
Proceeds from issuance of Senior Notes due
2007...................................... 194,500 -- --
Proceeds from issuance of Remarketed Par
Securities................................ 68,075 -- --
Repayments of Senior Notes due 2004........ (73,241) -- --
Proceeds from resale of Senior Notes due
2004...................................... -- 7,384 --
Proceeds from issuance of common stock..... -- 59,228 --
Net change in minority interest............ (51,762) 53,484 --
Proceeds from exercise of stock options.... 1,332 1,671 825
--------- --------- ----------
Net cash provided by (used in) financing
activities.................................. 273,747 (177,834) 1,047,004
Net change in cash........................... (23,650) 35,081 14,262
Cash at beginning of year.................... 74,247 39,166 24,904
--------- --------- ----------
Cash at end of year.......................... $ 50,597 $ 74,247 $ 39,166
========= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
77
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION
Imperial Credit Industries, Inc., incorporated in 1986 in the State of
California, is 23.0% 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 significant wholly-owned operating
subsidiaries, significant majority-owned operating subsidiaries and
significant equity investments in two publicly traded companies (collectively
the "Company"). The significant wholly-owned subsidiaries include Southern
Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit
Advisors, Inc. ("ICAI"), Auto Marketing Network ("AMN"), Imperial Credit
Commercial Asset Management Corporation, ("ICCAMC") and Imperial Credit
Worldwide ("ICW"). The significant operating majority owned consolidated
subsidiary is Imperial Capital Group ("ICG") which is 60% owned by the Company
and 40% owned by outside private investors. The significant equity investments
in publicly traded companies are Southern Pacific Funding Corporation ("SPFC")
NYSE Symbol: SFC, and Franchise Mortgage Acceptance Company ("FMC") NASDAQ
Symbol: FMAX. Both SPFC and FMC were former consolidated subsidiaries of the
Company. All material intercompany balances and transactions with consolidated
subsidiaries have been eliminated.
2. STRATEGIC FOCUS AND ACQUISITIONS
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: sub-prime residential mortgage banking; commercial mortgage banking
and income producing property loans; business lending--equipment leasing,
asset-based lending, and participation in syndicated commercial lending;
consumer loans--sub-prime auto loans and Title I home improvement loans. The
Company solicits loans and leases from brokers on a wholesale and portfolio
basis and originates loans directly from borrowers. The majority of the
Company's loans and leases, other than those held by SPB for investment, are
sold in secondary markets through securitizations and whole loan sales.
Impac Mortgage Holdings, Inc. and Impac Funding Corporation
During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH"),
formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets,
the Company received approximately 11.8% of the common stock of IMH.
Additionally, ICAI entered into a management agreement with IMH pursuant to
which ICAI advised upon the day-to-day operations of IMH and for which it was
paid a management fee. During 1997, the Company sold its common stock interest
in IMH for a gain of approximately $11.5 million. In December 1997, IMH and
the Company negotiated a termination of the management agreement (the
"Termination Agreement"). The consideration received by the Company pursuant
to the Termination Agreement was $44 million, comprised of 2,009,310 shares of
IMH common stock and certain securitization-related assets. Additionally, the
Company agreed to cancel its note receivable from ICI Funding Corporation
("ICIFC"), a former subsidiary of ICII which is now known as Impac Funding
Corporation and is the origination unit of IMH, in the amount of $29.1
million. The IMH common stock and the securitization-related assets were
recorded by the Company at their estimated fair values of approximately $35.0
million and $13.1 million, respectively, for a total of $48.1 million. This
amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
78
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During the first quarter of 1997, the Company disposed of its common stock
interest in ICIFC, at a loss of $100,000. At December 31, 1996, the Company
owned 100% of the common stock of ICIFC which represented only a 1% economic
interest as IMH owned all of the non-voting preferred stock of ICIFC which
gave IMH 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.
Franchise Mortgage Acceptance Company
On June 30, 1995, the Company completed the acquisition of certain net
assets from Greenwich Capital Financial Products, Inc. and formed Franchise
Mortgage Acceptance Company LLC ("FMAC"), a limited liability company, in
which the Company had a 66.7% ownership interest. The acquisition was
accounted for as a purchase and the purchase price of $7.6 million, which
included $3.8 million in contingent consideration for loans in the pipeline,
was allocated to the net assets acquired based on their fair value resulting
in goodwill of approximately $4.0 million. The Company's franchise lending
business was conducted through FMAC until November 1997, at which time FMAC
merged into FMC, a Delaware corporation formed for the purpose of succeeding
to the business of FMAC, and FMC completed an initial public offering of its
common stock. The Company sold into FMC's initial public offering 3,568,175
shares at $18.00 per share generating net proceeds of $59.7 million and a gain
of $48.9 million. Additionally, the Company recognized a gain of $43.2 million
resulting from the adjustment in the basis of its investment in FMC due to the
offering and its reduced ownership percentage. Upon the completion of FMC's
initial public offering and at December 31, 1997, the Company's percentage
ownership of FMC common stock was 38.4%. Accordingly, FMC's operating results
are no longer consolidated with those of the Company and the Company's
investment in FMC is accounted for under the equity method.
Southern Pacific Funding Corporation
For the year ended December 31, 1996, a substantial portion of the Company's
operations were conducted through its sub-prime residential lending
subsidiary, Southern Pacific Funding Corporation ("SPFC"). In June 1996, SPFC
completed an initial public offering of its common stock pursuant to which
ICII was a selling shareholder. SPFC and the Company sold 5.2 million shares
and 3.5 million shares, respectively, at $11.33 per share. In a secondary
offering, the Company sold 1.5 million SPFC shares at $19.83 per share. The
Company recognized a gain on sale of the SPFC shares it owned of $51.2
million, which is net of offering expenses and the Company's cost basis in the
shares. The Company also recognized a gain of $31.4 million related to the
stock sold by SPFC. The gain related to the stock sold by SPFC is based on the
difference between the Company's equity ownership in SPFC after the sale and
such equity ownership prior to the sale, using the Company's respective SPFC
ownership percentages. During the first quarter of 1997, the Company sold
370,000 shares of SPFC common stock at $16.63 per share generating net
proceeds of $6.2 million and a gain of $4.3 million. Such transaction reduced
the Company's ownership percentage in SPFC from 51.2% at December 31, 1996, to
49.4% at March 31, 1997. Accordingly, SPFC's operating results are no longer
consolidated with those of the Company and the Company's investment in SPFC is
accounted for under the equity method. During the third quarter of 1997, the
Company sold an additional 500,000 shares of SPFC common stock generating net
proceeds of $7.6 million and a gain of $5.2 million. At December 31, 1997, the
Company's ownership interest in SPFC was 47.0%.
Imperial Business Credit
The Company expanded its commercial equipment leasing business conducted by
IBC through the acquisitions of substantially all of the assets of First
Concord Acceptance Corporation ("FCAC") for a purchase price of $21.4 million
in May 1995 and all of the assets of Avco Leasing Services, Inc and Avco
Financial Services of Southern California, Inc. (together "Avco") for
approximately $94.8 million in October 1996.
79
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
These acquisitions were accounted for as purchases and the purchase prices
were allocated to the net assets acquired based on their fair value resulting
in goodwill of $1.2 million and $12.5 million for the FCAC and Avco
transactions, respectively.
IBC's lease originations were $151.3 million and $87.2 million, and it
securitized and sold $213.6 million and $87.0 million during the years ended
December 31, 1997, and 1996, respectively.
Coast Business Credit
In September 1995, the Company began making asset-based loans to middle
market companies located mainly in California by acquiring CoastFed Business
Credit. This entity, now a division of SPB, was renamed Coast Business Credit
("CBC"). The acquisition was accounted for as a purchase and the purchase
price of $150 million was allocated to the net assets acquired based on their
fair value resulting in goodwill of approximately $16 million. At December 31,
1997 and 1996, CBC had total commitments of $803.3 million and $547.7 million,
of which $484.8 million and $288.5 million of loans were outstanding,
respectively.
Imperial Capital Group
During the fourth quarter of 1996, the Company continued to diversify and
strategically deploy its capital by announcing the closing of its investment
in Dabney/Resnick/Imperial LLC ("DRI") (formerly Dabney/Resnick, Inc.), an
investment banking firm. DRI was headquartered in Beverly Hills, California
with offices in Chicago, Illinois, Dallas, Texas, and Sun Valley, Idaho, and
offered full service investment banking, brokerage, and asset management
services. DRI managed and underwrote public offerings of securities, arranged
private placements and provided advisory and other services in connection with
mergers, acquisitions, restructurings, and other financial transactions. The
Company acquired a 1% interest in DRI and purchased a warrant to acquire an
additional 48% interest. During the fourth quarter of 1997, the Company formed
a new subsidiary, ICG, which includes a registered broker/dealer and an asset
management company offering individual and corporate investors a wide range of
financial products and services. In connection with the formation of ICG, the
Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG. During the fourth quarter of 1997, ICG raised $323 million for corporate
clients through private placement debt and equity offerings generating
investment banking fees of $7.7 million. At December 31, 1997, the Company's
ownership interest in ICG was 60%.
Auto Marketing Network
In March 1997, the Company acquired all the outstanding common stock of AMN,
a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 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. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
PrinCap Mortgage Warehouse
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and
PrinCap Mortgage Backed, L.P. (collectively, "PrinCap") and
80
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contributed such assets to a subsidiary. The acquisition was accounted for as
a purchase, and the purchase price of $123.7 million was allocated to the net
assets acquired based on their fair value resulting in goodwill of $6.8
million.
PrinCap's primary business is residential mortgage warehouse lending to
medium-sized brokers and mortgage bankers on a national basis. At December 31,
1997, PrinCap had commitments outstanding and loans of $124.6 million and
$122.5 million, respectively.
Imperial Credit Commercial Asset Management Corporation
The Company formed ICCAMC, a wholly-owned subsidiary, to oversee the day to
day operations of Imperial Credit Commercial Mortgage Investment Corporation
("ICCMIC"), a real estate investment trust intending to invest primarily in
performing multi-family and commercial real estate loans and mortgage-backed
securities. In October 1997, ICCMIC completed its initial public offering and
sold approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. The Company
purchased 2,970,000 shares of ICCMIC common stock in the offering and an
additional 100,000 shares in December 1997. As of December 31, 1997, the
Company owned 8.9% of the common stock of ICCMIC.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, liabilities and disclosure of
contingent 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 affected 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
1997 presentation.
Investment Securities
The Company classifies investments as held to maturity, trading securities,
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 the ability to hold to maturity.
Trading securities include mortgage-backed securities resulting from certain
mortgage banking related activities and United States Treasury securities.
81
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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
income and are derived using the specific identification method for
determining the cost of securities sold.
Premiums and discounts are amortized over the life of the securities by use
of the interest method. When a decline in value of a security is judged to be
other than temporary, it is written down to fair value by a charge to
earnings.
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market,
which is based on sale commitments or prices for similar products.
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. Individually
significant loans are evaluated for impairment separately; other loans are
evaluated for impairment collectively. 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 by 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 fully recover the remaining principal balance of the
loan, in which case such cash receipts are recognized as interest income.
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
82
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Purchased and Originated Servicing Rights
Purchased servicing represents the cost of acquiring the right to service
mortgage loans. 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 purchased servicing rights portfolio for impairment
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.
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.
Retained Interest in Loan and Lease Securitizations
The Company adopted on January 1, 1997, 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," 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 amortized in proportion to, and
over the period of, net servicing income or loss. Servicing assets and
liabilities are assessed for impairment based on their fair value.
83
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The implementation of SFAS 125 did not have a material impact on the
Company's financial condition or results of operation. Under the provisions of
SFAS 125, securitization interests retained by the Company as a result of
securitization transactions are held as either available for sale or trading.
The Company may create retained interest in loan and lease securitizations
as a result of the sale of loans into securitization trusts. 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 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 begins to receive
the cash flows from any subordinated bonds or residual interests retained on a
monthly basis. Retained interest in loan and lease securitizations is
classified as available for sale, and income is amortized using the interest
method. To the extent that the future performance results are less than the
Company's initial performance estimates, the Company's retained interest in
loan and lease securitizations will be written down through a charge to
operations.
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 SPB's and SPFC's securitization of loans through various trust
vehicles.
Loan Sales and Related Gain or Loss
Loans are sold through either securitizations or whole loan sales with
servicing retained by the Company. Securitizations typically require credit
enhancements in the form of cash reserves or overcollateralization that are
reflected as retained interest in loan and lease securitizations on the
balance sheet. Sales are recognized when the transaction settles and the risks
and rewards of ownership are determined to have been passed to the purchaser.
Gain is recognized to the extent that the selling prices exceed the carrying
value of the loans sold based on the estimated relative fair values of the
assets transferred, assets obtained and liabilities incurred. The assets
obtained in a sale include, generally, retained interest in loan and lease
securitizations, loan servicing assets, and call options. Liabilities incurred
in a sale include, generally, recourse obligations, put options, and servicing
liabilities. In the securitizations completed to date, the Company retained
call options giving it the right to repurchase loans sold when the outstanding
amount of such loans is 1% to 10% or less of the original amount sold,
depending on the terms of the related securitization. As these call options
are equivalent to a cleanup call, the Company has ascribed no value to them.
The securitizations completed to date had no put option features.
In determining the estimated fair values of the retained interest in loan
and lease securitizations, the Company estimates the cash flows therefrom and
discounts such cash flows at interest rates determined by management to be
rates market participants would use in similar circumstances. Discount rates
ranged from 11% to 28%, as of and for the year ended December 31, 1997. Quoted
market prices are not available as no active market exists for retained
interest in loan and lease securitizations. In estimating the cash flows, the
Company considers default and prepayment rates. The default rates used by the
Company as of and for the year ended December 31, 1997 have ranged from 2.0%
to 18.5%, and the prepayment rates used by the Company have ranged from 0.25%
to 48.0%.
84
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loan Origination Fees
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. When a loan
is classified as a nonaccrual loan, the related net deferred origination fees
are no longer amortized.
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 which
approximates market value.
Other Real Estate Owned
Foreclosed real estate is transferred from the loan portfolio at the lower
of the cost of the former mortgage loan or net fair value of the property less
estimated selling costs and is classified as other real estate owned ("OREO").
The excess carrying value, if any, of the loan over the estimated fair value
of the collateral based on appraisal or broker opinion of value less estimated
selling costs is charged to the allowance for loan losses. Any subsequent
impairments in value are recognized through a valuation allowance. Subsequent
increases in fair value are credited to income and reduce the valuation
allowance.
Subsequent increases in the fair value of an asset are only recognized to
the extent that decreases in fair value were recorded through the valuation
allowance. Gains and losses from sales of OREO, provisions for losses on OREO,
and net operating expenses of OREO are recorded in operations and included in
the caption "net expenses of other real estate owned" in the accompanying
consolidated statements of income.
Income Taxes
The Company files a combined California franchise tax return and a
consolidated Federal income tax return with all of its subsidiaries except
ICG. 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.
85
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Impairment
is measured by discounting operating income of the related entity at an
appropriate discount rate. At December 31, 1997 and 1996, Goodwill is
presented net of accumulated amortization of $25.5 million and $2.2 million,
respectively.
Debt Issue Costs
Capitalized debt issue costs are included in Other Assets and are amortized
to interest expense over the life of the related debt using the interest
method.
Hedging Loans Held for Sale
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 United States
Treasury futures contracts. Unrealized and realized 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.
Management has determined that hedge accounting is appropriate for the
Company's hedging program because the hedged loans expose the Company to price
risk. The futures contracts reduce that risk and are designated as hedges, and
at the inception of the hedge and throughout the hedge period, there is a high
correlation between the price of the futures contracts and the fair value of
the loans being hedged. In the event correlation does not remain high, the
futures contracts will cease to be accounted for as hedges and a gain or loss
will be recognized to the extent the futures results have not been offset by
the price changes of the hedged loans.
Total Rate of Return Swaps
The Company has entered into total rate of return swap contracts with
various investment bank counterparties, the provisions of which entitle the
Company to receive the total return on various commercial loans in exchange
for a floating payment of one month LIBOR plus a spread. These contracts are
off-balance sheet financial instruments. The Company's cash collateral held by
the counterparties is included in trading securities. Net income or expense on
these contracts is included in interest income, and the contracts are carried
at their estimated fair values.
Equity Investments
Equity investments are carried under the equity method of accounting.
Accordingly, the Company records as a part of its earnings, the ownership
percentage of its equity investments net income. Dividends received from such
subsidiaries, if any, are credited to the investment balance and not recorded
as earnings.
The Company records gains from the sale of stock in subsidiaries carried
under the equity method based on the difference between the Company's equity
ownership after the sale and such equity ownership prior to the sale, using
the Company's respective ownership percentages. Deferred income tax
liabilities on such gains are accrued at the time such gains are recognized.
86
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation", the
Company accounts for stock based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company provides the pro forma
net earnings, pro forma income per share, and plan disclosures as set forth in
SFAS 123.
Income Per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." This statement replaces the previously reported primary and fully-
diluted income per share with basic and diluted income per share. Unlike
primary income per share, basic income per share excludes any dilutive effects
of stock options. Diluted income per share is similar to fully-diluted income
per share. Income per share amounts for all periods ending prior to December
31, 1997, have been restated to conform to the SFAS 128 requirements. The
following table reconciles the number of shares used in the computations of
basic and diluted income per share for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average common shares outstanding
during the year used to compute basic
income per share.......................... 38,610,952 36,062,776 31,825,495
Assumed common shares issued on exercise of
stock options............................. 2,244,321 2,912,058 3,296,167
---------- ---------- ----------
Number of common shares used to compute
diluted income per share.................. 40,855,273 38,974,834 35,121,662
========== ========== ==========
</TABLE>
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". 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 and interim periods beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management believes that the adoption of
SFAS 130 will have no significant impact on its financial position or results
of operations.
87
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". 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 No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS 131 requires that all public enterprises report financial
and descriptive information about 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 is to be restated. Management is in the process of
determining the impact, if any, this statement will have on the financial
position, results of operations and disclosures of the Company.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures about
Pensions and Other Postretirement Benefits". The statement revises the
required disclosures for pensions and other post retirement plans but does not
change the measurement or recognition of such plans. SFAS 132 is effective for
fiscal years beginning after December 15, 1997. The Company, as required, will
adopt this statement during 1998. As the Company does not offer defined
benefit pension plans, Management believes that the adoption of SFAS 132 will
not have a material effect on the Company's existing disclosures regarding
postretirement benefits
88
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the statement of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest......................................... $119,144 $134,251 $ 93,223
Income taxes..................................... 24,611 24,134 8,283
Significant non-cash activities:
Loans transferred from held for investment to
held for sale................................... -- -- 505,037
Loans transferred to OREO or repossessed assets.. 29,359 14,203 12,302
Loans transferred from held for sale to held for
investment...................................... 37,007 197,141 83,398
Loans to facilitate the sale of OREO............. 2,347 1,871 1,315
Retained interest in loan and lease
securitizations capitalized..................... 23,592 6,908 14,002
Transfer of securities from available for sale to
trading......................................... 15,178 -- --
Securities received in consideration of IMH
Termination Agreement........................... 48,167 -- --
Cancellation of note receivable from ICIFC in
consideration of IMH Termination Agreement...... 29,121 -- --
Change in unrealized gain on securities available
for sale........................................ (3,084) 1,799 3,211
Deconsolidation of SPFC, ICIFC and FMAC:
Decrease in loans held for sale.................. 768,025 -- --
Decrease in interest only and residual
certificates.................................... 87,017 -- --
Decrease in retained interest in loan
securitizations................................. 30,035 -- --
Decrease in capitalized excess servicing......... 23,142 -- --
Decrease in accrued interest receivable.......... 5,026 -- --
Decrease in other borrowings..................... 693,016 -- --
Decrease in convertible subordinated debt........ 75,000 -- --
Purchase of Auto Marketing Network:
Assets acquired, including goodwill of $20,770... $ 82,484 -- --
Liabilities assumed.............................. 81,734 -- --
--------
Cash paid........................................ $ 750 -- --
========
Purchase of PrinCap Mortgage Warehouse, Inc.
assets:
Assets acquired, including goodwill of $6,800.... $123,767 -- --
Liabilities assumed.............................. 29 -- --
--------
Cash paid........................................ $123,738 -- --
========
</TABLE>
5. INVESTMENT IN FHLB STOCK
As a member of the FHLB system, the Company's wholly owned subsidiary, SPB,
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.
89
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SECURITIES AVAILABLE FOR SALE
The following table provides a summary of securities available for sale with
a comparison of amortized cost and fair values as of December 31, 1997 and
1996.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment in IMH stock............... $ 35,037 $ 879 $-- $ 35,916
Investment in ICCMIC stock............ 42,938 1,961 -- 44,899
Avalon total return fund.............. 5,000 492 -- 5,492
AMN Auto Trust 1997-A Class A-2
principal-only security.............. 6,809 -- -- 6,809
IBC 1997-1 Class B-1 subordinated
bond................................. 4,585 -- -- 4,585
IBC 1997-1 Class C-1 interest-only
security............................. 9,638 -- -- 9,638
Other................................. 388 -- -- 388
-------- ------ ---- --------
$104,395 $3,332 $ -- $107,727
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
----------------- --------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment in IMH stock................ $ 454 $8,668 $-- $ 9,122
SPTL 1996 C-1 interest only securities. 9,829 -- -- 9,829
FLRT 1991-A residual interest.......... 36,571 -- -- 36,571
FLRT 1994-A interest-only security..... 1,814 -- -- 1,814
FLRT 1995-A interest-only security..... 964 -- -- 964
Other.................................. 816 -- -- 816
------- ------ ---- -------
$50,448 $8,668 $ -- $59,116
======= ====== ==== =======
</TABLE>
Gross realized gains and losses on the sale of available for sale securities
were $11.5 million and $936,000, respectively for the year ended December 31,
1997. There were no sales of available for sale securities for the years ended
December 31, 1996 and 1995.
7. TRADING SECURITIES
The following table provides a summary of trading securities as of December
31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury Securities................................. $ 79,751 $ --
FLRT 1996-A interest-only securities..................... 8,541 --
SPTL 1997 C-1 interest-only security..................... 6,637 --
SPTL 1996 C-1 interest-only securities................... 12,179 25,180
Other.................................................... 13,796 --
-------- -------
$120,904 $25,180
======== =======
</TABLE>
90
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gross unrealized gains and losses on trading securities included in income
were $709,000 and $835,000 for the year ended December 31, 1997. There were no
gross unrealized gains or losses on trading securities included in income for
the years ended December 31, 1996 and 1995.
During the year ended December 31, 1997, the Company entered into total rate
of return swap contracts for investment purposes with various investment bank
counterparties, the provisions of which entitle the Company to receive the
total return on various commercial loans in exchange for a floating payment of
one month LIBOR plus a spread. These contracts are off balance sheet
instruments. As of December 31, 1997, the Company was party to total rate of
return swap contracts with a total notional amount of $150.6 million, under
which the Company was obligated to pay one month LIBOR plus a weighted average
spread of 0.78%. The weighted average remaining life of these contracts was
37.1 months as of December 31, 1997. For the year ended December 31, 1997, the
Company recognized $448,000 in interest income on total return swaps.
The Company's cash collateral held by the counterparties is included in
trading securities. Net income or expense on these contracts is included in
interest income, and the contracts are carried at their estimated fair values.
8. LOANS HELD FOR SALE
Loans held for sale, at the lower of cost or market, consisted of the
following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4..................................... $ 13,169 $562,002
Multi-family.......................................... 68,294 186,391
-------- --------
81,463 748,393
Automobile loans........................................ 9,102 --
Leases.................................................. 13,561 8,547
Commercial loans........................................ 58,445 183,156
-------- --------
$162,571 $940,096
======== ========
</TABLE>
9. LOANS HELD FOR INVESTMENT, NET
Loans held for investment consisted of the following at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Loans secured by real estate:
Single family 1-4................................ $ 244,588 $ 375,476
Multi-family..................................... 17,261 2,527
Commercial....................................... 1,085 11,011
---------- ----------
262,934 389,014
Leases............................................. 7,745 99,717
Installment loans.................................. 154,919 34,248
Franchise loans.................................... 62,219 115,910
Asset based loans.................................. 484,832 288,528
Commercial loans................................... 344,882 173,932
---------- ----------
1,317,531 1,101,349
Unearned income.................................... (7,850) (6,336)
Deferred loan fees................................. (4,916) (6,415)
---------- ----------
1,304,765 1,088,598
Allowance for loan and lease losses.............. (38,047) (19,999)
---------- ----------
$1,266,718 $1,068,599
========== ==========
</TABLE>
91
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, loans to experienced franchisees
of nationally recognized restaurant concepts, and participations in syndicated
commercial loans. 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.
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of year....................... $ 19,999 $13,729 $ 7,054
Provision for loan and lease losses.............. 38,951 9,773 5,450
Business acquisitions and bulk loan purchases.... 11,161 4,500 4,320
Sale of Leases................................... (900) -- --
Deconsolidation of ICIFC......................... (687) -- --
Loans charged off................................ (31,053) (8,326) (3,106)
Recoveries on loans previously charged off....... 576 323 11
-------- ------- -------
Net charge-offs.................................. (30,477) (8,003) (3,095)
-------- ------- -------
Balance, end of period........................... $ 38,047 $19,999 $13,729
======== ======= =======
</TABLE>
As of December 31, 1997 and 1996 and 1995, non-accrual loans totaled $70.6
million, $50.1 million, and $31.0 million, respectively. Interest income
foregone on nonaccrual loans was $4.9 million, $1.1 million, and $492,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, impaired loans and the related allowance for
loan and lease losses were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
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........ $70,631 $(5,351) $65,280 $38,297 $(3,671) $34,626
Restructured loans...... -- -- -- 800 (4) 796
------- ------- ------- ------- ------- -------
Total impaired loans.... $70,631 $(5,351) $65,280 $39,097 $(3,675) $35,422
======= ======= ======= ======= ======= =======
</TABLE>
Impaired loans averaged $61.8 million, $33.3 million and $21.1 million
during 1997, 1996 and 1995 respectively. During 1997 total interest income
recognized on impaired loans was not material. During 1996 total interest
income recognized on impaired loans was $2.0 million and was immaterial during
1995. At December 31, 1997, total impaired loans were comprised of $40.1
million which had $5.4 million of specific allowances for losses and $30.5
million with no related specific allowance. There were no impaired loans
without a related allowance for losses at December 31, 1996 and 1995.
10. 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,
92
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1998.
Activity in the allowance for restructuring charges during 1997 and 1996 was
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
ALLOWANCE CHARGES CHARGES BALANCE AT
PROVIDED INCURRED INCURRED DECEMBER 31, 1997
--------- -------- -------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Disposition of wholesale mortgage
origination offices............. $2,500 $(2,354) $(146) $--
Disposal of fixed assets......... 1,000 (886) (114) --
Other............................ 300 -- (229) 71
------ ------- ----- ----
Total.......................... $3,800 $(3,240) $(489) $ 71
====== ======= ===== ====
</TABLE>
11. CAPITALIZED EXCESS SERVICING FEES RECEIVABLE
Changes in capitalized excess servicing fees receivable were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance............................. $ 23,142 $ 33,181 $ 4,319
Present value of excess servicing fees on
loans sold................................... -- 19,448 40,353
Amortization.................................. -- (24,812) (11,491)
Writedowns.................................... -- (4,675) --
Deconsolidation of ICIFC...................... (23,142) -- --
-------- -------- --------
Ending balance................................ $ -- $ 23,142 $ 33,181
======== ======== ========
</TABLE>
Capitalized excess servicing fees receivable are net of a valuation
allowance of $4.5 million at December 31, 1996.
12. PURCHASED AND ORIGINATED SERVICING RIGHTS
Changes in purchased and originated servicing rights were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning Balance............................... $14,887 $ 18,428 $16,746
Additions....................................... 2,982 10,970 7,340
Increase as a result of the FMAC acquisition.... -- -- 3,805
Decrease as a result of the ICIFC
deconsolidation................................ (8,785) -- --
Bulk purchase of servicing...................... -- -- 757
Sales of servicing rights....................... (1,264) (13,390) (6,234)
Amortization--accelerated....................... (2,217) -- (1,176)
Amortization--scheduled......................... (872) (1,121) (2,810)
------- -------- -------
Ending balance.................................. $ 4,731 $ 14,887 $18,428
======= ======== =======
</TABLE>
The servicing portfolio associated with purchased and originated servicing
rights at December 31, 1997 and 1996 was $665.3 million and $1.0 billion,
respectively.
93
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. PREMISES AND EQUIPMENT, NET
Premises and equipment consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Premises and equipment................................... $14,504 $19,606
Leasehold improvements................................... 1,371 1,394
------- -------
15,875 21,000
Less accumulated depreciation and amortization........... (6,362) (8,558)
------- -------
$ 9,513 $12,442
======= =======
</TABLE>
14. DEPOSITS
Deposits of $100,000 and over totaled approximately $236.4 million and
$220.8 million at December 31, 1997 and 1996, respectively. Interest expense
associated with certificates of deposit of $100,000 and over was approximately
$15.6 million, $13.6 million, and $15.4 million for the years ended December
31, 1997, 1996, and 1995, respectively.
15. BORROWINGS FROM FEDERAL HOME LOAN BANK
SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to borrow
up to a maximum of 35% of the assets of SPB. These borrowings must be fully
collateralized by qualifying mortgage loans and may be in the form of
overnight funds or term borrowings at SPB's option. At December 31, 1997 and
1996, all of the outstanding borrowings from the FHLB were scheduled to mature
within one year. The FHLB advances are secured by the investment in stock of
the FHLB and certain real estate mortgage loans with a carrying value of
$104.7 million and $228.5 million at December 31, 1997 and 1996, respectively.
At December 31, 1997, 1996 and 1995, FHLB borrowings are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at year end........................... $ 45,000 $140,500 190,000
Maximum outstanding at any month end.......... 109,500 338,000 435,000
Average balance during the year............... 56,761 188,765 292,000
Weighted average rate during the year......... 5.82% 6.10% 6.26%
Weighted average rate at year end............. 6.71% 6.30% 6.10%
</TABLE>
Interest expense on borrowings from the FHLB was $3.3 million, $12.1 million
and $19.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
16. OTHER BORROWINGS
Other borrowings primarily consist of revolving warehouse lines of credit to
fund the Company's and its subsidiaries' lending activities. At December 31,
1997 and 1996, approximately $159 million and $700 million of loans and
securities 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
94
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
compliance at December 31, 1997 and 1996. ICII and its subsidiaries have
various revolving warehouse lines of credit and repurchase facilities
available at December 31, 1997, as follows:
<TABLE>
<CAPTION>
INTEREST INDEX
RATE COMMITMENT OUTSTANDING (BASIS POINTS) EXPIRATION DATE
-------- ---------- ----------- -------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 7.25% $125,000 $ 20,058 Libor plus 125 March 10, 1998
Donaldson, Lufkin and
Jenrette (Corona Film
Finance Fund).......... 5.85 79,591 79,591 Fixed rate January 7, 1998
Core States (IBC)....... 8.17 30,000 10,192 Libor plus 220 October 6, 1998
Morgan Stanley (SPB).... 6.51 200,000 35,000 Libor plus 50 October 1, 1998
-------- --------
6.37 $434,591 $144,841
======== ========
</TABLE>
ICII and its subsidiaries had 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>
Interest expense on other borrowings was $29.6 million, $64.4 million and
$35.8 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
95
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SENIOR NOTES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
UNAMORTIZED
FACE VALUE DISCOUNT BOOK VALUE
---------- ----------- ----------
<S> <C> <C> <C>
9.75% Senior Notes due 2004.............. $ 20,174 $(361) $ 19,813
9.875% Senior Notes due 2007............. 200,000 -- 200,000
-------- ----- --------
$220,174 $(361) $219,813
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
UNAMORTIZED
FACE VALUE DISCOUNT BOOK VALUE
---------- ----------- ----------
<S> <C> <C> <C>
9.75% Senior notes due 2004.............. $90,000 $(1,791) $88,209
------- ------- -------
$90,000 $(1,791) $88,209
======= ======= =======
</TABLE>
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior
Notes"). A portion of the proceeds from the offering was used to repurchase
$69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75%
Senior Notes") on which the Company recorded an extraordinary after-tax loss
of $4.0 million. The remaining proceeds were 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.
The 9.875% Senior Notes may be redeemed after January 15, 2002 at the option
of the Company until maturity at a declining premium, plus accrued interest.
The 9.875% Senior Notes are general unsecured obligations of the Company
ranking pari passu with all senior indebtedness of the Company, but are
effectively subordinated to the liabilities of SPB. The Indenture for the
9.875% 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, 1997, the Company was in
compliance with the debt covenants related to the 9.875% Senior Notes.
In January 1994, the Company issued $90.0 million of 9.75% Senior Notes. At
December 31, 1997 and 1996, $20.2 million and $90.0 million of the 9.75%
Senior Notes were outstanding, respectively. The 9.75% 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 9.75% 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 SPB.
The Indenture for the 9.75% 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,
1997 and 1996, the Company was in compliance with the debt covenants related
to the 9.75% Senior Notes.
96
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total interest expense on the Senior Notes for the years ended December 31,
1997, 1996 and 1995 was $21.7 million, $9.0 million and $8.4 million,
respectively.
18. CONVERTIBLE SUBORDINATED DEBENTURES
At December 31, 1996, the SPFC convertible subordinated debentures were
convertible into 3,151,125 shares of common stock of the Company's former
consolidated 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 were 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. The convertible subordinated debentures were deconsolidated
during the first quarter of 1997 when the Company reduced its ownership
percentage in SPFC to below 50%.
19. REMARKETED PAR SECURITIES
During the second quarter of 1997, 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 at par. The ROPES are secured by
resettable rate debentures which are general unsecured obligations of the
Company and 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 were used for capital contributions to subsidiaries, strategic
acquisitions, investments and general corporate purposes. Interest expense on
the ROPES was $4.3 million for the year ended December 31, 1997.
The Trust Indenture for the ROPES 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,
1997, the Company was in compliance with the debt covenants related to the
ROPES.
20. 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.
In the fourth quarter of 1997, the Company's board of directors announced
the authorization to repurchase approximately 5% of the company's common
stock, or as much as 1.9 million shares. During 1997, the Company repurchased
and retired 25,000 shares of common stock under this program.
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.
97
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 24, 1995, the Company effected a 3-for-2 stock split to
shareholders of record as of October 10, 1995.
21. INCOME TAXES
The Company's income taxes for the years ended December 31, 1997, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal....................................... $41,988 $31,138 $ 7,803
State......................................... 13,551 12,210 2,452
------- ------- -------
Total current............................... 55,539 43,348 10,255
------- ------- -------
Deferred:
Federal....................................... 4,399 16,009 1,846
State......................................... 1,792 6,095 274
------- ------- -------
Total deferred.............................. 6,191 22,104 2,120
------- ------- -------
Taxes credited (charged) to shareholders'
equity......................................... 2,916 4,422 (2,231)
Reduction of deferred tax liability due to FMC
public offering ............................... (5,899) -- --
------- ------- -------
Taxes on income before extraordinary item....... 58,747 69,874 10,144
Current taxes--extraordinary item............... (2,919) -- --
------- ------- -------
Income taxes.................................... $55,828 $69,874 $10,144
======= ======= =======
</TABLE>
The Company's current income taxes payable totaled approximately $24.8
million and $25.7 million at December 31, 1997 and 1996, respectively.
98
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes arise from differences in the timing of recognition of
income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowances for loan losses............................... $ 13,156 $ 4,365
Unrealized gain on loans and securities.................. -- 1,671
State taxes.............................................. 7,099 5,677
Executive stock options.................................. 543 548
Other.................................................... 213 1,309
-------- --------
Total.................................................. 21,011 13,570
-------- --------
Valuation allowance...................................... -- --
-------- --------
Deferred tax assets, net of valuation allowance.......... 21,011 13,570
-------- --------
Deferred tax liabilities:
Sales/Investments in FMAC/SPFC/ICIFC..................... (41,984) (12,934)
Purchased and originated servicing rights................ -- (5,222)
Gain on sale of servicing................................ (926) (8,934)
Excess servicing gains................................... (1,143) (6,162)
Leases................................................... (7,915) (3,930)
Deferred loan fees....................................... (505) (510)
Depreciation............................................. (1,160) (468)
Unrealized gain on securities available for sale......... (1,363) (3,473)
FHLB stock dividends..................................... (1,791) (1,522)
-------- --------
Total.................................................. (56,787) (43,155)
-------- --------
Net deferred tax liability................................. $(35,776) $(29,585)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks 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,
----------------
1997 1996 1995
---- ---- ----
<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............ 6.3 7.5 7.3
Reduction of deferred tax liability due to FMC public
offering............................................. (3.7) -- --
Other, net............................................ (0.7) 1.8 (0.3)
---- ---- ----
Effective income tax rate............................... 36.9% 44.3% 42.0%
==== ==== ====
</TABLE>
99
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. 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 $296,000, $305,000, and $209,000 for the years ended
December 31, 1997, 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 matching funds would be allocated as a
50% match of employee contributions on the first 4% of the employee's
deferrals. Discretionary contributions of $0, $350,000, and $200,000 were
charged to operations in each of the years ending December 31, 1997, 1996, and
1995.
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 1,082,493 options were outstanding at December 31,
1997.
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 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.
100
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1,453,200 options
were outstanding at December 31, 1997.
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 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.
101
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of changes in outstanding stock options follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTION OF OPTION OF OPTION
SHARES IN THOUSANDS SHARES PRICE SHARES PRICE SHARES PRICE
------------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1. 2,589 $8.58 1,637 $2.94 1,758 $2.46
Options granted................ 470 18.72 1,609 13.62 394 5.01
Options exercised.............. (430) 2.61 (295) 2.61 (323) 2.55
Options canceled............... (93) 10.56 (362) 8.32 (192) 2.80
----- ----- ----- ----- ----- -----
Options outstanding, December
31............................ 2,536 11.41 2,589 8.58 1,637 2.94
===== ===== =====
Options Exercisable............ 678 6.95 551 2.47 467 2.24
</TABLE>
There were 1,636,431 options available for future grants at December 31,
1997.
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.
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 1997, 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,
-----------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported...................................... $85,921 $75,984 $14,193
Pro forma........................................ 81,707 74,733 14,089
Basic income per share:
As reported...................................... $ 2.23 $ 2.11 $ 0.45
Pro forma........................................ 2.12 2.07 0.44
Diluted income per share:
As reported...................................... $ 2.10 $ 1.95 $ 0.40
Pro forma........................................ 2.00 1.92 0.40
</TABLE>
The effects of applying SFAS 123 for disclosing compensation cost may not be
representative of the effects on reported net income for future years.
102
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair value at date of grant of options granted during
1997, 1996 and 1995 was $11.27, $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,
-------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Expected life (years)................................. 5.53 3.40 3.43
Interest rate......................................... 5.76% 5.48% 5.14%
Volatility............................................ 64.33 57.51 60.80
Dividend yield........................................ 0.00% 0.00% 0.00%
</TABLE>
23. EXECUTIVE COMPENSATION
Employment Agreements
On January 1, 1997, the Company entered into five-year employment contracts
with H. Wayne Snavely, Chairman of the Board, President and Chief Executive
Officer, Kevin E. Villani, Executive Vice President, Chief Financial Officer
and a Director and Stephen J. Shugerman, President of SPB and a Director,
which provide for minimum annual aggregate compensation of $1 million, subject
to adjustment for inflation, plus an annual bonus approved by the Company's
Board of the Directors based on the 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. The total cash compensation of the
three senior officers is limited in the aggregate to $2.95 million annually.
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). These options
expire on December 1, 2001 and are not covered by the Company's stock option
plan.
Compensation expense relating to these options was recorded in the Company's
consolidated financial statements over a four year period which ended 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 year ended December 31,
1995 related to the stock options was $871,200.
24. 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.
103
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As a part of the SPB 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 of 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 swap was an off balance sheet
instrument, and it expired on September 30, 1997.
25. COMMITMENTS AND CONTINGENCIES
Loan Servicing
As of December 31, 1997 and 1996 the Company was servicing loans for others,
directly and through sub-servicing arrangements, totaling approximately $1.3
billion and $2.1 billion, respectively.
Related fiduciary funds held in trust for investors in non-interest bearing
accounts totaled $8.3 million and $1.3 million at December 31, 1997 and 1996,
respectively. These funds are segregated in special bank accounts and are held
as deposits at SPB. The Company is a guarantor of certain performances and
lease servicing by IBC. The Company is a guarantor for AMN's performance with
regards to the Auto Trust 1997-A securitization.
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. The Company provided $5.4
million in 1997 as an allowance for losses on repurchases of former mortgage
banking loans.
During the years ended December 31, 1997 and 1996, the Company retained
servicing rights on $197.8 million and $35.1 million of mortgage loans sold
through traditional secondary market channels and $919.1 million and $1.3
billion on loans and leases sold through securitizations. Additionally, during
the year ended December 31, 1996, 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.
Loan Commitments
As of December 31, 1997 and 1996, the Company had unfunded open loan
commitments amounting to $655.3 million and $642.8 million, respectively, to
fund loans. 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.
104
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1997 and 1996, the Company had $0
and $143.0 million, respectively, in outstanding commitments to sell mortgage
loans through mortgage-backed securities.
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, 1997 and 1996, the Company had open positions of $16.4
million and $183.7 million related to the sales of United States Treasury
futures contracts hedging the interest rate risk on fixed rate loans held for
sale. At December 31, 1997, the Company had unrealized gains of $277,000 on
open positions. At December 31, 1996, the Company had unrealized losses of
$1.7 million on open positions.
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 $0 and $70.0 million notional amount of written call option
contracts outstanding at December 31, 1997 and 1996, respectively. The Company
received $0 and $366,000 in premiums related to the options outstanding at
December 31, 1997 and 1996, respectively. There were no option contracts
exercised during the year.
Lease Commitments
Minimum rental commitments under all noncancelable operating leases at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998...................................... $ 4,629
1999...................................... 3,664
2000...................................... 3,421
2001...................................... 2,828
2002...................................... 2,572
Thereafter................................ 1,493
-------
Total................................... $18,607
=======
</TABLE>
105
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the years ended December 31, 1997, 1996 and 1995 was $4.0
million, $4.2 million, and $3.6 million, respectively.
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 under the auspices of the American
Arbitration Association. 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 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 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 judgment, 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.
The Company and a Director are defendants in Judy L. Resnick v. Imperial
Credit Industries, Inc., et al originally filed on January 14, 1998, in Los
Angeles Superior Court. The complaint alleges conspiracies by the defendants
to defraud, interfere with advantageous business relationships, defame, and
breach of fiduciary duty as well as actual fraud, defamation, and breach of
implied covenant of good faith and fair dealing arising out of ICG's
acquisition of substantially all of the assets of Dabney/Resnick/Imperial. The
plaintif is seeking actual, consequential, incidental, general and punitive
damages in a sum of not less than $25 million.
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, that none of these proceedings will have a
material effect on the Company's financial condition or results of operations.
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial 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.
106
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
FINANCIAL ASSETS
The carrying values of cash, interest bearing deposits, FHLB stock, and
accrued interest receivable are considered to approximate fair value. The
carrying values of securities held for trading and available for sale
approximate fair value. Such market value is determined by reference to quoted
market prices. When quoted market prices are not available, fair value is
estimated by reference to market values for similar securities or by
discounting cash flows at an appropriate risk rate. The fair value of loans
held for sale is based on forward sales contracts or quoted market prices. The
fair value of loans held for investment is estimated using a combination of
techniques, including discounting estimated future cash flows and quoted
market prices for similar instruments, taking into consideration the varying
degrees of credit risk.
The fair value of servicing rights, excess servicing fees and securitization
related assets is estimated by discounting future cash flows using appropriate
risk, default and prepayment rates. The fair value of investments in
unconsolidated publicly traded affiliates is based on quoted market prices.
FINANCIAL LIABILITIES
The carrying amounts of deposits due on demand and accrued interest payable
is considered to approximate fair value. For fixed maturity deposits, fair
value is estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar maturities. The fair value of debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of lending commitments is estimated using the fees currently
charged to enter into similar agreements; such estimated fair value is not
material. The fair value of interest rate swaps, forward treasury contracts,
interest rate futures and interest rate swaps is based on quoted market
prices. The fair value of option contracts is based on the unamortized
premium.
107
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash............................. $ 50,597 $ 50,597 $ 74,247 $ 74,247
Interest bearing deposits........ 103,738 103,738 3,369 3,369
Investment in Federal Home Loan
Bank stock...................... 5,646 5,646 17,152 17,152
Securities held for trading...... 115,905 115,905 25,180 25,180
Securities available for sale.... 112,726 112,726 59,116 59,116
Loans held for sale.............. 162,571 168,262 940,096 954,299
Loans held for investment, net... 1,266,718 1,286,820 1,068,599 1,081,053
Purchased and originated
servicing rights................ 4,731 4,731 14,887 14,887
Capitalized excess servicing fees
receivable...................... -- -- 23,142 23,142
Retained interest in loan and
lease securitizations........... 43,105 43,105 49,548 49,548
Interest only and residual
certificates.................... -- -- 87,017 87,017
Accrued interest receivable...... 9,132 9,132 13,847 13,847
Investments in unconsolidated
subsidiaries.................... 118,402 330,427 -- --
LIABILITIES:
Deposits......................... $1,156,022 $1,160,294 $1,069,184 $1,069,624
Borrowings from Federal Home Loan
Bank............................ 45,000 45,000 140,500 140,500
Other borrowings................. 144,841 144,841 694,352 694,352
Remarketed par securities........ 70,000 70,000 -- --
Senior notes..................... 219,813 219,474 88,209 93,150
Convertible debentures........... -- -- 75,000 75,000
Accrued interest payable......... 21,484 21,484 14,034 14,034
OFF BALANCE SHEET ITEMS:
Options.......................... -- -- 366 366
Interest rate swap............... -- -- -- 1,166
Forward treasury contracts....... 277 277 (1,700) (1,700)
</TABLE>
108
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
27. SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Gain on sale of loans............. $ 8,666 $28,558 $20,512 $ 9,987
Net interest income............... 20,808 23,723 29,181 27,631
Other revenues.................... 13,691 10,960 25,405 128,517
Provision for loan and lease
losses........................... 2,870 5,736 9,559 20,786
Other expenses.................... 21,134 29,064 35,090 64,224
Net income........................ 7,037 14,073 14,589 50,222
Income per share:
Basic........................... $ 0.18 $ 0.37 $ 0.38 $ 1.29
Diluted......................... $ 0.17 $ 0.35 $ 0.36 $ 1.22
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 26,483
Provision for loan and lease
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:
Basic........................... $ 0.27 $ 1.19 $ 0.25 $ 0.39
Diluted......................... $ 0.24 $ 1.11 $ 0.23 $ 0.37
</TABLE>
28. SELECTED FINANCIAL INFORMATION OF SUBSIDIARIES
The following represents summarized financial information with respect to the
operations of SPB, a significant wholly-owned subsidiary of ICII.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
SOUTHERN PACIFIC BANK 1997 1996 1995
--------------------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Total assets................................ $1,503,807 $1,384,008 $1,432,554
Deposits.................................... 1,189,841 1,072,266 1,093,250
Borrowings from Federal Home Loan Bank...... 45,000 140,500 190,000
Other borrowings............................ 80,000 -- --
Stockholder's equity........................ 157,081 144,798 126,599
Interest income............................. 153,824 131,184 103,112
Interest expense............................ 80,453 73,141 70,819
Noninterest income.......................... 34,636 15,149 17,790
Noninterest expense......................... 39,768 21,846 13,942
Provision for loan losses................... 14,900 8,938 5,450
Income before taxes......................... 53,339 42,408 30,691
Net income.................................. 30,824 24,399 17,753
</TABLE>
109
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents summarized consolidating financial information as
of December 31, 1997 and December 31, 1996, and for the years ended December
31, 1997, 1996 and 1995, with respect to the financial position, results of
operations and cash flows of the Company and its wholly-owned and majority-
owned subsidiaries. On January 17, 1997, the Company sold $200 million of
9.875% Senior Notes due 2007. As of December 31, 1997, the 9.875% Senior Notes
are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI,
ICCAMC, ICW and AMN (the "Guarantor Subsidiaries"). As of December 31, 1997,
the non-guarantor subsidiaries are SPB, ICG and ICCTI. FMC was a guarantor
subsidiary through September 30, 1997. Each of the guarantees is full and
unconditional and joint and several. The summarized consolidated financial
information is presented in lieu of separate financial statements and other
related disclosures of the wholly-owned subsidiary guarantors as management
has determined that such information is not material to investors. None of the
subsidiary guarantors is restricted from making distributions to the Company.
CONSOLIDATING CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597
Interest bearing
deposits............... 31,390 1,149 71,199 -- 103,738
Investments in Federal
Home Loan Bank stock... -- -- 5,646 -- 5,646
Securities available for
sale and trading....... 107,671 21,031 99,929 -- 228,631
Loans held for sale..... 12,138 23,694 126,739 -- 162,571
Loans held for
investment, net........ 78,922 44,941 1,197,430 (54,575) 1,266,718
Investment in SPFC...... 65,303 -- -- -- 65,303
Purchased and originated
servicing rights....... -- -- 4,731 -- 4,731
Investment in FMC....... 53,099 -- -- -- 53,099
Retained interest in
loan and lease
securitizations........ -- 43,105 -- -- 43,105
Investment in
subsidiaries........... 281,454 -- -- (281,454) --
Goodwill................ -- 13,229 22,378 -- 35,607
Other assets............ 59,911 (1,104) 26,473 (2,932) 82,348
-------- -------- ---------- --------- ----------
Total assets.......... $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $ -- $ -- $1,189,840 $ (33,818) $1,156,022
Other borrowings........ -- 30,250 196,528 (36,937) 189,841
Remarketed Par
Securities............. 72,165 -- (2,165) -- 70,000
Senior notes............ 219,813 -- -- -- 219,813
Minority interest in
consolidated
subsidiaries........... 946 20 111 2,097 3,174
Other liabilities....... 86,260 7,327 45,095 629 139,311
-------- -------- ---------- --------- ----------
Total liabilities..... 379,184 37,597 1,429,409 (68,029) 1,778,161
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 147,109 125,139 89,342 (214,481) 147,109
Retained earnings....... 174,898 (22,023) 79,092 (57,069) 174,898
Unrealized gain on
securities available
for sale............... 1,926 -- -- -- 1,926
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 323,933 115,116 168,434 (283,550) 323,933
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders' equity. $703,117 $152,713 $1,597,843 $(351,579) $2,102,094
======== ======== ========== ========= ==========
</TABLE>
110
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
(Loss) gain on sale of
loans and leases....... $ (4,427) $ 5,894 $ 65,853 $ 403 $ 67,723
-------- -------- -------- -------- --------
Interest income......... 28,916 32,736 172,894 (6,609) 227,937
Interest expense........ 25,703 11,283 96,116 (6,508) 126,594
-------- -------- -------- -------- --------
Net interest income..... 3,213 21,453 76,778 (101) 101,343
Provision for loan and
lease losses........... 5,000 19,051 14,900 -- 38,951
-------- -------- -------- -------- --------
Net interest income
after Provision for
loan and lease
losses................ (1,787) 2,402 61,878 (101) 62,392
-------- -------- -------- -------- --------
Loan servicing (expense)
income................. (2,283) 5,212 7,814 -- 10,743
Investment Banking fees. -- -- 7,702 -- 7,702
Gains on sale of FMC
stock.................. 92,137 -- -- -- 92,137
Gain on sale of SPFC
stock.................. 9,488 -- -- -- 9,488
Gain on sale of IMH
stock.................. 9,225 411 1,294 566 11,496
Gain on termination of
REIT contract.......... -- 19,046 -- -- 19,046
Equity in net income
SPFC................... 25,869 -- -- -- 25,869
Equity in net loss FMC.. (3,050) -- -- -- (3,050)
Dividends received from
subsidiaries........... 27,514 -- -- (27,514) --
Other (expense) income.. (3,447) 5,050 5,113 (702) 6,014
-------- -------- -------- -------- --------
Total other income..... 155,453 29,719 21,923 (27,650) 179,445
-------- -------- -------- -------- --------
Total revenues....... 149,239 38,015 149,654 (27,348) 309,560
-------- -------- -------- -------- --------
EXPENSES:
Personnel expense....... 4,682 17,769 38,379 -- 60,830
Amortization of PMSR's
and OMSR's............. 1,580 637 872 -- 3,089
Occupancy expense....... 1,310 598 2,411 -- 4,319
Data processing expense. 260 288 955 -- 1,503
Net expenses of other
real estate owned...... 4,513 (254) 2,268 -- 6,527
Professional services... 3,611 1,684 5,008 -- 10,303
Amortization of
goodwill............... -- 21,724 1,536 -- 23,260
Provision for loss on
loan repurchase........ 5,400 -- -- -- 5,400
Loss on restructuring... 3,709 -- -- -- 3,709
General, administrative
and other expense...... 4,662 13,486 13,695 (399) 31,444
-------- -------- -------- -------- --------
Total expenses......... 29,727 55,932 65,124 (399) 150,384
-------- -------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company expense
and extraordinary item. 119,512 (17,917) 84,530 (26,949) 159,176
Income taxes (benefit).. 41,611 (5,670) 22,568 238 58,747
-------- -------- -------- -------- --------
Income (loss) before
minority interest and
extraordinary item..... 77,901 (12,247) 61,962 (27,187) 100,429
Minority interest in
income of consolidated
subsidiaries........... 10,513 -- -- -- 10,513
-------- -------- -------- -------- --------
Income (loss) before
deferred inter-company
expense and
extraordinary item..... 67,388 (12,247) 61,962 (27,187) 89,916
Deferred inter-company
expense, net of income
taxes.................. (327) -- -- 327 --
-------- -------- -------- -------- --------
Income (loss) before
equity in undistributed
income of subsidiaries
and extraordinary item. 67,715 (12,247) 61,962 (27,514) 89,916
Equity in undistributed
income of subsidiaries. 22,201 -- -- (22,201) --
-------- -------- -------- -------- --------
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes.................. (3,995) -- -- -- (3,995)
-------- -------- -------- -------- --------
Net income (loss)....... $ 85,921 $(12,247) $ 61,962 $(49,715) $ 85,921
======== ======== ======== ======== ========
</TABLE>
111
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ (2,067) $ 31,657 $ 815,765 $(787,628) $ 57,727
--------- -------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (31,390) (986) (70,797) 2,804 (100,369)
Purchase of securities
available for sale... (42,938) -- -- -- (42,938)
Sale of securities
available for sale... -- -- 29,354 (23,950) 5,404
Net change loans held
for investment....... (56,088) 15,544 (272,429) 106,801 (206,172)
Proceeds of sale of
SPFC stock........... 13,707 -- -- -- 13,707
Proceeds of sales of
IMH stock............ 9,679 411 1,295 565 11,950
Proceeds of sales of
FMC stock............ 59,731 -- -- -- 59,731
Investment in Imperial
Credit Asset
Resolution Inc....... (74,810) -- -- 74,810 --
Cash utilized for
acquisitions......... (750) -- (123,738) -- (124,488)
Net change in
investment in
Subsidiaries......... (11,803) -- -- 11,803 --
Other, net............ 3,645 (23,283) (40,377) 88,066 28,051
--------- -------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (131,017) (8,314) (476,692) 260,899 (355,124)
--------- -------- --------- --------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 117,575 (30,737) 86,838
Advances from Federal
Home Loan Bank....... -- -- 50,000 -- 50,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (145,500) -- (145,500)
Net change in other
borrowings........... (15,363) (58,518) (290,113) 507,499 143,505
Proceeds from offering
of Senior Notes...... 194,500 -- -- -- 194,500
Borrowings from
Imperial Credit
Investment Corp...... 10,000 -- -- (10,000) --
Proceeds from offering
of Remarketed
Securities........... 68,075 -- -- -- 68,075
Repurchase of Senior
Notes................ (73,241) -- -- -- (73,241)
Net change in minority
interest............. (44,203) -- 111 (7,670) (51,762)
Other, net............ 1,332 33,870 (92,754) 58,884 1,332
--------- -------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 141,100 (24,648) (360,681) 517,976 273,747
--------- -------- --------- --------- ---------
Net change in cash.... 8,016 (1,305) (21,608) (8,753) (23,650)
Cash at beginning of
period............... 5,213 7,973 64,926 (3,865) 74,247
--------- -------- --------- --------- ---------
Cash at end of period. $ 13,229 $ 6,668 $ 43,318 $ (12,618) $ 50,597
========= ======== ========= ========= =========
</TABLE>
112
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 5,213 $ 7,973 $ 64,926 $ (3,865) $ 74,247
Interest bearing
deposits............... -- 163 2,594 612 3,369
Investments in Federal
Home Loan Bank stock... -- -- 17,152 -- 17,152
Investment and trading
securities............. 8,802 887 75,173 (566) 84,296
Loans held for sale..... 4,839 8,547 926,710 -- 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........ -- 19,646 29,902 -- 49,548
Interest-only and
residual certificates.. -- -- 87,017 -- 87,017
Accrued interest on
loans.................. 1,425 -- 12,422 -- 13,847
Premises and equipment,
net.................... 4,922 404 7,116 -- 12,442
Other real estate owned,
net.................... 3,508 -- 8,706 -- 12,214
Investment in
subsidiaries........... 269,651 -- -- (269,651) --
Goodwill................ -- 14,115 24,375 -- 38,490
Other assets............ 96,746 (15,385) (22,998) (27,070) 31,293
-------- -------- ---------- --------- ----------
Total assets.......... $429,611 $123,201 $2,219,054 $(301,227) $2,470,639
======== ======== ========== ========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $ -- $ -- $1,072,266 $ (3,082) $1,069,184
Borrowings from Federal
Home Loan Bank......... -- -- 140,500 -- 140,500
Other borrowings........ 15,363 88,768 605,343 (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 9,222 71,605 (13,259) 108,950
-------- -------- ---------- --------- ----------
Total liabilities....... 190,103 97,990 1,964,714 (21,676) 2,231,131
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- -- 9,143 (9,143) --
Common stock............ 145,521 21,501 140,382 (161,883) 145,521
Retained earnings....... 88,977 3,525 104,815 (108,340) 88,977
Unrealized gain on
securities available
for sale............... 5,010 185 -- (185) 5,010
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 239,508 25,211 254,340 (279,551) 239,508
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders'
equity............... $429,611 $123,201 $2,219,054 $(301,227) $2,470,639
======== ======== ========== ========= ==========
</TABLE>
113
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
Gain on sale of loans... $ (937) $ 2,617 $ 86,090 $ 386 $ 88,156
------- ------- -------- -------- --------
Interest income......... 14,877 3,811 193,963 (5,180) 207,471
Interest expense........ 16,696 1,901 127,181 (10,742) 135,036
------- ------- -------- -------- --------
Net interest income..... (1,819) 1,910 66,782 5,562 72,435
Provision for loan and
lease losses........... -- -- 9,625 148 9,773
------- ------- -------- -------- --------
Net interest income
after provision for
loan and lease losses. (1,819) 1,910 57,157 5,414 62,662
------- ------- -------- -------- --------
Loan servicing income... (3,706) 3,095 11,444 (9,153) 1,680
Gain 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 3,214 6,162 4,037 14,154
------- ------- -------- -------- --------
Total other income..... 92,174 6,309 17,606 (9,974) 106,115
------- ------- -------- -------- --------
Total revenues......... 89,418 10,836 160,853 (4,174) 256,933
------- ------- -------- -------- --------
EXPENSES:
Personnel expense....... 8,757 2,997 36,837 (236) 48,355
Amortization of PMSRs
and OMSRs.............. 402 106 613 -- 1,121
Occupancy expense....... 1,994 229 2,352 78 4,653
Data processing expense. 1,094 62 1,007 -- 2,163
Net expenses of other
real estate owned...... 4,969 -- 765 1,280 7,014
General, administrative
and other expense...... 13,652 3,583 17,877 631 35,743
------- ------- -------- -------- --------
Total expenses......... 30,868 6,977 59,451 1,753 99,049
------- ------- -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company expense
and extraordinary item. 58,550 3,859 101,402 (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 2,253 62,267 (6,230) 88,010
Minority interest in of
consolidated
subsidiaries........... 12,026 -- -- -- 12,026
------- ------- -------- -------- --------
Income before deferred
inter-company expense.. 17,694 2,253 62,267 (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 2,253 62,267 (7,613) 75,984
Equity in undistributed
income of subsidiaries. 56,907 -- -- (56,907) --
------- ------- -------- -------- --------
Net income (loss)....... $75,984 $ 2,253 $ 62,267 $(64,520) $ 75,984
======= ======= ======== ======== ========
</TABLE>
114
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
OTHER NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $ 141,655 $ 28,949 $(222,480) $ 20,614 $ (31,262)
--------- --------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... -- (163) 265,206 (636) 264,407
Proceeds of sales of
servicing rights..... 31,799 -- -- (21,788) 10,011
Purchase of securities
available for sale... -- (887) (41,704) (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)
Proceeds from sale of
SPFC stock........... 64,625 -- -- -- 64,625
Net change in
investment in
Subsidiaries......... (155,759) -- -- 155,759 --
Other, net............ 3,762 (524) (6,425) 4,545 1,358
--------- --------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (60,883) (107,807) 179,723 233,144 244,177
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- (20,984) (2,821) (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) 88,768 105,266 (184,134) (186,463)
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 -- 26,400 (26,631) 9,055
--------- --------- --------- --------- ---------
Net cash (used in)
provided by financing
activities............. (84,152) 88,768 75,147 (257,597) (177,834)
--------- --------- --------- --------- ---------
Net change in cash.... (3,380) 9,910 32,390 (3,839) 35,081
Cash at beginning of
period............... 8,593 (1,937) 32,536 (26) 39,166
--------- --------- --------- --------- ---------
Cash at end of period. $ 5,213 $ 7,973 $ 64,926 $ (3,865) $ 74,247
========= ========= ========= ========= =========
</TABLE>
115
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
<S> <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 76 110,595 3,134 129,482
Interest expense........ 20,900 17 77,708 (2,897) 95,728
-------- ------ -------- -------- --------
Net interest income..... (5,223) 59 32,887 6,031 33,754
Provision for loan
losses................. -- -- 5,450 -- 5,450
-------- ------ -------- -------- --------
Net interest income
after provision for
loan loss............. (5,223) 59 27,437 6,031 28,304
-------- ------ -------- -------- --------
Loan servicing income... 14,007 27 6,670 (7,986) 12,718
Gain on sale of
servicing rights....... 4,889 -- 401 (1,712) 3,578
Other income............ (885) 2,465 2,676 (3,104) 1,152
-------- ------ -------- -------- --------
Total other income..... 18,011 2,492 9,747 (12,802) 17,448
-------- ------ -------- -------- --------
Total revenues......... 25,787 4,354 73,235 (18,067) 85,309
-------- ------ -------- -------- --------
EXPENSES:
Personnel expense....... 20,281 1,606 12,789 (623) 34,053
Amortization of PMSRs
and OMSRs.............. 3,986 -- 2,892 (2,892) 3,986
Occupancy expense....... 2,874 54 1,065 (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...... 9,938 493 9,277 (3,845) 15,863
-------- ------ -------- -------- --------
Total expenses......... 38,461 2,154 28,087 (7,522) 61,180
-------- ------ -------- -------- --------
Income before income
taxes, minority
interest, deferred
inter-company gains and
extraordinary item..... (12,674) 2,200 45,148 (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) 1,271 25,936 (5,991) 13,985
Minority interest in
loss of consolidated
subsidiaries........... (208) -- -- -- (208)
-------- ------ -------- -------- --------
(Loss) income before
deferred inter-company
gains.................. (7,023) 1,271 25,936 (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) 1,271 25,936 (4,281) 14,193
Equity in undistributed
income of subsidiaries. 22,926 -- -- (22,926) --
-------- ------ -------- -------- --------
Net income (loss)....... $ 14,193 $1,271 $ 25,936 $(27,207) $ 14,193
======== ====== ======== ======== ========
</TABLE>
116
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
ICII SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $(258,380) $ 22,093 $(1,076,751) $ 139,335 $(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 -- 5,055 (5,055) 12,815
Net change in loans
held for investment.. 51,784 -- 493,749 21,160 566,693
Cash utilized for
acquisitions......... -- (25,015) (150,000) -- (175,015)
Net change in
investment in
Subsidiaries......... (15,581) -- -- 15,581 --
Other, net............ (8,310) (15) 1,194 775 (6,356)
--------- -------- ----------- --------- -----------
Net cash provided by
(used in) investing
activities............. 40,708 (25,030) 223,298 (98,015) 140,961
--------- -------- ----------- --------- -----------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 146,390 11,979 158,369
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 -- 708,823 (39,733) 880,815
Issuance of Bonds..... -- -- 111,995 -- 111,995
Net change in minority
interest............. 1,453 -- -- (1,453) --
Other, net............ 825 1,000 (1,100) 100 825
--------- -------- ----------- --------- -----------
Net cash provided by
financing activities... 214,003 1,000 861,108 (29,107) 1,047,004
--------- -------- ----------- --------- -----------
Net change in cash.... (3,669) (1,937) 7,655 12,213 14,262
Cash at beginning of
period............... 12,262 -- 24,881 (12,239) 24,904
--------- -------- ----------- --------- -----------
Cash at end of period. $ 8,593 $ (1,937) $ 32,536 $ (26) $ 39,166
========= ======== =========== ========= ===========
</TABLE>
117
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
29. SPB REGULATORY MATTERS
General
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 regulators 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,
1997 and 1996, SPB was categorized as well capitalized.
Restrictions on Availability of Funds from SPB
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 SPB's by-
laws, at December 31, 1997, all of SPB's capital and surplus in excess of
$125.0 million is available for the payment of dividends.
Additionally, SPB 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, SPB 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
On October 30, 1997, SPB announced that the Memorandum of Understanding
("MOU") entered into in September 1996 had been terminated as a result of the
recent concurrent examinations by the FDIC and CDFI and their joint
conclusions that the terms of the agreement have been satisfactorily met and
the improvement in SPB's operations no longer warranted the MOU.
On September 30, 1996 SPB entered into a MOU with the FDIC and the
California Department of Financial Institutions ("CDFI"). This agreement
required SPB to (i) have and retain qualified management, (ii) adopt and
118
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
implement comprehensive risk management policies, programs and systems, (iii)
take all reasonable and good faith steps to ensure future compliance with all
applicable laws and regulations, (iv) develop a credit review program, (v)
update the lending, investments and audit policies, and (vi) provide quarterly
progress reports to the FDIC and the Department of Corporations.
Regulatory Capital
SPB 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 SPB's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, SPB 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. SPB'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 SPB 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, 1997, that SPB
meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized SPB as well capitalized under the regulatory framework for prompt
and corrective action. To be categorized as well capitalized SPB 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 SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of
December 31, 1997.
<TABLE>
<CAPTION>
MINIMUM WELL CAPITALIZED
ACTUAL REQUIREMENT REQUIREMENT
-------------- -------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- -------- ----- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation................... $157,082 13.20% $ 59,476 5.00% $ -- --
Risk-based Capital............ 190,673 12.25% 124,583 8.00% 155,729 10.00%
Risk-based Tier 1 Capital..... 136,206 8.75% 62,292 4.00% 93,437 6.00%
FDIC Leverage Ratio........... 136,206 8.30% 65,644 4.00% 82,055 5.00%
</TABLE>
119
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
30. IMPERIAL CREDIT INDUSTRIES, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash......................................................... $ 13,229 $ 5,213
Interest bearing deposits.................................... 31,390 --
Securities available for sale................................ 86,695 8,802
Trading securities........................................... 20,976 --
Loans held for sale.......................................... 12,138 4,839
Loans held for investment, net............................... 78,922 34,505
Premises and equipment, net.................................. 2,272 4,922
Other real estate owned, net................................. 1,158 3,508
Investment in SPFC........................................... 65,303 --
Investment in FMC............................................ 53,099 --
Investment in subsidiaries................................... 281,454 269,651
Accrued interest on loans.................................... 3,320 1,425
Other assets................................................. 53,161 96,746
-------- --------
Total assets............................................... $703,117 $429,611
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Remarketed Par Securities.................................... $ 72,165 $ --
Other borrowings............................................. -- 15,363
Senior Notes................................................. 219,813 88,209
Minority interest in consolidated subsidiaries............... 946 45,149
Other liabilities............................................ 86,260 41,382
-------- --------
Total liabilities.......................................... 379,184 190,103
-------- --------
Shareholders' equity:
Common stock, no par value, authorized 80,000,000 shares;
38,791,439 and 38,291,112 shares issued and outstanding at
December 31, 1997 and 1996, respectively.................. 147,109 145,521
Retained earnings.......................................... 174,898 88,977
Unrealized gain on securities available for sale, net...... 1,926 5,010
-------- --------
Total shareholders' equity............................... 323,933 239,508
-------- --------
Total liabilities and shareholders' equity............... $703,117 $429,611
======== ========
</TABLE>
120
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
(Loss) gain on sale of loans..................... $ (4,427) $ (937) $12,999
-------- ------- -------
Interest income.................................. 28,916 14,877 15,677
Interest expense................................. 25,703 16,696 20,900
-------- ------- -------
Net interest income (expense).................. 3,213 (1,819) (5,223)
-------- ------- -------
Provision for loan and lease losses.............. 5,000 -- --
-------- ------- -------
Net interest expense after provision for loan and
lease losses.................................... (1,787) (1,819) (5,223)
Loan servicing (expense) income.................. (2,283) (3,706) 14,007
Gain on sale of servicing rights................. -- 6,249 4,889
Gains on sale of FMC stock....................... 92,137 -- --
Gain on sale of IMH stock........................ 9,225 -- --
Gains on sale of SPFC stock...................... 9,488 82,690 --
Equity in net income of SPFC..................... 25,869 -- --
Equity in net loss of FMC........................ (3,050) -- --
Dividends received from subsidiaries............. 27,514 6,200 --
Other (loss) income.............................. (3,447) 741 (885)
-------- ------- -------
Total other income............................. 155,453 92,174 18,011
-------- ------- -------
Total revenue.................................... 149,239 89,418 25,787
-------- ------- -------
Expenses:
Personnel expense................................ 4,682 8,757 20,281
Occupancy expense................................ 1,310 1,994 2,874
Other expense.................................... 23,735 20,117 15,306
-------- ------- -------
Total expenses................................. 29,727 30,868 38,461
-------- ------- -------
Income (loss) before income taxes, minority
interest, deferred inter-Company gains and
extraordinary item.............................. 119,512 58,550 (12,674)
Income taxes..................................... 41,611 28,830 (5,443)
-------- ------- -------
Income (loss) before minority interest, deferred
inter-company items and extraordinary item...... 77,901 29,720 (7,231)
Minority interest in income (loss) of
consolidated subsidiaries....................... 10,513 12,026 (208)
Deferred inter-company (expense) income, net of
income taxes.................................... (327) (1,383) 1,710
-------- ------- -------
Income (loss) before extraordinary item.......... 67,715 19,077 (8,733)
Extraordinary item--Loss on extinguishment of
debt, net of income taxes....................... (3,995) -- --
-------- ------- -------
Income (loss) before equity in undistributed
income of subsidiaries.......................... 63,720 19,077 (8,733)
Equity in undistributed income of subsidiaries... 22,201 56,907 22,926
-------- ------- -------
Net income..................................... $ 85,921 $75,984 $14,193
======== ======= =======
</TABLE>
121
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities................................... $ (2,067) $ 141,655 $(258,380)
--------- --------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits..... (31,390) -- --
Proceeds from bulk sale of servicing rights. -- 31,799 12,815
Purchase of servicing rights................ -- -- (8,128)
Proceeds from sale of other real estate
owned...................................... 4,637 2,953 --
Net change in securities available for sale. (42,938) -- --
Investment in Imperial Credit Asset
Resolution Inc............................. (74,810) -- --
Proceeds from sale of SPFC stock............ 13,707 64,625 --
Proceeds from sale of FMC stock............. 59,731 -- --
Proceeds from sale of IMH stock............. 9,679 -- --
Net change in loans held for investment..... (56,088) (5,310) 51,784
Net change in investment in subsidiaries.... (11,803) (155,759) (15,581)
Cash utilized for acquisitions.............. (750) -- --
(Purchase) disposal of premises and
equipment.................................. (992) 809 (182)
--------- --------- ---------
Net cash (used in) provided by investing
activities................................... (131,017) (60,883) 40,708
--------- --------- ---------
Cash flows from financing activities:
Net change in borrowings from Imperial Bank. -- (5,000) 5,000
Proceeds from offering of Senior Notes due
2007....................................... 194,500 -- --
Proceed from offering of Remarketed Par
Securities................................. 68,075 -- --
Repayments of Senior Notes due 2004......... (73,241) -- --
Borrowings from Imperial Credit Investment
Corporation................................ 10,000 -- --
Proceeds from resale of Senior Notes due
2004....................................... -- 7,615 --
Proceeds from issuance of common stock...... -- 59,228 --
Proceeds from exercise of stock options..... 1,332 1,671 825
Net change in other borrowings.............. (15,363) (191,363) 206,725
Net change in minority interest............. (44,203) 43,697 1,453
--------- --------- ---------
Net cash provided by (used in) financing
activities................................... 141,100 (84,152) 214,003
--------- --------- ---------
Net change in cash............................ 8,016 (3,380) (3,669)
Cash at beginning of year..................... 5,213 8,593 12,262
--------- --------- ---------
Cash at end of year........................... $ 13,229 $ 5,213 $ 8,593
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information supplements the condensed statements of cash flows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest........................................... $19,349 $ 16,315 $20,898
Significant non-cash activities:
Loans transferred to OREO.......................... $ 6,751 $ 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
Change in unrealized gain on securities available
for sale, net..................................... (3,084) 1,799 3,211
Contribution of fixed assets to ICIFC.............. -- -- 525
</TABLE>
122
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................... 124
Consolidated Balance Sheets................................................ 125
Consolidated Statements of Earnings........................................ 126
Consolidated Statements of Changes in Shareholders' Equity................. 127
Consolidated Statements of Cash Flows...................................... 128
Notes to Consolidated Financial Statements................................. 129
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
123
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Southern Pacific Funding Corporation:
We have audited the accompanying consolidated balance sheets of Southern
Pacific Funding Corporation and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Southern Pacific Funding Corporation and subsidiaries as of December 31,
1996 and 1997, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1997
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Portland, Oregon
January 29, 1998
124
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
------------ ------------
ASSETS
------
<S> <C> <C>
Cash................................................ $ 14,175,566 $ 7,886,412
Loans held for sale................................. 223,059,102 264,384,993
Interest-only and residual certificates............. 87,016,900 277,156,343
Accrued interest receivable......................... 3,181,449 4,568,977
Premises and equipment, net......................... 3,036,388 7,660,691
Goodwill, net of accumulated amortization of $0 and
$448,375 at December 31, 1996 and 1997,
respectively....................................... 4,742,571 6,615,080
Other assets........................................ 5,165,048 21,072,897
------------ ------------
Total assets.................................... $340,377,024 $589,345,393
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Borrowings under warehouse lines of credit........ $152,680,395 $205,031,055
Notes Payable..................................... -- 3,431,972
Deferred tax liability............................ 18,445,495 48,074,988
Long term debt.................................... 75,000,000 175,000,000
Other liabilities................................. 9,164,901 18,652,471
------------ ------------
Total liabilities............................... 255,290,791 450,190,486
Shareholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued or outstanding at
December 31, 1996 and 1997....................... -- --
Common stock, no par value, 75,000,000 shares
authorized; 20,737,500 and 20,760,450 shares
issued and outstanding at December 31, 1996 and
1997, respectively............................... 53,798,099 54,100,622
Contributed capital............................... 247,500 247,500
Translation adjustment............................ -- (8,745)
Retained earnings................................. 31,040,634 84,815,530
------------ ------------
Total shareholders' equity...................... 85,086,233 139,154,907
------------ ------------
Total liabilities and shareholders' equity...... $340,377,024 $589,345,393
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
125
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Gains on sales of loans................ $16,328,621 $55,360,515 $148,403,866
Interest income........................ 4,304,760 13,848,976 39,306,759
Securities valuation and other income.. 1,666,682 4,265,285 1,634,175
----------- ----------- ------------
Total revenues....................... 22,300,063 73,474,776 189,344,800
=========== =========== ============
Expenses:
Interest............................... 3,413,652 7,799,986 27,613,103
Personnel and commission expense....... 4,190,566 10,996,713 45,027,704
General and administrative expense..... 2,153,220 6,599,474 24,685,987
----------- ----------- ------------
Total expenses....................... 9,757,438 25,396,173 97,326,794
=========== =========== ============
Earnings before taxes.................... 12,542,625 48,078,603 92,018,006
Income taxes............................. 5,205,190 20,446,614 38,243,110
----------- ----------- ------------
Net earnings......................... $ 7,337,435 $27,631,989 $ 53,774,896
=========== =========== ============
Net earnings per share:
Basic.................................. $ .47 $ 1.49 $ 2.59
Diluted................................ $ .47 $ 1.37 $ 2.23
Weighted average number of shares
outstanding:
Basic.................................. 15,562,500 18,552,500 20,747,665
Diluted................................ 15,562,500 20,511,936 25,358,202
</TABLE>
See accompanying notes to consolidated financial statements.
126
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- CONTRIBUTED TRANSLATION RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS EQUITY
---------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 15,562,500 $ -- $789,591 $ -- $ 4,761,693 $ 5,551,284
Net earnings, 1995...... -- -- -- -- 7,337,435 7,337,435
---------- ----------- -------- ------- ----------- ------------
Balance, December 31,
1995................... 15,562,500 -- 789,591 -- 12,099,128 12,888,719
Effect of contribution
transaction............ -- -- (542,091) -- (8,690,483) (9,232,574)
Proceeds from initial
public offering of
5,175,000 shares of
common stock, net of
offering expenses of
$4,810,911 5,175,000 53,798,099 -- -- -- 53,798,099
Net earnings, 1996...... -- -- -- -- 27,631,989 27,631,989
---------- ----------- -------- ------- ----------- ------------
Balance, December 31,
1996................... 20,737,500 53,798,099 247,500 -- 31,040,634 85,086,233
Exercise of stock
options for 22,950
shares of common stock 22,950 302,523 -- -- -- 302,523
Translation adjustment.. -- -- -- (8,745) -- (8,745)
Net earnings, 1997...... -- -- -- -- 53,774,896 53,774,896
---------- ----------- -------- ------- ----------- ------------
Balance, December 31,
1997................... 20,760,450 $54,100,622 $247,500 $(8,745) $84,815,530 $139,154,907
========== =========== ======== ======= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
127
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net earnings..................... $ 7,337,435 $ 27,631,989 $ 53,774,896
Adjustments to reconcile net
income to net cash used in
operating activities:
Depreciation and amortization.. 51,488 615,258 2,714,870
Amortization of discount on
note payable.................. -- -- 163,972
Translation adjustment......... -- -- (8,745)
Securities valuation .......... -- (4,265,285) 427,799
Deferred tax expense........... -- 20,446,614 29,629,493
Changes in certain assets and
liabilities, net of effect of
acquisitions and contribution
transaction:
Mortgage loans held for sale... (63,536,648) (143,632,836) (41,325,891)
Net change in interest only and
residual certificates......... (18,235,099) (71,493,840) (186,767,242)
Loans held under repurchase
agreement..................... (12,800,565) 12,800,565 --
Accrued interest receivable.... (928,119) (2,204,075) (1,387,528)
Other assets................... (282,831) (1,387,556) (12,465,420)
Other liabilities.............. 3,186,942 3,787,856 9,487,570
------------ ------------- -------------
Net cash used in operating
activities.................. (85,207,397) (157,701,310) (145,756,226)
------------ ------------- -------------
Cash Flows Used in Investing
Activities:
Purchases of premises and
equipment....................... (436,853) (3,028,897) (5,649,989)
Purchase of interest-only and
residual certificates........... -- -- (3,800,000)
Payment for acquisitions......... -- (5,000,000) --
Payment for long-term investment
and loan commitment............. -- (525,000) --
------------ ------------- -------------
Net cash used in investment
activities:................. (436,853) (8,553,897) (9,449,989)
------------ ------------- -------------
Cash Flows from Financing
Activities:
Net change in:
Borrowings under warehouse
lines of credit............... 96,130,120 56,550,275 52,350,660
Borrowings from SPTL........... (12,940,537) 322,053 --
Due to affiliates.............. 1,585,150 (1,504,984) --
Bank overdraft................. 619,517 (619,517) --
Proceeds from long term debt... -- 72,162,436 96,263,878
Proceeds from issuance of
common stock.................. -- 53,798,099 302,523
Contribution transaction....... -- (277,589) --
------------ ------------- -------------
Net cash provided by (used
in) financing activities.... 85,394,250 180,430,773 148,917,061
------------ ------------- -------------
Net change in cash................. (250,000) 14,175,566 (6,289,154)
Cash at beginning of year.......... 250,000 -- 14,175,566
------------ ------------- -------------
Cash at end of year................ $ -- $ 14,175,566 $ 7,886,412
============ ============= =============
Supplementary information:
Interest paid.................... $ 2,129,369 $ 6,330,097 $ 25,540,511
Taxes paid....................... $ -- $ 1,213,252 $ 9,105,917
</TABLE>
See accompanying notes to consolidated financial statements.
128
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
1. ORGANIZATION
Southern Pacific Funding Corporation ("SPFC" or the "Company") is the
successor to the Residential Lending Division of Southern Pacific Thrift and
Loan ("SPTL"). The Company originates and acquires non-conforming single-
family residential loans, including loans secured by second mortgages. In
October 1994, Imperial Credit Industries, Inc. ("ICII") incorporated the
Company as part of a strategic decision to form a separate subsidiary through
which to operate SPTL's Residential Lending Division. In April 1995, ICII
caused SPTL to contribute (the "Contribution Transaction") to SPFC certain
customer lists of SPTL's Residential Lending Division to the ongoing
operations of such division. In addition, in April 1995 all employees of
SPTL's Residential Lending Division became employees of SPFC. The Company
completed an initial public offering of its Common Stock in June 1996. At
December 31, 1997, upon completion of three secondary offerings, ICII owned
approximately 46.9% of the Company's outstanding Common Stock.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of SPFC and its
majority and wholly owned subsidiaries. These subsidiaries include National
Capital Funding, Inc., Oceanmark Financial Corporation, Home America Financial
Services, Inc. and Hallmark America Corp. which are located throughout the
United States and Southern Pacific Mortgage Limited which is the Company's
United Kingdom operation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of aggregate cost or
market. These loans are pledged against the Company's lines of credit. The
cost of mortgage loans held for sale is the cost of the mortgage loans reduced
or increased by the net deferred fees or costs associated with originating or
acquiring the loan and increased by costs that are recognized upon sale. On an
ongoing basis, management of the Company monitors the loan portfolio and
considers such factors as historical loan loss experience, underlying
collateral values, known problem loans, assessment of economic conditions,
including changes in interest rates, and other appropriate data to identify
risks in the loan portfolio.
Interest-only and Residual Certificates
Assets reflected in the accompanying consolidated balance sheets as
interest-only and residual certificates in real estate mortgage investment
conduits (REMICs) are recorded as a result of the Company's securitization of
loans through various trust vehicles. The Company considers its obligations
under recourse provisions in connection with its securitizations in valuing
its interest-only and residual certificates. The Company estimates future cash
flows from these interest-only and residual certificates and values them
utilizing assumptions that it believes are consistent with those that would be
utilized by an unaffiliated third party purchaser and records them as trading
securities at fair value. Unrealized gains and losses are included in gains on
sales of loans in the accompanying financial statements. The initial and
subsequent changes in the unrealized gains and losses are included in
securities valuation and other income. To the Company's knowledge, there is no
active market for the sale of these interest-only and residual certificates.
The fair value of interest-only and residual certificates is determined by
computing the present value of the excess of the weighted average coupon on
the loans sold over the sum of: (1) the coupon on the senior interests, (2) a
base servicing fee paid to the loan servicer, (3) expected losses to be
incurred on the portfolio of loans sold
129
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over the lives of the loans, and (4) fees payable to the trustee and monoline
insurer. Prepayment assumptions used in the present value computation are
based on recent evaluations of the actual prepayments of the Company's
servicing portfolio or on market prepayment rates on new portfolios, taking
into consideration the current interest rate environment and its expected
impact on prepayment rates. The cash flows expected to be received by the
Company are discounted at an interest rate that the Company believes an
unaffiliated third-party purchaser would require as a rate of return on such a
financial instrument. To the extent that actual future excess cash flows are
different from estimated excess cash flows, the fair value of the Company's
interest-only and residual certificates will be adjusted monthly with
corresponding adjustments made to earnings in that period.
In certain of its securitizations, the Company provided an initial
overcollateralization on the securities sold and in all its securitizations
the Company builds overcollateralization as cash flows projected as described
above are used by the trustee to reduce the outstanding balance of the
securities sold by the Company.
The Company currently uses a 12% discount rate to calculate present value of
anticipated "out of the trust" cash flows that it anticipates receiving from
the securitization trust after overcollateralization requirements have been
achieved. Prepayment assumptions are applied to each discrete security and
further to each product (i.e. ARM's, Fixed and 2/28's) within each security.
The estimated CPR varies over time based upon the relative maturity of the
loans included in each pool. The estimated annual CPR is 4% at inception and
increases in equal monthly increments until the peak estimated CPR is
achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for
ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally
maintained through month 36. Thereafter, peak CPR's are reduced in two twelve
month steps at which time terminal CPR's are reached. Terminal CPR's are
estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The
Company also periodically provides for additional credit losses which may be
incurred on loans which the Company voluntarily purchases from the trusts.
Gains on Sales of Loans
Gains on sales of loans are determined by deducting from the gross proceeds
of the sales or securitizations the allocated basis in the loans sold or
securitized and related transaction costs. The initial fair value of interest-
only and residual certificates is included as proceeds in calculating gains on
sales of loans.
Interest Income
Interest income includes interest earned on mortgage loans held for sale.
Interest expense includes interest paid on the Company's outstanding warehouse
lines of credit, the Company's convertible subordinated debentures and the
Company's senior notes.
Securities Valuation and Other Income
Securities valuation and other income includes the change in unrealized
gains and losses on interest-only and residual certificates.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation is recorded using the straight-line method over the
estimated useful lives of individual assets (three to five years). Leasehold
improvements are amortized over the terms of the related leases or the
estimated useful lives of improvements, whichever is shorter.
130
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Dividends
The Company intends to retain all of its future earnings to finance its
operations. The subsidiaries of the Company are restricted from paying
dividends to the Company or any of its subsidiaries due to covenants in the
Company's senior note agreement.
Goodwill
Goodwill, which represents the excess of purchases price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 15 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
(See Note 14).
Long-Term Investments
Long-term investments, included in other assets, are carried at cost and
consist of preferred stock in Hallmark Government, Inc. of $360,000 at
December 31, 1997.
Deferred Income Taxes
The accompanying financial statements reflect income taxes for SPFC as if it
had been a separate entity for all years presented. SPFC accounts for income
taxes under the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under the asset and liability method, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Net Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS No.
128 establishes standards for computing and presenting earnings per share
(EPS). It simplifies the standards in APB Opinion No. 15, Earnings per Share,
for computing EPS by replacing primary earnings per share with basic earnings
per share and by alterning the calculation of diluted EPS, which replaces
fully diluted EPS. SFAS No. 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. All
prior period EPS figures have been restated to conform to the provisions of
the Statement.
131
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net income available to common
shareholders......................... $ 7,337,435 15,562,500 $0.47
Effect of dilutive securities:
Stock options....................... -- --
Convertible subordinated notes...... -- --
----------- ---------- -----
Diluted EPS........................... $ 7,337,435 15,562,500 $0.47
=========== ========== =====
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net Income available to common
shareholders......................... $27,631,989 18,552,500 $1.49
Effect of dilutive securities:
Stock options....................... 481,422
Convertible subordinated notes...... 510,078 1,478,014
----------- ---------- -----
Diluted EPS........................... $28,142,067 20,511,936 $1.37
=========== ========== =====
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
WEIGHTED PER SHARE
INCOME AVERAGE SHARES AMOUNT
----------- -------------- ---------
<S> <C> <C> <C>
Basic EPS
Net Income available to common
shareholders......................... $53,774,896 20,747,665 $2.59
Effect of dilutive securities:
Stock options....................... 1,459,277
Convertible subordinated notes...... 2,864,198 3,151,260
----------- ---------- -----
Diluted EPS........................... $56,639,094 25,358,202 $2.23
=========== ========== =====
</TABLE>
Foreign Currency Translation
All assets and liabilities of the U.K. subsidiaries are translated into U.S.
dollars at the rate in effect as of the date of the financial statements.
Income and expense items are translated at the weighted average exchange rate
for the period. The resulting translation adjustments are recorded as a
component of shareholder's equity.
5. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following at December 31, 1996 and
1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Premises and equipment.. $3,634,193 $ 9,938,813
Less accumulated
depreciation and
amortization........... (597,805) (2,278,122)
---------- -----------
$3,036,388 $ 7,660,691
========== ===========
</TABLE>
132
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The table below summarizes the information about the fair value of the
financial instruments recorded on the Company's financial statements at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------- -------------------------
CARRY VALUE FAIR VALUE CARRY VALUE FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash....................... $ 14,175,566 $ 14,175,566 $ 7,886,412 $ 7,886,412
Loans held for sale........ 223,059,102 231,981,466 264,384,993 274,960,393
Interest-only and residual
certificates.............. 87,016,900 87,016,900 277,156,343 277,156,343
Notes Payable.............. -- -- 3,431,972 3,431,972
Long Term Debt............. 75,000,000 75,000,000 175,000,000 175,000,000
Borrowings under warehouse
lines of credit........... 152,680,395 152,680,395 205,031,055 205,031,055
</TABLE>
Because no market exists for certain of the Company's assets and
liabilities, fair value estimates are based on judgments regarding credit
risk, investor expectations of future economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, including the off balance sheet instruments
disclosed in Note 15, are as follows:
Loans held for sale. The Company has estimated the fair values reported
based on recent sales and securitizations.
Interest-only and residual certificates. Fair value determined using
estimated discounted future cash flows taking into consideration anticipated
prepayment rates, loss experience and prepayment penalties.
The Company currently uses a 12% discount rate to calculate present value of
anticipated "out of the trust" cash flows that it anticipates receiving from
the securitization trust after overcollateralization requirements have been
achieved. Prepayment assumptions are applied to each discrete security and
further to each product (i.e. ARM's, Fixed and 2/28's) within each security.
The estimated CPR varies over time based upon the relative maturity of the
loans included in each pool. The estimated annual CPR is 4% at inception and
increases in equal monthly increments until the peak estimated CPR is
achieved, generally within 12-23 months. Peak CPR's, range from 30% to 50% for
ARM's, 40% for 2/28's and 23% for fixed rate loans. These peaks are generally
maintained through month 36. Thereafter, peak CPR's are reduced in two twelve
month steps at which time terminal CPR's are reached. Terminal CPR's are
estimated at 20% for ARM's and 2/28's and 15% for fixed rate loans. The
Company also periodically provides for additional credit losses which may be
incurred on loans which the Company voluntarily purchases from the trusts.
Borrowings under warehouse lines of credit. The carrying value reported
approximates fair value due to the short-term nature of the borrowings and the
variable interest rates charged on the borrowings.
Commitments to originate loans and loans in process. Many loan commitments
are expected to, and typically do, expire without being drawn upon. As the
rates and terms of the commitments to lend and loans in process are
competitive with others in which the Company operates, the values disclosed in
Note 15 are determined to be a reasonable estimate of fair value.
Notes Payable. The carrying value reported approximates fair value due to
the nature of the borrowings.
133
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long Term Debt. The carrying value reported approximates fair value based on
the current debt rates.
Hedging Transactions. The Company regularly securitizes and sells fixed and
variable-rate mortgage loans. To offset the effects of interest rate
fluctuations on the value of its fixed-rate loans held for sale, the Company
in certain cases will hedge its interest rate risk related to loans held for
sale by selling U.S. Treasury securities short or in the forward market.
As of December 31, 1996 and 1997, the Company had open hedge positions of
$32.6 million and $65.6 million respectively, related to the sales of United
States Treasury securities in the forward market. The proceeds from the short
sale are shown net of the related liability in the accompanying balance sheet
at December 31, 1996 and 1997.
8. RELATED PARTY TRANSACTIONS
Intracompany Cost Allocations
During 1995 and 1996, the Company accrued allocated expenses for ICII that
are included as part of personnel and commission expense and general and
administrative expenses of $256,000 and $292,000, respectively. No
administrative services are being provided by ICII or SPTL, effective January
1, 1997.
Borrowings from Affiliates
The average borrowings from affiliates and interest rates used to determine
the weighted average interest on borrowings for the years ended December 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Average borrowings.................. $34,777,138 $3,890,267 $1,250,000
Interest rate....................... 3.69% 6.25% 12.00%
Interest on borrowings.............. $ 1,284,282 $ 230,236 $ 125,000
</TABLE>
SPTL
In March 1996, the Company entered into a $10 million revolving credit and
term loan agreement with SPTL (the "SPTL Agreement") which was scheduled to
expire on September 30, 1996. Advances under the SPTL Agreement were
collateralized by the Company's interest-only and residual certificates (other
than such interests retained by SPTL pursuant to the Contribution Transaction)
and bore interest at 2% above LIBOR. In April, 1996 the Company repaid all
borrowings outstanding under the SPTL Agreement and it was canceled.
ICII
On July 17, 1997, the Company borrowed $15 million from ICII due on October
17, 1997 and bore interest at a rate of 12%. The $15 million was repaid on
August 11, 1997 along with $125,000 in interest.
Loan Servicing
From the point of commencement of operations until March 1994, SPTL served
as the loan servicer for the Company and the Company was allocated its pro
rata portion of SPTL's loan servicing expenses. In March 1994, SOUTHERN
PACIFIC FUNDING CORPORATION
134
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ICII assumed the role of loan servicer for a servicing fee of approximately
$7.50 per loan per month, so that the Company could complete its first
securitization. In September 1995, the Company began to utilize the services
of Advanta, an independent loan servicer, as the master servicer. Fees charged
by Advanta are $25 per loan and 37.5 basis points per annum on the declining
principal balance of each loan serviced, paid monthly, respectively, which
fees are higher than those previously paid to ICII due to the additional
collection activities performed by Advanta.
Consulting Agreements
In June 1996, the Company entered into a five-year consulting agreement with
The Dewey Consulting Group, owned by one of the Company's directors, John D.
Dewey. Under the agreement, Mr. Dewey has agreed to assist the Company in the
development of strategic alliances with selected mortgage lenders, including
the identification of potential strategic alliance participants. The Company
has agreed to compensate Mr. Dewey based upon actual strategic alliances
entered into and loan production and earnings resulting from those alliances
which amounts to .015% of the Company's share of warrants, interest-only cash
received, and interest-only strips. No amounts were paid in 1996 or owing at
December 31, 1996, $254,122 was paid in 1997 and $335,619 was owing at
December 31, 1997.
Other
The Company has outstanding receivables from Hallmark Government, Inc. of
$7,153,800, collateralized by first mortgage loans.
9. LONG TERM OBLIGATIONS
Long Term Debt at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- ------------
<S> <C> <C>
Senior Notes, interest at 11.5%, due semi-
annually, principal due November 1, 2004......... $ -- $100,000,000
Convertible subordinated debentures, interest at
6.75%, due
semi-annually, principal due October 15, 2006.... 75,000,000 75,000,000
</TABLE>
Interest on the senior notes is payable semi-annually. Debt issuance costs
of $3,647,368 at December 31, 1997 are included in other assets. These costs
have been deferred and are being amortized over seven years using the interest
method.
The Convertible subordinated debentures are convertible into 3,151,125
shares of common stock, for a conversion price of $23.80 per share, at any
time prior to maturity. Interest on the debentures is payable semi-annually.
Debt issuance costs of $2,794,220 and $2,521,360 at December 31, 1996 and
1997, respectively, are included in other assets. These costs have been
deferred and are being amortized over ten years using the interest method.
Notes Payable at December 31, 1997 represents a payable to Oceanmark Bank
for the purchase of Mortgage Division Assets and has a face amount of
$3,800,000. The note bears no interest and has a 36 month term. Principal is
payable in three equal installments of $1,266,667 at 12 months, 24 months and
36 months. The note was initially recorded at its present value of $3,268,000,
discounted at 7%. The discount will be amortized over the term of the note
using the interest method.
135
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
For the 1996 period through the effective date of the IPO in June 1996, SPFC
is included in a consolidated tax return filing with ICII. For the 1996 period
subsequent to the IPO and 1997, SPFC will file a separate tax return on a
stand-alone basis.
SPFC's income taxes were as follows for the years ended December 31, 1996
and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................... $2,731,115 $ 3,680,000 $ 7,341,259
State................................. 602,452 772,000 1,272,358
---------- ----------- -----------
Total current....................... 3,333,567 4,452,000 8,613,617
Deferred:
Federal............................... 1,533,378 11,461,414 24,977,663
State................................. 338,245 4,533,200 4,651,830
---------- ----------- -----------
Total deferred...................... 1,871,623 15,994,614 29,629,493
---------- ----------- -----------
Total income taxes...................... $5,205,190 $20,446,614 $38,243,110
========== =========== ===========
</TABLE>
The following table shows the tax effects of temporary differences which
give rise to the primary components of SPFC's net deferred tax liability at
December 31, 1996 and 1997.
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Interest-only and residual certificates....... $18,445,495 $48,074,988
=========== ===========
</TABLE>
A reconciliation of the income tax provision and the amount computed by
applying the statutory Federal corporate income tax rate to income before
income taxes are as follows for the years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate................ 35.0% 35.0% 35.0%
Increases in rate resulting from state income taxes,
net of Federal benefit............................... 6.5 7.5 6.5
---- ---- ----
Effective income tax rate............................. 41.5% 42.5% 41.5%
==== ==== ====
</TABLE>
At the effective date of the IPO, the Company entered into a tax agreement
with ICII whereby, among other things, ICII will indemnify and hold the
Company harmless from any tax liability attributable to periods ending on or
before the effective date of the IPO in excess of such taxes as the Company
has already paid or recognized.
136
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
Prior to October 1, 1997, employees of SPFC were eligible to participate in
the ICII 401(k) plan. The ICII 401(k) plan matched a portion of the employee
pretax contribution. Effective October 1, 1997 employees of SPFC are eligible
to participate in the SPFC 401(k) plan which came into effect at that time.
Employees may elect to enroll in the plan on the first day of any month,
provided that they have been employed by SPFC for at least six months.
Employees may contribute up to 15% of their compensation to the SPFC 401(k)
Plan and SPFC will match 50% of the first 6% of employee pretax contributions.
SPFC matching contributions are made as of December 31st each year. SPFC
recorded 401(k) matching expense of approximately $26,000, $111,000 and
$433,148 for the years ended December 31, 1995, 1996, and 1997, respectively.
12. STOCK OPTIONS
Effective November 1, 1995, the Company reserved and granted options for
1,942,200 shares of Company common stock pursuant to the 1995 Senior
Management Stock Option Plan (the "Senior Management Plan"). All of the
options granted under the Senior Management Plan have been issued to senior
management personnel at an exercise price of $7.00 per share, the fair value
on the date of grant. The options vest ratably over a five-year period
commencing one year after the date of grant.
Also effective November 1, 1995, the Company adopted the 1995 Stock Option,
Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which
provides for the grant of qualified incentive stock options, incentive stock
options, and awards consisting of deferred stock, restricted stock, stock
appreciation rights and limited stock appreciation rights. The Stock Option
Plan authorizes the grant of options to purchase, and awards of, an aggregate
of 1,942,200 shares of Company common stock. If an option granted under the
Stock Option Plan expires or terminates, or an award is forfeited, the shares
subject to any unexercised portion of such option or award will again become
available for the issuance of further options or awards under the Stock Option
Plan.
All share data related to shares issued and outstanding have been restated
to give retroactive recognition to a 4,150 for one stock split effective April
1, 1996 and a three for two stock split effective January 23, 1997.
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based
on the fair value at the grant date for its stock options under SFAS No. 123,
the Company's net earnings would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Net Earnings:
As reported............................... $7,337,435 $27,631,989 $53,774,896
Pro forma................................. 7,105,518 26,266,703 50,612,358
Net Earnings Per Share:
As reported: Basic........................ $0.47 $1.49 $2.59
Diluted.............................. $0.46 $1.37 $2.23
Pro forma: Basic.......................... $0.47 $1.42 $2.44
Diluted............................... $0.46 $1.31 $2.11
</TABLE>
137
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock option activity during the period indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1994..................... -- --
Granted........................................ 1,942,200 $7.00
Exercised...................................... -- --
Forfeited...................................... -- --
Expired........................................ -- --
--------- -----
Balance at December 31, 1995..................... 1,942,200 7.00
Granted........................................ 1,078,500 12.57
Exercised...................................... -- --
Forfeited...................................... (113,250) 11.90
Expired........................................ -- --
--------- -----
Balance at December 31, 1996..................... 2,907,450 8.85
Granted........................................ 868,750 11.15
Exercised...................................... (22,950) 11.39
Forfeited...................................... (276,300) 13.07
Expired........................................ -- --
--------- -----
Balance at December 31, 1997..................... 3,476,950 $9.09
</TABLE>
At December 31, 1997, there were 384,500 additional shares available for
grant under the Stock Option Plan. The per share weighted-average fair value
of stock options granted during 1995, 1996 and 1997 was $15.74, $13.34 and
$11.17, respectively, on the date of grant using the Black Scholes option
pricing model with the following weighted-average assumptions: expected
dividend yield 0.00%, risk free interest rate of 5.42%, an expected life of 6
years and an annualized volatility rate of 66.57%.
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $7.00-15.00 and 8.20
years and $15.01-$20.00 and 8.80 years, respectively.
At December 31, 1996 and 1997 there were 388,440, and 1,129,830 options,
respectively exercisable.
13. SHORT TERM BORROWINGS
Lines of Credit
The Company has obtained five lines of credit from investment banks, for the
purpose of funding one-to-four family residential first and second mortgage
loans, which is subject to certain operating and financial covenants and
collateral requirements. Total borrowings under the warehouse lines are
limited to $988.2 million and the lines are scheduled to expire between April
15, 1998 and December 14, 1998.
As of December 31, 1996 and 1997, $152,680,395 and $205,031,055,
respectively, were outstanding on the lines of credit, on which interest was
charged based on the type of loan funded. Interest expense incurred for the
years ended December 31, 1995, 1996 and 1997 amounted to approximately
$131,000, $6,409,061 and $19,544,258, respectively with weighted average
interest rates ranging from 5.7% to 8.3% for 1997.
Residual Facility
In May, 1997 the Company entered into a residual financing facility of $30
million that allowed the Company to obtain debt secured by interest-only and
residual certificates. The Company drew upon $29.4 million of this facility
and repaid the full amount on November 4, 1997.
138
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. ACQUISITIONS
In 1996, the Company purchased 95% of the common stock of a diversified
financial services company for $5,000,000 in cash. The amount in excess of the
fair value of net assets acquired is $4,742,571. The Company acquired net
assets of $5,000,000 consisting primarily of goodwill of $4,742,571. The
results of operations of the acquired company have been included in the
consolidated financial statements since the date of acquisition.
In May 1997, the Company purchased certain assets of a diversified financial
services company in exchange for a $3,800,000 note payable (see Note 9). The
amount in excess of the fair value of the net assets acquired was $2,320,884
which has been recorded as goodwill in the accompanying financial statements.
In addition, the Company acquired interest-only and residual certificates for
cash of $3.8 million.
In December 1997, the Company purchased the loan servicing operation of NAMC
for $400,000. The Company acquired NAMC's servicing operations assets and
retained its loan servicing employees.
15. LOAN SERVICING
Through December 1997 the company contracted for the servicing of
substantially all loans it originated, purchased and held for sale with
Advanta. This arrangement allowed the Company to increase the volume of loans
it originated and purchased without incurring the overhead investment in
servicing operations. As with any external service provider, the Company is
subject to risks associated with inadequate or untimely services. The Company
regularly reviews the delinquency of its servicing portfolio. Many of the
Company's borrowers require notices and reminders to keep their loans current
and to prevent delinquencies and foreclosures. A substantial increase in the
Company's delinquency rate or foreclosure rate could adversely affect its
ability to profitably access the capital markets for its financing needs,
including future securitizations.
As of December 31, 1997 the Company's servicing portfolio (inclusive of
securitized loans where the Company has ongoing risk of loss) was
approximately $2.5 million. Through that date substantially all of the
Company's loan servicing had either been outsourced or subcontracted to
Advanta.
The Company's acquisition in December 1997 of NAMC's loan servicing
operations allowed the Company in mid-January 1998 to begin its own loan
servicing operation for all new loans originated and purchased. In the second
quarter of 1998, the Company plans to transfer to its internal servicing
department the servicing of the loans included in the Company's December 1997
securitization and of remaining loans originated and purchased in December
1997 and January 1998.
16. COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off Balance Sheet Risk
The Company is a party to financial instruments with off balance sheet risk
in the normal course of business. These financial instruments include
agreements to fund fixed and variable-rate mortgage loans and loans in
process. For agreements to fund fixed-rate loans, the contract amounts
represent exposure to loss from market fluctuations as well as credit loss.
The Company controls the credit risk of its agreements to fund fixed and
variable-rate loans through credit approvals, limits and monitoring
procedures.
Agreements to fund mortgage loans are agreements to lend to customers as
long as there is no violation of any condition established in the contracts.
Such agreements generally have fixed expiration dates or other termination
clauses. Since some agreements may expire without being drawn upon, the total
agreement amounts do not necessarily represent future cash requirements. As of
December 31, 1997, the Company had agreements to fund loans of approximately
$43.0 million.
139
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales of Loans and Servicing Rights
In the ordinary course of business, SPFC is exposed to liability from
representations and warranties made to purchasers and insurers of mortgage
loans and the purchasers of servicing rights. Under certain circumstances,
SPFC is required to repurchase mortgage loans if there has been a breach of a
representation or warranty. For loans which have been securitized, the Company
includes an estimate of credit loss, using a risk free rate, in determining
its discounted recourse liability. On a periodic basis, the Company reviews
its assumptions in light of historical experience and economic trends to
evaluate their reasonableness in measuring the fair value of recorded assets.
The Company's servicing agreement with Advanta provides that if the Company
desires to terminate the agreement without cause upon 90 days' written notice,
the Company will be required to pay Advanta an amount equal to 1.0% of the
aggregate principal balance of the mortgage loans being serviced by Advanta at
that time. The agreement also provides that a transfer service fee of $100 per
loan shall be paid to Advanta for any mortgage loan for which the Company
transfers servicing from Advanta to another servicer, without terminating the
agreement.
Litigation
The Company, its subsidiary Oceanmark Financial Corporation, and members of
its board directors are defendants in a lawsuit in US District Court for the
southern District of Florida. Oceanmark Bank, F.S.B. is the plaintiff. The
Company was served on March 9, 1998. The complaint relates to the Company's
acquisition of mortgages and notes of Oceanmark Bank beginning in 1995 and
ending with the Company's acquisition of the mortgage operations of Oceanmark
Bank and certain residual assets in May 1997 and events subsequent to the May
1997 acquisition. The complaint alleges, among other things, that employees of
Oceanmark Bank conspired with the Company to lower the purchase price of the
assets sold to the Company by Oceanmark Bank. The plaintiff seeks relief under
theories of racketeering, securities fraud, breach of contract, breach of
fiduciary duty, conspiracy, and negligence and requests compensatory and
punitive damages totaling $75 million.
The Company's management believes that the Oceanmark claims are without
merit and intends to defend the Company's position vigorously. Management
believes that the resolution of this matter will not have a material adverse
effect on the Company's financial condition, results of operations or
liquidity.
SPFC occasionally becomes involved in litigation arising in the normal
course of business. Management believes that any liability with respect to
such legal actions, individually or in the aggregate, will not have a material
adverse effect on the Company's financial position or results of operations.
Operating Leases
The Company leases premises and equipment under operating leases with
various expiration dates. Minimum annual rental payments at December 31, 1997
were as follows:
<TABLE>
<S> <C>
1998......................................................... $ 4,190,910
1999......................................................... 3,917,316
2000......................................................... 3,092,437
2001......................................................... 2,666,172
2002......................................................... 2,057,852
-----------
Total...................................................... $15,924,687
===========
</TABLE>
140
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense amounted to $309,607, $484,416 and $2,394,621 for the years
ended December 31, 1995, 1996 and 1997, respectively.
17. CONSOLIDATING CONDENSED FINANCIAL INFORMATION
Following is consolidating condensed financial information of SPFC, the
Subsidiary Guarantors of the 11 1/2% Senior Notes due 2004 issued in November
1997 and the Subsidiary which is not a Subsidiary Guarantor:
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
---------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL
------------ ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $ 408,286 $ 2,047,362 $ 5,430,764 $ 7,886,412 $ -- $ 7,886,412
Loans held for sale..... 133,110,124 61,330,849 67,991,237 262,432,210 1,952,783 264,384,993
Interest-only and
residual certificates.. 277,156,343 -- -- 277,156,343 -- 277,156,343
Investment in
subsidiaries........... 11,220,645 -- -- 11,220,645 (11,220,645) --
Other assets............ 104,244,775 53,563,593 1,507,189 159,315,557 (119,397,912) 39,917,645
------------ ------------ ----------- ------------ ------------- ------------
Total assets......... $526,140,173 $116,941,804 $74,929,190 $718,011,167 $(128,665,774) $589,345,393
============ ============ =========== ============ ============= ============
Borrowings of credit
under warehouse line... $143,789,768 $ -- $61,241,287 $205,031,055 $ -- $205,031,055
Deferred tax liability.. 44,111,149 4,213,931 (211,030) 48,114,050 (39,062) 48,074,988
Convertible subordinated
notes.................. 175,000,000 -- -- 175,000,000 -- 175,000,000
Other liabilities....... 29,454,384 95,414,744 14,111,962 138,981,090 (116,896,647) 22,084,443
------------ ------------ ----------- ------------ ------------- ------------
Total liabilities.... 392,355,301 99,628,675 75,142,219 567,126,195 (116,935,709) 450,190,486
============ ============ =========== ============ ============= ============
Shareholders' equity:
Common stock........... 54,100,644 25,343 -- 54,125,987 (25,365) 54,100,622
Contributed capital.... 247,500 11,649,637 -- 11,897,137 (11,649,637) 247,500
Translation
adjustment............ -- -- (8,745) (8,745) -- (8,745)
Retained earnings...... 79,436,728 5,638,149 (204,284) 84,870,593 (55,063) 84,815,530
------------ ------------ ----------- ------------ ------------- ------------
Total shareholders'
equity.............. 133,784,872 17,313,129 (213,029) 150,884,972 (11,730,065) 139,154,907
------------ ------------ ----------- ------------ ------------- ------------
Total liabilities and
shareholders'
equity.............. $526,140,173 $116,941,804 $74,929,190 $718,011,167 $(128,665,774) $589,345,393
============ ============ =========== ============ ============= ============
</TABLE>
141
<PAGE>
SOUTHERN PACIFIC FUNDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONSOLIDATING STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL
------------ ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Gains on sales of
loans................. $118,230,144 $27,091,191 $3,082,531 $148,403,866 $ -- $148,403,866
Interest income........ 36,941,438 9,213,663 2,916,618 49,071,719 (9,764,960) 39,306,759
Securities valuation
and other income...... (2,766,667) 4,511,716 (110,874) 1,634,175 -- 1,634,175
------------ ----------- ---------- ------------ ----------- ------------
Total revenues........ 152,404,915 40,816,570 5,888,275 199,109,760 (9,764,960) 189,344,800
============ =========== ========== ============ =========== ============
Expenses:
Interest on other
borrowings............ 26,074,145 8,958,966 2,344,952 37,378,063 (9,764,960) 27,613,103
Personnel and
commission Expense.... 28,091,560 15,184,601 1,751,543 45,027,704 -- 45,027,704
General and
administrative
Expense............... 15,430,810 7,020,069 2,140,983 24,591,862 94,125 24,685,987
------------ ----------- ---------- ------------ ----------- ------------
Total expenses........ 69,596,515 31,163,636 6,237,478 106,997,629 (9,670,835) 97,326,794
============ =========== ========== ============ =========== ============
Earnings before taxes... 82,808,400 9,652,934 (349,203) 92,112,131 (94,125) 92,018,006
Income taxes............ 34,412,306 4,014,785 (144,919) 38,282,172 (39,062) 38,243,110
------------ ----------- ---------- ------------ ----------- ------------
Net earnings.......... $ 48,396,094 $ 5,638,149 $ (204,284) $ 53,829,959 $ (55,063) $ 53,774,896
============ =========== ========== ============ =========== ============
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
SPFC GUARANTORS SUBSIDIARY SUBTOTAL ELIMINATIONS TOTAL
------------ ----------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities............. $(95,039,704) $ 4,276,336 $(55,180,048) $(145,943,416) $ 187,190 $(145,756,226)
Net cash used in
investing activities... (3,096,096) (5,723,418) (630,475) (9,449,989) -- (9,449,989)
Cash flows from
financing activities:
Net changes in:
Borrowings under
warehouse lines of
credit............... (8,890,627) -- 61,241,287 52,350,660 -- 52,350,660
Proceeds from long
term debt............ 96,263,878 -- -- 96,263,878 -- 96,263,878
Other................. 302,523 187,190 -- 489,713 (187,190) 302,523
------------ ----------- ------------ ------------- --------- -------------
Net cash provided by
(used in) financing
activities............. 87,675,774 187,190 61,241,287 149,104,251 (187,190) 148,917,061
Net change in cash...... (10,460,026) (1,259,892) 5,430,764 (6,289,154) -- (6,289,154)
Cash at beginning of
period................. 14,175,566 -- -- 14,175,566 -- 14,175,566
------------ ----------- ------------ ------------- --------- -------------
Cash at end of year..... $ 3,715,540 $(1,259,892) $ 5,430,764 $ 7,886,412 $ -- $ 7,886,412
============ =========== ============ ============= ========= =============
</TABLE>
142
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
---- --- ---------------------
<C> <C> <S>
H. Wayne Snavely(1).............. 56 Chairman of the Board, President and
Chief Executive Officer
Executive Vice President and Chief
Kevin E. Villani(1).............. 49 Financial Officer
Irwin L. Gubman(1)............... 55 General Counsel and Secretary
Paul B. Lasiter.................. 31 Senior Vice President and Controller
Stephen J. Shugerman(1).......... 50 President of SPB and a Director
Joseph R. Tomkinson.............. 49 Director
Robert S. Muehlenbeck(2)......... 50 Director
G. Louis Graziadio, III(2)....... 47 Director
Perry A. Lerner(2)(3)............ 54 Director
James Clayburn LaForce, Jr.(2)(3) 68 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
H. WAYNE SNAVELY has been Chairman of the Board and Chief Executive Officer
of the Company since December 1991 and President since February 1996. Mr.
Snavely served as a director of Imperial Bank from 1975 to 1983 and from 1993
to January 1998. Mr. Snavely is Chairman of the Board of Southern Pacific
Funding Corporation, Impac Mortgage Holdings, Inc., Franchinse Mortgage
Acceptance Corporation and Imperial Credit Commercial Mortgage Investment
Corporation and a director of Imperial Financial Group.
KEVIN E. VILLANI has been the Executive Vice President and Chief Financial
Officer of the Company since September 1995. Mr. Villani is President of
ICCAMC and serves as a member of the Company's Board of Directors and is Vice-
Chairman of the Board of ICCMIC. Mr. Villani joined the University of Southern
California as the Wells Fargo Visiting Professor of Finance in 1990 and
remained on the full-time faculty through 1997. From 1985 to 1990, he was the
Executive Vice President and Chief Financial Officer for Imperial Corporation
of America. From 1982 to 1985, Mr. Villani served in various capacities at the
Federal Home Loan Mortgage Corporation, including Chief Economist and Chief
Financial Officer. 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 1990 through 1995, Mr.
Villani also served as a full-time consulting economist at the World Bank and
International Finance Corporation on housing, banking, finance and investment
issues in emerging markets. Mr. Villani has published over 100 books and
articles on financial markets and instruments.
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
143
<PAGE>
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.
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 SPB 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. Mr. Tomkinson is the Chairman and
Chief Executive Officer of Impac Commercial Holdings, Inc., a commercial REIT
and a Director of BNC Mortgage, Inc., a residential real estate lending
company
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 FMC and of Imperial Bancorp and
Imperial Trust Company, an indirect subsidiary of Imperial Bancorp. He serves
as Co-Chairman of IFG.
PERRY A. LERNER has been a Director of the Company since May 1992. He has
been a principal in his investment firm of Crown Capital Group, Inc., since
1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 to 1997,
having been a partner with the firm since 1984. Mr. Lerner was an Attorney-
Advisor of the International Tax Counsel of the United States Treasury
Department from 1973 to 1976. Mr. Lerner is a Director of FMC and IFG.
JAMES CLAYBURN LAFORCE, JR. has been a Director of the Company since May
1992. From July 1978 to July 1993, Mr. LaForce was the Dean of The Anderson
School, University of California at Los Angeles. In addition, Mr. LaForce was
appointed in January 1991 to the position of Acting Dean of the Hong Kong
University of Science and Technology, Hong Kong.
Directors of the Company hold office until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier resignation or removal. All officers are appointed by and serve
at the discretion of the Board of Directors, subject to employment agreements,
where applicable. There are no family relationships between any directors or
officers of the Company. George L. Graziadio, Jr., the President, Chief
Executive Officer and the Chairman of the Board of Directors of Imperial
Bancorp ("Bancorp"), is the father of G. Louis Graziadio, III. The Graziadio
family and related entities are significant shareholders of Bancorp.
144
<PAGE>
ITEM 11. 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 four highly compensated executive officers (the "Named Executive
Officers"), other than the Company's Chief Executive Officer, whose salary and
bonus during the fiscal year ended December 31, 1997 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION
------------------------
FISCAL OTHER ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED
- --------------------------- ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely........... 1997 $450,000 $700,000 $29,082(1) --
President, Chief Executive 1996 300,000 700,000 28,564(1) 400,000(2)
Officer and Chairman 1995 300,000 252,603 32,960(1) --
Kevin E. Villani........... 1997 300,000 266,666 17,082(3) 50,000(2)
Executive Vice President
and 1996 200,000 200,000 12,986(3) 84,000(2)
Chief Financial Officer 1995 59,103 25,000 2,295(3) 66,000(2)
Stephen J. Shugerman....... 1997 250,000 501,000 21,882(4) --
President of SPB 1996 200,000 400,000 20,963(4) 100,000(2)
1995 200,000 166,027 16,372(4) --
Irwin L. Gubman............ 1997 200,000 200,000 16,852(5) 70,000(2)
General Counsel and 1996 50,000 30,000 750(5) 30,000(2)
Secretary 1995 -- -- -- --
Joseph Parise.............. 1997 141,667 175,000 2,911(6) 40,000(2)
Managing Director of 1996 45,032 26,000 -- 20,000(2)
Capital Markets 1995 -- -- -- --
</TABLE>
- --------
(1) In 1997, 1996 and 1995, 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 $11,082, $10,564 and $14,960
respectively, under employee benefit plans.
(2) See "--Stock Option Plans" for details regarding the terms of such
options.
(3) In 1997, 1996 and 1995, consists of (i) a car allowance paid by the
Company of $6,000, $6,000 and $1,773, respectively, and (ii) aggregate
contributions paid by the Company of $11,082, $6,986, and $522,
respectively, under employee benefit plans.
(4) In 1997, 1996 and 1995, 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 $11,082, $10,163, and $5,572,
respectively.
(5) In 1997 and 1996, consists of (i) a car allowance paid by the Company of
$6,000 and $750, respectively, and (ii) aggregate contributions paid by
the Company of $10,852 and $0, respectively, under employee benefit plans.
(6) In 1997, consists of aggregate contributions paid by the Company of $2,911
under employee benefit plans.
145
<PAGE>
OPTION GRANTS, EXERCISES AND YEAR END VALUES
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
EXERCISE APPRECIATION
1997 PERCENTAGE PRICE FOR OPTION TERM
OPTIONS OF TOTAL PER EXPIRATION ---------------
NAME GRANTED GRANTS OPTION DATE 5% 10%
---- ------- ---------- -------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Kevin E. Villani......... 50,000 10.64% 18.6250 8/15/02 257,287 568,537
Irwin L. Gubman.......... 70,000 14.89% 18.6250 8/15/02 360,202 795,952
Joseph Parise............ 40,000 8.51% 18.6250 8/15/02 205,830 454,830
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED NUMBER OF UNEXERCISED VALUE OF ALL
OPTIONS AT FY-END SENIOR MANAGEMENT UNEXERCISED IN-THE-MONEY
SHARES UNDER THE OPTION PLAN OPTIONS AT FY-END UNDER THE OPTIONS AT
ACQUIRED ON VALUE EXERCISABLE/ OPTION PLAN EXERCISABLE/ DECEMBER 31, 1997
NAME EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2) EXERCISABLE/UNEXERCISABLE(3)
---- ----------- ---------- --------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely...... 15,285 $ 269,877 80,000/320,000 917,052 $18,421,949/$2,680,000
Kevin E. Villani...... -- -- 30,000/156,800 -- / -- 35,780/ 1,246,849
Stephen J. Shugerman.. 76,422 1,368,435 20,000/ 80,000 158,524 / -- 3,164,035/ 545,000
Irwin L. Gubman....... -- -- 6,000/ 94,000 -- / -- 24,375/ 228,750
Joseph R. Parise...... -- -- 4,000/ 56,000 -- / -- 20,250/ 156,000
</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, 1997
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 SPB. 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.
146
<PAGE>
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 and Co-Chairman of IFG. Mr Lerner is the Manager of Corona Film
Finance Fund (in which ICII is an investor).
SENIOR MANAGEMENT STOCK OPTIONS
Effective January 1992, members of senior management of the Company received
ten year options to purchase shares of the Company's common stock (the "Common
Stock"). Such options are not covered by the Company's option plans described
below. The exercise price of these options is $0.88 per share for one-half of
the options, with the other half exercisable at $1.40 per share. These options
are currently exercisable. H. Wayne Snavely, Joseph R. Tomkinson, and Stephen
J. Shugerman were granted 917,053, 917,053 and 458,526 of such options,
respectively.
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, 1997. See Note 23
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 1,082,493 options were outstanding at December 31,
1997.
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").
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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
1,453,200 options were outstanding at December 31, 1997.
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 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.
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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 $296,000, $305,000, and $209,000 for the years ended
December 31, 1997, 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 $600,000, $350,000, and
$200,000 were charged to operations in 1997, 1996 and 1995, respectively.
Company matching contributions are made as of December 31st each year.
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 $20.0 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 Item 2.
"Business--Legal Proceedings."
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ITEM 12. 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
February 28, 1998, by (i) each director of the Company, (ii) the Chief
Executive Officer and the four most highly compensated executive officers
whose salary exceeded $100,000 for the year ended December 31, 1997, (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 % OF TOTAL
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OUTSTANDING(2)
------------------- ------------------ --------------
<S> <C> <C>
Imperial Bank(3).......................... 8,938,553 22.2%
Wellington Management Co.(4).............. 4,558,540 11.3
Keefe Managers, Inc.(4)................... 2,233,900 5.5
Maverick Capital Ltd.(4).................. 2,000,000 5.0
H. Wayne Snavely(5)....................... 1,396,281 3.5
Stephen J. Shugerman(6)................... 258,768 0.6
G. Louis Graziadio, III(7)................ 133,518 0.3
Joseph R. Tomkinson(8).................... 73,474 0.2
Perry A. Lerner(9)........................ 79,722 0.2
Robert S. Muehlenbeck(10)................. 77,792 0.2
J. Clayburn LaForce(11)................... 48,422 0.1
Kevin E. Villani(12)...................... 40,000 0.1
Paul B. Lasiter(13)....................... 36,745 0.1
Irwin L. Gubman(14)....................... 10,000 *
Joseph R. Parise(15)...................... 4,000 *
All Directors and Officers as a Group (11
persons)(16)............................. 2,158,722 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) 791-8020.
(2) Percentage ownership is based on 40,343,055 shares of Common Stock
outstanding as of February 28, 1998.
(3) Imperial Bank, headquartered in Los Angeles, California, is a California
chartered bank whose deposits are insured by the FDIC. The address of
Imperial Bank is 9920 La Cienega Boulevard, Inglewood, California 90301.
(4) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of February 28, 1998. 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), Keefe Managers, Inc. and Maverick Capital Ltd., which is
deemed a beneficial owner of the shares only by virtue of the direct or
indirect investment and/or voting discretion they possess pursuant to the
provisions of investment advisory agreements with such clients.(5)
(5) Includes 1,037,052 shares subject to stock options exercisable within 60
days of February 28, 1998.
(6) Includes 178,524 shares subject to stock options exercisable within 60
days of February 28, 1998.
(7) Includes 119,422 shares subject to stock options exercisable within 60
days of February 28, 1998.
(8) Includes 10,000 shares subject to stock options exercisable within 60
days of February 28, 1998. Mr. Tomkinson resigned as an officer of the
Company in February 1996 but remains a director.
(9) Includes 76,422 shares subject to stock options exercisable within 60
days of February 28, 1998.
(10) Includes 70,022 shares subject to stock options exercisable within 60
days of February 28, 1998.
(11) Includes 48,422 shares subject to stock options exercisable within 60
days of February 28, 1998.
(12) Includes 40,000 shares subject to stock options exercisable within 60
days of February 28, 1998.
(13) Includes 11,300 shares subject to stock options exercisable within 60
days of February 28, 1998.
(14) Includes 6,000 shares subject to stock options exercisable within 60 days
of February 28, 1998.
(15) Includes 4,000 shares subject to stock options exercisable within 60 days
of February 28, 1998.
(16) Includes 1,601,164 shares subject to stock options exercisable within 60
days of February 28, 1998.
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ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
PRINCIPAL SHAREHOLDER; LIMITATIONS ON INVESTMENT; CONFLICTS OF INTEREST
At December 31, 1997, Imperial Bank owned 8,938,553 shares of Common Stock,
or 23.0% of the Company. Imperial Bancorp ("Bancorp") is the owner of all of
the outstanding capital stock of Imperial Bank.
The Federal Reserve Board has advised Bancorp that it considers the
retention by the Bank of its shares of ICII stock to be in violation of the
Bank Holders Company Act. This position is apparently a consequence of the
Federal Reserve Board's view that ICII is engaged in activities which are not
determined by regulation to be a closely related activity and that Bancorp did
not file or obtain a notice or approval to engage such activities in
accordance with Regulation Y.
In addition, Section 24 of the Federal Deposit Insurance Act (the "FDIA")
limits the investments of state-chartered banks, such as the Bank, to
investments which are permitted investments for national banks or are
otherwise permitted under Section 24. On June 10, 1996, the Bank filed an
application for approval of retention of its ownership of ICII stock. The Bank
has submitted additional information to the FDIC in response to FDIC requests.
Subsequently, the Bank has advised the FDIC of its intention to contribute all
of the common stock owned by the Bank to Imperial Financial Group, Inc, a
Delaware corporation, which is currently a wholly-owned subsidiary of the Bank
(the "Contribution"). No action has been taken by the FDIC on the application
in contemplation of consummation of the Contribution.
Due to the perceived existence of significant issues as to whether approval
by the Federal Reserve Board of an application to retain Bancorp's ownership
in ICII or approval of the FDIC of the application to retain the Bank's
ownership in ICII would be forthcoming, the Bancorp Board has determined no to
seek Federal Reserve approval at this time of its ownership in ICII stock, but
rather to address these regulatory concerns through the Contribution.
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,
Bancorp, and Imperial Financial Group, Inc. the Company believes that, in the
event of an insolvency, bankruptcy or receivership proceeding involving
Imperial Bank, Bancorp, or Imperial Financial Group, Inc., 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 of these entities.
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.
One director of the Company also serves on the Board of Directors of
Imperial Bancorp. See Item 10. "Directors and Executive Officers of the
Registrant."
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
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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.
BANK DEPOSITS
The Company had deposits (including escrow balances) with SPB which were
approximately $14.7 million and $4.5 million at December 31, 1997 and 1996,
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 SPB'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 SPB to contribute to SPFC
certain customer lists of SPB's residential lending division relating to the
ongoing operations of such division. In addition, in April 1996 all employees
of SPB's residential lending division became employees of SPFC. SPB retained
all other assets and all liabilities related to the contributed operations
including all residual interests generated in connection with securitizations
effected by SPB'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.
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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 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 years ended December 31, 1997 1996 and 1995
were approximately $74,000, $713,000 and $256,000, respectively.
Effective April 1, 1997, ICII discontinued providing many of the services it
previously provided to SPFC. ICII currently provides to SPFC mortgage loan
production software and hardware and data communications management.
OTHER ARRANGEMENTS
From the point of commencement of operations until March 1994, SPB 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.
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In March 1996, SPFC entered into a $10.0 million revolving credit and term
loan agreement with SPB. Advances under this agreement were collateralized by
the Company's interest-only and residual certificates (other than those
retained by SPB 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. In July 1997, SPFC borrowed $15.0 from
ICII bearing interest at 12.0% per annum. As of August 31, 1997, the $15.0
million owed to ICII had been repaid.
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 65 basis points. Until the first
quarter of 1997, this line was guaranteed by ICII. The line has an expiration
date of March 26, 1998. As of December 31, 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
In January 1998, IMH changed its name to Impac Mortgage Holdings, Inc. from
Imperial Mortgage Holdings, Inc. 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 represented 99% of the economic
interest in ICIFC, (ii) caused SPB to contribute to IMH certain of the
operating assets and certain customer lists of SPB's warehouse lending
division and (iii) executed a non-compete agreement and a 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 SPB. All of the outstanding
shares of common stock of ICIFC were retained by ICII. Lastly, IMH contributed
all of the aforementioned operating assets of SPB's warehouse lending
operations contributed to it by SPB 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 SPB 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 SPB to fund mortgage conduit loan
acquisitions and to fund finance receivables, respectively.
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.
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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 $39,200. 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 SPB'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 years ended December 31, 1997, 1996,
and 1995 aggregated $67,000, $518,000, and $269,000, respectively.
Effective December 31, 1997, ICIFC and IMH entered into a services agreement
whereby ICAI would provide human resource, data and phone communication
services for an agreed upon fee. The initial term of this agreement expires on
December 19, 1998.
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OTHER TRANSACTIONS
General
ICAI, a wholly-owned subsidiary of the Company, oversaw 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 was 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 years ended December 31, 1997,
1996 and 1995, ICAI earned $3.0 million, $2.0 million and $37,888 in
management fees, respectively.
ICAI was 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 years ended December 31,
1997, 1996 and 1995, ICAI earned $1.9 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 paid 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 years ended December 31, 1997, 1996 and 1995,
there were no monies paid to ICAI as reimbursement of expenses.
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In December 1997, IMH and the Company negotiated a termination of the
management agreement (the "Termination Agreement"). The consideration received
by the Company pursuant to the Termination Agreement was comprised of
2,009,310 shares of IMH common stock and certain securitization-related
assets. Additionally, the Company agreed to cancel its note receivable from
ICIFC, the origination unit of IMH, in the amount of $29.1 million. The IMH
common stock and the securitization related assets were recorded by the
Company at their estimated fair values of approximately $35.0 million and
$13.1 million, respectively, for a total of $48.1 million. This amount, when
netted with the $29.1 million cancellation of the ICIFC note receivable
resulted in the gain on termination of the management agreement of
approximately $19.0 million.
IMH Registration Rights Agreement
Pursuant to the IMH Registration Rights Agreement IMH has agreed to file one
or more registration statements under the Securities Act in the future for
shares of IMH held by ICAI pursuant to the Termination Agreement, subject to
certain conditions set forth therein. Pursuant to the IMH Registration Rights
Agreement, IMH 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 IMH held by ICAI pursuant to the aforementioned
termination agreement. ICAI has contributed the shares to ICII.
Residual Interests owned by ICIFC
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, setting a term of ten years and reducing the interest
rate from 12% to 10%. ICII had agreed to compensate ICIFC for losses related
to certain loans, to the extent that such loans did not perform, with the
exact terms to be determined later. The residual interests were subsequently
received by the Company in consideration of the Termination Agreement and the
loan was forgiven. See "Other Transactions--General".
Bulk Mortgage Loan Purchases
In December 1995, ICIFC entered into a number of agreements with the Company
and SPB 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 SPB 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 SPB, 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
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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 December 31, 1997, holds the subordinated
interest as an investment vehicle.
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 FMC
On November 24, 1997, FMC completed an initial public offering of 10,000,000
shares of common stock. On December 3, 1997, FMC and the selling stockholders
completed the sale of 1,500,000 shares pursuant to the underwriters' over-
allotment option. Of the aggregate offering of 11,500,000 shares, 6,828,125
shares were sold by FMC, 3,568,175 shares were sold by the Company and
1,103,700 shares were sold by FLRT, Inc., respectively. As a result of these
sales pursuant to the initial public offering, the Company's and FLRT, Inc.'s
percentage ownership of FMC was reduced to approximately 38.4% and 21.6%,
respectively.
FMC 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 FMC
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 FMC as could have been obtained from
unaffiliated parties.
Additional or modified arrangements and transactions may be entered into by
FMC, 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 FMC and ICII, and it is possible that
conflicts of interest will be involved. All transactions by and between FMC
and ICII must be approved by a majority of the disinterested directors of FMC.
The following is a summary of certain arrangements and transactions between
FMC and ICII.
FMC Services Agreement
FMC and ICII have entered into a services agreement effective as of November
18, 1997 (the "FMC Services Agreement") under which ICII will continue to
provide human resource administration and certain accounting functions to FMC.
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ICII will charge fees for each of the services which it will provide under
the FMC Services Agreement based upon usage. The FMC 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. FMC may terminate the
FMC Services Agreement, in whole or in part, upon one month's written notice.
As part of the services to be provided under the FMC Services Agreement, ICII
will provide FMC with insurance coverage and self insurance programs,
including health insurance. The charge to FMC 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 FMC Services Agreement are as favorable to FMC
as could be obtained from independent third parties.
FMC Tax Agreement
Pursuant to the Reorganization, FMAC's status as a limited liability company
was automatically terminated. Pursuant to the FMC tax agreement (the "FMC Tax
Agreement"), FMC has agreed to indemnify each of ICII and FLRT, Inc. for any
federal or state income taxes, including penalties and interest thereon,
imposed by any taxing authority with respect, to, for, or fairly attributable
to the operations of FMAC for the period from July 1, 1995 through November
24, 1997. Notwithstanding the foregoing, each of ICII and FLRT, Inc. has
agreed to indemnify FMC for all taxes, including penalties and interest
thereon, resulting from any determination made by a taxing authority that FMAC
should be determined for tax purposes to be an association taxable as a
corporation and only to the extent that such taxes pertain to the income of
FMAC as originally reported on its income tax return for the period in
question and solely to the extent of any limited liability company
distributions made by FMAC to ICII and FLRT, Inc.
ICII Registration Rights Agreement
FMC has entered into a registration rights agreement (the "ICII Registration
Rights Agreement") pursuant to which FMC has agreed to file one or more
registration statements under the Securities Act in the future for shares of
FMC held by ICII, subject to certain conditions set forth therein. Pursuant to
the ICII Registration Rights Agreement, FMC 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 FMC held by ICII. Also, under
the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares
onto any registration statement concerning shares of the FMC's common stock
held by ICII; provided however than for a period of three years following the
date of the proposed initial public offering, FLRT, Inc. is limited in the
amount of shares of FMC'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 SPB
In July 1995, FMAC sold approximately $3.8 million of servicing rights to
SPB, resulting in a gain of $31,000. At December 31, 1997, 1996 and 1995,
there was approximately $0, $183 million and $262 million, respectively, of
loans outstanding underlying this subservicing arrangement. FMAC received
approximately 13 basis points for providing such services. ICII purchased the
servicing rights from SPB in December 1997. FMC then purchased the servicing
rights from ICII for $2.2 million.
FMAC purchased $15.5 million in franchise loans at par value from SPB on
June 26, 1997. These franchise loans were purchased at par value by SPB from
FMAC in 1996 and 1997. FMC purchased $45.1 million in franchise loans at par
value from SPB on December 24, 1997. These franchise loans were purchased at
par value by SPB from FMAC in 1996 and 1997. On December 30, 1997, FMC sold
$1.8 million of participation loans at par value to SPB.
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FMC also has a master purchase and sale agreement with SPB to originate
loans for SPB under mutual agreement, and subject to SPB underwriting each
such loan prior to sale of such loans. Under this agreement, FMC also has the
ability to repurchase loans, under mutual agreement with SPB. 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 December
31, 1997, loans originated for SPB (and not repurchased), totaled
approximately $104 million. FMC does not expect to originate a significant
volume of loans for SPB under this arrangement in the future.
Borrowings and Guarantees
At December 31, 1997 and 1996, FMC had borrowings from ICII outstanding of
$0 and $17.7 million, respectively. FMAC paid interest at 12% on the
outstanding balances.
FMAC, among other subsidiaries of ICII, jointly and severally and fully and
unconditionally guaranteed the 9.875% Senior Notes and the ROPES securities.
Such guarantees terminated upon the deconsolidation of FMC in the financial
statements of ICII.
In consideration of ICII's guarantee of FMC's warehouse lines of credit and
repurchase facilities, FMC pays to ICII monthly a fee equal to 15 basis points
on FMC's committed warehouse lines covered by such guarantee. For the years
ended December 31, 1997, 1996 and 1995, the amount of such guarantee fees was
$617,000, $0 and $0, respectively. ICII will not guarantee any of FMC's future
warehouse lines of credit and repurchase facilities.
ICII guaranteed FMC'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 FMC's future leases.
ICII and FLRT, Inc. have agreed to indemnify FMC against any and all
liability that FMC 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 FMC
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 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 FMC
In the ordinary course of business, FMC 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 FMC's policies.
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RELATIONSHIPS WITH ICCMIC
ICCMIC Management Agreement
On the closing date of ICCMIC's initial public offering, ICCMIC entered 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 is at
all times subject to the supervision of ICCMIC's board of directors and has
only such functions and authority as ICCMIC delegates to it. ICCAMC advises
the board of directors as to the activities and operations of ICCMIC. ICCAMC
is 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 performs (or causes 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.
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ICCAMC performs portfolio management services on behalf of ICCMIC pursuant
to the ICCMIC Management Agreement with respect to ICCMIC's investments. Such
services include, but are not limited 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 performs 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 include, but are not 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
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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.
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 MBS interests. Moreover, the directors and certain of the
executive officers of ICCAMC executed non-compete agreements that 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 SPB, expect to continue to originate
mortgage loans and MBS interests. SPB has entered 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 SPB. 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 SPB in which ICCMIC
will be a ready, willing and able purchaser of MBS interests that may be sold
from time to time by SPB. Although no binding commitment will exist on the
part of ICII, SPB or ICCMIC regarding the sale and purchase of MBS interests,
ICCMIC expects to be able to purchase MBS interests from SPB at prices and on
terms meeting ICCMIC's investment criteria.
ICCMIC expects that ICII and SPB 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
163
<PAGE>
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 SPB.
Other Transactions
From time to time, SPB may act as the servicer for ICCMIC's loans. SPB 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, are governed by policy guidelines 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 approved the acquisition of the initial investments by
ICCMIC from ICII and SPB. 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
On October 31, 1997, ICCMIC purchased multifamily/commercial mortgage loans
and interests in certain multifamily and commercial mortgage backed securities
from SPB and from the Company, for an aggregate purchase price of
approximately $163 million plus interest.
In December 1997, ICCMIC purchased a pool of multifamily and commercial
mortgage loans from SPB for approximately $97 million plus interest.
ICCMIC may acquire additional assets from ICII and its affiliates in the
future. Any such acquisitions will be in accordance with the guidelines
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
On October 20, 1997, the Company completed the initial public offering of
ICCMIC. The initial public offering of 34,500,000 shares of common stock was
priced at $15.00 per share, representing total net proceeds from the offering
of approximately $481.2 million. All of the shares were offered by ICCMIC. In
October 1997, the Company purchased 2,970,000 shares of ICCMIC common stock
for $41.4 million. In December 1997, the Company purchased an additional
100,000 shares of ICCMIC common stock for $1.5 million.
164
<PAGE>
As of December 31, 1997, the Company owns 8.9% of the outstanding common
stock of ICCMIC. ICCMIC will be managed by ICCAMC, a wholly owned subsidiary
of the Company. ICCMIC intends to invest primarily in performing multifamily
and commercial loans and in mortgage backed securities. 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.
OTHER MATTERS
In October 1997, the Company loaned H. Wayne Snavely and Kevin E. Villani
$1,999,998 and $999,992, respectively, for the purposes of assisting each of
them to purchase ICCMIC common stock. The loans are each evidenced by a
promissory note maturing June 14, 2002, secured by a deed of trust and stock
of ICCMIC held by such individuals. The note bears interest at an annual rate
of 10.4% and is payable in semi-annual installments commencing June 15, 1998.
At February 28, 1998, the remaining balances are $1.1 million and $610,000,
for Wayne Snavely and Kevin E. Villani, respectively.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Imperial Credit Industries, Inc.
By: /s/ H. Wayne Snavely
___________________________________
H. Wayne Snavely
Chairman of the Board,
President
and Chief Executive Officer
Date: March 31, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each
of them, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Annual Report on
From 10-K, and to file the same, with all exhibits thereto, and other
documents in connection wherewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorneys-in fact and agents or any of them or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ H. Wayne Snavely Chairman of the Board, March 31, 1998
____________________________________ President and Chief
(H. Wayne Snavely) Executive Officer and
Director (Principal
Executive Officer)
/s/ Joseph R. Tomkinson Director March 31, 1998
____________________________________
(Joseph R. Tomkinson)
/s/ Kevin E. Villani Executive Vice President March 31, 1998
____________________________________ Chief Financial Officer
(Kevin E. Villani) (Principal Financial
Officer and Principal
Accounting Officer) and
Director
/s/ Stephen J. Shugerman Director March 31, 1998
____________________________________
(Stephen J. Shugerman)
</TABLE>
166
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Robert S. Muehlenbeck Director March 31, 1998
____________________________________
(Robert S. Muehlenbeck)
/s/ G. Louis Graziadio, III Director March 31, 1998
____________________________________
(G. Louis Graziadio, III)
/s/ Perry A. Lerner Director March 31, 1998
____________________________________
(Perry A. Lerner)
/s/ James Clayburn LaForce, Jr. Director March 31, 1998
____________________________________
(James Clayburn LaForce, Jr.)
</TABLE>
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
3.1(S) Articles of Incorporation, as amended of Registrant.
3.2(S) Bylaws of Registrant.
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 the Registrant, Imperial Business Credit, Inc.
("IBC"), Imperial Credit Advisors, Inc. ("ICAI"), Auto Marketing
Network, Inc. ("AMN"), 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, Registrant, Imperial
Credit Capital Trust I (the "Trust"), IBC, ICAI, AMN, and Lehman
Brothers, Inc., dated as of June 9, 1997.
4.5+ Remaketing Agreement, by and among, the Registrant, the Trust and
Lehman Brothers, Inc., dated as of June 9, 1997.
4.6+ Form of Guarantee Agreement to be executed by the Registrant, for the
benefit of the Holders of Remarketed Redeemable Par Securities,
Series B.
4.7# Indenture, by and among the Registrant, Chemical Trust Company of
California, IBC, ICAI, AMN dated as of Janury 23, 1997, with forms of
Senior Notes.
4.8(S) Form of Common Stock Certificate
10.1(S) Form of Indemnification Agreement for directors and officers.
10.2(S) 1992 Incentive Stock Option Plan and Nonstatutory Stock Option Plan
and form of Stock Option Agreement thereunder.
10.3* 1996 Stock Option, Deferrd Stock and Restricted Stock Plan effective
as of June 21, 1996.
10.4** Senior Management Stock Option Agreement dated effective as of January
1, 1992 by and between Registrant and H. Wayne Snavely.
10.5** Senior Management Stock Option Agreement dated effective as of January
1, 1992 by and between Registrant and Joseph R. Tomkinson.
10.6** Senior Management Stock Option Agreement dated effective as of January
1, 1992 by and between Registrant and Stephen J. Shugerman.
10.7** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and H. Wayne Snavely, effective as of January 1,
1992.
10.8** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and Joseph R. Tomkinson, effective as of January
1, 1992.
10.9** Amendment No. 1 to Senior Management Stock Option Agreement by and
between Registrant and Stephen J. Shugerman, effective as of January
1, 1992.
10.10** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and H. Wayne Snavely, effective as of September 30, 1995.
10.11** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and Joseph R. Tomkinson, effective as of September 30,
1995.
10.12** Amendment No. 2 to Senior Management Stock Option by and between
Registrant and Stephen J. Shugerman, effective as of September 30,
1995.
</TABLE>
168
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.13(S) Form of Lease Agreement dated January 2, 1992, as amended.
10.14*** Contribution Agreement among the Registrant, Impac Mortgage
Holdings, Inc. ("IMH"), Southern Pacific Bank, ICI Funding
Corporation("ICIFC") and Imperial Warehouse Lending Group, Inc.
dated as of November 20, 1995.
10.15*** Non-Competition Agreement between the Registrant and IMH dated as
of November 20, 1995.
10.16*** Right of First Refusal Agreement among the Registrant, IMH and
ICIFC dated as of November 20, 1995.
10.17*** Tax Agreement between the Registrant and IMH dated as of November
20, 1995.
10.18*** Services Agreement between the Registrant and IMH dated as of
November 20, 1995.
10.19*** Submanagement Agreement between the Registrant and ICAI dated as
of November 20, 1995.
10.20 Employment agreement dated as of January 1, 1997 by and between
Registrant and H. Wayne Snavely.
10.21 Employment agreement dated as of January 1, 1997 by and between
Registrant and Kevin E. Villani.
10.22 Employment agreement dated as of January 1, 1997 by and between
Registrant and Stephen J. Shugerman.
10.23 Registration Rights Agreement dated as of August 26, 1997, by and
among Registrant, FLRT, Inc. and Franchise Mortgage Acceptance
Company.
10.24 Registration Rights Agreement dated as of October 17, 1996, by and
between Registrant and Southern Pacific Funding Corporation.
10.25 Registration Rights Agreement dated as of December 29, 1997, by
and between ICAI and IMH.
10.26 Termination Agreement dated as of December 19, 1997, by and
between ICAI and IMH.
10.27 Promissory Note Secured by Stock Pledge and Deed of Trust dated as
of October 21, 1997, between Registrant and H. Wayne Snavely.
10.28 Promissory Note Secured by Stock Pledge and Deed of Trust dated as
of October 21, 1997, between Registrant and Kevin E. Villani.
11 Statement Regarding Computation of Earnings Per Share.
21 Subsidiaries of Registrant.
23.1.1 Independent auditors' consent.
24 Power of Attorney (included on signature page of Form 10-K).
27.1 Financial Data Schedules for December 31, 1997 and 1996.
27.2 Financial Data Schedule for December 31, 1995.
</TABLE>
- --------
(S) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the
SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992,
respectively.
+ Incorporated by reference to Registrant's Registration Statement on Form S-
4 (Registration No. 333-30809) filed on July 3, 1997.
# Incorporated by reference to Registrant's Registration Statement on Form S-
4 (Registration No. 333-22141) filed with the SEC on February 19, 1997.
* Incorporated by reference to Registrant's Registration Statement on Form S-
8 (Registration No. 333-13805) filed October 9, 1996.
** Incorporated by reference to Registrant's Registration Statement on Form S-
8 (Registration No. 333-15149) filed October 31, 1996.
*** Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
169
<PAGE>
EXHIBIT 10.20
EMPLOYMENT AND NON-COMPETITION AGREEMENT
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made
and entered into as of January 1, 1997, by and between Imperial Credit
Industries, Inc. (the "Corporation"), a California corporation, H. Wayne
Snavely, an individual (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to employ the Executive as its Chairman,
President and Chief Executive Officer; and
WHEREAS, Executive has agreed not to compete with Corporation or use any
confidential and proprietary business information regarding the business of
Corporation to the detriment of Corporation during the term of this Agreement
(and thereafter as applicable) in order to induce Corporation to enter into this
Agreement and to perform its obligations hereunder; and
WHEREAS, the Executive desires to accept such employment under the terms
and conditions herein stated.
NOW, THEREFORE, the Corporation and the Executive, each intending to be
legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term
-------------------
(a) Employment - The Corporation hereby offers to employ the Executive as
the Chairman, President and Chief Executive Officer of the Corporation and the
Executive hereby accepts such employment, for the term set forth in Section
1(b). In addition, the Corporation agrees to use its reasonable efforts to
nominate and recommend that the Executive be elected to the Board of Directors
of the Corporation (the "Board") where he shall be entitled to serve as Chairman
of the Board, for so long as the Executive continues to be employed hereunder.
(b) Term - The employment hereunder shall be for a term of five years (the
"Term") commencing on January 1, 1997 and terminating on December 31, 2002 (the
"Expiration Date"), provided that such term may be extended if authorized by the
Board and evidenced by a written agreement signed by the Chairman of the
Board's Compensation Committee and the Executive.
-1-
<PAGE>
2. Duties
------
During his Term, the Executive shall serve as Chief Executive Officer of the
Corporation and shall have all powers and duties consistent with such position
subject to the direction of the Board, to whom the Executive shall report. The
Executive shall devote his full time and attention and best efforts to fulfill
faithfully, responsibly and to the best of his ability his duties hereunder.
3. Compensation
------------
(a) Base Salary - For services performed by the Executive for the
Corporation pursuant to this Agreement during his Term, the Corporation shall
pay the Executive a base salary ("Base Salary") at the rate of $450,000 per
year, payable twice each month in the amount of $18,750 on the 15th day and the
last day of each month, or in accordance with the Corporation's regular payroll
practices. Any compensation which may be paid to the Executive under any
additional compensation plan of the Corporation, or which may be otherwise
authorized from time to time by the Board, shall be in addition to the Base
Salary to which the Executive shall be entitled under this Agreement.
(b) Annual Bonus - For each full year during his Term, commencing on January
1, 1997, the Executive shall be eligible to receive a cash bonus based on the
Corporation's achievement of certain financial goals established at the
beginning of such year by the Board's Compensation Committee. For calendar year
1997, and until changed by the Board's Compensation Committee, the annual cash
bonus award shall be determined on the basis of the performance of three
components, namely, the Corporation's return on equity, the Corporation's
earnings per share and the relative change in the dollar value of a share of the
Corporation's common stock. Depending on the results of each component, the
Executive's cash bonus will range from $0 to $1,050,000, as follows:
i) Return on Equity - If the Corporation's return on equity for the
calendar year is less than 15%, no cash bonus shall be paid for this
component. If the return on equity is from 15% to 20%, the cash bonus shall
be $200,000 for this component; if from 20% to 25%, $250,000; and, if 25% or
more, $350,000;
ii) Earnings per share - If the Corporation's earnings per share are
less than $1.25 for the calendar year, no cash bonus shall be paid for this
component. If earnings per share are from $1.25 to $1.50, the cash bonus
shall be $200,000 for this component; if from $1.50 to $1.75, $250,000; and,
if $1.75 or more, $350,000;
iii) Stock Performance - If the performance of the Corporation's common
stock, as measured by the increase (decrease) in the average closing price
reported by NASDAQ for the fourth quarter of 1997 divided by the average
closing price for the fourth quarter of 1996 and stated as a percentage, is
less than the fourth quarter percentage increase (or more than the fourth
quarter percentage decrease) for the Standard and Poor's 500 stock index, no
cash bonus shall be paid for this component. If the Corporation's common
stock performance as measured on this basis equals or
-2-
<PAGE>
exceeds Standard and Poor's 500 stock index performance for the same period by
up to 10%, the cash bonus shall be $200,000 for this component; if from 10% to
20%, $250,000; and, if 20% or more, $350,000. The bonus payable for any calendar
year shall be paid to the Executive no later than the 15th day of April of the
following year. This annual bonus arrangement shall be in lieu of the
Executive's participation in any other cash bonus or cash incentive plan or
arrangement of the Corporation; provided, however, that the foregoing shall not
preclude the Executive from participating in any equity or equity-based
compensation program of the Corporation, and the bonus program set forth herein
may be replaced with a different program approved by the Board's Compensation
Committee and agreed with the Executive.
(c) Equity - The Executive shall be eligible to receive grants of common
stock of the Corporation under the 1996 Stock Option Plan (the "Plan") and any
successor or addition thereto, in the sole discretion of the Board-appointed
committee which administers the Plan.
(d) Tax Withholding - The Corporation shall provide for the withholding of
any taxes required to be withheld by federal, state and local law with respect
to any payment in cash, shares of capital stock or other property made by or on
behalf of the Corporation to or for the benefit of the Executive under this
Agreement or otherwise. The Corporation may, at its option; (i) withhold such
taxes from any cash payments owing from the Corporation to the Executive,
including any payments owing under any other provision of the Agreement, (ii)
require the Executive to pay to the Corporation in cash such amount as may be
required to satisfy such withholding or (iii) make other satisfactory
arrangements with the Executive to satisfy such withholding obligations.
4. Benefits
--------
In addition to the Base Salary to be paid to the Executive pursuant to
Section 3(a) hereof and any annual bonuses earned by, and discretionary grants
of common stock awarded to, the Executive pursuant to Sections 3(b) and 3(c)
hereof, the Executive shall also be entitled to the following:
(a) Participation in Insurance and Healthcare Benefit Plans - Except as
otherwise expressly provided herein, the Executive and his dependents shall be
enrolled in the Corporation's insurance and healthcare benefit group plans in
accordance with established Corporation policies.
(b) Participation in the Corporation's 401(k) Plan - The Executive shall be
entitled to participate in the Corporation's 401(k) Plan in accordance with
established Corporation policies.
(c) Expense Reimbursement - The Corporation shall reimburse the Executive,
upon proper accounting, for reasonable business expenses incurred by him in the
course of the performance of his duties under this Agreement.
-3-
<PAGE>
(d) Vacations, Holidays, Absences and Leaves - The Executive shall be
entitled to the benefit of the vacation, holiday, absence and leave policies
applicable to all employees of comparable title or status in the Corporation.
(e) Automobile Allowance - The Corporation shall pay the Executive a
monthly automobile allowance of $1500, to be applied in the Executive's
discretion. The Corporation shall not provide the Executive any vehicles,
insurance or the cost of any maintenance hereunder.
(f) Proration of Benefits - Any payments or benefits pursuant to this
Section 4, in any year during which the Executive is employed by the Corporation
for less than the entire year, shall, unless otherwise provided herein or in the
applicable plan or arrangement, be prorated in accordance with the number of
days in such year during which the Executive is employed by the Corporation.
5. Indemnification
---------------
The Executive shall be entitled to the maximum indemnification provided by
the Bylaws and the Articles of Incorporation of the Corporation for officers,
directors and employees of the Corporation. The Executive's rights under this
paragraph shall continue without time limit so long as he may be subject to any
such liability, whether or not the Executive's term of employment by the
Corporation may have ended.
6. Representations and Warranties of the Executive
-----------------------------------------------
The Executive hereby represents and warrants to the Corporation that (a)
the Executive's execution and delivery of this Agreement and his performance of
his duties and obligations hereunder will not conflict with, or cause a default
under, or give any party a right to damages under, or to terminate, any other
agreement to which the Executive is a party or by which he is bound, and (b)
there are no agreements or understandings that would make unlawful the
Executive's execution or delivery of this Agreement or his employment hereunder.
7. Representations and Warranties of the Corporation
-------------------------------------------------
The Corporation hereby represents and warrants to the Executive as follows:
(a) The Corporation is duly organized and established as a corporation
under the laws of the State of California and has all requisite power and
authority to enter into this Agreement and to perform its obligations hereunder.
The consummation of the transactions contemplated by this Agreement will neither
violate nor be in conflict with any agreement or instrument to which the
Corporation is a party or by which it is bound.
-4-
<PAGE>
(b) The execution, delivery and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized by all
requisite Corporate action on the part of the corporation and are valid, legal
and binding obligations of the Corporation, enforceable in accordance with their
terms except as may be limited by laws of general application relating to
bankruptcy, insolvency, moratorium or other similar laws relating to or
affecting the enforcement of creditors' rights generally, and rules of law
governing specific performance, injunctive relief or other equitable remedies.
8. Termination
-----------
Executive's employment shall terminate prior to the Expiration Date upon
the happening of any of the following events:
A. For Cause
---------
The Executive may be terminated for Cause immediately upon receipt of
notice pursuant to a good faith determination to terminate for Cause made by a
majority of the Board. For purposes of this Agreement, "Cause" means:
(1) the Executive engages in any act of theft, embezzlement, falsification
of records, misappropriation of funds or property, or fraud against, or with
respect to the business of, the Corporation or any affiliate;
(2) current use of illegal drugs on or off the job or current addiction to
alcohol, unless the Executive voluntarily requests accommodation for
rehabilitation before such time as the Corporation notifies the Executive that
it suspects the Executive's use of illegal drugs or addiction to alcohol;
(3) the Executive commits a breach of any material term of this Agreement
or any other material legal obligation to the Corporation and, if such breach is
capable of being cured, fails to cure such breach within 30 days of notice of
such breach;
(4) the Executive is convicted of, or pleads guilty or nolo contendere to
a felony or a crime involving moral turpitude, breach of trust or dishonesty;
(5) the Executive commits any act that causes, or knowingly fails to take
reasonable and appropriate action to prevent, any material injury to the
financial condition or business reputation of the Corporation or any of its
affiliates; however, this shall not apply to any act of the Corporation or its
affiliates by any other employee thereof except to the extent that such act is
committed at the direction, or with the knowledge, of the Executive; or
(6) the Executive ceases to devote his full time and attention and best
efforts to his duties hereunder.
-5-
<PAGE>
B. Good Reason (by the Executive)
------------------------------
The Executive's employment may be terminated by the Executive at any time
for any of the following reasons (each of which is referred to herein as "Good
Reason") by giving the Corporation notice of the effective date of such
termination (which effective date may be the date of such notice):
(1) the Corporation commits a breach of any material term of this
Agreement and, if such breach is capable of being cured, fails to cure such
breach within 30 days of receipt of notice of such breach; or
(2) the Corporation removes the Executive from the position of Chief
Executive Officer of the Corporation, other than for Cause.
C. Executive's Rights to Terminate
-------------------------------
The Executive may, at his option, terminate his employment hereunder for
any reason upon 60 days prior written notice to the Corporation.
D. Death
-----
This Agreement shall terminate automatically upon the Executive's death.
E. Disability
----------
The Corporation may terminate the Executive's employment upon a good faith
determination by the Board that Executive has become so physically or mentally
disabled as to be incapable of satisfactorily performing his duties hereunder
for a period of 180 consecutive days, such determination to be based upon a
certificate as to such physical or mental disability issued by a licensed
physician or psychiatrist employed by the Corporation.
F. Without Cause
-------------
The Corporation may, at its option, terminate the Executive's employment
without Cause at any time upon written notice to the Executive.
G. Date of Termination
-------------------
For purposes of this Agreement, the term "Date of Termination" shall mean
the later of the date that any party gives written notice that it intends to
terminate this Agreement pursuant to the terms hereof or the date, if any,
specified by the terminating party in such notice as the effective date of
termination.
-6-
<PAGE>
9. Obligations of the Corporation Upon Termination
-----------------------------------------------
(a) Cause - If the Executive's employment shall be terminated for Cause,
the Corporation's obligations to the Executive shall terminate, other than the
obligation (i) to pay to the Executive his Base Salary through the Date of
Termination at the rate in effect on the day preceding the Date of Termination,
and (ii) to continue to provide the Executive with benefits of the type
described in Section 4 through the Date of Termination.
(b) Voluntary - If the Executive terminates his employment for other than
Good Reason (a "Voluntary Termination"), this Agreement shall terminate without
further obligation to the Executive hereunder, other than the obligation (i) to
pay the Executive his Base Salary through the Date of Termination at the rate in
effect on the day preceding the Date of Termination and any previously awarded
but not yet paid cash bonus; and (ii) to continue to provide the Executive with
benefits of the type described in section 4 through the Date of Termination.
(c) Without Cause or for Good Reason - If the Corporation shall terminate
the Executive's employment without Cause, or if the Executive shall terminate
-------
his employment for Good Reason, the Corporation shall (i) continue in accordance
with the Corporation's normal payroll procedures to pay the Executive his Base
Salary through the Date of Termination and the pro rata portion of any cash
bonus award the Executive would be entitled to receive as of year end, (ii)
continue to provide the Executive with benefits of the type described in Section
4 through the Expiration Date and (iii) pay the Severance Amount to the
Executive pro rata from the Date of Termination to the end of that month and
thereafter as of the first day of each month commencing with the month
immediately following the month in which the Date of Termination occurs and
ending on the Expiration Date; provided, however, that payment of the Severance
Amount shall be suspended during any period in which the Executive is an
employee or independent contractor of a company that in the Board's opinion
competes with the Corporation.
"Severance Amount" shall mean an amount, calculated as of the Date of
Termination, which is the monthly equivalent of a $450,000 annual compensation
benefit reduced by the actuarial equivalent of the Executive's projected
primary Social Security benefit. If the Executive resigns for Good Reason prior
to the first anniversary of the date of this Agreement, the Severance Amount
shall equal 50% of the monthly amount calculated as described in the immediately
preceding sentence. In the event Executive becomes an employee or independent
contractor of another company following the first anniversary of the date of
this Agreement and Executive is compensated at an annual rate that is less than
$450,000, the Severance Amount shall be adjusted to equal the annual rate of
$450,000 minus the Executive's annual compensation pro rated at his new
employer. No Severance Amount shall be paid if the Executive's total annual cash
compensation at his new employer exceeds the amount calculated in the first
sentence of this paragraph.
10. Non-Competition
---------------
The Executive acknowledges and recognizes the highly competitive nature of
the business of the Corporation and its affiliates as well as his extensive
participation in the
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ownership of the common stock of the Corporation. The Executive accordingly
agrees, until the third anniversary of the Executive's termination or
resignation of employment (such date being hereafter referred to as the
"Restricted Date") as follows:
(a) The Executive will not directly or indirectly engage (as owner,
stockholder, partner or otherwise, except as a holder of fewer than 5% of the
outstanding shares or other equity interests of a company whose shares or other
equity interests are publicly traded) in any business which directly or
indirectly competes with the business of the Corporation or any of its
affiliates within the same jurisdictions in which the Corporation or any of its
affiliates engages in business at the time of the Executive's termination or
resignation, as the case may be.
(b) The Executive will not directly or indirectly induce any employee of
the Corporation or any of its affiliates to engage in any activity in which the
Executive is prohibited from engaging by paragraph (a) above or to terminate his
employment with the Corporation or any of its affiliates, and will not directly
or indirectly employ or offer employment to any person who was employed by the
Corporation or any of its affiliates unless such person shall have been
terminated without cause or ceased to be employed by any such entity for a
period of at least 12 months.
(c) The Executive will not make any statement or take any action intended
to impair the goodwill or the business reputation of the Corporation or any of
its affiliates, or to be otherwise detrimental to the interests of the
Corporation or any of its affiliates, including any action or statement
intended, directly or indirectly, to benefit a competitor of the Corporation or
any of its affiliates.
(d) It is expressly understood and agreed that although the Executive and
the Corporation consider the restrictions contained in this Section 10 to be
reasonable, if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against the Executive, the
provisions of this Agreement shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such maximum
extent as such court may judicially determine or indicate to be enforceable.
Alternatively, if any court of competent jurisdiction finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such finding shall not affect the
enforceability of any of the other restrictions contained herein.
11. Proprietary Information
-----------------------
Through the Restricted Date, the Executive shall not use for his personal
benefit, or disclose, communicate or divulge to, or use for the direct or
indirect benefit on any person, firm, association or company other than the
Corporation, any Proprietary Information. "Proprietary Information" means
information relating to the properties, prospects, products, services or
operations of the Corporation or any direct or indirect affiliate thereof that
is not generally known, is proprietary to the Corporation or such affiliate and
is made known to the Executive or learned or acquired by the Executive while in
the employ of the Corporation, including, without limitation, information
concerning trade secrets of the Corporation, or any of the Corporation's
affiliates and any improvements relating to the products of the Corporation
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<PAGE>
in accounting, marketing, selling, leasing, financing and other business methods
and techniques. However, Proprietary Information shall not include (A) at the
time of disclosure to the Executive such information that was in the public
domain or later entered the public domain other than as a result of a breach of
an obligation herein; or (B) subsequent to disclosure to the Executive,
Executive received such information from a third party under no obligation to
maintain such information in confidence, and the third party came into
possession of such information other than as a result of a breach of an
obligation herein. All materials or articles of information of any kind
furnished to the Executive by the Corporation or developed by the Executive in
the course of his employment hereunder are and shall remain the sole property
of the Corporation; and if the Corporation requests the return of such
information at any time during, upon or after the termination of the Executive's
employment hereunder, the Executive shall immediately deliver the same to the
Corporation.
12. Ownership of Proprietary Information
------------------------------------
The Executive agrees that all Proprietary Information shall be the sole
property of the Corporation and its assigns, and the Corporation and its assigns
shall be the sole owner of all licenses and other rights in connection with such
Proprietary Information. At all times, until the Restricted Date, the Executive
will keep in the strictest confidence and trust all Proprietary Information and
will not use or disclose such Proprietary Information, or anything relating to
such information, without the prior written consent of the Corporation, except
as may be necessary in the ordinary course of performing his duties under this
Agreement.
13. Documents and Other Property
----------------------------
All materials and articles of information of any kind furnished to the
Executive in the course of his employment hereunder are and shall remain the
sole property of the Corporation; and if the Corporation requests the return of
such information at any time during, upon or after the termination of the
Executive's employment hereunder, the Executive shall immediately deliver the
same to the Corporation. The Executive will not, without the prior written
consent of the Corporation, retain any documents, data or property, or any
reproduction thereof of any description, belonging to the Corporation or
pertaining to any Proprietary Information.
14. Third Party Information
-----------------------
The Corporation from time to time receives from third parties confidential
or proprietary information subject to a duty on the Corporation's part to
maintain the confidentiality of such information and to use it only for certain
limited purposes ("Third Party Information"). At all times the Executive will
hold Third Party Information in the strictest confidence and will not disclose
or use Third Party Information except as permitted by the agreement between the
Corporation and such third Party.
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15. Intellectual Property
---------------------
Any and all products, including but not limited to marketing and financing
materials and methods ("Products") made, developed or created by the Executive
(whether at the request or suggestion of the Corporation or otherwise, whether
alone or in conjunction with others, and whether during regular hours of work or
otherwise) (i) during the period of this Agreement, or (ii) within a period of
one year after the date of termination or resignation of employment hereunder,
which may be directly or indirectly useful in, or relate to, the business of or
tests being carried out by any member of the Corporation, shall be promptly and
fully disclosed by the Executive to the members of the Board and, if such
intellectual property was made, developed or created other than pursuant to the
Executive's employment hereunder, the Executive shall grant the Corporation a
perpetual, royalty free license to such intellectual property, and if such
intellectual property was made, developed or created pursuant to the Executive's
employment hereunder, such intellectual property shall be the Corporation's
exclusive property as against the Executive, and the Executive shall promptly
deliver to an appropriate representative of the Corporation as designated by the
Board all papers, drawings, models, data and other material relating to any
invention made, developed or created by him as aforesaid. The Executive shall,
at the request of the Corporation and without any payment therefor, execute any
documents necessary or advisable in the opinion of the Corporation's counsel or
direct issuance of patents or copyrights to the Corporation with respect to such
Products as are to be the Corporation's exclusive property as against the
Executive or to vest in the Corporation title to such Products as against the
Executive. The expense of securing any such patent or copyright shall be borne
by the Corporation.
16. Customer Lists
--------------
The Executive will not during, or for a period of three years after the
termination of, his employment (i) disclose the Corporation's (including its
subsidiaries') customer lists or any part thereof to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
(ii) assist in obtaining any of the Corporation's (including its subsidiaries')
existing customers for any competing business, or (iii) encourage any customer
to terminate its relationship with the Corporation or any of its subsidiaries.
17. Equitable Relief
----------------
The Executive acknowledges that, in view of the nature of the business in
which the Corporation is engaged, the restrictions contained in Sections 10
through 16 inclusive (the "Restrictions") are reasonable and necessary in order
to protect the legitimate interests of the Corporation, and that any violation
thereof would result in irreparable injuries to the Corporation, and the
Executive therefore further acknowledges that, if the Executive violates, or
threatens to violate, any of the Restrictions, the Corporation shall be entitled
to obtain from any court of competent jurisdiction, without the posting of any
bond or other security, preliminary and permanent injunctive relief as well as
damages and an equitable accounting of all earnings, profits and other benefits
arising from such violation, which rights shall be cumulative and in addition to
any other rights or remedies in law or equity to which the Corporation may be
entitled.
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18. Binding Effect
--------------
This Agreement shall be binding upon and inure to the benefit of the heirs
and representatives of the Executive and the successors and assigns of the
Corporation. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation or otherwise) to all or a significant portion of
its assets, by agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Corporation would be required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Corporation in accordance with the operation of law and such successor shall be
deemed the "Corporation" for purposes of this Agreement.
19. Notices
-------
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered by hand or
sent by facsimile transmission with telephonic confirmation of receipt, or
mailed within the continental United States by first-class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the Board or the Corporation, to:
Imperial Credit Industries, Inc.
Building One, Suite 240
23550 Hawthorne Boulevard
Torrance, California 90505
Attention: General Counsel
(b) if to the Executive, to:
H. Wayne Snavely
2500 Paseo Del Mar
Palos Verdes Estates, CA 90274
Such addresses may be changed by written notice sent to the other party at
the last recorded address of that party.
20. Arbitration of All Disputes
---------------------------
(a) Any controversy or claim arising out of or relating to this
Agreement or the breach thereof (including the arbitrability of any controversy
or claim), shall be settled by arbitration in the City of Los Angeles in
accordance with the laws of the State of California by one arbitrator. If the
parties cannot agree on the appointment of an arbitrator, then the arbitrator
shall be appointed by the American Arbitration Association. The arbitration
shall be conducted in accordance with the rules of the American Arbitration
Association, except with respect to the selection of an arbitrator which shall
be as provided in this Paragraph 20. The
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<PAGE>
cost of any arbitration proceeding hereunder shall be borne equally by the
Corporation and the Executive. The award of the arbitrator shall be binding
upon the parties. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
(b) If it shall be necessary or desirable for the Executive to retain legal
counsel and incur other costs and expenses in connection with the enforcement of
any or all of his rights under this Agreement, and provided that the Executive
substantially prevails in the enforcement of such rights, the Corporation shall
pay (or the Executive shall be entitled to recover from the Corporation, as the
case may be) the Executive's reasonable attorneys' fees and costs and expenses
in connection with the enforcement of his rights including the enforcement of
any arbitration award.
21. No Assignment
-------------
Except as otherwise expressly provided herein, this Agreement is not
assignable by any party and no payment to be made hereunder shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
other charge.
22. Execution in Counterparts
-------------------------
This Agreement may be executed by the parties hereto in two
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the same instrument, and all signatures
need not appear on any one counterpart.
23. Jurisdiction and Governing Law
------------------------------
This Agreement shall be construed and interpreted in accordance with
and governed by the laws of the State of California, without reference to its
conflict of laws provisions.
24. Severability
------------
If any provision of this Agreement shall be adjudged by any court of
competent jurisdiction to be invalid or unenforceable for any reason, such
judgment shall not affect, impair or invalidate the remainder of this Agreement.
25. Entire Agreement
----------------
This Agreement embodies the entire agreement of the parties hereof,
and supersedes all other oral or written agreements or understandings between
them regarding the subject matter hereof. No change, alteration or modification
hereof may be made except in a writing, signed by each of the parties hereto.
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<PAGE>
26. Headings Descriptive
--------------------
The headings of the several paragraphs of this Agreement are inserted
for convenience only and shall not in any way affect the meaning or construction
of any of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement as of the day and year first above written.
IMPERIAL CREDIT INDUSTRIES, INC. EXECUTIVE
By: /s/ Robert Muehlenbeck By: /s/ H. Wayne Snavely
--------------------------- --------------------
Name: Robert Muehlenbeck H. Wayne Snavely
Title: Chairman, Compensation Committee
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<PAGE>
EXHIBIT 10.21
EMPLOYMENT AND NON-COMPETITION AGREEMENT
----------------------------------------
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made and
entered into as of January 1, 1997, by and between Imperial Credit Industries,
Inc. (the "Corporation"), a California corporation, and Kevin E. Villani, an
individual (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to employ the Executive as its Executive
Vice President and Chief Financial Officer; and
WHEREAS, Executive has agreed not to compete with Corporation or use any
confidential and proprietary business information regarding the business of
Corporation to the detriment of Corporation during the term of this Agreement
(and thereafter as applicable) in order to induce Corporation to enter into this
Agreement and to perform its obligations hereunder; and
WHEREAS, the Executive desires to accept such employment under the terms
and conditions herein stated.
NOW, THEREFORE, the Corporation and the Executive, each intending to be
legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term
-------------------
(a) Employment - The Corporation hereby offers to employ the Executive as
the Execution Vice President and Chief Financial Officer of the Corporation on
the terms and conditions set forth herein, and the Executive hereby accepts such
employment, for the term set forth in Section 1(b).
(b) Term - The employment hereunder shall be for a term of five years (the
"Term") commencing on January 1, 1997 and terminating on December 31, 2002 (the
"Expiration Date"), provided that such term may be extended if authorized by the
Board and evidenced by a written agreement signed by the Chairman of the
Corporation and the Executive.
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<PAGE>
2. Duties
------
During his Term, the Executive shall serve as Chief Financial Officer of
the Corporation and shall have all powers and duties consistent with such
position subject to the direction of the Chairman of the Corporation, to whom
the Executive shall report. The Executive shall devote his full time and
attention and best efforts to fulfill faithfully, responsibly and to the best of
his ability his duties hereunder.
3. Compensation
------------
(a) Base Salary - For services performed by the Executive for the
Corporation pursuant to this Agreement during his Term, the Corporation shall
pay the Executive a base salary ("Base Salary") at the rate of $300,000 per
year, payable twice each month in the amount of $12,500 on the 15th day and the
last day of each month, or in accordance with the Corporation's regular payroll
practices. Any compensation which may be paid to the Executive under any
additional compensation plan of the Corporation, or which may be otherwise
authorized from time to time by the Board, shall be in addition to the Base
Salary to which the Executive shall be entitled under this Agreement.
(b) Annual Bonus - For each full year during his Term, commencing on
January 1, 1997, the Executive shall be eligible to receive a cash bonus based
on the Corporation's achievement of certain financial goals established at the
beginning of such year by the Board's Compensation Committee. For calendar year
1997, and until changed by the Board's Compensation committee, the annual cash
bonus award shall be determined on the basis of the performance of three
components, namely, the Corporation's return on equity, the Corporation's
earnings per share and the relative change in the dollar value of a share of the
Corporation's common stock. Depending on the results of each component, the
Executive's cash bonus will range from $0 to $400,000, as follows:
i) Return on Equity - If the Corporation's return on equity for the
calendar year is less than 15%, no cash bonus shall be paid for this component.
If the return on equity is from 15% to 20%, the cash bonus shall be $66,667 for
this component; if from 20% to 25%, $100,000; and, if 25% or more, $133,333;
ii) Earnings per share - If the Corporation's earnings per share are
less than $1.25 for the calendar year, no cash bonus shall be paid for this
component. If earnings per share are from $1.25 to $1.50, the cash bonus shall
be $66,667 for this component; if from $1.50 to $1.75, $100,000; and, if $1.75
or more, $133,333;
iii) Stock Performance - If the performance of the Corporation's
common stock, as measured by the increase (decrease) in the average closing
price reported by NASDAQ for the fourth quarter of 1997 divided by the average
closing price for the fourth quarter of 1996 and stated as a percentage, is less
than the fourth quarter percentage increase (or more than the fourth quarter
percentage decrease) for the Standard and Poor's 500 stock index, no cash bonus
shall be paid for this component. If the Corporation's common stock performance
as measured on this basis equals or
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exceeds Standard and Poor's 500 stock index performance for the same period
by up to 10%, the cash bonus shall be $66,667 for this component; if from
10% to 20%, $100,000; and, if 20% or more, $133,333. The bonus payable for
any calendar year shall be paid to the Executive no later than the 15th day
of April of the following year. This annual bonus arrangement shall be in
lieu of the Executive's participation in any other cash bonus or cash
incentive plan or arrangement of the Corporation; provided, however, that
the foregoing shall not preclude the Executive from participating in any
equity or equity-based compensation program of the Corporation, and the
bonus program set forth herein may be replaced with a different program
approved by the Board's Compensation Committee and agreed with the
Executive.
(c) Equity - The Executive shall be eligible to receive grants of common
stock of the Corporation under the 1996 Stock option Plan (the "Plan") and any
successor or addition thereto, in the sole discretion of the Board-appointed
committee which administers the Plan.
(d) Tax Withholding - The Corporation shall provide for the withholding
of any taxes required to be withheld by federal, state and local law with
respect to any payment in cash, shares of capital stock or other property made
by or on behalf of the Corporation to or for the benefit of the Executive under
this Agreement or otherwise. The Corporation may, at its option: (i) withhold
such taxes from any cash payments owing from the Corporation to the Executive,
including any payments owing under any other provision of the Agreement, (ii)
require the Executive to pay to the Corporation in cash such amount as may be
required to satisfy such withholding or (iii) make other satisfactory
arrangements with the Executive to satisfy such withholding obligations.
4. Benefits
--------
In addition to the Base Salary to be paid to the Executive pursuant to
Section 3(a) hereof and any annual bonuses earned by, and discretionary grants
of common stock awarded to, the Executive pursuant to Sections 3(b) and 3(c)
hereof, the Executive shall also be entitled to the following:
(a) Participation in Insurance and Healthcare Benefit Plans - Except as
otherwise expressly provided herein, the Executive and his dependents shall be
enrolled in the Corporation's insurance and healthcare benefit group plans in
accordance with established Corporation policies.
(b) Participation in the Corporation's 401(k) Plan - The Executive shall
be entitled to participate in the Corporation's 401(k) Plan in accordance with
established Corporation policies.
(c) Expense Reimbursement - The Corporation shall reimburse the
Executive, upon proper accounting, for reasonable business expenses incurred by
him in the course of the performance of his duties under this Agreement.
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<PAGE>
(d) Vacations, Holidays, Absences and Leaves - The Executive shall be
entitled to the benefit of the vacation, holiday, absence and leave policies
applicable to all employees of comparable title or status in the Corporation.
(e) Automobile Allowance - The Corporation shall pay the Executive a
monthly automobile allowance of $500, to be applied in the Executive's
discretion. The Corporation shall not provide the Executive any vehicles,
insurance or the cost of any maintenance hereunder.
(f) Proration of Benefits - Any payments or benefits pursuant to this
Section 4, in any year during which the Executive is employed by the Corporation
for less than the entire year, shall, unless otherwise provided herein or in the
applicable plan or arrangement, be prorated in accordance with the number of
days in such year during which the Executive is employed by the Corporation.
5. Indemnification
---------------
The Executive shall be entitled to the maximum indemnification provided
by the Bylaws and the Articles of Incorporation of the Corporation for officers,
directors and employees of the Corporation. The Executive's rights under this
paragraph shall continue without time limit so long as he may be subject to any
such liability, whether or not the Executive's term of employment by the
Corporation may have ended.
6. Representations and Warranties of the Executive
-----------------------------------------------
The Executive hereby represents and warrants to the Corporation that (a)
the Executive's execution and delivery of this Agreement and his performance of
his duties and obligations hereunder will not conflict with, or cause a default
under, or give any party a right to damages under, or to terminate, any other
agreement to which the Executive is a party or by which he is bound, and (b)
there are no agreements or understandings that would make unlawful the
Executive's execution or delivery of this Agreement or his employment hereunder.
7. Representations and Warranties of the Corporation
-------------------------------------------------
The Corporation hereby represents and warrants to the Executive as
follows:
(a) The Corporation is duly organized and established as a corporation
under the laws of the State of California and has all requisite power and
authority to enter into this Agreement and to perform its obligations hereunder.
The consummation of the transactions contemplated by this Agreement will neither
violate nor be in conflict with any agreement or instrument to which the
Corporation is a party or by which it is bound.
(b) The execution, delivery and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized by all
requisite corporate action on
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<PAGE>
the part of the Corporation and are valid, legal and binding obligations of the
Corporation, enforceable in accordance with their terms except as may be limited
by laws of general application relating to bankruptcy, insolvency, moratorium or
other similar laws relating to or affecting the enforcement of creditors' rights
generally, and rules of law governing specific performance, injunctive relief or
other equitable remedies.
8. Termination
-----------
Executive's employment shall terminate prior to the Expiration Date upon
the happening of any of the following events:
A. For Cause
---------
The Executive may be terminated for Cause immediately upon receipt of
notice pursuant to a good faith determination to terminate for Cause made by a
majority of the Board. For purposes of this Agreement, "Cause" means:
(1) the Executive engages in any act of theft, embezzlement,
falsification of records, misappropriation of funds or property, or fraud
against, or with respect to the business of, the Corporation or any affiliate;
(2) current use of illegal drugs on or off the job or current addiction
to alcohol, unless the Executive voluntarily requests accommodation for
rehabilitation before such time as the Corporation notifies the Executive that
it suspects the Executive's use of illegal drugs or addiction to alcohol;
(3) the Executive commits a breach of any material term of this
Agreement or any other material legal obligation to the Corporation and, if such
breach is capable of being cured, fails to cure such breach within 30 days of
notice of such breach;
(4) the Executive is convicted of, or pleads guilty or nolo contendere
to a felony or a crime involving moral turpitude, breach of trust or dishonesty;
(5) the Executive commits any act that causes, or knowingly fails to
take reasonable and appropriate action to prevent, any material injury to the
financial condition or business reputation of the Corporation or any of its
affiliates; however, this shall not apply to any act of the Corporation or its
affiliates by any other employee thereof except to the extent that such act is
committed at the direction, or with the knowledge, of the Executive; or
(6) the Executive ceases to devote his full time and attention and best
efforts to his duties hereunder.
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<PAGE>
B. Good Reason (by the Executive)
-----------------------------
The Executive's employment may be terminated by the Executive at any time
for any of the following reasons (each of which is referred to herein as "Good
Reason") by giving the Corporation notice of the effective date of such
termination (which effective date may be the date of such notice):
(1) the Corporation commits a breach of any material term of this
Agreement and, if such breach is capable of being cured, fails to cure such
breach within 30 days of receipt of notice of such breach; or
(2) the Corporation removes the Executive from the position of Chief
Financial Officer of the Corporation, other than for Cause.
C. Executive's Rights to Terminate
-------------------------------
The Executive may, at his option, terminate his employment hereunder for
any reason upon 60 days prior written notice to the Corporation.
D. Death
-----
This Agreement shall terminate automatically upon the Executive's death.
E. Disability
----------
The Corporation may terminate the Executive's employment upon a good
faith determination by the Board that Executive has become so physically or
mentally disabled as to be incapable of satisfactorily performing his duties
hereunder for a period of 180 consecutive days, such determination to be based
upon a certificate as to such physical or mental disability issued by a licensed
physician or psychiatrist employed by the Corporation.
F. Without Cause
-------------
The Corporation may, at its option, terminate the Executive's employment
without Cause at any time upon written notice to the Executive.
G. Date of Termination
-------------------
For purposes of this Agreement, the term "Date of Termination" shall mean
the later of the date that any party gives written notice that it intends to
terminate this Agreement pursuant to the terms hereof or the date, if any,
specified by the terminating party in such notice as the effective date of
termination.
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<PAGE>
9. Obligations of the Corporation Upon Termination
-----------------------------------------------
(a) Cause - If the Executive's employment shall be terminated for
Cause, the Corporation's obligations to the Executive shall terminate, other
than the obligation (i) to pay to the Executive his Base Salary through the
Date of Termination at the rate in effect on the day preceding the Date of
Termination, and (ii) to continue to provide the Executive with benefits of the
type described in Section 4 through the Date of Termination.
(b) Voluntary - If the Executive terminates his employment for other
than Good Reason (a "Voluntary Termination"), this Agreement shall terminate
without further obligation to the Executive hereunder, other than the obligation
(i) to pay the Executive his Base Salary through the Date of Termination at the
rate in effect on the day preceding the Date of Termination and any previously
awarded but not yet paid cash bonus; and (ii) to continue to provide the
Executive with benefits of the type described in Section 4 through the Date of
Termination.
(c) Without Cause or for Good Reason - If the Corporation shall
terminate the Executive's employment without Cause, or if the Executive shall
-------
terminate his employment for Good Reason, the Corporation shall (i) continue in
accordance with the Corporation's normal payroll procedures to pay the Executive
his Base Salary through the Date of Termination and the pro rata portion of any
cash bonus award the Executive would be entitled to receive as of year end, (ii)
continue to provide the Executive with benefits of the type described in Section
4 through the Expiration Date and (iii) pay the Severance Amount to the
Executive pro rata from the Date of Termination to the end of that month and
thereafter as of the first day of each month commencing with the month
immediately following the month in which the Date of Termination occurs and
ending on the Expiration Date; provided, however, that payment of the Severance
Amount shall be suspended during any period in which the Executive is an
employee or independent contractor of a company that in the Board's opinion
competes with the Corporation.
"Severance Amount" shall mean $300,000 annual compensation benefit
reduced by the actuarial equivalent of the Executive's projected primary Social
Security benefit. If the Executive resigns for Good Reason prior to the first
anniversary of the date of this Agreement, the Severance Amount shall equal 50%
of the monthly amount calculated as described in the immediately preceding
sentence. In the event Executive becomes an employee or independent contractor
of another company following the first anniversary of the date of this Agreement
and Executive is compensated at an annual rate that is less than $300,000, the
Severance Amount shall be adjusted to equal the annual rate of $300,000 minus
the Executive's annual compensation pro rated at his new employer. No Severance
Amount shall be paid if the Executive's total annual cash compensation at his
new employer exceeds the amount calculated in the first sentence of this
paragraph.
10. Non-Competition
---------------
The Executive acknowledges and recognizes the highly competitive nature
of the business of the Corporation and its affiliates as well as his extensive
participation in the ownership of the common stock of the Corporation. The
Executive accordingly agrees, until
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the third anniversary of the Executive's termination or resignation of
employment (such date being hereafter referred to as the "Restricted Date"), as
follows:
(a) The Executive will not directly or indirectly engage (as owner,
stockholder, partner or otherwise, except as a holder of fewer than 5% of the
outstanding shares or other equity interests of a company whose shares or other
equity interests are publicly traded) in any business which directly or
indirectly competes with the business of the Corporation or any of its
affiliates within the same jurisdictions in which the Corporation or any of its
affiliates engages in business at the time of the Executive's termination or
resignation, as the case may be.
(b) The Executive will not directly or indirectly induce any employee of
the Corporation or any of its affiliates to engage in any activity in which the
Executive is prohibited from engaging by paragraph (a) above or to terminate his
employment with the Corporation or any of its affiliates, and will not directly
or indirectly employ or offer employment to any person who was employed by the
Corporation or any of its affiliates unless such person shall have been
terminated without cause or ceased to be employed by any such entity for a
period of at least 12 months.
(c) The Executive will not make any statement or take any action intended
to impair the goodwill or the business reputation of the Corporation or any of
its affiliates, or to be otherwise detrimental to the interests of the
Corporation or any of its affiliates, including any action or statement
intended, directly or indirectly, to benefit a competitor of the Corporation or
any of its affiliates.
(d) It is expressly understood and agreed that although the Executive
and the Corporation consider the restrictions contained in this Section 10 to
be reasonable, if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against the Executive, the
provisions of this Agreement shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such maximum
extent as such court may judicially determine or indicate to be enforceable.
Alternatively, if any court of competent jurisdiction finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such finding shall not affect the
enforceability of any of the other restrictions contained herein.
11. Proprietary Information
-----------------------
Through the Restricted Date, the Executive shall not use for his personal
benefit, or disclose, communicate or divulge to, or use for the direct or
indirect benefit on any person, firm, association or company other than the
Corporation, any Proprietary Information. "Proprietary Information" means
information relating to the properties, prospects, products, services or
operations of the Corporation or any direct or indirect affiliate thereof that
is not generally known, is proprietary to the Corporation or such affiliate and
is made known to the Executive or learned or acquired by the Executive while in
the employ of the Corporation, including, without limitation, information
concerning trade secrets of the Corporation, or any of the Corporation's
affiliates and any improvements relating to the products of the Corporation in
accounting, marketing, selling, leasing, financing and other business methods
and
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techniques. However, Proprietary Information shall not include (A) at the time
of disclosure to the Executive such information that was in the public domain or
later entered the public domain other than as a result of a breach of an
obligation herein; or (B) subsequent to disclosure to the Executive, Executive
received such information from a third party under no obligation to maintain
such information in confidence, and the third party came into possession of such
information other than as a result of a breach of an obligation herein. All
materials or articles of information of any kind furnished to the Executive by
the Corporation or developed by the Executive in the course of his employment
hereunder are and shall remain the sole property of the Corporation; and if the
Corporation requests the return of such information at any time during, upon or
after the termination of the Executive's employment hereunder, the Executive
shall immediately deliver the same to the Corporation.
12. Ownership of Proprietary Information
------------------------------------
The Executive agrees that all Proprietary Information shall be the sole
property of the Corporation and its assigns, and the Corporation and its assigns
shall be the sole owner of all licenses and other rights in connection with such
Proprietary Information. At all times, until the Restricted Date, the Executive
will keep in the strictest confidence and trust all Proprietary Information and
will not use or disclose such Proprietary Information, or anything relating to
such information, without the prior written consent of the Corporation, except
as may be necessary in the ordinary course of performing his duties under this
Agreement.
13. Documents and Other Property
----------------------------
All materials and articles of information of any kind furnished to the
Executive in the course of his employment hereunder are and shall remain the
sole property of the Corporation; and if the Corporation requests the return of
such information at any time during, upon or after the termination of the
Executive's employment hereunder, the Executive shall immediately deliver the
same to the Corporation. The Executive will not, without the prior written
consent of the Corporation, retain any documents, data or property, or any
reproduction thereof of any description, belonging to the Corporation or
pertaining to any Proprietary Information.
14. Third Party Information
-----------------------
The Corporation from time to time receives from third parties
confidential or proprietary information subject to a duty on the Corporation's
part to maintain the confidentiality of such information and to use it only for
certain limited purposes ("Third Party Information"). At all times the
Executive will hold Third Party Information in the strictest confidence and
will not disclose or use Third Party Information except as permitted by the
agreement between the Corporation and such third party.
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15. Intellectual Property
---------------------
Any and all products, including but not limited to marketing and
financing materials and methods ("Products") made, developed or created by the
Executive (whether at the request or suggestion of the Corporation or otherwise,
whether alone or in conjunction with others, and whether during regular hours of
work or otherwise) (i) during the period of this Agreement, or (ii) within a
period of one year after the date of termination or resignation of employment
hereunder, which may be directly or indirectly useful in, or relate to, the
business of or tests being carried out by any member of the Corporation, shall
be promptly and fully disclosed by the Executive to the members of the Board
and, if such intellectual property was made, developed or created other than
pursuant to the Executive's employment hereunder, the Executive shall grant the
Corporation a perpetual, royalty free license to such intellectual property, and
if such intellectual property was made, developed or created pursuant to the
Executive's employment hereunder, such intellectual property shall be the
Corporation's exclusive property as against the Executive, and the Executive
shall promptly deliver to an appropriate representative of the Corporation as
designated by the Board all papers, drawings, models, data and other material
relating to any invention made, developed or created by him as aforesaid. The
Executive shall, at the request of the Corporation and without any payment
therefor, execute any documents necessary or advisable in the opinion of the
Corporation's counsel or direct issuance of patents or copyrights to the
Corporation with respect to such Products as are to be the Corporation's
exclusive property as against the Executive or to vest in the Corporation title
to such Products as against the Executive. The expense of securing any such
patent or copyright shall be borne by the Corporation.
16. Customer Lists
--------------
The Executive will not during, or for a period of three years after the
termination of, his employment (i) disclose the Corporation's (including its
subsidiaries') customer lists or any part thereof to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
(ii) assist in obtaining any of the Corporation's (including its subsidiaries')
existing customers for any competing business, or (iii) encourage any customer
to terminate its relationship with the Corporation or any of its subsidiaries.
17. Equitable Relief
----------------
The Executive acknowledges that, in view of the nature of the business
in which the Corporation is engaged, the restrictions contained in Sections 10
through 16 inclusive (the "Restrictions") are reasonable and necessary in order
to protect the legitimate interests of the Corporation, and that any violation
thereof would result in irreparable injuries to the Corporation, and the
Executive therefore further acknowledges that, if the Executive violates, or
threatens to violate, any of the Restrictions, the Corporation shall be entitled
to obtain from any court of competent jurisdiction, without the posting of any
bond or other security, preliminary and permanent injunctive relief as well as
damages and an equitable accounting of all earnings, profits and other benefits
arising from such violation, which rights shall be
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cumulative and in addition to any other rights or remedies in law or equity to
which the Corporation may be entitled.
18. Binding Effect
--------------
This Agreement shall be binding upon and inure to the benefit of the
heirs and representatives of the Executive and the successors and assigns of the
Corporation. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation or otherwise) to all or a significant portion of
its assets, by agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Corporation would be required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Corporation in accordance with the operation of law and such successor shall be
deemed the "Corporation " for purposes of this Agreement.
19. Notices
-------
All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered by hand
or sent by facsimile transmission with telephonic confirmation of receipt, or
mailed within the continental United States by first-class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the Board or the Corporation, to:
Imperial Credit Industries, Inc.
Building One, Suite 240
23550 Hawthorne Boulevard
Torrance, California 90505
Attention: General Counsel
(b) if to the Executive, to:
Kevin E. Villani
5658 Dolphin Place
La Jolla, CA 92037
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
20. Arbitration of All Disputes
---------------------------
(a) Any controversy or claim arising out of or relating to this
Agreement or the breach thereof (including the arbitrability of any controversy
or claim), shall be settled by arbitration in the City of Los Angeles in
accordance with the laws of the State of California by
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one arbitrator. If the parties cannot agree on the appointment of an arbitrator,
then the arbitrator shall be appointed by the American Arbitration Association.
The arbitration shall be conducted in accordance with the rules of the American
Arbitration Association, except with respect to the selection of an arbitrator
which shall be as provided in this Paragraph 20. The cost of any arbitration
proceeding hereunder shall be borne equally by the Corporation and the
Executive. The award of the arbitrator shall be binding upon the parties.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof.
(b) If it shall be necessary or desirable for the Executive to retain
legal counsel and incur other costs and expenses in connection with the
enforcement of any or all of his rights under this Agreement, and provided that
the Executive substantially prevails in the enforcement of such rights, the
Corporation shall pay (or the Executive shall be entitled to recover from the
Corporation, as the case may be) the Executive's reasonable attorneys' fees and
costs and expenses in connection with the enforcement of his rights including
the enforcement of any arbitration award.
21. No Assignment
-------------
Except as otherwise expressly provided herein, this Agreement is not
assignable by any party and no payment to be made hereunder shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
other charge.
22. Execution in Counterparts
-------------------------
This Agreement may be executed by the parties hereto in two
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the same instrument, and all signatures
need not appear on any one counterpart.
23. Jurisdiction and Governing Law
-------------------------------
This Agreement shall be construed and interpreted in accordance with
and governed by the laws of the State of California, without reference to its
conflict of laws provisions.
24. Severability
------------
If any provision of this Agreement shall be adjudged by any court of
competent jurisdiction to be invalid or unenforceable for any reason, such
judgment shall not affect, impair or invalidate the remainder of this Agreement.
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25. Entire Agreement
----------------
This Agreement embodies the entire agreement of the parties hereof, and
supersedes all other oral or written agreements or understandings between them
regarding the subject matter hereof. No change, alteration or modification
hereof may be made except in a writing, signed by each of the parties hereto.
26. Headings Descriptive
--------------------
The headings of the several paragraphs of this Agreement are inserted
for convenience only and shall not in any way affect the meaning or construction
of any of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
IMPERIAL CREDIT INDUSTRIES, INC. EXECUTIVE
By:/s/ H. Wayne Snavely By:/s/ Kevin E. Villani
----------------------------- --------------------------
Name: H. Wayne Snavely Kevin E. Villani
Title: Chairman and Chief Executive Officer
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EXHIBIT 10.22
EMPLOYMENT AND NON-COMPETITION AGREEMENT
----------------------------------------
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT (the "Agreement") is made and
entered into as of January 1, 1997, by and between Southern Pacific Thrift and
Loan Association (the "Corporation"), a California corporation, and Stephen J.
Shugerman, an individual (the "Executive").
WITNESSETH:
WHEREAS, the Corporation desires to employ the Executive as its President;
and
WHEREAS, Executive has agreed not to compete with Corporation or use any
confidential and proprietary business information regarding the business of
Corporation to the detriment of Corporation during the term of this Agreement
(and thereafter as applicable) in order to induce Corporation to enter into this
Agreement and to perform its obligations hereunder; and
WHEREAS, the Executive desires to accept such employment under the terms
and conditions herein stated.
NOW, THEREFORE, the Corporation and the Executive, each intending to be
legally bound, hereby mutually covenant and agree as follows:
1. Employment and Term
-------------------
(a) Employment - The Corporation hereby offers to employ the Executive as
the President of the Corporation on the terms and conditions set forth herein,
and the Executive hereby accepts such employment, for the term set forth in
Section 1(b).
(b) Term - The employment hereunder shall be for a term of five years (the
"Term") commencing on January 1, 1997 and terminating on December 31, 2002 (the
"Expiration Date"), provided that such term may be extended if authorized by the
Board and evidenced by a written agreement signed by the Chairman of the
Corporation and the Executive.
2. Duties
------
During his Term, the Executive shall serve as President of the Corporation
and shall have all powers and duties consistent with such position subject to
the direction of the Chairman of the Corporation, to whom the Executive shall
report. The Executive shall devote
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his full time and attention and best efforts to fulfill faithfully, responsibly
and to the best of his ability his duties hereunder.
3. Compensation
------------
(a) Base Salary - For services performed by the Executive for the
Corporation pursuant to this Agreement during his Term, the Corporation shall
pay the Executive a base salary ("Base Salary") at the rate of $250,000 per
year, payable twice each month in the amount of $10,416.67 on the 15th day and
last day of each month, or in accordance with the Corporation's regular payroll
practices. Any compensation which may be paid to the Executive under any
additional compensation plan of the Corporation, or which may be otherwise
authorized from time to time by the Board, shall be in addition to the Base
Salary to which the Executive shall be entitled under this Agreement.
(b) Annual Bonus - For each full year during his Term, commencing on
January 1, 1997, the Executive shall be eligible to receive a cash bonus based
on the Corporation's achievement of certain financial and business goals
established at the beginning of such year by the Chairman of the Corporation.
For calendar year 1997, and until changed by the Chairman, the annual cash bonus
award shall be determined on the basis of the performance of three components,
namely, Imperial Credit Industries, Inc.'s earnings per share and two
qualitative measures of the Corporation's performance. Depending on the
results of each component, the Executive's cash bonus will range from $0 to
$500,000, as follows:
(i) Earnings per share - If Imperial Credit Industries Inc.'s earnings
per share are less than $1.25 for the calendar year, no cash bonus shall be paid
for this component. If earnings per share are from $1.25 to $1.50, the cash
bonus shall be $50,000 for this component; if from $1.50 to $1.75, $100,000;
and, if $1.75 or more, $167,000;
(ii) Qualitative Objective No. 1 - If Southern Pacific Thrift and Loan
Association's existing Memorandum of Understanding with the Federal Deposit
Insurance Corporation and the California Department of Corporations is augmented
with additional corrective measures following the 1997 examination or more
severe agency actions are taken, no cash bonus shall be paid for this component.
If the Memorandum of Understanding remains in effect without substantive change
as a result of the 1997 safety and soundness examination to the date of the 1998
examination, the cash bonus shall be $50,000 for this component. If the
corrective measures required to be taken under the Memorandum of Understanding
are materially reduced in scope as a result of the 1997 examination, the cash
bonus shall be $100,000 for this component. If the Memorandum of Understanding
is removed entirely as a result of the 1997 examination or at any time prior to
the 1998 safety and soundness examination, the cash bonus shall be $167,000 for
this component;
(iii) Qualitative Objective No. 2 - If Southern Pacific Thrift and
Loan Association's 1997 safety and soundness examination rating is below the
composite rating of the prior year's safety and soundness examination, no cash
bonus shall be paid
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for this component. If the safety and soundness examination rating equals
the composite rating for the prior year, then the cash bonus shall be
$50,000 for this component. If the safety and soundness examination rating
is maintained at the prior year's level but with significant substantive
improvements noted in the report of examination, the cash bonus shall be
$100,000 for this component. If the 1997 safety and soundness examination
rating is improved from the prior year, the cash bonus shall be $167,000 for
this component.
The bonus payable for any calendar year shall be paid to the Executive no
later than the 15th day of April of the following year. This annual bonus
arrangement shall be in lieu of the Executive's participation in any other cash
bonus or cash incentive plan or arrangement of the Corporation; provided,
however, that the foregoing shall not preclude the Executive from participating
in any equity or equity-based compensation program of the Corporation, and the
bonus program set forth herein may be replaced with a different program approved
by the Chairman and agreed with the Executive.
(c) Equity - The Executive shall be eligible to receive grants of common
stock of Imperial Credit Industries, Inc. under the 1996 Stock Option Plan (the
"Plan") and any successor or addition thereto, in the sole discretion of the
Board-appointed committee which administers the Plan.
(d) Tax Withholding - The Corporation shall provide for the withholding
of any taxes required to be withheld by federal, state and local law with
respect to any payment in cash, shares of capital stock or other property made
by or on behalf of the Corporation to or for the benefit of the Executive under
this Agreement or otherwise. The Corporation may, at its option: (i) withhold
such taxes from any cash payments owing from the Corporation to the Executive,
including any payments owing under any other provision of the Agreement, (ii)
require the Executive to pay to the Corporation in cash such amount as may be
required to satisfy such withholding or (iii) make other satisfactory
arrangements with the Executive to satisfy such withholding obligations.
4. Benefits
--------
In addition to the Base Salary to be paid to the Executive pursuant to
Section 3(a) hereof and any annual bonuses earned by, and discretionary grants
of common stock awarded to, the Executive pursuant to Sections 3(b) and 3(c)
hereof, the Executive shall also be entitled to the following:
(a) Participation in Insurance and Healthcare Benefit Plans - Except as
otherwise expressly provided herein, the Executive and his dependents shall be
enrolled in the Corporation's insurance and healthcare benefit group plans in
accordance with established Corporation policies.
(b) Participation in the Corporation's 401(k) Plan - The Executive shall
be entitled to participate in the Corporation's 401(k) Plan in accordance with
established Corporation policies.
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<PAGE>
(c) Expense Reimbursement - The Corporation shall reimburse the
Executive, upon proper accounting, for reasonable business expenses incurred by
him in the course of the performance of his duties under this Agreement.
(d) Vacations, Holidays, Absences and Leaves - The Executive shall be
entitled to the benefit of the vacation, holiday, absence and leave policies
applicable to all employees of comparable title or status in the Corporation.
(e) Automobile Allowance - The Corporation shall pay the Executive a
monthly automobile allowance of $900, to be applied in the Executive's
discretion. The Corporation shall not provide the Executive any vehicles,
insurance or the cost of any maintenance hereunder.
(f) Proration of Benefits - Any payments or benefits pursuant to this
Section 4, in any year during which the Executive is employed by the Corporation
for less than the entire year, shall, unless otherwise provided herein or in the
applicable plan or arrangement, be prorated in accordance with the number of
days in such year during which the Executive is employed by the Corporation.
5. Indemnification
---------------
The Executive shall be entitled to the maximum indemnification provided
by the Bylaws and the Articles of Incorporation of the Corporation for officers,
directors and employees of the Corporation. The Executive's rights under this
paragraph shall continue without time limit so long as he may be subject to any
such liability, whether or not the Executive's term of employment by the
Corporation may have ended.
6. Representations and Warranties of the Executive
-----------------------------------------------
The Executive hereby represents and warrants to the Corporation that (a)
the Executive's execution and delivery of this Agreement and his performance of
his duties and obligations hereunder will not conflict with, or cause a default
under, or give any party a right to damages under, or to terminate, any other
agreement to which the Executive is a party or by which he is bound, and (b)
there are no agreements or understandings that would make unlawful the
Executive's execution or delivery of this Agreement or his employment hereunder.
7. Representations and Warranties of the Corporation
-------------------------------------------------
The Corporation hereby represents and warrants to the Executive as
follows:
(a) The Corporation is duly organized and established as a corporation
under the laws of the State of California and has all requisite power and
authority to enter into this Agreement and to perform its obligations hereunder.
The consummation of the transactions contemplated by this Agreement will neither
violate nor be in conflict with any agreement or instrument to which the
Corporation is a party or by which it is bound.
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<PAGE>
(b) The execution, delivery and performance of this Agreement and the
transactions contemplated hereby have been duly and validly authorized by all
requisite corporate action on the part of the Corporation and are valid, legal
and binding obligations of the Corporation, enforceable in accordance with their
terms except as may be limited by laws of general application relating to
bankruptcy, insolvency, moratorium or other similar laws relating to or
affecting the enforcement of creditors' rights generally, and rules of law
governing specific performance, injunctive relief or other equitable remedies.
8. Termination
-----------
Executive's employment shall terminate prior to the Expiration Date upon
the happening of any of the following events:
A. For Cause
---------
The Executive may be terminated for Cause immediately upon receipt of
notice pursuant to a good faith determination to terminate for Cause made by a
majority of the Board. For purposes of this Agreement, "Cause" means:
(1) the Executive engages in any act of theft, embezzlement,
falsification of records, misappropriation of funds or property, or fraud
against, or with respect to the business of, the Corporation or any affiliate;
(2) current use of illegal drugs on or off the job or current addiction
to alcohol, unless the Executive voluntarily requests accommodation for
rehabilitation before such time as the Corporation notifies the Executive that
it suspects the Executive's use of illegal drugs or addiction to alcohol;
(3) the Executive commits a breach of any material term of this Agreement
or any other material legal obligation to the Corporation and, if such breach
is capable of being cured, fails to cure such breach within 30 days of notice of
such breach;
(4) the Executive is convicted of, or pleads guilty or nolo contendere to
a felony or a crime involving moral turpitude, breach of trust or dishonesty;
(5) the Executive commits any act that causes, or knowingly fails to take
reasonable and appropriate action to prevent, any material injury to the
financial condition or business reputation of the Corporation or any of its
affiliates; however, this shall not apply to any act of the Corporation or its
affiliates by any other employee thereof except to the extent that such act is
committed at the direction, or with the knowledge, of the Executive; or
(6) the Executive ceases to devote his full time and attention and best
efforts to his duties hereunder.
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B. Good Reason (by the Executive)
------------------------------
The Executive's employment may be terminated by the Executive at any time
for any of the following reasons (each of which is referred to herein as "Good
Reason") by giving the Corporation notice of the effective date of such
termination (which effective date may be the date of such notice):
(1) the Corporation commits a breach of any material term of this
Agreement and, if such breach is capable of being cured, fails to cure such
breach within 30 days of receipt of notice of such breach; or
(2) the Corporation removes the Executive from the position of President
of the Corporation, other than for Cause.
C. Executive's Rights to Terminate
-------------------------------
The Executive may, at his option, terminate his employment hereunder for
any reason upon 60 days prior written notice to the Corporation.
D. Death
-----
This Agreement shall terminate automatically upon the Executive's death.
E. Disability
----------
The Corporation may terminate the Executive's employment upon a good
faith determination by the Board that Executive has become so physically or
mentally disabled as to be incapable of satisfactorily performing his duties
hereunder for a period of 180 consecutive days, such determination to be based
upon a certificate as to such physical or mental disability issued by a licensed
physician or psychiatrist employed by the Corporation.
F. Without Cause
-------------
The Corporation may, at its option, terminate the Executive's employment
without Cause at any time upon written notice to the Executive.
G. Date of Termination
-------------------
For purposes of this Agreement, the term "Date of Termination" shall mean
the later of the date that any party gives written notice that it intends to
terminate this Agreement pursuant to the terms hereof or the date, if any,
specified by the terminating party in such notice as the effective date of
termination.
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9. Obligations of the Corporation Upon Termination
-----------------------------------------------
(a) Cause -- If the Executive's employment shall be terminated for
Cause, the Corporation's obligations to the Executive shall terminate, other
than the obligation (i) to pay to the Executive his Base Salary through the Date
of Termination at the rate in effect on the day preceding the Date of
Termination, and (ii) to continue to provide the Executive with benefits of the
type described in Section 4 through the Date of Termination.
(b) Voluntary -- If the Executive terminates his employment for other
than Good Reason (a "Voluntary Termination"), this Agreement shall terminate
without further obligation to the Executive hereunder, other than the obligation
(i) to pay the Executive his Base Salary through the Date of Termination at the
rate in effect on the day preceding the Date of Termination and any previously
awarded but not yet paid cash bonus; and (ii) to continue to provide the
Executive with benefits of the type described in Section 4 through the Date of
Termination.
(c) Without Cause or for Good Reason -- If the Corporation shall
terminate the Executive's employment without Cause, or if the Executive shall
-------
terminate his employment for Good Reason, the Corporation shall (i) continue in
accordance with the Corporation's normal payroll procedures to pay the Executive
his Base Salary through the Date of Termination and the pro rata portion of any
cash bonus award the Executive would be entitled to receive as of year end, (ii)
continue to provide the Executive with benefits of the type described in Section
4 through the Expiration Date and (iii) pay the Severance Amount to the
Executive pro rata from the Date of Termination to the end of that month and
thereafter as of the first day of each month commencing with the month
immediately following the month in which the Date of Termination occurs and
ending on the Expiration Date; provided, however, that payment of the Severance
Amount shall be suspended during any period in which the Executive is an
employee or independent contractor of a companay that in the Board's opinion
competes with the Corporation.
"Severance Amount" shall mean an amount, calculated as of the day
preceding the Date of Termination, which is the monthly equivalent of a $250,000
annual compensation benefit reduced by the actuarial equivalent of the
Executive's projected primary Social Security benefit. If the Executive resigns
for Good Reason prior to the first anniversary of the date of this Agreement,
the Severance Amount shall equal 50% of the monthly amount calculated as
described in the immediately preceding sentence. In the event Executive becomes
an employee or independent contractor of another company following the first
anniversary of the date of this Agreement and Executive is compensated at an
annual rate that is less than $250,000, the Severance Amount shall be adjusted
to equal the annual rate of $250,000 minus the Executive's annual compensation
pro rated at his new employer. No Severance Amount shall be paid if the
Executive's total annual cash compensation at his new employer exceeds the
amount calculated in the first sentence of this paragraph.
10. Non-Competition
---------------
The Executive acknowledges and recognizes the highly competitive
nature of the business of the Corporation and its affiliates as well as his
extensive participation in the
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ownership of the common stock of the Corporation. The Executive accordingly
agrees, until the third anniversary of the Executive's termination or
resignation of employment (such date being hereafter referred to as the
"Restricted Date"), as follows:
(a) The Executive will not directly or indirectly engage (as owner,
stockholder, partner or otherwise, except as a holder of fewer than 5% of the
outstanding shares or other equity interests of a company whose shares or other
equity interests are publicly traded) in any business which directly or
indirectly competes with the business of the Corporation or any of its
affiliates within the same jurisdictions in which the Corporation or any of its
affiliates engages in business at the time of the Executive's termination or
resignation, as the case may be.
(b) The Executive will not directly or indirectly induce any employee of
the Corporation or any of its affiliates to engage in any activity in which the
Executive is prohibited from engaging by paragraph (a) above or to terminate his
employment with the Corporation or any of its affiliates, and will not directly
or indirectly employ or offer employment to any person who was employed by the
Corporation or any of its affiliates unless such person shall have been
terminated without cause or ceased to be employed by any such entity for a
period of at least 12 months.
(c) The executive will not make any statement or take any action
intended to impair the goodwill or the business reputation of the Corporation or
any of its affiliates, or to be otherwise detrimental to the interests of the
Corporation or any of its affiliates, including any action or statement
intended, directly or indirectly, to benefit a competitor of the Corporation or
any of its affiliates.
(d) It is expressly understood and agreed that although the Executive
and the Corporation consider the restrictions contained in this Section 10 to be
reasonable, if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against the Executive, the
provisions of this Agreement shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such maximum
extent as such court may judicially determine or indicate to be enforceable.
Alternatively, if any court of competent jurisdiction finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such finding shall not affect the
enforceability of any of the other restrictions contained herein.
11. Proprietary Information
-----------------------
Through the Restricted Date, the Executive shall not use for his personal
benefit, or disclose, communicate or divulge to, or use for the direct or
indirect benefit on any person, firm, association or company other than the
Corporation, any Proprietary Information. "Proprietary Information" means
information relating to the properties, prospects, products, services or
operations of the Corporation or any direct or indirect affiliate thereof that
is not generally known, is proprietary to the Corporation or such affiliate and
is made known to the Executive or learned or acquired by the Executive while in
the employ of the Corporation, including, without limitation, information
concerning trade secrets of the Corporation, or any of the Corporation's
affiliates and any improvements relating to the products of the Corporation
-8-
<PAGE>
in accounting, marketing, selling, leasing, financing and other business methods
and techniques. However, Proprietary Information shall not include (A) at the
time of disclosure to the Executive such information that was in the public
domain or later entered the public domain other than as a result of a breach of
an obligation herein; or (B) subsequent to disclosure to the Executive,
Executive received such information from a third party under no obligation to
maintain such information in confidence, and the third party came into
possession of such information other than as a result of a breach of an
obligation herein. All materials or articles of information of any kind
furnished to the Executive by the Corporation or developed by the Executive in
the course of his employment hereunder are and shall remain the sole property of
the Corporation; and if the Corporation requests the return of such information
at any time during, upon or after the termination of the Executive's employment
hereunder, the Executive shall immediately deliver the same to the Corporation.
12. Ownership of Proprietary Information
------------------------------------
The Executive agrees that all Proprietary Information shall be the sole
property of the Corporation and its assigns, and the Corporation and its assigns
shall be the sole owner of all licenses and other rights in connection with such
Proprietary Information. At all times, until the Restricted Date, the Executive
will keep in the strictest confidence and trust all Proprietary Information and
will not use or disclose such Proprietary Information, or anything relating to
such information, without the prior written consent of the Corporation, except
as may be necessary in the ordinary course of performing his duties under this
Agreement.
13. Documents and Other Property
----------------------------
All materials and articles of information of any kind furnished to the
Executive in the course of his employment hereunder are and shall remain the
sole property of the Corporation; and if the Corporation requests the return of
such information at any time during, upon or after the termination of the
Executive's employment hereunder, the Executive shall immediately deliver the
same to the Corporation. The Executive will not, without the prior written
consent of the Corporation, retain any documents, data or property, or any
reproduction thereof of any description, belonging to the Corporation or
pertaining to any Proprietary Information.
14. Third Party Information
-----------------------
The Corporation from time to time receives from third parties
confidential or proprietary information subject to a duty on the Corporation's
part to maintain the confidentiality of such information and to use it only for
certain limited purposes ("Third Party Information"). At all times the
Executive will hold Third Party Information in the strictest confidence and will
not disclose or use Third Party Information except as permitted by the agreement
between the Corporation and such third party.
-9-
<PAGE>
15. INTELLECTUAL PROPERTY
---------------------
Any and all products, including but not limited to marketing and
financing materials and methods ("Products") made, developed or created by the
Executive (whether at the request or suggestion of the Corporation or otherwise,
whether alone or in conjunction with others, and whether during regular hours of
work or otherwise) (i) during the period of this Agreement, or (ii) within a
a period of one year after the date of termination or resignation of employment
hereunder, which may be directly or indirectly useful in, or relate to, the
business of or tests being carried out by any member of the Corporation, shall
be promptly and fully disclosed by the Executive to the members of the Board
and, if such intellectual property was made, developed or created other than
pursuant to the Executive's employment hereunder, the Executive shall grant the
Corporation a perpetual, royalty free license to such intellectual property, and
if such intellectual property was made, developed or created pursuant to the
Executive's employment hereunder, such intellectual property shall be the
Corporation's exclusive property as against the Executive, and the Executive
shall promptly deliver to an appropriate representative of the Corporation as
designated by the Board all papers, drawings, models, data and other material
relating to any invention made, developed or creted by him as aforesaid. The
Executive shall, at the request of the Corporation and without any payment
therefor, execute any documents necessary or advisable in the opinion of the
Corporation's counsel or direct issuance of patents or copyrights to the
Corporation with respect to such Products as are to be the Corporation's
exclusive property as against the Executive or to vest in the Corporation title
to such Products as against the Executive. The expense of securing any such
patent or copyright shall be borne by the Corporation.
16. CUSTOMER LISTS
--------------
The Executive will not during, or for a period of three years after
termination of, his employment (i) disclose the Corporation's (including its
subsidiaries') customer lists or any part thereof to any person, firm,
corporation, association or other entity for any reason or purpose whatsoever,
(ii) assist in obtaining any of the Corporation's (including its subsidiaries')
existing customers for any competing business, or (iii) encourage any customer
to terminate its relationship with the Corporation or any of its subsidiaries.
17. EQUITABLE RELIEF
----------------
The Executive acknowledges that, in view of the nature of the business
in which the Corporation is engaged, the restrictions contained in Sections 10
through 16 inclusive (the "Restrictions") are reasonable and necessary in order
to protect the legitimate interests of the Corporation, and that any violation
thereof would result in irreparable injuries to the Corporation, and the
Executive therefore further acknowledges that, if the Executive violates, or
threatens to violate, any of the Restrictions, the Corporation shall be entitled
to obtain from any court of competent jurisdiction, without the posting of any
bond or other security, preliminary and permanent injunctive relief as well as
damages and an equitable accounting of all earnings, profits and other benefits
arising from such violation, which rights shall be
-10-
<PAGE>
cumulative and in addition to any other rights or remedies in law or equity to
which the Corporation may be entitled.
18. BINDING EFFECT
--------------
This Agreement shall be binding upon and inure to the benefit of the
heirs and representatives of the Executive and the successors and assigns of the
Corporation. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation or otherwise) to all or a significant portion of
its assets, by agreement in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in the same manner and
to the same extent that the Corporation would be required to perform this
Agreement if no such succession had taken place. Regardless of whether such
agreement is executed, this Agreement shall be binding upon any successor of the
Corporation in accordance with the operation of law and such successor shall be
deemed the "Corporation" for purposes of this Agreement.
19. NOTICES
-------
All notices, requests, demands and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered by hand
or sent by facsimile transmission with telephonic confirmation of receipt, or
mailed within the continental United States by first-class certified mail,
return receipt requested, postage prepaid, addressed as follows:
(a) if to the Board or the Corporation, to:
Imperial Credit Industries, Inc.
Building One, Suite 240
23550 Hawthorne Boulevard
Torrance, California 90505
Attention: General Counsel
(b) if to the Executive, to:
Stephen J. Shugerman
20537 Cheney Drive
Topanga, CA 90290
Such addresses may be changed by written notice sent to the other party at the
last recorded address of that party.
-11-
<PAGE>
20. Arbitration of All Disputes
---------------------------
(a) Any controversy or claim arising out of or relating to this
Agreement or the breach thereof (including the arbitrability of any controversy
or claim), shall be settled by arbitration in the City of Los Angeles in
accordance with the laws of the State of California by one arbitrator. If the
parties cannot agree on the appointment of an arbitrator, then the arbitrator
shall be appointed by the American Arbitration Association. The arbitration
shall be conducted in accordance with the rules of the American Arbitration
Association, except with respect to the selection of an arbitrator which shall
be as provided in this Paragraph 20. The cost of any arbitration proceeding
hereunder shall be borne equally by the Corporation and the Executive. The award
of the arbitrator shall be binding upon the parties. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof.
(b) If it shall be necessary or desirable for the Executive to retain
legal counsel and incur other costs and expenses in connection with the
enforcement of any or all of his rights under this Agreement, and provided that
the Executive substantialy prevails in the enforcement of such rights, the
Corporation shall pay (or the Executive shall be entitled to recover from the
Corporation, as the case may be) the Executive's reasonable attorney's fees and
costs and expenses in connection with the enforcement of his rights including
the enforcement of any arbitration award.
21. No Assignment
-------------
Except as otherwise expressly provided herein, this Agreement is not
assignable by any party and no payment to be made hereunder shall be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
other charge.
22. Execution in Counterparts
-------------------------
This Agreement may be executed by the parties hereto in two counterparts,
each of which shall be deemed to be an original, but all such counterparts shall
constitute one and the same instrument, and all signatures need not appear on
any one counterpart.
23. Jurisdiction and Governing Law
------------------------------
This Agreement shall be construed and interpreted in accordance with and
governed by the laws of the State of California, without reference to its
conflict of laws provisions.
24. Severability
------------
If any provision of this Agreement shall be adjudged by any court of
competent jurisdiction to be invalid or unenforceable for any reason, such
judgment shall not affect, impair or invalidate the remainder of this Agreement.
-12-
<PAGE>
25. Entire Agreement
----------------
This Agreement embodies the entire agreement of the parties hereof, and
supersedes all other oral or written agreements or understandings between them
regarding the subject matter hereof. No change, alteration or modification
hereof may be made except in a writing, signed by each of the parties hereto.
26. Headings Descriptive
--------------------
The headings of the several paragraphs of this Agreement are inserted
for convenience only and shall not in any way affect the meaning or construction
of any of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
SOUTHERN PACIFIC
THRIFT & LOAN ASSOCIATION EXECUTIVE
By:/s/ H. Wayne Snavely By: /s/ Stephen J. Shugerman
--------------------- ------------------------
Name: H. Wayne Snavely Name: Stephen J. Shugerman
Title: Chairman Title: President
-13-
<PAGE>
EXHIBIT 10.23
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
AMONG
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
AND
IMPERIAL CREDIT INDUSTRIES, INC.
AND
FLRT, INC.
DATED AS OF
August 26, 1997
- --------------------------------------------------------------------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of August 26, 1997, by and among FRANCHISE MORTGAGE ACCEPTANCE COMPANY
(the "Company"), IMPERIAL CREDIT INDUSTRIES, INC. ("Imperial") and FLRT, INC.
("FLRT" and collectively, Imperial and FLRT are the "Selling Stockholders").
1. Consideration. The Selling Stockholders and the Company have agreed to
-------------
enter into this Agreement to provide the registration rights set forth
herein and to otherwise perform their respective obligations hereunder in
consideration of the mutual covenants contained herein.
2. Definitions. The following definitions shall apply in addition to those
-----------
terms defined elsewhere herein:
a. "Common Stock" means the Company's Common Stock, $0.001 par value per
share.
b. "Continuous Offering" means an Offering pursuant to Rule 415 under the
Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if
applicable.
c. "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
d. "FLRT Shares" means the shares of Common Stock, and any other
securities into which the Common Stock may be changed by virtue of any merger,
consolidation or recapitalization or otherwise, owned of record by FLRT as of
the date hereof.
e. "Imperial Shares" means the shares of Common Stock, and any other
securities into which the Common Stock may be changed by virtue of any merger,
consolidation or recapitalization or otherwise, owned of record by Imperial as
of the date hereof.
f. "Offering" means any public offering of the Common Stock of the
Company, whether or not subject to the registration requirements of the
Securities Act, and any other method of disposition of the Common Stock of the
Company that is subject to the registration requirements of the Securities Act
or any other applicable federal or state statute or regulation.
g. "Offering Documents" means all documents relating to an Offering which
are required to be filed with any governmental agency or authority or to be
delivered to any Person to whom securities of the Company are offered for sale
or sold, including, without limitation, Registration
2
<PAGE>
Statements, Prospectuses, and preliminary Prospectuses, and all material
incorporated by reference therein, and any schedule or exhibit to any of the
foregoing, in each case as such documents may be amended from time to time.
h. "Party" means Imperial, FLRT or the Company and "Parties" means all of
Imperial, FLRT and the Company.
i. "Person" means any individual, corporation, partnership, limited
liability company, association, trust or unincorporated association.
j. "Prospectus" means the prospectus included in a Registration Statement,
relating to an Offering in which Common Stock is included, as amended or
supplemented by a prospectus supplement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
k. "Registration Expenses" means, with respect to an Offering, any and all
expenses incident to the Company's performance of or compliance with the
provisions of this Agreement, including without limitation (a) fees for any
filings required to be made with the National Association of Securities Dealers,
Inc., or the SEC in connection with such Offering, and any other registration
and filing fees, (b) all fees and expenses of complying with securities or blue
sky laws (including reasonable fees and disbursements of counsel in connection
with blue sky qualifications of the Common Stock to be included in such
Offering), (c) all printing, messenger, telephone, and delivery expenses, (d)
all fees and expenses incurred in connection with the listing of the Common
Stock to be included in such Offering on any securities exchange, (e) the
reasonable fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance, and (f) the reasonable fees and disbursements of the Selling
Stockholders' outside counsel, outside accountants, investment bankers, and
financial consultants, if any, in connection with any Offering.
l. "Registration Statement" means a registration statement filed with the
SEC pursuant to the Securities Act, relating to an Offering in which Common
Stock is included, including any pre-or post-effective amendment thereto, the
Prospectus included therein, and all material incorporated by reference therein,
and any schedule or exhibit to any of the foregoing.
m. "Rule 144" means Rule 144 under the Securities Act, 17 C.F.R. 230.144,
or any successor rule of the SEC, if applicable.
n. "SEC" means the Securities and Exchange Commission.
o. "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
3
<PAGE>
p. "Securities Offering Regulations" means any regulations promulgated by
any agency or authority of the United States government, under the Securities
Act, or any statute hereafter enacted into law, relating to or governing an
Offering of securities by the Company.
3. a. Incidental Registration Rights. If the Company proposes to make an
------------------------------
Offering of its Common Stock and to prepare Offering Documents not
required pursuant to Paragraph 4 (other than any registration by the
Company on Form S-8 or a successor or substantially similar form of
(A) an employee stock option, stock purchase or compensation plan or
securities issued or to be issued pursuant to any such plan, or (B) a
dividend investment plan), the Company will give prompt written notice
to Imperial of its intention to do so and of Imperial's rights under
this Paragraph 3. Upon the written request of Imperial made within
thirty (30) days after the receipt of any such notice (which request
shall specify the number of Imperial Shares intended to be disposed of
by Imperial), the Company will include in the Offering Documents
relating to such Offering all Imperial Shares that the Company has
been requested to include by Imperial; provided, that if at any time
after giving written notice under this Paragraph 3 the Company shall
determine for any reason not to proceed with the proposed Offering,
the Company may, at its election, give written notice of such
determination to Imperial and thereupon shall be relieved of its
obligations to Imperial with respect to such proposed Offering under
this Paragraph 3. Imperial shall be entitled to withdraw its request
for the inclusion of Imperial Shares in an Offering and withdraw from
the Offering at any time before the time that the Offering Documents,
including any Registration Statement (if applicable), are declared
effective and the Offering has commenced.
b. Continuous Offering. If the Company intends to effect a Continuous
-------------------
Offering, the Company will give written notice thereof to Imperial and
include in such Offering all of the Imperial Shares which Imperial
elects to include in such Offering. During the period in which a
Registration Statement (if applicable) with respect to a Continuous
Offering is effective, if Imperial desires to sell Imperial Shares in
a transaction covered by such Registration Statement, it shall give
notice to the Company of the proposed date of such sale at least
thirty (30) days before such proposed date of sale, and the Company
shall take all actions necessary to permit such sale. Within fifteen
(15) days of receipt of notice of a proposed sale by Imperial, the
Company will advise Imperial either that it has no objection to such
sale or that such sale should be delayed for up to sixty (60) days, on
the basis that the Company is involved in a confidential proposed
transaction or negotiations therefor (which have been previously
disclosed to the Company's Board of Directors) which would not require
the Company to make or amend any public filings under the securities
laws at that time. If the Company has not objected to
4
<PAGE>
such proposed sale as permitted in this subparagraph (b) within such
fifteen (15) day period, the Company shall take all actions necessary
to permit such sale on the proposed date of sale pursuant to such
Registration Statement.
c. Underwritten Offerings. In the case of an underwritten Offering
----------------------
initiated by the Company under this Paragraph 3, including
underwritten Offerings effected as part of a Continuous Offering, the
underwriter(s) and the managing underwriter shall be selected by the
Company. If the managing underwriter advises the Company in writing
that, in its opinion, the number of Imperial Shares and securities of
the Company, if any, being sold exceeds the number that can be sold in
such Offering, so as to be likely to have an adverse effect on the
price at which the Company can sell securities for its own account,
then there shall be included in such Offering (and in the Offering
Documents) first, securities of the Company being sold for its own
account, and second, the maximum number of Imperial Shares requested
to be included in such Offering which, in the opinion of such managing
underwriter, can be sold without having such adverse effect on such
price. If Imperial Shares are so excluded from registration in an
Offering, the Company shall, upon the request of Imperial, use its
reasonable efforts to effect a registration with the SEC or take such
actions as shall be reasonably required to effect an Offering (in the
event the Imperial Shares are already registered with the SEC) in
respect of such excluded Imperial Shares as soon as practicable after
consummation of such Offering. Imperial may withdraw its Imperial
Shares from such subsequent Offering without costs or penalty at any
time before the effective date of the Registration Statement relating
to such Offering.
d. Expenses. In connection with any offering of Imperial Shares a new
--------
issuance of Common Stock by the Company, Imperial and the Company
shall each pay their pro rata share of Registration Expenses in
proportion to the number of shares of Common Stock to be offered by
each.
4. Demand Registration Rights. On or after one year from the effective date
--------------------------
of the Company's initial public offering, Imperial, without limitation as
to any other method of disposition available to it, shall be entitled to
dispose of any or all of the Imperial Shares then held by it in accordance
with the provisions of this Paragraph 4.
a. Requests by Imperial. Upon the receipt by the Company of written
--------------------
notice from Imperial of its intent to sell all or part of its Imperial
Shares in an Offering subject to this Paragraph 4 at least 30 days
before such proposed date of sale, and specifying both the number of
Imperial Shares to be sold and the intended method of disposition, the
Company will use its best efforts to register such Imperial Shares so
as to permit as soon as practicable the requested sale of Imperial
Shares. Within fifteen (15) days of receipt of notice of a proposed
sale by Imperial, the Company will advise Imperial either that it has
no objection of such sale or that
5
<PAGE>
such sale should be delayed for up to sixty (60) days, on the basis
that the Company is involved in a confidential proposed transaction or
negotiations therefor (which have been previously disclosed to the
Company's Board of Directors) which would not require the Company to
make or amend any public filings under the securities laws at that
time. If the Company has not objected to such proposed sale as
permitted in this subparagraph (a) within such fifteen (15) day
period, the Company shall take all actions necessary to permit such
sale on the proposed date of sale pursuant to such Registration
Statement. If, at any time after giving 30 days written notice under
this Paragraph 4, Imperial shall notify the Company in writing that it
has determined for any reason not to proceed with the proposed
Offering, then the Company shall terminate such Offering.
b. Limitation on Requests and Payment of Registration Expenses. Imperial
-----------------------------------------------------------
shall be entitled to make a request to the Company to register
Imperial Shares pursuant to the provisions of Paragraph 3(b) or this
Paragraph 4 two times within each one year period commencing one year
from the effective date of the Company's initial public offering. The
Company shall not be required to register Imperial Shares in
accordance with the provisions of Paragraph 4(a) if there is
outstanding at the time of the request an effective Registration
Statement for a Continuous Offering and Imperial can dispose of
Imperial Shares in accordance with Paragraph 3(b). Imperial will pay
all Registration Expenses in connection with an Offering of Imperial
Shares requested by Imperial pursuant to the second sentence of
Paragraph 3(b) or this Paragraph 4. Any Offering abandoned or
terminated by Imperial after its filing in accordance with the
provisions of Paragraph 4(a) shall be deemed to be a request pursuant
to this Paragraph 4.
c. Selection of Underwriters. If Imperial specifies in the notice
-------------------------
delivered to the Company pursuant to the second sentence of Paragraph
3(b) or Paragraph 4 that it intends to sell Imperial Shares in an
underwritten Offering pursuant to the second sentence of Paragraph
3(b) or Paragraph 4, Imperial shall be entitled to select the
underwriter(s) and managing underwriter. If the Company issues and
sells securities of the same class as the Imperial Shares
contemporaneously with any Offering pursuant to Paragraph 3(b) or this
Paragraph 4, the Company shall (i) sell such securities to the
underwriter(s) selected by Imperial pursuant to this Paragraph 4(c) on
the same terms and conditions as apply to Imperial and (ii) execute
and deliver a copy of the underwriting agreement relating to such
Offering. If the managing underwriter advises Imperial and the
Company in writing that, in its opinion, the number of securities
requested to be included in such Offering exceeds the number that can
be sold in such Offering, so as to be likely to have an adverse effect
on the price at which the Imperial Shares or securities being offered
by the Company can be sold, then there shall be included in such
Offering (and in the Offering Documents relating to such Offering)
first, the maximum number of Imperial Shares requested to be included
in such Offering by
6
<PAGE>
Imperial and second, the maximum number of securities, if any,
proposed to be sold by the Company for its own account or for the
account of any other holder of the Company's securities, which in the
opinion of the managing underwriter can be sold without having such
adverse effect.
d. Registration on Form S-3. The Company shall not be required to
------------------------
register Imperial Shares in any Continuous Offering under this
Paragraph 4 until the date which is one year after the date of the
Company's initial public offering. Thereafter, Imperial shall have the
right to require the Company to register any or all of its shares on
Form S-3 (or on Form S-1, if Form S-3 is not available).
e. (1) FLRT Incidental Registration Rights. During the period
-----------------------------------
commencing upon the effective date of the Company's initial
public offering of Common Stock and ending upon the third
anniversary of such date, if Imperial demands the Company to make
an Offering of its Common Stock and causes the Company to prepare
Offering Documents pursuant to this Paragraph 4, the Company will
give prompt written notice to FLRT of its intention to do so and
of FLRT's rights under this Paragraph 4(e). Upon the written
request of FLRT made within thirty (30) days after the receipt of
any such notice (which request shall specify the number of FLRT
Shares intended to be disposed of by FLRT; provided, however,
that the amount actually sold by FLRT pursuant to any such
Offering may not at any time exceed the amount that FLRT would
otherwise be authorized to sell pursuant to the volume
limitations of Rule 144), the Company will include in the
Offering Documents relating to such Offering all FLRT Shares that
the Company has been requested to include by FLRT, subject to the
limitations of Paragraph 4(e)(2) herein; provided, that if at any
time after giving written notice under this Paragraph 4(e)
Imperial shall determine for any reason not to proceed with the
proposed Offering, the Company may, at its election, give written
notice of such determination to FLRT and thereupon shall be
relieved of its obligations to FLRT with respect to such proposed
Offering under this Paragraph 4. FLRT shall be entitled to
withdraw its request for the inclusion of FLRT Shares in an
Offering and withdraw from the Offering at any time before the
time that the Offering Documents, including any Registration
Statement (if applicable), are declared effective and the
Offering has commenced.
(2) Underwritten Offerings. In the case of an underwritten Offering
----------------------
initiated by Imperial under this Paragraph 4, including
underwritten Offerings effected as part of a Continuous Offering,
the underwriter(s) and the managing underwriter shall be selected
by Imperial. If the Company issues and sells securities of the
same class as the Imperial Shares contemporaneously with any
Offering pursuant to Paragraph 3(b) or this
7
<PAGE>
Paragraph 4, the Company shall (i) sell such securities to the
underwriter(s) selected by Imperial pursuant to Paragraph 4(c) on
the same terms and conditions as apply to Imperial and (ii)
execute and deliver a copy of the underwriting agreement relating
to such Offering. If the managing underwriter advises Imperial
and the Company in writing that, in its opinion, the number of
Imperial Shares, shares offered by the Company, if any, and FLRT
Shares, if any, being sold exceeds the number that can be sold in
such Offering, so as to be likely to have an adverse effect on
the price at which Imperial can sell securities for its own
account, then there shall be included in such Offering (and in
the Offering Documents relating to such Offering) first, the
maximum number of Imperial Shares requested to be included in
such Offering by Imperial, second, the maximum number of
securities, if any, proposed to be sold by the Company for its
own account which in the opinion of the managing underwriter can
be sold with out having such adverse effect, third, the maximum
number of FLRT Shares requested to be included in such Offering
which, in the opinion of such managing underwriter, can be sold
without having such adverse effect and fourth, the maximum number
of securities, if any, proposed to be sold by the Company for the
account of any other holder of the Company's securities, which in
the opinion of the managing underwriter can be sold without
having such adverse effect.
(3) Expenses. FLRT shall pay its pro rata share of Registration
--------
Expenses in proportion to the number of FLRT Shares offered by it
as compared to all shares offered pursuant to the subject
Offering.
5. FLRT Registration Rights. On or after three years from the effective date
------------------------
of the Company's initial public offering, FLRT, without limitation as to
any other method of disposition available to it, shall be entitled to
dispose of any or all of the FLRT Shares then held by it in the same manner
as accorded Imperial under the provisions of Paragraphs 3 and 4 except,
that for so long as any Imperial Shares are outstanding, any disposition of
FLRT Shares shall be subject to the provisions of Paragraph 4 (e)(2).
Notwithstanding the foregoing, in the event that Wayne Knyal's
employment is terminated by the Company pursuant to Sections 8B or 8F of
that Employment and Non-Competition Agreement dated November 8, 1997 to be
effective as of November 1, 1997 by and between the Company and Mr. Knyal,
then FLRT, without limitation as to any other method of disposition
available to it, shall be entitled to dispose of any or all of the FLRT
Shares then held by it in the same manner as accorded Imperial under the
provisions of Paragraphs 3 and 4.
6. The Company's Duties. If and whenever the Company is required to permit
--------------------
either or both of the Selling Stockholders to effect any Offering as
provided in Paragraphs 3 and
8
<PAGE>
4, the Company covenants and agrees that it will, as expeditiously as
possible (but not later than sixty (60) days after receipt of a request
from either or both of the Selling Stockholders to include its respective
Shares in a given Offering):
1. (1) prepare all Offering Documents in accordance with all applicable
requirements of the Securities Act, and the Securities Offering
Regulations, including, if requested by Imperial and if permitted by
the rules and regulations of the SEC, a Registration Statement
pursuant to Rule 415 of the Securities Act or any successor rule of
the SEC, with respect to such Offering to permit the disposition of
the Selling Stockholder's Shares by the Selling Stockholder in
accordance with the intended method of disposition (and, in the case
of an underwritten Offering, consistent in form, substance, and scope
with customary practice for the offering of securities of corporations
by nationally recognized investment banking firms), (2) file with the
SEC such Offering Documents and all other documents required to permit
the disposition thereof; provided, that before filing any such
Offering Documents (including any documents incorporated by reference
therein), the Company will furnish to counsel designated by the
subject Selling Stockholder and to the underwriter(s), if any, copies
of all such Offering Documents, which Offering Documents shall be
subject to the review of such counsel(s) and the underwriter(s), if
any, and, where feasible, the Company shall make such changes in such
Offering Documents as are reasonably requested by such counsel(s) or
underwriter(s), and (3) use its reasonable efforts to have such
Offering Documents declared effective by, and obtain all approvals
from the SEC to the extent necessary to permit the Offering; provided,
however, that the Company may discontinue any Offering that is being
effected pursuant to Paragraph 3 at any time before the effective date
of the related Offering Documents; and provided, further, that the
Company shall not file any Offering Document which shall be
disapproved by the subject Stockholder within a reasonable period
after the same has been provided for review;
2. thereafter, prepare and file with the SEC such amendments and post-
effective amendments to the Offering Documents as may be necessary to
keep the Offering Documents continuously effective and cause the
Offering Documents to be supplemented by any required supplement, and
as so supplemented to the filed, if required, with the SEC during the
period ending on the later of (i) such time as all of the Selling
Stockholder's Shares covered by such Offering Documents have been
disposed of in accordance with the intended method of disposition set
forth in such Offering Documents or, in the case of an Offering made
pursuant to Rule 415 under the Securities Act or any successor rule of
the SEC (if applicable), if securities remain unsold at the expiration
of the Offering, such time as the Company shall file, with the consent
of the subject Selling Stockholder, a post-effective amendment with
the SEC deregistering the securities which remain unsold at the
termination of the Offering or (ii) so long as a dealer is required to
9
<PAGE>
deliver a Prospectus in connection with the Offering; provided, that
before filing any such post-effective amendment, the Company will
furnish to counsel designated by the subject Selling Stockholder and
to the underwriter(s), if any, copies of the post-effective amendment
(including any other document proposed to the filed therewith), which
Offering Documents shall be subject to the review of such counsel(s)
and the underwriter(s), if any, and, where feasible, the Company shall
make such changes in such post-effective amendment as are reasonably
requested by such counsel(s) or underwriter(s);
3. furnish to the subject Selling Stockholder and to the underwriter(s),
if any, such number of copies of the Offering Documents (including
each amendment and supplement thereto) as they may reasonably request
in order to facilitate the disposition of the Selling Stockholder's
Shares included in such Offering;
4. register or qualify, or cooperate with the subject Selling
Stockholder, the underwriter(s), if any, and their respective counsel
in registering or qualifying, all Imperial Shares covered by the
Offering Documents for offer and sale under the applicable securities
or blue sky laws of such jurisdictions as Imperial and the
underwriter(s), if any, shall reasonably request in writing, and do
any and all other acts and things which may be reasonably necessary or
advisable to enable the subject Selling Stockholder and the
underwriter(s), if any, to consummate the disposition in such
jurisdictions of the Common Stock covered by the Offering Documents;
provided however that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so
qualified or to take any action that would subject it to general
service of process in any such jurisdiction where it is not then so
subject or subject the Company to any tax in any such jurisdiction
where it is not then so subject;
5. use its reasonable efforts to cause such Common Stock covered by the
Offering Documents to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
subject Selling Stockholder and the underwriter(s), if any, to
consummate the disposition of such Common Stock;
6. cooperate reasonably with any managing underwriter to effect the sale
of the subject Selling Stockholder's Shares, including but not limited
to attendance of the Company's executive officers at any planned "road
show" presentations';
7. notify the subject Selling Stockholder and the underwriter(s), if any,
at any time when the Offering Documents include an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances then existing, and at the request of the
subject Selling Stockholder or any underwriter, prepare
10
<PAGE>
and furnish to such Person(s), such reasonable number of copies of any
amendment or supplement to the Offering Documents as may be necessary
so that, as thereafter delivered to the purchasers of such Common
Stock, such Offering Documents shall not include any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and to deliver
to purchasers of any other securities of the Company included in the
Offering copies of such Offering Documents as so amended or
supplemented;
8. keep the subject Selling Stockholder informed of the Company's best
estimates of the earliest date on which the Offering Documents will
become effective, and promptly notify the Selling Stockholder of (A)
the effectiveness of such Offering Documents, (B) a request by the SEC
for an amendment or supplement to such Offering Documents, (C) the
issuance by the SEC of an order suspending the effectiveness of the
Offering Documents, or of the threat of a proceeding for that purpose,
and (D) the suspension of the qualification of any securities included
in the Offering Documents for sale in any jurisdiction or the
initiation or threat of any proceeding for that purpose;
9. comply with the provisions of the Securities Offering Regulations and
the Securities Act with respect to the disposition of all securities
covered by the Offering Documents in accordance with the intended
method of distribution of the sellers thereof set forth in such
Offering Documents;
10. use its reasonable efforts to list the securities proposed to be sold
in such Offering on the Nasdaq National Market, or on such other
securities exchange or inter-dealer quotation system on which the
Common Stock is then listed, not later than the closing of the
Offering contemplated thereby;
11. enter into such customary agreements (including but not limited to an
underwriting agreement in customary form) and take such other
reasonable actions as Imperial or the underwriter(s), if any,
reasonably request in order to expedite or facilitate the disposition
of such Common Stock;
l2. obtain such "cold comfort" letter(s) from the Company's independent
public accountants, in customary form and covering matters of the type
customarily covered by "cold comfort" letter(s), as Imperial or the
underwriter(s), if any, shall reasonably request; and
13. upon prior notice, make available for reasonable inspection by any
underwriter(s) participating in any disposition to be effected
pursuant to the Offering Documents and by any attorney, accountant, or
other agent retained by any such Person(s), its financial and other
records, pertinent corporate documents
11
<PAGE>
and properties of the Company, and such opportunities to discuss the
business of the Company with its officers, directors, and employees
and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinions of such
underwriters' respective counsels, to conduct a reasonable
investigation; provided, that any records, information, or documents
that are designated by the Company in writing as confidential shall be
kept confidential by each such Person, unless disclosure of such
records, information, or documents is required by law, by judicial or
administrative order, or in order to defend a claim asserted against
such Person in connection with such Offering.
7. Information from Selling Stockholders.
-------------------------------------
1. Information. The Company may require the Selling Stockholders to
-----------
furnish it with such information regarding the Selling Stockholders
and regarding the method of distribution as is pertinent to the
disclosure requirements relating to the Offering of such Common Stock
as the Company may from time to time reasonably request in writing.
2. Use of Offering Documents Upon Notice of Defects. The Selling
------------------------------------------------
Stockholders each agree, and shall cause underwriter(s), if any,
acting on its behalf to agree, that upon receipt of any notice from
the Company of the happening of any event of the kind described in
Paragraph 6(f), it will immediately discontinue the use of the
Offering Documents covering such Common Stock until the receipt by any
Selling Stockholder and any such underwriter(s) of the copies of the
supplemented or amended Offering Documents contemplated by such clause
and, if so directed by the Company, any Selling Stockholder will
deliver and cause each underwriter, if any, to deliver to the Company
all copies, other than permanent file copies then in the possession of
the Selling Stockholder or any such underwriter, of the Offering
Documents covering such Common Stock at the time of receipt of such
notice. If the Company shall give any such notice, the period
mentioned in Paragraph 6(b) shall be extended by the number of days
during which offerings were suspended (i.e., the period from and
including the date of the receipt of such notice pursuant to Paragraph
6(f), to and including the date when the Selling Stockholder shall
have received the copies of the supplemented or amended Offering
Documents contemplated by such clause).
8. Resales; Reports Under Exchange Act. In order to permit the Selling
-----------------------------------
Stockholders to sell their Shares, if they so desire, pursuant to any
applicable resale exemption under the Securities Offering Regulations or
the Securities Act, the Company will:
1. comply with all rules and regulations of the SEC in connection with
use of any such resale exemption;
12
<PAGE>
2. make and keep available adequate and current public information
regarding the Company;
3. file with the SEC in a timely manner, all reports and other documents
required to be filed under the Securities Act, the Exchange Act, or
the Securities Offering Regulations;
4. furnish to the Selling Stockholders copies of annual reports required
to be filed under the Exchange Act and the Securities Offering
Regulations; and
5. furnish to the Selling Stockholders, upon request, (1) a copy of the
most recent quarterly report of the Company and such other reports and
documents filed by the Company with the SEC and (2) such other
information as may be reasonably requested to permit the Selling
Stockholders pursuant to any applicable resale exemption under the
Securities Act or the Securities Offering Regulations, if any.
9. Indemnification. The obligations of indemnification of the Parties set
---------------
forth in this Paragraph 9 shall be in addition to any liability which any
Party may otherwise have to any other party.
1. Indemnification by the Company. The Company agrees to indemnify and
------------------------------
hold harmless, to the full extent permitted by law, any Selling
Stockholder, its officers, directors, employees and agents, each
Person who participates as an underwriter in an Offering, each
officer, director, employee, or agent of such an underwriter, and
each Person who controls (within the meaning of the Securities Act)
Imperial and such an underwriter against any and all losses, claims,
damages, liabilities, and expenses, joint or several, including
without limitation reasonable legal or other expenses incurred in
connection with investigating or defending against any loss, claim,
damage, or liability, or action or proceeding (whether commenced or
threatened) in respect thereof, caused by any untrue statement or
alleged untrue statement of a material fact contained in any of the
Offering Documents relating to such Offering or any omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made,
except insofar as the same are (i) made in reliance on and in
conformity with any information about the Selling Stockholder or any
underwriter furnished in writing to the Company by the Selling
Stockholder or any underwriter specifically for inclusion in the
Offering Documents relating to such Offering or (ii) the result of the
fact that the Selling Stockholder or any underwriter sold Common Stock
subject to an Offering to a Person to whom there was not sent or
given, at or before the written configuration of such sale, a copy of
the final Offering
13
<PAGE>
Documents, if the Company has previously furnished copies thereof to
Imperial or underwriter and such final Offering Documents corrected
such untrue statement or alleged untrue statement or omission or
alleged omission.
2. Indemnification by Imperial. Imperial agrees to indemnify and hold
---------------------------
harmless, to the full extent permitted by law, the Company, its
officers, directors, employees, and agents, each Person who
participates as an underwriter in an Offering, each officer, director,
employee or agent of such an underwriter, and each Person who controls
(within the meaning of the Securities Act) the Company and such
underwriter against any and all losses, claims, damages, liabilities,
and expenses, joint or several, including without limitation
reasonable legal or other expenses incurred in connection with
investigating or defending against any loss, claim, damage, or
liability, or action or proceeding (whether commenced or threatened)
in respect thereof, caused by any untrue statement or alleged untrue
statement of a material fact contained in any of the Offering
Documents relating to such Offering or any omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, but only to the
extent that such untrue statement or omission is made in reliance on
and in conformity with any information furnished in writing by
Imperial concerning Imperial to the Company specifically for inclusion
in the Offering Documents relating to such Offering.
3. Indemnification by FLRT. FLRT agrees to indemnify and hold harmless,
-----------------------
to the full extent permitted by law, the Company, its officers,
directors, employees, and agents, each Person who participates as an
underwriter in an Offering, each officer, director, employee or agent
of such an underwriter, and each Person who controls (within the
meaning of the Securities Act) the Company and such underwriter
against any and all losses, claims, damages, liabilities, and
expenses, joint or several, including without limitation reasonable
legal or other expenses incurred in connection with investigating or
defending against any loss, claim, damage, or liability, or action or
proceeding (whether commenced or threatened) in respect thereof,
caused by any untrue statement or alleged untrue statement of a
material fact contained in any of the Offering Documents relating to
such Offering or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under
which they were made, but only to the extent that such untrue
statement or omission is made in reliance on and in conformity with
any information furnished in writing by FLRT concerning FLRT to the
Company specifically for inclusion in the Offering Documents relating
to such Offering.
4. Notices of Claims; Procedures. Promptly after receipt by an
-----------------------------
indemnified
14
<PAGE>
party hereunder of written notice of the commencement of any action or
proceeding with respect to which a claim for indemnification may be
made pursuant to this Paragraph 9, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party,
give written notice to the indemnifying party of the commencement of
such action; provided, that the failure of the indemnified party to
give notice as provided herein shall not relieve the indemnifying
party of its obligations under this Paragraph 9, except to the extent
that the indemnifying party is actually materially prejudiced by such
failure to give notice. If any such action is brought against an
indemnified party (unless in such indemnified party's reasonable
judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim) the
indemnifying party will be entitled to participate in and to assume
the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel
reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election
so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with the defense
thereof other than reasonable costs of investigation; provided,
however, that, any Person entitled to indemnification hereunder shall
have the right to employ separate counsel and to participate in the
defense of such claim, but the fees and expenses of such counsel shall
be at the expense of such Person unless (A) the indemnifying party has
agreed to pay such fees or expenses or (B) the indemnifying party
shall have failed to assume the defense of such claim and employ
counsel reasonably satisfactory to such Person or (C) in the
reasonable judgment of any such Person based upon advice of its
counsel, a conflict of interest may exist between such Person and the
indemnifying party with respect to such claims (in which case, if the
Person notifies the indemnifying party in writing that such Person
elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the
defense of such claim on behalf of such Person). If such defense is
not assumed by the indemnifying party, the indemnifying party will not
be subject to any liability for any settlement made without its
consent (but such consent will not be unreasonably withheld). No
indemnifying party will consent to entry of any judgment or enter into
any settlement which does not include, as an unconditional term
thereof, the giving by the claimant or plaintiff to such indemnified
party of a release from all liability in respect to such claim or
litigation. An indemnifying party who is not entitled to or elects not
to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel in each jurisdiction for
all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party
a conflict of interest may exist between such indemnified party and
any other of such indemnified parties with respect to such claim, in
which event the indemnifying party shall be obligated to pay the fees
and expenses of such additional counsel or
15
<PAGE>
counsels.
5. Contribution. If the indemnification provided for this in this
------------
Paragraph 9 from the indemnifying party is unavailable to an
indemnified party hereunder (other than pursuant to the terms hereof)
in respect of any losses, claims, damages, liabilities, or expenses
referred to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities, or expenses in such proportion as is
appropriate to reflect the relative fault of the indemnifying party
and indemnified parties in connection with the actions that resulted
in such losses, claims, damages, liabilities, or expenses, as well as
any other relevant equitable considerations. The relative fault of
such indemnifying party and indemnified parties shall be determined by
reference to, among other things, whether any action in question,
including any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such
indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information, and opportunity to correct
or prevent such action. The amount paid or payable by a Party as a
result of the losses, claims, damages, liabilities, and expense
referred to above shall be deemed to include, subject to the
limitations set forth in this Paragraph 9(e) any legal or other fees
or expenses reasonably incurred by such party in connection with any
investigation or proceeding. The Parties agree that it would not be
just and equitable if contributions pursuant to this Paragraph 9(e)
were datelined by a pro rata allocation or by any other method of
allocation that does not take into account the equitable
considerations referred to above. No Person guilty of fraudulent
misrepresentation shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
6. This Paragraph 9 shall apply to each Registration Statement filed by
the Company pursuant to this Agreement that includes Imperial Shares.
10. Miscellaneous.
-------------
1. Amendments and Waivers. This Agreement may be amended, and the
----------------------
Company may take any action herein prohibited or omit to perform any
act herein required to be performed by it, only if the Company shall
have obtained the written consent of Imperial to such amendment,
action or omission to act.
2. Successors, Assigns and Transferees. This Agreement shall be binding
-----------------------------------
upon the parties hereto and their respective successors and assigns.
3. Notices. Any notice, request, demand, consent, approval or other
-------
16
<PAGE>
communication permitted or required to be given to any of the parties
hereunder shall be deemed given when received, shall be in writing,
and shall be delivered in person or sent by certified mail, postage
prepaid, or by private courier service or by telecopy or telex, to
such party at its address set forth below or at such other address as
such party may hereunder furnish in writing to the other parties.
(i) if to the Company, to:
Franchise Mortgage Acceptance Company
2049 Century Park East, Suite 350
Los Angeles, California 90067
Attention: Secretary and Chief Financial Officer
(ii) if to Imperial:
Imperial Credit Industries, Inc.
23350 Hawthorne Blvd.
Building 1, Suite 240
Torrance, California 90505
Attention: General Counsel
with a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Blvd., East Tower, 8th Floor
Beverly Hills, California 90212-3480
Attention: Thomas J. Poletti, Esq.
(iii) if to FLRT:
FLRT, Inc.
11560 Bellagio Road
Los Angeles, California 90049
Attention: Wayne L. Knyal
4. Headings. The headings in this Agreement are for the convenience of
--------
reference only and shall not limit or otherwise affect the meaning of
the interpretation of this Agreement or any provision hereof.
5. Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason,
the validity, legality and enforceability of such provision in every
other respect and of the remaining provisions hereof
17
<PAGE>
shall not be in any way impaired, it being intended that all rights,
powers and privileges of the parties hereto shall be enforceable to
the fullest extent permitted by law.
6. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an
original, and all such counterparts shall together constitute one and
the same instrument.
7. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the United States of America and, in the
absence of controlling federal law, in accordance with the laws of the
State of Delaware. Any legal action or proceedings with respect to
this Agreement shall be brought in the federal courts of the United
States located in California and each of the parties hereto submits to
the exclusive jurisdiction of such courts and hereby waives any
objections on the grounds of venue, forum non conveniens or any
similar grounds.
8. Entire Agreement. This Agreement embodies the entire Agreement of the
----------------
parties hereto in relation to the subject matter hereof and supersedes
all prior understandings or agreements, oral or written, with respect
thereto among the parties hereto.
9. Certain Remedies. Without in any way limited the remedies otherwise
----------------
available under this Agreement, the parties hereto acknowledge that,
in the event of any breach or nonperformance by any party of the
agreements or covenants required by this Agreement to be performed or
observed by it, the other parties shall be entitled to such equitable
remedies as may be appropriate, including, without limitation specific
performance.
18
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or
caused this Agreement to be executed on its behalf as of the date first written
above.
FRANCHISE MORTGAGE ACCEPTANCE COMPANY
By:_________________________________________
Name: Wayne L. Knyal
---------------------------------------
Title: Chief Executive Officer and President
--------------------------------------
IMPERIAL CREDIT INDUSTRIES, INC.
By:_________________________________________
Name: Irwin L. Gubman
---------------------------------------
Title: General Counsel
--------------------------------------
FLRT, INC.
By:_________________________________________
Name: Wayne L. Knayl
---------------------------------------
Title: Chairman
--------------------------------------
19
<PAGE>
EXHIBIT 10.24
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
BETWEEN
SOUTHERN PACIFIC FUNDING CORPORATION
AND
IMPERIAL CREDIT INDUSTRIES, INC.
DATED AS OF
OCTOBER 17, 1996
- --------------------------------------------------------------------------------
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of October 17, 1996, by and between SOUTHERN PACIFIC FUNDING CORPORATION
(the "Company") and IMPERIAL CREDIT INDUSTRIES, INC. ("Imperial").
1. Consideration. Imperial and the Company have agreed to enter into this
-------------
Agreement to provide the registration rights set forth herein and to otherwise
perform their respective obligations hereunder in consideration of the mutual
covenants contained herein.
2. Definitions. The following definitions shall apply in addition to those
-----------
terms defined elsewhere herein:
a. "Common Stock" means the Company's Common Stock, no par value per
------------
share.
b. "Continuous Offering" means an Offering pursuant to Rule 415 under the
-------------------
Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if
applicable.
c. "Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated thereunder.
d. "Offering" means any public offering of the Common Stock of the
--------
Company, whether or not subject to the registration requirements of the
Securities Act, and any other method of disposition of the Common Stock of the
Company that is subject to the registration requirements of the Securities Act
or any other applicable federal or state statute or regulation.
e. "Offering Documents" means all documents relating to an Offering which
------------------
are required to be filed with any governmental agency or authority or to be
delivered to any Person to whom securities of the Company are offered for sale
or sold, including, without limitation, Registration Statements, Prospectuses,
and preliminary Prospectuses, and all material incorporated by reference
therein, and any schedule or exhibit to any of the foregoing, in each case as
such documents may be amended from time to time.
f. "Party" means Imperial or the Company and "Parties" means both Imperial
----- -------
and the Company.
g. "Person" means any individual, corporation, partnership, limited
------
liability company, association, trust or unincorporated association.
h. "Prospectus" means the prospectus included in a Registration Statement,
----------
relating to an Offering in which Common Stock is included, as amended or
supplemented by a prospectus supplement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
-1-
<PAGE>
i. "Registration Expenses" means, with respect to an Offering, any and all
---------------------
expenses incident to the Company's performance of or compliance with the
provisions of this Agreement, including without limitation (a) fees for any
filings required to be made with the National Association of Securities Dealers,
Inc., or the SEC in connection with such Offering, and any other registration
and filing fees, (b) all fees and expenses of complying with securities or blue
sky laws (including reasonable fees and disbursements of counsel in connection
with blue sky qualifications of the Common Stock to be included in such
Offering), (c) all printing, messenger, telephone, and delivery expenses, (d)
all fees and expenses incurred in connection with the listing of the Common
Stock to be included in such Offering on any securities exchange, (e) the
reasonable fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance, and (f) the reasonable fees and disbursements of Imperial's outside
counsel, outside accountants, investment bankers, and financial consultants, if
any, in connection with any Offering.
j. "Registration Statement" means a registration statement filed with the
----------------------
SEC pursuant to the Securities Act, relating to an Offering in which Common
Stock is included, including any pre- or post-effective amendment thereto, the
Prospectus included therein, and all material incorporated by reference therein,
and any schedule or exhibit to any of the foregoing.
k. "SEC" means the Securities and Exchange Commission.
---
l. "Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
m. "Securities Offering Regulations" means any regulations promulgated by
-------------------------------
any agency or authority of the United States government, under the Securities
Act, or any statute hereafter enacted into law, relating to or governing an
Offering of securities by the Company.
n. "Imperial Shares" means the shares of Common Stock, and any other
---------------
securities into which the Common Stock may be changed by virtue of any merger,
consolidation or recapitalization or otherwise, owned of record by Imperial as
of the date hereof.
3. a. Incidental Registration Rights. If the Company proposes to make an
------------------------------
Offering of its Common Stock and to prepare Offering Documents not required
pursuant to Paragraph 4 (other than any registration by the Company on Form S-8
or a successor or substantially similar form of (A) an employee stock option,
stock purchase or compensation plan or securities issued or to be issued
pursuant to any such plan, or (B) a dividend investment plan), the Company will
give prompt written notice to Imperial of its intention to do so and of
Imperial's rights under this Paragraph 3. Upon the written request of Imperial
made within thirty (30) days after the receipt of any such notice (which request
shall specify the number of Imperial Shares intended to be disposed of by
Imperial), the Company will include in the Offering Documents relating to such
Offering all Imperial Shares that the Company has been requested to include by
Imperial; provided, that if at any time after giving written notice under this
Paragraph 3 the Company
-2-
<PAGE>
shall determine for any reason not to proceed with the proposed Offering, the
Company may, at its election, give written notice of such determination to
Imperial and thereupon shall be relieved of its obligations to Imperial with
respect to such proposed Offering under this Paragraph 3. Imperial shall be
entitled to withdraw its request for the inclusion of Imperial Shares in an
Offering and withdraw from the Offering at any time before the time that the
Offering Documents, including any Registration Statement (if applicable), are
declared effective and the Offering has commenced.
b. Continuous Offering. If the Company intends to effect a Continuous
-------------------
Offering, the Company will give written notice thereof to Imperial and include
in such Offering all of the Imperial Shares which Imperial elects to include in
such Offering. During the period in which a Registration Statement (if
applicable) with respect to a Continuous Offering is effective, if Imperial
desires to sell Imperial Shares in a transaction covered by such Registration
Statement, it shall give notice to the Company of the proposed date of such sale
at least thirty (30) days before such proposed date of sale, and the Company
shall take all actions necessary to permit such sale. Within fifteen (15) days
of receipt of notice of a proposed sale by Imperial, the Company will advise
Imperial either that it has no objection of such sale or that such sale should
be delayed for up to four months, on the basis either that the Company is
involved in a confidential proposed transaction or negotiations therefor (which
have been previously disclosed to the Company's Board of Directors) which would
not require the Company to make or amend any public filings under the securities
laws at that time, or that such sale would have a material adverse effect upon
the Company's ability to access the capital markets. If the Company has not
objected to such proposed sale as permitted in this subparagraph (b) within such
fifteen (15) day period, the Company shall take all actions necessary to permit
such sale on the proposed date of sale pursuant to such Registration Statement.
c. Underwritten Offerings. In the case of an underwritten Offering
----------------------
initiated by the Company under this Paragraph 3, including underwritten
Offerings effected as part of a Continuous Offering, the underwriter(s) and the
managing underwriter shall be selected by the Company. If the managing
underwriter advises the Company in writing that, in its opinion, the number of
Imperial Shares and securities of the Company, if any, being sold exceeds the
number that can be sold in such Offering, so as to be likely to have an adverse
effect on the price at which the Company can sell securities for its own
account, then there shall be included in such Offering (and in the Offering
Documents relating to the Offering) first, securities of the Company being sold
for its own account, and second, the maximum number of Imperial Shares requested
to be included in such Offering which, in the opinion of such managing
underwriter, can be sold without having such adverse effect on such price. If
Imperial Shares are so excluded from registration in an Offering, the Company
shall, upon the request of Imperial, use its reasonable efforts to effect a
registration with the SEC or take such actions as shall be reasonably required
to effect an Offering (in the event the Imperial Shares are already registered
with the SEC) in respect of such excluded Imperial Shares as soon as practicable
after consummation of such Offering. Imperial may withdraw its Imperial Shares
from such subsequent Offering without cost or penalty at any time before the
effective date of the Registration Statement relating to such Offering.
-3-
<PAGE>
d. Expenses. In connection with any offering of Imperial Shares and a new
--------
issuance of Common Stock by the Company, Imperial and the Company shall each pay
their pro rata share of Registration Expenses in proportion to the number of
shares of Common Stock to be offered by each.
4. Demand Registration Rights. On or after April 1, 1997, Imperial, without
--------------------------
limitation as to any other method of disposition available to it, shall be
entitled to dispose of any or all of the Imperial Shares then held by it in
accordance with the provisions of this Paragraph 4.
a. Requests by Imperial. Upon the receipt by the Company of written notice
--------------------
from Imperial of its intent to sell all or part of its Imperial Shares in an
Offering subject to this Paragraph 4 at least 30 days before such proposed date
of sale, and specifying both the number of Imperial Shares to be sold and the
intended method of disposition, the Company will use its best efforts to
register such Imperial Shares so as to permit as soon as practicable the
requested sale of Imperial Shares. Within fifteen (15) days of receipt of
notice of a proposed sale by Imperial, the Company will advise Imperial either
that it has no objection of such sale or that such sale should be delayed for up
to four months, on the basis either that the Company is involved in a
confidential proposed transaction or negotiations therefor (which have been
previously disclosed to the Company's Board of Directors) which would not
require the Company to make or amend any public filings under the securities
laws at that time, or that such sale would have a material adverse effect upon
the Company's ability to access the capital markets. If the Company has not
objected to such proposed sale as permitted in this subparagraph (a) within such
fifteen (15) day period, the Company shall take all actions necessary to permit
such sale on the proposed date of sale pursuant to such Registration Statement.
If, at any time after giving 30 days written notice under this Paragraph 4,
Imperial shall notify the Company in writing that it has determined for any
reason not to proceed with the proposed Offering, then the Company shall
terminate such Offering.
b. Limitation on Requests and Payment of Registration Expenses. Imperial
-----------------------------------------------------------
shall be entitled to make a request to the Company to register Imperial Shares
pursuant to the provisions of Paragraph 3(b) or this Paragraph 4 two times
within each one year period commencing April 1, 1997. The Company shall not be
required to register Imperial Shares in accordance with the provisions of
Paragraph 4(a) if there is outstanding at the time of the request an effective
Registration Statement for a Continuous Offering and Imperial can dispose of
Imperial Shares in accordance with Paragraph 3(b). Imperial will pay all
Registration Expenses in connection with an Offering of Imperial Shares
requested by Imperial pursuant to the second sentence of Paragraph 3(b) or this
Paragraph 4. Any Offering abandoned or terminated by Imperial after its filing
in accordance with the provisions of Paragraph 4(a) shall be deemed to be a
request pursuant to this Paragraph 4.
c. Selection of Underwriters. If Imperial specifies in the notice
-------------------------
delivered to the Company pursuant to the second sentence of Paragraph 3(b) or
Paragraph 4 that it intends to sell Imperial Shares in an underwritten Offering
pursuant to the second sentence of Paragraph 3(b) or Paragraph 4, Imperial shall
be entitled to select the underwriter(s) and managing underwriter.
-4-
<PAGE>
If the Company issues and sells securities of the same class as the Imperial
Shares contemporaneously with any Offering pursuant to Paragraph 3(b) or this
Paragraph 4, the Company shall (i) sell such securities to the underwriter(s)
selected by Imperial pursuant to this Paragraph 4(c) on the same terms and
conditions as apply to Imperial and (ii) execute and deliver a copy of the
underwriting agreement relating to such Offering. If the managing underwriter
advises Imperial and the Company in writing that, in its opinion, the number of
securities requested to be included in such Offering exceeds the number that can
be sold in such Offering, so as to be likely to have an adverse effect on the
price at which the Imperial Shares or securities being offered by the Company
can be sold, then there shall be included in such Offering (and in the Offering
Documents relating to such Offering) first, the maximum number of Imperial
Shares requested to be included in such Offering by Imperial and second, the
maximum number of securities, if any, proposed to be sold by the Company for its
own account or for the account of any other holder of the Company's securities,
which in the opinion of the managing underwriter can be sold without having such
adverse effect.
d. Registration on Form S-3. The Company shall not be required to register
------------------------
Imperial Shares in any Continuous Offering under this Paragraph 4 until July 1,
1997. Thereafter, Imperial shall have the right to require the Company to
register any or all of its shares on Form S-3 (or on Form S-1, if Form S-3 is
not available).
5. The Company's Duties. If and whenever the Company is required to permit
--------------------
Imperial to effect any Offering as provided in Paragraphs 3 and 4, the Company
covenants and agrees that it will, as expeditiously as possible (but not later
than sixty (60) days after receipt of a request from Imperial to include
Imperial Shares in a given Offering):
a. (A) prepare all Offering Documents in accordance with all applicable
requirements of the Securities Act, and the Securities Offering Regulations,
including, if requested by Imperial and if permitted by the rules and
regulations of the SEC, a Registration Statement pursuant to Rule 415 of the
Securities Act or any successor rule of the SEC, with respect to such Offering
to permit the disposition of the Imperial Shares by Imperial in accordance with
the intended method of disposition (and, in the case of an underwritten
Offering, consistent in form, substance, and scope with customary practice for
the offering of securities of corporations by nationally recognized investment
banking firms), (B) file with the SEC such Offering Documents and all other
documents required to permit the disposition of the Imperial Shares by Imperial
in accordance with the intended method of disposition thereof; provided, that
before filing any such Offering Documents (including any documents incorporated
by reference therein), the Company will furnish to counsel(s) designated by
Imperial and to the underwriter(s), if any, copies of all such Offering
Documents, which Offering Documents shall be subject to the review of such
counsel(s) and the underwriter(s), if any, and, where feasible, the Company
shall make such changes in such Offering Documents as are reasonably requested
by such counsel(s) or underwriter(s), and (C) use its reasonable efforts to have
such Offering Documents declared effective by, and obtain all approvals from the
SEC to the extent necessary to permit the Offering; provided, however, that the
Company may discontinue any Offering that is being effected pursuant to
Paragraph 3 at any time before the effective date of the related Offering
-5-
<PAGE>
Documents; and provided, further, that the Company shall not file any Offering
Document which shall be disapproved by Imperial within a reasonable period after
the same has been provided for review;
b. thereafter, prepare and file with the SEC such amendments and post-
effective amendments to the Offering Documents as may be necessary to keep the
Offering Documents continuously effective and cause the Offering Documents to be
supplemented by any required supplement, and as so supplemented to be filed, if
required, with the SEC during the period ending on the later of (i) such time as
all of the Imperial Shares covered by such Offering Documents have been disposed
of in accordance with the intended method of disposition set forth in such
Offering Documents or, in the case of an Offering made pursuant to Rule 415
under the Securities Act or any successor rule of the SEC (if applicable), if
securities remain unsold at the expiration of the Offering, such time as the
Company shall file, with the consent of Imperial, a posteffective amendment with
the SEC deregistering the securities which remain unsold at the termination of
the Offering or (ii) so long as a dealer is required to deliver a Prospectus in
connection with the Offering; provided, that before filing any such post-
effective amendment, the Company will furnish to counsel(s) designated by
Imperial and to the underwriter(s), if any, copies of the post-effective
amendment (including any other document proposed to be filed therewith), which
Offering Documents shall be subject to the review of such counsel(s) and the
underwriter(s), if any, and, where feasible, the Company shall make such changes
in such post-effective amendment as are reasonably requested by such counsel(s)
or underwriter(s);
c. furnish to Imperial and to the underwriter(s), if any, such number of
copies of the Offering Documents (including each amendment and supplement
thereto) as they may reasonably request in order to facilitate the disposition
of the Imperial Shares included in such Offering;
d. register or qualify, or cooperate with Imperial, the underwriter(s), if
any, and their respective counsel in registering or qualifying, all Imperial
Shares covered by the Offering Documents for offer and sale under the applicable
securities or blue sky laws of such jurisdictions as Imperial and the
underwriter(s), if any, shall reasonably request in writing, and do any and all
other acts and things which may be reasonably necessary or advisable to enable
Imperial and the underwriter(s), if any, to consummate the disposition in such
jurisdictions of the Common Stock covered by the Offering Documents; provided
however that the Company shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any tax
in any such jurisdiction where it is not then so subject;
e. use its reasonable efforts to cause such Common Stock covered by the
Offering Documents to be registered with or approved by such other governmental
agencies or authorities as may be necessary to enable Imperial and the
underwriter(s), if any, to consummate the disposition of such Common Stock;
-6-
<PAGE>
f. cooperate reasonably with any managing underwriter to effect the sale
of any Imperial Shares, including but not limited to attendance of the Company's
executive officers at any planned "road show" presentations;
g. notify Imperial and the underwriter(s), if any, at any time when the
Offering Documents include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing,
and at the request of Imperial or any underwriter, prepare and furnish to such
Person(s), such reasonable number of copies of any amendment or supplement to
the Offering Documents as may be necessary so that, as thereafter delivered to
the purchasers of such Common Stock, such Offering Documents shall not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and to deliver to
purchasers of any other securities of the Company included in the Offering
copies of such Offering Documents as so amended or supplemented;
h. keep Imperial informed of the Company's best estimate of the earliest
date on which the Offering Documents will become effective, and promptly notify
Imperial of (A) the effectiveness of such Offering Documents, (B) a request by
the SEC for an amendment or supplement to such Offering Documents, (C) the
issuance by the SEC of an order suspending the effectiveness of the Offering
Documents, or of the threat of an proceeding for that purpose, and (D) the
suspension of the qualification of any securities included in the Offering
Documents for sale in any jurisdiction or the initiation or threat of any
proceeding for that purpose;
i. comply with the provisions of the Securities Offering Regulations and
the Securities Act with respect to the disposition of all securities covered by
the Offering Documents in accordance with the intended method of distribution of
the sellers thereof set forth in such Offering Documents;
j. use its reasonable efforts to list the securities proposed to be sold
in such Offering on the New York Stock Exchange, or on such other securities
exchange on which the Common Stock is then listed, not later than the closing of
the Offering contemplated thereby;
k. enter into such customary agreements (including but not limited to an
underwriting agreement in customary form) and take such other reasonable actions
as Imperial or the underwriter(s), if any, reasonably request in order to
expedite or facilitate the disposition of such Common Stock;
l. obtain such "cold comfort" letter(s) from the Company's independent
public accountants, in customary form and covering matters of the type
customarily covered by "cold comfort" letter(s), as Imperial or the
underwriter(s), if any, shall reasonably request; and
m. upon prior notice, make available for reasonable inspection by any
underwriter(s) participating in any disposition to be effected pursuant to the
Offering Documents and by any
-7-
<PAGE>
attorney, accountant, or other agent retained by any such Person(s), its
financial and other records, pertinent corporate documents and properties of the
Company, and such opportunities to discuss the business of the Company with its
officers, directors, and employees and the independent public accountants who
have certified its financial statements as shall be necessary, in the opinions
of such underwriters' respective counsels, to conduct a reasonable
investigation; provided, that any records, information, or documents that are
designated by the Company in writing as confidential shall be kept confidential
by each such Person, unless disclosure of such records, information, or
documents is required by law, by judicial or administrative order, or in order
to defend a claim asserted against such Person in connection with such Offering.
6. Information from Imperial.
--------------------------
a. Information. The Company may require Imperial to furnish it with such
-----------
information regarding Imperial and regarding the method of distribution as is
pertinent to the disclosure requirements relating to the Offering of such Common
Stock as the Company may from time to time reasonably request in writing.
b. Use of Offering Documents Upon Notice of Defects. Imperial agrees, and
------------------------------------------------
shall cause underwriter(s), if any, acting on its behalf to agree, that upon
receipt of any notice from the Company of the happening of any event of the kind
described in Paragraph 5(f), it will immediately discontinue the use of the
Offering Documents covering such Common Stock until the receipt by Imperial and
any such underwriter(s) of the copies of the supplemented or amended Offering
Documents contemplated by such clause and, if so directed by the Company,
Imperial will deliver and cause each underwriter, if any, to deliver to the
Company all copies, other than permanent file copies then in the possession of
Imperial or any such underwriter, of the Offering Documents covering such Common
Stock at the time of receipt of such notice. If the Company shall give any such
notice, the period mentioned in Paragraph 5(b) shall be extended by the number
of days during which offerings were suspended (i.e., the period from and
including the date of the receipt of such notice pursuant to Paragraph 5(f), to
and including the date when Imperial shall have received the copies of the
supplemented or amended Offering Documents contemplated by such clause).
7. Resales: Reports Under Exchange Act. In order to permit Imperial to sell the
-----------------------------------
Imperial Shares, if it so desires, pursuant to any applicable resale exemption
under the Securities Offering Regulations or the Securities Act, the Company
will:
a. comply with all rules and regulations of the SEC in connection with use
of any such resale exemption;
b. make and keep available adequate and current public information
regarding the Company;
c. file with the SEC in a timely manner, all reports and other documents
required to be filed under the Securities Act, the Exchange Act, or the
Securities Offering Regulations;
-8-
<PAGE>
d. furnish to Imperial copies of annual reports required to be filed under
the Exchange Act and the Securities Offering Regulations; and
e. furnish to Imperial, upon request, (A) a copy of the most recent
quarterly report of the Company and such other reports and documents filed by
the Company with the SEC and (B) such other information as may be reasonably
requested to permit Imperial pursuant to any applicable resale exemption under
the Securities Act or the Securities Offering Regulations, if any.
8. Indemnification. The obligations of indemnification of the Parties set forth
---------------
in this Paragraph 8 shall be in addition to any liability which any Party may
otherwise have to any other Party.
a. Indemnification by the Company. The Company agrees to indemnify and
------------------------------
hold harmless, to the full extent permitted by law, Imperial, its officers,
directors, employees and agents, each Person who participates as an underwriter
in an Offering, each officer, director, employee, or agent of such an
underwriter, and each Person who controls (within the meaning of the Securities
Act) Imperial and such an underwriter against any and all losses, claims,
damages, liabilities, and expenses, joint or several, including without
limitation reasonable legal or other expenses incurred in connection with
investigating or defending against any loss, claim, damage, or liability, or
action or proceeding (whether commenced or threatened) in respect thereof,
caused by any untrue statement or alleged untrue statement of a material fact
contained in any of the Offering Documents relating to such Offering or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, except insofar as the
same are (i) made in reliance on and in conformity with any information about
Imperial or any underwriter furnished in writing to the Company by Imperial or
any underwriter specifically for inclusion in the Offering Documents relating to
such Offering or (ii) the result of the fact that Imperial or any underwriter
sold Common Stock subject to an Offering to a Person to whom there was not sent
or given, at or before the written configuration of such sale, a copy of the
final Offering Documents, if the Company has previously furnished copies thereof
to Imperial or underwriter and such final Offering Documents corrected such
untrue statement or alleged untrue statement or omission or alleged omission.
b. Indemnification by Imperial. Imperial agrees to indemnify and hold
---------------------------
harmless, to the full extent permitted by law, the Company, its officers,
directors, employees, and agents, each Person who participates as an underwriter
in an Offering, each officer, director, employee or agent of such an
underwriter, and each Person who controls (within the meaning of the Securities
Act) the Company and such underwriter against any and all losses, claims,
damages, liabilities, and expenses, joint or several, including without
limitation reasonable legal or other expenses incurred in connection with
investigating or defending against any loss, claim, damage, or liability, or
action or proceeding (whether commenced or threatened) in respect thereof,
caused by any untrue statement or alleged untrue statement of a material fact
contained in any of the Offering Documents relating to such Offering or any
omission or alleged omission to state
-9-
<PAGE>
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made, but only to the extent that such untrue statement or omission is made
in reliance on and in conformity with any information furnished in writing by
Imperial concerning Imperial to the Company specifically for inclusion in the
Offering Documents relating to such Offering.
c. Notices of Claims; Procedures. Promptly after receipt by an indemnified
-----------------------------
party hereunder of written notice of the commencement of any action or
proceeding with respect to which a claim for indemnification may be made
pursuant to this Paragraph 8, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to the
indemnifying party of the commencement of such action; provided, that the
failure of the indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this Paragraph 8, except
to the extent that the indemnifying party is actually materially prejudiced by
such failure to give notice. If any such action is brought against an
indemnified party (unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim) the indemnifying party will be entitled to participate
in and to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by the latter in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that, any Person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in the defense of such
claim, but the fees and expenses of such counsel shall be at the expense of such
Person unless (A) the indemnifying party has agreed to pay such fees or expenses
or (B) the indemnifying party shall have failed to assume the defense of such
claim and employ counsel reasonably satisfactory to such Person or (C) in the
reasonable judgment of any such Person based upon advice of its counsel, a
conflict of interest may exist between such Person and the indemnifying party
with respect to such claims (in which case, if the Person notifies the
indemnifying party in writing that such Person elects to employ separate counsel
at the expense of the indemnifying party, the indemnifying party shall not have
the right to assume the defense of such claim on behalf of such Person.) If such
defense is not assumed by the indemnifying party, the indemnifying party will
not be subject to any liability for any settlement made without its consent (but
such consent will not be unreasonably withheld). No indemnifying party will
consent to entry of any judgment or enter into any settlement which does not
include, as an unconditional term thereof, the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation. An indemnifying party who is not entitled to or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel in each jurisdiction for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or counsels.
-10-
<PAGE>
d. Contribution. If the indemnification provided for in this Paragraph 8
------------
from the indemnifying party is unavailable to an indemnified party hereunder
(other than pursuant to the terms hereof) in respect of any losses, claims,
damages, liabilities, or expenses referred to therein, then the indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities, or expenses in such proportion as is appropriate
to reflect the relative fault of the indemnifying party and indemnified parties
in connection with the actions that resulted in such losses, claims, damages,
liabilities, or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and indemnified
parties shall be determined by reference to, among other things, whether any
action in question, including any untrue statement or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such action. The amount paid
or payable by a Party as a result of the losses, claims, damages, liabilities,
and expenses referred to above shall be deemed to include, subject to the
limitations set forth in this Paragraph 8(d), any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding. The Parties agree that it would not be just and equitable if
contributions pursuant to this Paragraph 8(d) were datelined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to above. No Person guilty of fraudulent
misrepresentation shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
e. This Paragraph 8 shall apply to each Registration Statement filed by
the Company pursuant to this Agreement that includes Imperial Shares.
9. Miscellaneous.
-------------
a. Termination. Imperial's rights to demand registration or to
-----------
participate in underwritten Offerings of the Common Stock shall expire on July
1, 2002.
b. Amendments and Waivers. This Agreement may be amended, and the Company
----------------------
may take any action herein prohibited or omit to perform any act herein required
to be performed by it, only if the Company shall have obtained the written
consent of Imperial to such amendment, action or omission to act.
c. Successors, Assigns and Transferees. This Agreement shall be binding
-----------------------------------
upon the parties hereto and their respective successors and assigns.
d. Notices. Any notice, request, demand, consent, approval or other
-------
communication permitted or required to be given to any of the parties hereunder
shall be deemed given when received, shall be in writing, and shall be delivered
in person or sent by certified mail, postage prepaid, or by private courier
service or by telecopy or telex, to such party at its address set
-11-
<PAGE>
forth below or at such other address as such party may hereunder furnish in
writing to the other parties.
(i) if to the Company, to:
Southern Pacific Funding Corporation
One Centerpoint Drive, Suite 500
Lake Oswego, Oregon 97035
Attention: Secretary and Chief Financial Officer
with a copy to:
Thacher Proffitt & Wood
40th Floor
Two World Trade Center
New York, New York 10048
Attention: Lauris G.L. Rall, Esq.
(ii) if to Imperial:
Imperial Credit Industries, Inc.
23350 Hawthorne Blvd.
Building 1, Suite 210
Torrance, California 90505
Attention: Secretary
with a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Blvd, East Tower, 8th Floor
Beverly Hills, California 90212-3480
Attention: Thomas J. Poletti
e. Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning of the
interpretation of this Agreement or any provision hereof.
f. Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired, it being intended
that all rights, powers and privileges of the parties hereto shall be
enforceable to the fullest extent permitted by law.
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<PAGE>
g. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original, and
all such counterparts shall together constitute one and the same instrument.
h. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the United States of America and, in the absence of
controlling federal law, in accordance with the laws of the State of California.
Any legal action or proceedings with respect to this Agreement shall be brought
in the federal courts of the United States located in New York and each of the
parties hereto submits to the exclusive jurisdiction of such courts and hereby
waives any objections on the grounds of venue, forum non conveniens or any
similar grounds.
i. Entire Agreement. This Agreement embodies the entire Agreement of the
----------------
parties hereto in relation to the subject matter hereof and supersedes all prior
understandings or agreements, oral or written, with respect thereto among the
parties hereto.
j. Certain Remedies. Without in any way limiting the remedies otherwise
----------------
available under this Agreement, the parties hereto acknowledge that, in the
event of any breach or nonperformance by any party of the agreements or
covenants required by this Agreement to be performed or observed by it, the
other parties shall be entitled to such equitable remedies as may be
appropriate, including without limitation specific performance.
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<PAGE>
IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or
caused this Agreement to be executed on its behalf as of the date first written
above.
SOUTHERN PACIFIC FUNDING CORPORATION
By:_________________________________
Name:_______________________________
Title:______________________________
IMPERIAL CREDIT INDUSTRIES, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
EXHIBIT 10.25
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REGISTRATION RIGHTS AGREEMENT
BETWEEN
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
AND
IMPERIAL CREDIT ADVISORS, INC.
DATED AS OF
DECEMBER 29, 1997
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REGISTRATION RIGHTS AGREEMENT
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THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into as of December 29, 1997, by and between IMPERIAL CREDIT MORTGAGE HOLDINGS,
INC. a Maryland corporation (the "Company") and IMPERIAL CREDIT ADVISORS, INC. a
California corporation ("Imperial").
1. Consideration. Imperial and the Company have agreed to enter into this
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Agreement to provide the registration rights set forth herein and to otherwise
perform their respective obligations hereunder in consideration of the mutual
covenants contained herein.
2. Definitions. The following definitions shall apply in addition to those
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terms defined elsewhere herein:
a. "Common Stock" means the Company's Common Stock, $.01 par value per
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share.
b. "Continuous Offering" means an Offering pursuant to Rule 415 under the
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Securities Act, 17 C.F.R. 230.415, or any successor rule of the SEC, if
applicable.
c. "Exchange Act" means the Securities Exchange Act of 1934, as amended,
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and the rules and regulations promulgated thereunder.
d. "Offering" means any public offering of the Common Stock of the
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Company, whether or not subject to the registration requirements of the
Securities Act, and any other method of disposition of the Common Stock of the
Company that is subject to the registration requirements of the Securities Act
or any other applicable federal or state statute or regulation.
e. "Offering Documents" means all documents relating to an Offering which
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are required to be filed with any governmental agency or authority or to be
delivered to any Person to whom securities of the Company are offered for sale
or sold, including, without limitation, Registration Statements, Prospectuses,
and preliminary Prospectuses, and all material incorporated by reference
therein, and any schedule or exhibit to any of the foregoing, in each case as
such documents may be amended from time to time.
f. "Party" means Imperial or the Company and "Parties" means both
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Imperial and the Company.
g. "Person" means any individual, corporation, partnership, limited
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liability company, association, trust or unincorporated association.
h. "Prospectus" means the prospectus included in a Registration
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Statement, relating to an Offering in which Common Stock is included, as amended
or supplemented by a prospectus
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supplement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by reference
in such Prospectus.
i. "Registration Expenses" means, with respect to an Offering, any and
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all expenses incident to the Company's performance of or compliance with the
provisions of this Agreement, including without limitation (a) fees for any
filings required to be made with the National Association of Securities Dealers,
Inc., or the SEC in connection with such Offering, and any other registration
and filing fees, (b) all fees and expenses of complying with securities or blue
sky laws (including reasonable fees and disbursements of counsel in connection
with blue sky qualifications of the Common Stock to be included in such
Offering), (c) all printing, messenger, telephone, and delivery expenses, (d)
all fees and expenses incurred in connection with the listing of the Common
Stock to be included in such Offering on any securities exchange, and (e) the
reasonable fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of any special audits
and/or "cold comfort" letters required by or incident to such performance and
compliance.
j. "Registration Statement" means a registration statement filed with the
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SEC pursuant to the Securities Act, relating to an Offering in which Common
Stock is included, including any pre-or post-effective amendment thereto, the
Prospectus included therein, and all material incorporated by reference therein,
and any schedule or exhibit to any of the foregoing.
k. "SEC" means the Securities and Exchange Commission.
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l. "Securities Act" means the Securities Act of 1933, as amended, and the
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rules and regulations promulgated thereunder.
m. "Securities Offering Regulations" means any regulations promulgated by
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any agency or authority of the United States government, under the Securities
Act, or any statute hereafter enacted into law, relating to or governing an
Offering of securities by the Company.
n. "Imperial Shares" means the shares of Common Stock, and any other
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securities into which the Common Stock may be changed by virtue of any merger,
consolidation or recapitalization or otherwise, owned of record by Imperial as
of the date hereof.
3. a. Incidental Registration Rights. If the Company proposes to make an
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Offering of its Common Stock and to prepare Offering Documents not required
pursuant to Paragraph 4 (other than any registration by the Company on Form S-8
or a successor or substantially similar form of (A) an employee stock option,
stock purchase or compensation plan or securities issued or to be issued
pursuant to any such plan, or (B) a dividend investment plan), the Company will
give prompt written notice to Imperial of its intention to do so and of
Imperial's rights under this Paragraph 3. Upon the written request of Imperial
made within thirty (30) days after the receipt of any such notice (which request
shall specify the number of Imperial Shares intended to be disposed of by
Imperial), the Company will include in the Offering Documents relating to such
Offering all Imperial Shares that
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the Company has been requested to include by Imperial; provided, that if at any
time after giving written notice under this Paragraph 3 the Company shall
determine for any reason not to proceed with the proposed Offering, the Company
may, at its election, give written notice of such determination to Imperial and
thereupon shall be relieved of its obligations to Imperial with respect to such
proposed Offering under this Paragraph 3. Imperial shall be entitled to withdraw
its request for the inclusion of Imperial Shares in an Offering and withdraw
from the Offering at any time before the time that the Offering Documents,
including any Registration Statement (if applicable), are declared effective and
the Offering has commenced.
b. Continuous Offering. If the Company intends to effect a Continuous
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Offering, the Company will give written notice thereof to Imperial and include
in such Offering all of the Imperial Shares which Imperial elects to include in
such Offering. During the period in which a Registration Statement (if
applicable) with respect to a Continuous Offering is effective, if Imperial
desires to sell Imperial Shares in a transaction covered by such Registration
Statement, it shall give notice to the Company of the proposed date of such sale
at least thirty (30) days before such proposed date of sale, and the Company
shall take all actions necessary to permit such sale. Within fifteen (15) days
of receipt of notice of a proposed sale by Imperial, the Company will advise
Imperial either that it has no objection of such a registered sale or that such
a registered sale should be delayed for up to four months, on the basis either
that the Company is involved in a confidential proposed transaction or
negotiations therefor (which have been previously disclosed to the Company's
Board of Directors) which would not require the Company to make or amend any
public filings under the securities laws at that time, or that such sale would
have a material adverse effect upon the Company's ability to access the capital
markets. If the Company has not objected to such proposed registered sale as
permitted in this subparagraph (b) within such fifteen (15) day period, the
Company shall take all actions necessary to permit such sale on the proposed
date of sale pursuant to such Registration Statement.
c. Underwritten Offerings. In the case of an underwritten Offering
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initiated by the Company under this Paragraph 3, including underwritten
Offerings effected as part of a Continuous Offering, the underwriter(s) and the
managing underwriter shall be selected by the Company. If the managing
underwriter advises the Company in writing that, in its opinion, the number of
Imperial Shares and securities of the Company, if any, being sold exceeds the
number that can be sold in such Offering, so as to be likely to have an adverse
effect on the price at which the Company can sell securities for its own
account, then there shall be included in such Offering (and in the Offering
Documents) first, securities of the Company being sold for its own account, and
second, the maximum number of Imperial Shares requested to be included in such
Offering which, in the opinion of such managing underwriter, can be sold without
have such adverse effect on such price. If Imperial Shares are so excluded from
registration in an Offering, the Company shall, upon the request of Imperial,
use its reasonable efforts to effect a registration with the SEC or take such
actions as shall be reasonably required to effect an Offering (in the event the
Imperial Shares are already registered with the SEC) in respect of such excluded
Imperial Shares as soon as practicable after consummation of such Offering.
Imperial may withdraw its Imperial Shares from such subsequent
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Offering without costs or penalty at any time before the effective date of the
Registration Statement relating to such Offering.
d. Expenses. In connection with any offering of Imperial Shares in
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connection with a new issuance of Common Stock by the Company, the Company shall
pay all Registration Expenses.
4. Demand Registration Rights. Imperial, without limitation as to any other
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method of disposition available to it, shall be entitled to dispose of any or
all of the Imperial Shares then held by it in accordance with the provisions of
this Paragraph 4.
a. Requests by Imperial. Upon the receipt by the Company of written
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notice from Imperial of its intent to sell all or part of its Imperial Shares in
an Offering subject to this Paragraph 4 at least 30 days before such proposed
date of sale, and specifying both the number of Imperial Shares to be sold and
the intended method of disposition, the Company will use its best efforts to
register such Imperial Shares so as to permit as soon as practicable the
requested sale of Imperial Shares. Within fifteen (15) days of receipt of
notice of a proposed sale by Imperial, the Company will advise Imperial either
that it has no objection of such a registered sale or that such a registered
sale should be delayed for up to four months, on the basis either the Company is
involved in a confidential proposed transaction or negotiations therefor (which
have been previously disclosed to the Company's Board of Directors) which would
not require the Company to make or amend any public filings under the securities
laws at that time. If the Company has not objected to such proposed registered
sale as permitted in this subparagraph (a) within such fifteen (15) day period,
the Company shall take all actions necessary to permit such sale on the proposed
date of sale pursuant to such Registration Statement. If, at any time after
giving 30 days written notice under this Paragraph 4, Imperial shall notify the
Company in writing that it has determined for any reason not to proceed with the
proposed Offering, then the Company shall terminate such Offering.
b. Limitation on Requests and Payment of Registration Expenses. Imperial
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shall be entitled to make a request to the Company to register Imperial Shares
pursuant to the provisions of Paragraph 3(b) or this Paragraph 4 two times
within each one year period. The Company shall not be required to register
Imperial Shares in accordance with the provisions of Paragraph 4(a) if there is
outstanding at the time of the request an effective Registration Statement for a
Continuous Offering and Imperial can dispose of Imperial Share in accordance
with Paragraph 3(b). The Company will pay all Registration Expenses in
connection with the Offering of Imperial Shares requested by Imperial pursuant
to the second sentence of Paragraph 3(b) or this Paragraph 4. Any Offering
abandoned or terminated by Imperial after its filing in accordance with the
provisions of Paragraph 4(a) shall be deemed to be a request pursuant to this
Paragraph 4.
c. Selection of Underwriters. If Imperial specifies in the notice
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delivered to the Company pursuant to Paragraph 4 that it intends to sell
Imperial Shares in an underwritten Offering pursuant to the second sentence of
Paragraph 3(b) or Paragraph 4, Imperial shall be entitled to select the
underwriter(s) and managing underwriter. If the Company issues and sells
securities of the same class as the Imperial Shares contemporaneously with any
Offering pursuant to Paragraph 3(b) or this
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Paragraph 4, the Company shall (i) sell such securities to the underwriter(s)
selected by Imperial pursuant to this Paragraph 4(c) on the same terms and
conditions as apply to Imperial and (ii) execute and deliver a copy of the
underwriting agreement relating to such Offering. If the managing underwriter
advises Imperial and the Company in writing that, in its opinion, the number of
securities requested to be included in such Offering exceeds the number that can
be sold in such Offering, so as to be likely to have an adverse effect on the
price at which the Imperial Shares or securities being offered by the Company
can be sold, then there shall be included in such Offering (and in the Offering
Documents relating to such Offering) first, the maximum number of Imperial
Shares requested to be included in such Offering by Imperial and second, the
maximum number of securities, if any, proposed to be sold by the Company for its
own account or for the account of any other holder of the Company's securities,
which in the opinion of the managing underwriter can be sold without having such
adverse effect.
d. Registration on Form S-3. Imperial shall have the right to require
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the Company to register any or all of its shares on Form S-3 (or on Form S-1, if
Form S-3 is not available).
5. The Company's Duties. If and whenever the Company is required to permit
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Imperial to effect any Offering as provided in Paragraphs 3 and 4, the Company
covenants and agrees that it will, as expeditiously as possible (but not later
than thirty (30) days after receipt of a request from Imperial to include
Imperial Shares in a given Offering):
a. (A) prepare all Offering Documents in accordance with all applicable
requirements of the Securities Act, and the Securities Offering Regulations,
including, if requested by Imperial and if permitted by the rules and
regulations of the SEC, a Registration Statement pursuant to Rule 415 of the
Securities Act or any successor rule of the SEC, with respect to such Offering
to permit the disposition of the Imperial Shares by Imperial in accordance with
the intended method of disposition (and, in the case of an underwritten
Offering, consistent in form, substance, and scope with customary practice for
the offering of securities of corporations by nationally recognized investment
banking firms), (B) file with the SEC such Offering Documents and all other
documents required to permit the disposition thereof; provided, that before
filing any such Offering Documents (including any documents incorporated by
reference therein), the Company will furnish to counsel(s) designated by
Imperial and to the underwriter(s), if any, copies of all such Offering
Documents, which Offering Documents shall be subject to the review of such
counsel(s) and the underwriter(s), if any, and, where feasible, the Company
shall make such changes in such Offering Documents as are reasonably requested
by such counsel(s) or underwriter(s), and (C) use its reasonable efforts to have
such Offering Documents declared effective by, and obtain all approvals from the
SEC to the extent necessary to permit the Offering; provided, however, that the
Company may discontinue any Offering that is being effected pursuant to
Paragraph 3 at any time before the effective date of the related Offering
Documents; and provided, further, that the Company shall not file any Offering
Document which shall be disapproved by Imperial within a reasonable period after
the same has been provided for review;
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b. thereafter, prepare and file with the SEC such amendments and post-
effective amendments to the Offering Documents as may be necessary to keep the
Offering Documents continuously effective and cause the Offering Documents to be
supplemented by any required supplement, and as so supplemented to be filed, if
required, with the SEC during the period ending on the later of (i) such time as
all of the Imperial Shares covered by such Offering Documents have been disposed
of in accordance with the intended method of disposition set forth in such
Offering Documents or, in the case of an Offering made pursuant to Rule 415
under the Securities Act or any successor rule of the SEC (if applicable), if
securities remain unsold at the expiration of the Offering, such time as the
Company shall file, with the consent of Imperial, a post-effective amendment
with the SEC deregistering the securities which remain unsold at the termination
of the Offering or (ii) so long as a dealer is required to deliver a Prospectus
in connection with the Offering; provided, that before filing any such post-
effective amendment, the Company will furnish to counsel(s) designated by
Imperial and to the underwriter(s), if any, copies of the post-effective
amendment (including any other document proposed to be filed therewith), which
Offering Documents shall be subject to the review of such counsel(s) and the
underwriter(s), if any, and, where feasible, the Company shall make such changes
in such post-effective amendment as are reasonably requested by such counsel(s)
or underwriter(s);
c. furnish to Imperial and to the underwriter(s), if any, such number of
copies of the Offering Documents (including each amendment and supplement
thereto) as they may reasonably request in order to facilitate the disposition
of the Imperial Shares included in such Offering;
d. register or qualify, or cooperate with Imperial, the underwriter(s),
if any, and their respective counsel in registering or qualifying, all Imperial
Shares covered by the Offering Documents for offer and sale under the applicable
securities or blue sky laws of such jurisdictions as Imperial and the
underwriter(s), if any, shall reasonably request in writing, and do any and all
other acts and things which may be reasonably necessary or advisable to enable
Imperial and the underwriter(s), if any, to consummate the disposition in such
jurisdictions of the Common Stock covered by the Offering Documents; provided
however that the Company shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not then so subject or subject the Company to any tax
in any such jurisdiction where it is not then so subject;
e. use its reasonable efforts to cause such Common Stock covered by the
Offering Documents to be registered with or approved by such other governmental
agencies or authorities as may be necessary to enable Imperial and the
underwriter(s), if any, to consummate the disposition of such Common Stock;
f. cooperate reasonably with any managing underwriter to effect the sale
of any Imperial Shares, including but not limited to attendance of the Company's
executive officers at any planned "road show" presentations';
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g. notify Imperial and the underwriter(s), if any, at any time when the
Offering Documents include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing,
and at the request of Imperial or any underwriter, prepare and furnish to such
Person(s), such reasonable number of copies of any amendment or supplement to
the Offering Documents as may be necessary so that, as thereafter delivered to
the purchasers of such Common Stock, such Offering Documents shall not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and to deliver to
purchasers of any other securities of the Company included in the Offering
copies of such Offering Documents as so amended or supplemented;
h. keep Imperial informed of the Company's best estimates of the earliest
date on which the Offering Documents will become effective, and promptly notify
Imperial of (A) the effectiveness of such Offering Documents, (B) a request by
the SEC for an amendment or supplement to such Offering Documents, (C) the
issuance by the SEC of an order suspending the effectiveness of the Offering
Documents, or of the threat of a proceeding for that purpose, and (D) the
suspension of the qualification of any securities included in the Offering
Documents for sale in any jurisdiction or the initiation or threat of any
proceeding for that purpose;
i. comply with the provisions of the Securities Offering Regulations and
the Securities Act with respect to the disposition of all securities covered by
the Offering Documents in accordance with the intended method of distribution of
the sellers thereof set forth in such Offering Documents;
j. use its reasonable efforts to list the securities proposed to be sold
in such Offering on the American Stock Exchange, or on such other securities
exchange on which the Common Stock is then listed, not later than the closing of
the Offering contemplated thereby;
k. enter into such customary agreements (including but not limited to an
underwriting agreement in customary form) and take such other reasonable actions
as Imperial or the underwriter(s), if any, reasonably request in order to
expedite or facilitate the disposition of such Common Stock;
l. obtain such "cold comfort" letter(s) from the Company's independent
public accountants, in customary form and covering matters of the type
customarily covered by "cold comfort" letter(s), as Imperial or the
underwriter(s), if any, shall reasonably request; and
m. upon prior notice, make available for reasonable inspection by any
underwriter(s) participating in any disposition to be effected pursuant to the
Offering Documents and by any attorney, accountant, or other agent retained by
any such Person(s), its financial and other records, pertinent corporate
documents and properties of the Company, and such opportunities to discuss the
business of the Company with its officers, directors, and employees and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinions of such
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underwriters' respective counsels, to conduct a reasonable investigation;
provided, that any records, information, or documents that are designated by the
Company in writing as confidential shall be kept confidential by each such
Person, unless disclosure of such records, information, or documents is required
by law, by judicial or administrative order, or in order to defend a claim
asserted against such Person in connection with such Offering.
6. Information from Imperial.
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a. Information. The Company may require Imperial to furnish it with such
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information regarding Imperial and regarding the method of distribution as is
pertinent to the disclosure requirements relating to the Offering of such Common
Stock as the Company may from time to time reasonably request in writing.
b. Use of Offering Documents Upon Notice of Defects. Imperial agrees,
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and shall cause underwriter(s), if any, acting on its behalf to agree, that upon
receipt of any notice from the Company of the happening of any event of the kind
described in Paragraph 5(f), it will immediately discontinue the use of the
Offering Documents covering such Common Stock until the receipt by Imperial and
any such underwriter(s) of the copies of the supplemented or amended Offering
Documents contemplated by such clause and, if so directed by the Company,
Imperial will deliver and cause each underwriter, if any, to deliver to the
Company all copies, other than permanent file copies then in the possession of
Imperial or any such underwriter, of the Offering Documents covering such Common
Stock at the time of receipt of such notice. If the Company shall give any such
notice, the period mentioned in Paragraph 5(b) shall be extended by the number
of days during which offerings were suspended (i.e., the period from and
including the date of the receipt of such notice pursuant to Paragraph 5(f), to
and including the date when Imperial shall have received the copies of the
supplemented or amended Offering Documents contemplated by such clause).
7. Resales; Reports Under Exchange Act. In order to permit Imperial to sell
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the Imperial Shares, if it so desires, pursuant to any applicable resale
exemption under the Securities Offering Regulations or the Securities Act, the
Company will:
a. comply with all rules and regulations of the SEC in connection with
use of any such resale exemption;
b. make and keep available adequate and current public information
regarding the Company;
c. file with the SEC in a timely manner, all reports and other documents
required to be filed under the Securities Act, the Exchange Act, or the
Securities Offering Regulations;
d. furnish to Imperial copies of annual reports required to be filed
under the Exchange Act and the Securities Offering Regulations; and
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e. furnish to Imperial, upon request, (A) a copy of the most recent
quarterly report of the Company and such other reports and documents filed by
the Company with the SEC and (B) such other information as may be reasonably
requested to permit Imperial pursuant to any applicable resale exemption under
the Securities Act or the Securities Offering Regulations, if any.
8. Indemnification. The obligations of indemnification of the Parties set
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forth in this Paragraph 8 shall be in addition to any liability which any Party
may otherwise have to any other party.
a. Indemnification by the Company. The Company agrees to indemnify and
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hold harmless, to the full extent permitted by law, Imperial, its officers,
directors, employees and agents, each Person who participates as an underwriter
in an Offering, each officer, director, employee or agent of such an
underwriter, and each Person who controls (within the meaning of the Securities
Act) Imperial and such an underwriter against any and all losses, claims,
damages, liabilities, expenses, joint or several, including without limitation
reasonable legal or other expenses incurred in connection with investigating or
defending against any loss, claim, damage, or liability, or action or proceeding
(whether commenced or threatened) in respect thereof, caused by any untrue
statement or alleged untrue statement of a material fact contained in any of the
Offering Documents relating to such Offering, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances under which they were made, except insofar as the same are (i)
made in reliance on and in conformity with any information about Imperial or any
underwriter furnished in writing to the Company by Imperial or any underwriter
specifically for inclusion in the Offering Documents relating to such Offering
or (ii) the result of the fact that Imperial or any underwriter sold Common
Stock subject to an Offering to a Person to whom there was not sent or given, at
or before the written configuration of such sale, a copy of the final Offering
Documents, if the Company has previously furnished copies thereof to Imperial or
underwriter and such final Offering Documents corrected such untrue statement or
alleged untrue statement or omission or alleged omission.
b. Indemnification by Imperial. Imperial agrees to indemnify and hold
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harmless, to the full extent permitted by law, the Company, its officers,
directors, employees, and agents, each Person who participates as an underwriter
in an Offering, each officer, director, employee or agent of such an
underwriter, and each Person who controls (within the meaning of the Securities
Act) the Company and such underwriter against any and all losses, claims,
damages, liabilities, and expenses, joint or several, including without
limitation reasonable legal or other expenses incurred in connection with
investigating or defending against any loss, claim, damage, or liability, or
action or proceeding (whether commenced or threatened) in respect thereof,
caused by any untrue statement or alleged untrue statement of a material fact
contained in any of the Offering Documents relating to such Offering or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which they were made, but only to the extent
that such untrue statement or omission is made in reliance on and in conformity
with any information furnished in writing by Imperial concerning Imperial to the
Company specifically for inclusion in the Offering Documents relating to such
Offering.
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c. Notices of Claims; Procedures. Promptly after receipt by an
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indemnified party hereunder of written notice of the commencement of any action
or proceeding with respect to which a claim for indemnification may be made
pursuant to this Paragraph 8, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party, give written notice to the
indemnifying party of the commencement of such action; provided, that the
failure of the indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under this Paragraph 8, except
to the extent that the indemnifying party is actually materially prejudiced by
such failure to give notice. If any such action is brought against an
indemnified party (unless in such indemnified party's reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim) the indemnifying party will be entitled to participate
in and to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party will not be liable to such indemnified party for
any legal or other expenses subsequently incurred by the latter in connection
with the defense thereof other than reasonable costs of investigation; provided,
however, that, any Person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in the defense of such
claim, but the fees and expenses of such counsel shall be at the expense of such
Person unless (A) the indemnifying party has agreed to pay such fees or expenses
or (B) the indemnifying party shall have failed to assume the defense of such
claim and employ counsel reasonably satisfactory to such Person or (C) in the
reasonable judgment of any such Person based upon advice of its counsel, a
conflict of interest may exist between such Person and the indemnifying party
with respect to such claims (in which case, if the Person notifies the
indemnifying party in writing that such Person elects to employ separate counsel
at the expense of the indemnifying party, the indemnifying party shall not have
the right to assume the defense of such claim on behalf of such Person). If
such defense is not assumed by the indemnifying party, the indemnifying party
will not be subject to any liability for any settlement made without its consent
(but such consent will not be unreasonably withheld). No indemnifying party
will consent to entry of any judgment or enter into any settlement which does
not include, as an unconditional term thereof, the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
to such claim or litigation. An indemnifying party who is not entitled to or
elects not to, assume the defense of a claim will not be obligated to pay the
fees and expenses of more than one counsel in each jurisdiction for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or counsels.
d. Contribution. If the indemnification provided for this in this
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Paragraph 8 from the indemnifying party is unavailable to an indemnified party
hereunder (other than pursuant to the terms hereof) in respect of any losses,
claims, damages, liabilities, or expenses referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities, or expenses in such proportion as
is appropriate to reflect the relative fault of the indemnifying party and
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indemnified parties in connection with the actions that resulted in such losses,
claims, damages, liabilities, or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such indemnifying
party or indemnified parties, and the parties' relative intent, knowledge,
access to information, and opportunity to correct or prevent such action. The
amount paid or payable by a Party as a result of the losses, claims, damages,
liabilities, and expense referred to above shall be deemed to include, subject
to the limitations set forth in this Paragraph 8(d) any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding. The Parties agree that it would not be just and equitable if
contributions pursuant to this Paragraph 8(d) were determined by a pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to above. No Person guilty of fraudulent
misrepresentation shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
e. This Paragraph 8 shall apply to each Registration Statement filed by
the Company pursuant to this Agreement that includes Imperial Shares.
9. Miscellaneous.
-------------
a. Termination. Imperial's rights to demand registration or to
-----------
participate in underwritten Offerings of the Common Stock shall expire on
December 1, 2002.
b. Amendments and Waivers. This Agreement may be amended, and the
----------------------
Company may take any action herein prohibited or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent of Imperial to such amendment, action or omission to act.
c. Successors, Assigns and Transferees. This Agreement shall be binding
-----------------------------------
upon the parties hereto and their respective successors and assigns.
d. Notices. Any notice, request, demand, consent, approval or other
-------
communication permitted or required to be given to any of the parties hereunder
shall be deemed given when received, shall be in writing, and shall be delivered
in person or sent by certified mail, postage prepaid, or by private courier
service or by telecopy or telex, to such party at its address set forth below or
at such other address as such party may hereunder furnish in writing to the
other parties.
11
<PAGE>
(i) if to the Company, to:
Imperial Credit Mortgage Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, California 92707
Attention: Joseph R. Tomkinson
(ii) if to Imperial:
Imperial Credit Advisors, Inc.
23550 Hawthorne Blvd.
Building 1, Suite 240
Torrance, California 90505
Attention: Irwin Gubman, Esq.
e. Headings. The headings in this Agreement are for the convenience of
--------
reference only and shall not limit or otherwise affect the meaning of the
interpretation of this Agreement or any provision hereof.
f. Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of such provision in every other respect and of the
remaining provisions hereof shall not be in any way impaired, it being intended
that all rights, powers and privileges of the parties hereto shall be
enforceable to the fullest extent permitted by law.
g. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed an original, and
all such counterparts shall together constitute one and the same instrument.
h. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the United States of America and, in the absence of
controlling federal law, in accordance with the laws of the State of California.
i. Reference Provision.
-------------------
(i) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, will be settled by a reference proceeding
in Orange County, California, in accordance with the provisions of Section 638
et seq. of the California Code of Civil Procedure, or their successor section
("CCP") , which shall constitute the exclusive remedy for the settlement of any
controversy, dispute or claim concerning this Agreement, including whether such
controversy, dispute or claim is subject to the reference proceeding and the
parties waive their rights to initiate any legal proceedings against each other
in any court or jurisdiction other than the Superior Court of Orange County (the
"Court"). The referee shall be a retired Judge of the Court selected by mutual
12
<PAGE>
agreement of the parties, and if they cannot so agree within forty-five (45)
days after the date of the Contest, the referee shall be promptly selected by
the Presiding Judge of the Orange County Superior Court (or his representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one preemptory challenge pursuant to CCP 170.6. The referee shall (a) be
requested to set the matter for hearing within sixty (60) days after the date of
the Contest and (b) try any and all issues of law or fact and report a statement
of decision upon them, if possible, within ninety (90) days of the Claim Date.
Any decision rendered by the referee will be final, binding and conclusive and
judgment shall be entered pursuant to CCP 644 in any court in the State of
California having jurisdiction. Any party may apply for a reference at any
time after thirty (30) days following notice to any other party of the nature of
the controversy, dispute or claim, by filing a petition for a hearing and/or
trial. All discovery permitted by this Agreement shall be completed no later
than fifteen (15) days before the first hearing date established by the referee.
The referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and, request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
(ii) Except as expressly set forth in this Agreement, the referee
shall determine the manner in which the reference proceeding is conducted
including the time and place of all hearings, the order of presentation of
evidence, and all other questions that arise with respect to the course of the
reference proceeding. All proceedings and hearings conducted before the
referee, except for trial, shall be conducted without a court reporter, except
that when any party so requests, a court reporter will be used at any hearing
conducted before the referee. The party making such a request shall have the
obligation to arrange for and pay for the court reporter. The costs of the
court reporter at the trial shall be borne equally by the parties.
(iii) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of law, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
13
<PAGE>
(iv) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Orange County Superior
Court, in accordance with the California Arbitration Act, Sections 1280 through
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
j. Entire Agreement. This Agreement embodies the entire Agreement of the
----------------
parties hereto in relation to the subject matter hereof and supersedes all prior
understandings or agreements, oral or written, with respect thereto among the
parties hereto.
k. Certain Remedies. Without in any way limited the remedies otherwise
----------------
available under this Agreement, the parties hereto acknowledge that, in the
event of any breach or nonperformance by any party of the agreements or
covenants required by this Agreement to be performed or observed by it, the
other parties shall be entitled to such equitable remedies as may be
appropriate, including, without limitation specific performance.
14
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has executed this Agreement or
caused this Agreement to be executed on its behalf as of the date first written
above.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
By:_______________________________________________
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
IMPERIAL CREDIT ADVISORS, INC.
By:_______________________________________________
Name: H. Wayne Snavely
Title: Chairman
15
<PAGE>
EXHIBIT 10.26
TERMINATION AGREEMENT
This Termination Agreement (the "Agreement") is made and entered into as of
this 19th day of December, 1997, by and among Imperial Credit Industries, Inc.,
a California corporation ("ICII"), Imperial Credit Advisors, Inc., a California
corporation ("ICAI"), Imperial Credit Mortgage Holdings, Inc., a Maryland
corporation ("IMH"), ICI Funding Corporation, a California corporation
("ICIFC"), Joseph R. Tomkinson, an individual ("Tomkinson"), William S. Ashmore,
an individual ("Ashmore") and Richard J. Johnson, an individual ("Johnson")
(each of Tomkinson, Ashmore and Johnson are each a "Shareholder" and together
the "Shareholders").
RECITALS
WHEREAS, ICAI is a wholly-owned subsidiary of ICII;
WHEREAS, IMH owns 100% of the Preferred Stock of ICIFC and the Shareholders
own all the Common Stock of ICIFC;
WHEREAS, further to a Loan Agreement dated December 31, 1996 by and between
ICIFC and ICII, ICII loaned ICIFC the sum of $45,101,800 bearing interest at 10%
per annum, the proceeds of which were used to purchase from ICII certain assets,
including the Residual Securities (as that term is defined herein) and on March
31, 1997 a revised loan and security agreement and promissory note (the "Loan
Agreement") was executed in the amount of $28,815,223.62 bearing interest at 10%
per annum (the "Loan");
WHEREAS, on January 21, 1997, IMH and ICAI entered into an Amended and
Restated Management Agreement (the "Management Agreement") pursuant to which
ICAI agreed primarily to provide to IMH capital, asset and operations management
services in the manner and on the terms set forth therein;
WHEREAS, ICII has transferred the Loan to ICAI;
WHEREAS, the parties are desirous of terminating the Management Agreement
and the Loan Agreement and canceling the Loan subject to the terms and
exclusions and satisfaction of the conditions set forth in this Agreement; and
WHEREAS, certain capitalized terms used herein are defined in Article I
hereof.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein it is hereby covenanted and agreed as follows:
<PAGE>
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined).
"Agreed Per Share Value" of IMH's Common Stock shall mean the average of
the closing price of IMH's Common Stock as reported by the American Stock
Exchange for the five trading day period from and including December 19, 1997
through December 29, 1997.
"Agreement" has the meaning set forth in the Recitals hereof.
"Bill of Sale" has the meaning set forth in Section 2.3(b) hereof.
"CCP" has the meaning set forth in Section 11.5(a) hereof.
"Cash Advance" shall mean $300,000 payable by IMH to ICAI as an advance
against the Final Advisory Payment.
"Closing" has the meaning set forth in Section 2.1 hereof.
"Closing Date" has the meaning set forth in Section 2.1 hereof.
"Contest" has the meaning set forth in Section 10.2 hereof.
"Court" has the meaning set forth in Section 11.5(a) hereof.
"Due Amount of Loan" shall mean the outstanding principal balance plus all
accrued and unpaid interest due pursuant to the Loan as of the Closing Date (the
outstanding principal balance of the Loan and the amount of accrued and unpaid
interest as of December 29, 1997 will be $28,903,566.19 and $217,553.72,
respectively).
"Fairness Opinion" has the meaning set forth in Section 3.5 hereof.
"Final Advisory Payment" shall mean all compensation due by IMH to ICAI
under Sections 6 and 8 of the Management Agreement for the quarter ending
December 31, 1997 prorated through the Closing Date less the Cash Advance. By
way of example only, if total compensation due by IMH to ICAI under Sections 6
and 8 of the Management Agreement for the quarter ending December 31, 1997 was
calculated at $3.0 million and the date of this Agreement was December 1, 1997,
the Final Advisory Payment would be $1,989,130.20, calculated as follows: $3.0
million multiplied by 61 (number of days from and including October 1, 1997
2
<PAGE>
through including November 30, 1997) divided by 92 (total number of days from
and including October 1, 1997 through and December 31, 1997).
"GAAP" means generally accepted accounting principles in the United States
as in effect from time to time.
"ICII Representatives" shall mean any of the directors, officers,
employees, counsel, representatives, accountants and auditors of ICII, ICAI or
their subsidiaries.
"IMH Common Stock" shall mean shares of Common Stock of IMH.
"IMH Representatives" shall mean any of the directors, officers, employees,
counsel, representatives, accountants and auditors of IMH, ICIFC or their
subsidiaries.
"Indemnitee" has the meaning set forth in Section 10.2 hereof.
"Indemnitor" has the meaning set forth in Section 10.2 hereof.
"Indemnity Claim" has the meaning set forth in Section 10.2 hereof.
"Information" has the meaning set forth in Section 6.2(b) hereof.
"Lien" means any lien, pledge, mortgage, deed of trust, security interest,
claim, charge, option, right of first refusal, covenant, condition, restriction
or servitude, transfer restriction under any shareholder or similar agreement or
encumbrance.
"Loan" has the meaning set forth in the Recitals hereof.
"Loan Agreement" has the meaning set forth in the Recitals hereof.
"Losses" has the meaning set forth in Section 10.1(a) hereof.
"Management Agreement" has the meaning set forth in the Recitals hereof.
"1933 Act" has the meaning set forth in Section 3.6 hereof.
"Registration Rights Agreement" shall mean that Registration Rights
Agreement dated as of the Closing Date by and between ICAI and IMH pursuant to
which ICAI has certain rights to request the registration of the Shares; a copy
of the Registration Rights Agreement is attached hereto as Exhibit "A."
"Residual Securities" shall mean the following assets held by ICIFC (each
as more fully described in individual files): Prudential Securities Secured
Financing Corporation Trust 1995-1
3
<PAGE>
Class R, Prudential Securities Secured Financing Corporation Trust 1994-6 Class
R, Southern Pacific Secured Asset Corp. 1995-1 Class R, Southern Pacific Secured
Asset Corp. 1995-2, Class R1 and DLJ Mortgage Acceptance Corporation 1995-5
Class RII.
"Restricted Security" and "Restricted Securities" have the meanings set
forth in Section 3.6 hereof.
"Services Agreement" shall mean that Services Agreement dated as of the
Closing Date by and between ICAI, on the one hand, and IMH and ICIFC, on the
other hand, pursuant to which ICAI will perform certain administrative services
for IMH and ICIFC all as more expressly set forth therein; a copy of the
Services Agreement is attached hereto as Exhibit "B."
"Shares" shall have the meaning set forth in Section 3.2 hereof.
"Stifel" has the meaning set forth in Section 3.5 hereof.
"Termination Payment" shall have the meaning set forth in Section 3.1(a)
hereof.
"Termination Payment Certificate" shall have the meaning set forth in
Section 3.1(b) hereof.
"Unpaid Advisory Certificate" shall have the meaning set forth in Section
3.3(a) hereof.
"Unpaid Advisory Payment" shall mean all compensation due by IMH to ICAI
under Sections 6 and 8 of the Management Agreement for the three months ended
September 30, 1997.
"Value of Residual Securities" shall mean the value of each of the Residual
Securities as recorded by ICIFC on its general ledger as of the Closing Date
excluding the December 25, 1997 distribution, plus all accrued interest up to
but not including the date hereof. The parties hereto acknowledge and agree
that the value of the Residual Securities and accrued and unpaid interest up to
the Closing Date as recorded by ICIFC on its general ledger on December 29, 1997
will be $37,826,676.33 and $257,107.74, respectively, and that said carrying
value is not necessarily related to the book value of such Residual Securities
as determined in accordance with GAAP and may not reflect amounts which may be
actually collected pursuant to said Residual Securities. None of IMH, ICIFC or
the Shareholders makes any representations, express or implied, with respect to
said Residual Securities, except as otherwise expressly set forth herein.
4
<PAGE>
ARTICLE II
CLOSING AND TERMINATION
2.1 Closing Date and Location. Subject to the provisions hereof, the
-------------------------
closing of the transactions contemplated herein (the "Closing") shall occur at
3:00 p.m. on December 29, 1997, at the offices of Freshman, Marantz, Orlanski,
Cooper & Klein, or such different time and place as the parties hereto may set
by mutual agreement. The date of the Closing is referred to herein as the
"Closing Date."
2.2 Termination. Upon the terms and subject to the satisfaction of the
-----------
conditions set forth in this Agreement, as of the Closing Date, the parties
hereto agree to terminate the Management Agreement and, the Loan Agreement and
cancel the Loan by executing and delivering to each other this Agreement, which
execution and delivery shall constitute their agreement that none of the parties
hereto shall have any further obligations under the Management Agreement, the
Loan Agreement and the Loan, except as otherwise set forth herein in Section
6.3, hereof. None of the assets of ICAI shall be transferred to IMH or ICIFC as
a result of this Agreement.
2.3 Acquisition and Transfer of Residual Securities.
-----------------------------------------------
(a) At the Closing Date, ICIFC shall assign, transfer, convey and
deliver to IMH, and IMH shall acquire and accept from ICIFC, free and clear of
Liens, except for those imposed by the Loan Agreement, all of ICIFC's right,
title and interest in and to the Residual Securities and the Loan in exchange
for cash in the amount of $8,962,664.15; and
(b) Upon the terms and subject to the conditions hereinafter set
forth, on the Closing Date, IMH shall assign, transfer, convey and deliver to
ICAI, and ICAI shall acquire and accept from IMH, free and clear of all Liens,
except for those imposed by the Loan Agreement, all of IMH's right, title and
interest in and to the Residual Securities, including all products and proceeds
of such Residual Securities. Each of IMH and ICIFC shall promptly take all
actions necessary to effect the change in title to the Residual Securities at
IMH's and ICIFC's sole expense.
ARTICLE III
TERMINATION PAYMENT, UNPAID ADVISORY PAYMENT
AND SERVICES AGREEMENT
3.1 Termination Payment.
-------------------
(a) In reliance on the representations and warranties of the parties
hereto and in consideration for the termination of the Management Agreement, IMH
agrees to pay to ICAI a
5
<PAGE>
$44.0 million termination payment (the "Termination Payment") consisting of the
following consideration:
$35,037,335.85 in IMH Common Stock; and
The Residual Securities; and
Concurrently herewith the Loan shall be canceled.
(b) On the Closing Date, IMH shall deliver to ICII and ICAI a
certificate (the "Termination Payment Certificate") dated as of the Closing
Date, signed by each of Tomkinson and Johnson in their role as Chief Executive
Officer and Chief Financial Officer, respectively, of IMH, certifying as to
IMH's calculation of the Termination Payment, the Due Amount of Loan and the
Value of Residual Securities as of and through the Closing Date.
3.2 Payment of Termination Fee. The Termination Payment shall be paid by
--------------------------
IMH to ICAI as of the Closing Date by delivering to ICAI, as of the Closing
Date, a combination of Residual Securities and certificate(s) evidencing shares
(the "Shares") of IMH Common Stock in the amounts set forth in Section 3.1(a);
concurrently, ICAI shall deliver evidence to IMH that the Loan is canceled. The
number of Shares delivered by IMH to ICAI as of the Closing Date shall be based
on the Agreed Per Share Value of IMH's Common Stock. All costs and expenses
associated with the issuance and delivery of the Shares shall be at IMH's
expense.
3.3 Cash Advance. On the date hereof, IMH shall deliver to ICAI cash
------------
representing the Cash Advance by wire transfer of immediately available funds in
accordance with wire instructions specified by ICAI; ICAI agrees to immediately
dividend the entire amount of the Cash Advance to ICII.
3.4 Unpaid Advisory Payment.
-----------------------
(a) On the Closing Date, ICAI shall deliver to IMH a certificate (the
"Unpaid Advisory Certificate") dated as of the Closing Date, signed by the
Chairman of ICAI, certifying as to ICAI's calculation of the Unpaid Advisory
Payment; and
(b) IMH shall deliver to ICAI cash representing the Unpaid Advisory
Payment by wire transfer of immediately available funds in accordance with wire
instructions specified by ICAI;
3.5 Services Agreement and Registration Rights Agreement. On the Closing
----------------------------------------------------
Date, each of ICAI, ICIFC and IMH will execute the Services Agreement, and each
of IMH and ICAI will execute the Registration Rights Agreement.
3.6 Fairness Opinion. The parties hereto acknowledge that a condition to
----------------
the obligations of the parties hereto is that the investment banking firm of
Stifel Nicolaus & Company, Incorporated ("Stifel") shall have rendered a
fairness opinion (the "Fairness Opinion")
6
<PAGE>
to IMH's special committee that the transactions referenced in Article II and
Sections 3.1 and 3.2 hereof are fair to IMH from a financial point of view and
that said special committee shall have approved the Fairness Opinion.
3.7 Restrictions on Transfer. Absent an effective registration statement
------------------------
under the Securities Act of 1933, as amended (the "1933 Act"), covering the
disposition of the Shares (individually, a "Restricted Security" and
collectively, the "Restricted Securities"), neither ICAI, ICII or any of their
subsidiaries or affiliates shall sell, transfer, assign, pledge, hypothecate or
otherwise dispose of any of the Restricted Securities without first providing
IMH with an opinion of counsel reasonably satisfactory to IMH to the effect that
such sale, transfer, assignment, pledge, hypothecation or other disposition is
exempt from the registration and prospectus delivery requirements of the 1933
Act and in compliance with (or exempt from) the registration or qualification
requirements of any applicable state securities law.
3.8 Restrictive Legend. IMH may cause the following legend (or other
------------------
legend in substantially the same form) to be placed upon each certificate to be
delivered to ICAI representing the Restricted Securities and any other
securities issued in respect thereof upon any transfer, stock split, stock
dividend, recapitalization, merger, consolidation or similar event:
"THE SALE, TRANSFER, ASSIGNMENT, PLEDGE OR HYPOTHECATION OF THE SHARES
REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("ACT"). THESE SHARES MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS SUCH TRANSACTION IS
DULY REGISTERED UNDER THE ACT OR UNLESS THE COMPANY RECEIVES AN OPINION OF
COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY SATISFACTORY TO
THE COMPANY THAT SUCH TRANSACTION IS EXEMPT FROM THE REGISTRATION
PROVISIONS OF THE ACT."
3.9 Transfer Agent. IMH may make a notation on its records or give
--------------
instructions to any transfer agent of the Restricted Securities in order to
implement the restrictions on transfer of the Restricted Securities set forth in
this Article III.
3.10 Removal of Transfer Restrictions. The federal legend imprinted on a
--------------------------------
certificate evidencing a Restricted Security pursuant to Section 3.8 shall be
removed, and IMH shall issue a certificate without such legend to the holder of
such security, (a) if such security is registered under the 1933 Act, (b) if the
holder provides IMH with an opinion of counsel reasonably acceptable to IMH or a
no-action letter or interpretive opinion of the staff of the Securities and
Exchange Commission to the effect that a public sale or transfer of such
security may be made without registration under the 1933 Act, or (c) if the
holder has complied with the requirements of Rule 144(k) promulgated under the
1933 Act and provides a letter to that effect to IMH.
7
<PAGE>
3.11 Delivery of Residual Interests; Instruments of Conveyance and
-------------------------------------------------------------
Transfer.
- --------
(a) At the Closing Date, each of IMH and ICIFC shall cause to be
delivered to ICAI certificates representing the Residual Securities; and
(b) IMH shall also at the Closing Date deliver title to the Residual
Securities by delivering to ICAI an executed bill of sale substantially in the
form of Exhibit "C" hereto (the "Bill of Sale").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IMH AND ICIFC
Each of IMH and ICIFC jointly and severally represents and warrants to each
of ICII and ICAI that:
4.1 Valid Issuance. The Shares to be issued and sold by IMH pursuant to
--------------
the terms hereof upon such issuance will be, duly authorized, validly issued,
fully paid and nonassessable.
4.2 Corporate Power and Authority. Each of IMH and ICIFC has full
-----------------------------
corporate power and authority to enter into this Agreement. This Agreement has
been duly authorized, executed and delivered by each of IMH and ICIFC and
constitutes a valid and binding agreement of each of IMH and ICIFC and is
enforceable against each of IMH and ICIFC in accordance with its terms, except
as the enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws affecting creditors' rights
generally and moratorium laws in effect from time to time and by equitable
principles restricting the availability of equitable remedies. The execution
and delivery by each of IMH and ICIFC of, and the performance by each of IMH and
ICIFC of their respective obligations under, this Agreement, the consummation of
the transactions contemplated hereby and sale of the Shares to be sold by the
Company in the manner set forth herein will not result in the creation or
imposition of any Lien upon any of the assets of either IMH, ICIFC or any of
their subsidiaries pursuant to the terms or provisions of, or result in a breach
or violation of any of the terms or provisions of, or constitute a default
under, or give any other party a right to terminate any of its obligations
under, or result in the acceleration of any obligation under any indenture,
mortgage, deed of trust, lease or other agreement or instrument to which either
IMH, ICIFC or any of its subsidiaries is a party or by which either IMH, ICIFC
or any of their subsidiaries or any of its properties is bound or affected, or
the charter or by-laws of either IMH or ICIFC, or violate or conflict with any
judgment, ruling, decree, order, statute, rule or regulation of any court or
other governmental agency or body applicable to the business or properties of
either IMH, ICIFC or any of its subsidiaries the effect of any of which,
individually or in the aggregate, might have a material adverse effect of either
of IMH or ICIFC.
4.3 Consent and Approvals. No consent, approval, authorization or order
---------------------
of, or any filing or declaration with, any court or governmental agency or body
is required in connection
8
<PAGE>
with the authorization, issuance, transfer, sale or delivery of the Shares by
IMH, in connection with the execution, delivery and performance of this
Agreement by either IMH, ICIFC or in connection with the taking by either IMH or
ICIFC of any other action contemplated hereby.
4.4 Litigation. There is no legal proceeding pending or, to the knowledge
----------
of either of IMH or ICIFC, threatened, that seeks to enjoin or obtain damages in
respect of the consummation of the transactions contemplated by this Agreement
or that questions the validity of this Agreement or any action taken or to be
taken by either of IMH or ICIFC in connection with the consummation of the
transactions contemplated hereby.
4.5 Listing of Shares. The Shares are duly authorized for listing,
-----------------
subject to official notice of issuance, on the American Stock Exchange and no
procedure is pending, or to IMH or ICIFC's knowledge threatened, with respect to
the delisting of IMH's Common Stock on the American Stock Exchange. Such
listing shall be at IMH's expense.
4.6 Title to Residual Securities.
----------------------------
(a) At the time of the transfer of the Residual Securities from IMH to
ICAI pursuant to this Agreement, IMH will own and will have good and valid,
marketable title to all of the Residual Securities, free and clear of all Liens,
except those imposed by the Loan Agreement; and
(b) Upon consummation of the transactions contemplated hereby, ICII
will have acquired, on and as of the date hereof, good and valid title in and to
the Residual Securities, free and clear of all Liens.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ICII AND ICAI
Each of ICII and ICAI jointly and severally represents warrants and
covenants to each of IMH and ICIFC that:
5.1 Organization and Good Standing. Each of ICII and ICAI is a corporation
------------------------------
duly organized, validly existing and in good standing under the laws of the
State of California, and has all requisite corporate power and authority to
carry on its business as it is now being conducted.
5.2 Corporate Power and Authority. Each of ICII and ICAI has full
-----------------------------
corporate power and authority to enter into this Agreement. This Agreement has
been duly authorized, executed and delivered by each of ICII and ICAI and
constitutes a valid and binding agreement of each of ICII and ICAI and is
enforceable against each of ICII and ICAI in accordance with its terms, except
as the enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization and similar laws affecting creditors' rights
generally and moratorium laws in effect
9
<PAGE>
from time to time and by equitable principles restricting the availability of
equitable remedies. The execution and delivery by each of ICII and ICAI of, and
the performance by each of ICII and ICAI of their respective obligations under,
this Agreement and the consummation of the transactions contemplated hereby will
not result in the creation or imposition of any Lien upon any of the assets of
either ICII, ICAI or any of their subsidiaries pursuant to the terms or
provisions of, or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any other party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which either ICII, ICAI or any of its subsidiaries is
a party or by which either ICII, ICAI or any of their subsidiaries or any of its
properties is bound or affected, or the charter or by-laws of either ICII or
ICAI, or violate or conflict with any judgment, ruling, decree, order, statute,
rule or regulation of any court or other governmental agency or body applicable
to the business or properties of either ICII, ICAI or any of its subsidiaries
the effect of any of which, individually or in the aggregate, might have a
material adverse effect on the business or operations of either ICII or ICAI.
5.3 Consent and Approvals. No consent, approval, authorization or order
---------------------
of, or any filing or declaration with, any court or governmental agency or body
is required in connection with the execution, delivery and performance of this
Agreement by either ICII, ICAI or in connection with the taking by either ICII
or ICAI of any other action contemplated hereby.
5.4 Litigation. There is no legal proceeding pending or, to the knowledge
----------
of either of ICII or ICAI, threatened, that seeks to enjoin or obtain damages in
respect of the consummation of the transactions contemplated by this Agreement
or that questions the validity of this Agreement or any action taken or to be
taken by either of ICH or ICAI in connection with the consummation of the
transactions contemplated hereby.
5.5 Investor Representations. Each of ICII and ICAI has received all
------------------------
periodic reports filed by IMH under the Securities Exchange Act of 1934, as
amended, and is familiar with the terms and conditions and other information set
forth therein. Each of ICII and ICAI has had the opportunity to ask of IMH and
ICIFC, or a person or persons acting on their behalf, any and all relevant
questions in connection with any aspect of IMH and ICIFC and has received
answers which each of ICII and ICAI considers to be responsive to such
questions. ICII is able to bear the economic risk of the investment represented
by the Shares. In considering this investment, each of ICII and ICAI is not
relying on any representation, warranty or statement made by either IMH, ICIFC
or any of their respective agents, employees, officers or representatives not
specifically referenced herein or in any document attached hereto. Without
limiting the foregoing, each of ICII and ICAI specifically disclaims any
reliance on any written or oral information, representations and warranties
previously provided regarding the Residual Securities, except to the extent
expressly set forth herein. Each of ICII and ICAI understands that (a) if any
of the Residual Securities fail to generate cash flow, there will be no funds
payable thereunder to either ICII or ICAI, (b) if any of the Residual Securities
is not performing, it is subject to downgrade by one or more of the rating
agencies, (c) the Residual Securities are subject to certain triggers for
10
<PAGE>
losses and delinquencies, and (d) as a general matter, the Residual Securities
involve a high degree of risk and may entail a risk of total loss. Each of ICII
and ICAI covenants and representations that each of them is familiar with the
risks inherent in Residual Securities. In addition, each of ICAI and ICII:
(a) acknowledges that the Shares to be acquired by it pursuant to this
Agreement are not registered under the 1933 Act or qualified under any
applicable state securities laws on the ground that the sale provided for in
this Agreement and the issuance of securities is exempt from the registration
requirements of the 1933 Act, and state law exemptions relating to offers and
sales in private placements to accredited investors;
(b) represents that it is an accredited investor within the meaning of
Rule 501 of Regulation D promulgated under the 1933 Act;
(c) understands that the Shares must be held until subsequently
registered under the 1933 Act or an exemption from such registration is
available; and
(d) represents that either it has a preexisting personal or business
relationship with IMH or its principals or, by reason of its business or
financial experience, it has the capacity to protect its own interests in
connection with this transaction.
5.6 Sale of the Shares. ICAI agrees that it will sell the Shares received
------------------
pursuant to this Agreement as soon as practicable.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Public Announcements. The parties hereto acknowledge that a public
--------------------
announcement regarding the matters set forth herein was made on December 19,
1997, a copy of which is attached hereto as Exhibit "D." Neither IMH or ICIFC
on the one hand (nor any of their affiliates) nor ICII or ICAI on the other hand
(nor any of their affiliates) shall make any public statement from the date of
this Agreement forward, including, without limitation, any press release, with
respect to this Agreement and the transactions contemplated hereby, without the
prior written consent of the other party (which consent may not be unreasonably
withheld), except as may be required (a) by law or (b) in the case of IMH or
ICII, pursuant to the obligations of IMH or ICII resulting from the inclusion of
their common stock on the American Stock Exchange and the Nasdaq National
Market, respectively.
6.2 Confidential Information.
------------------------
(a) Each of IMH and ICIFC on the one hand and ICII and ICAI on the
other agree: (i) to hold in trust and maintain confidential, (ii) not to
disclose to others without prior
11
<PAGE>
written approval from the disclosing party, and (iii) to prevent duplication of
and disclosure to any other party, any Information received from the disclosing
party or developed, presently held or continued to be held, or otherwise
obtained, by the receiving party under this Agreement, the Loan Agreement or the
Management Agreement;
(b) "Information" shall mean all results of services provided under
the Management Agreement and Information disclosed by either party orally,
visually, in writing, or in other tangible form, and includes, but is not
limited to, technical, economic plans, computer Information data bases, customer
lists and the like obtained, prepared or otherwise provided further to this
Agreement, the Loan Agreement or the Management Agreement; and
(c) The foregoing obligations of confidentiality, non-disclosure and
non-use shall not apply to any Information to the extent that the obligated
party can show that: (i) such Information is or becomes knowledge generally
available to the public other than through the acts or omissions of the
obligated party; (ii) such Information is subsequently received by the obligated
party on a non-confidential basis from a third party who did not receive it
directly or indirectly from the disclosing party; (iii) such Information is
developed independently by the obligated party without reference to the
Information, or (iv) disclosure of such Information is required under applicable
law or regulations.
Specific elements of Information shall not be deemed to come under the
above exceptions merely because they are embraced by more general Information
which is or becomes public knowledge.
6.3 Payment of Final Advisory Payment. IMH shall pay the Final Advisory
---------------------------------
Payment to ICAI after the date hereof in accordance with the terms and
conditions set forth in Sections 6 and 8 of the Management Agreement.
6.4 Acknowledgment of Shareholders. Each of the Shareholders, by their
------------------------------
execution hereof, acknowledges that no amounts are due and owing to any of them
by either ICAI or ICII pursuant to the Management Agreement and hereby release,
each of ICAI and ICII from any amounts which may be owing to them by ICAI or
ICII pursuant to the Management Agreement.
6.5 Termination Fee. Each of the parties hereto agrees to treat the
---------------
delivery of the Termination Payment as the payment of a termination fee, which
is income to ICAI.
ARTICLE VII
CONDITIONS TO IMH'S AND ICIFC'S OBLIGATIONS AT CLOSING
7.1 The obligations of each of IMH and ICIFC under this Agreement are
subject to the fulfillment on or before the Closing Date of each of the
following conditions, any of which may be waived by each of IMH and ICIFC at its
sole discretion:
12
<PAGE>
(a) The representations and warranties of each of ICII and ICAI set
forth in this Agreement shall be true and correct as of the date of this
Agreement and as of the Closing Date;
(b) ICAI shall have entered into the Services Agreement;
(c) ICAI shall have entered into the Registration Rights Agreement;
(d) Each of ICII and ICAI shall have performed and complied with all
agreements and conditions required by this Agreement to be performed or complied
with by each of them on or before the Closing Date;
(e) Each of ICII and ICAI shall have delivered to IMH Certificates,
dated as of the Closing Date executed by each of their Chairmen, certifying
that, the representations made in Article V are true and correct and that the
conditions specified in Sections 7.1(a) and 7.1(d) have been fulfilled;
(f) Stifel shall have delivered to IMH's Special Committee
verification that the Fairness Opinion, dated as of December 19, 1997, is in
full force and effect as of the Closing Date;
(g) If, as a result of the transactions contemplated by this
Agreement, ICAI will own in excess of 9.5% of the outstanding common stock of
IMH, ICAI shall have delivered to IMH a certificate, reasonably acceptable to
IMH, providing that ICAI's ownership of the Shares will not cause any
"individual" (as defined in Section 542 of the Internal Revenue Code) or other
person (other than ICII and its affiliates) to own in excess of 9.5% of the
common stock of IMH; and
(h) Each of ICII and ICAI shall have delivered to IMH certified copies
of resolutions of the Board of Directors of each of ICII and ICAI authorizing
and approving the execution, delivery and performance of this Agreement and each
additional agreement or other document required hereunder.
ARTICLE VIII
CONDITIONS TO ICII'S AND ICAI'S OBLIGATIONS AT CLOSING
The obligations of each of ICII and ICAI under this Agreement are subject
to the fulfillment on or before the Closing Date of each of the following
conditions, any of which may be waived by each of ICII and ICAI at its sole
discretion:
(a) The representations and warranties of each of IMH and ICIFC set
forth in Article III shall be true and correct as of the date of this Agreement
and as of the Closing Date;
13
<PAGE>
(b) IMH and ICIFC shall have entered into the Services Agreement;
(c) IMH shall have entered into the Registration Rights Agreement;
(d) Each of IMH and ICIFC shall have performed and complied with all
agreements and conditions required by this Agreement to be performed or complied
with by each of IMH and ICIFC on or before the Closing Date; and
(e) Each of IMH and ICIFC shall have delivered to ICII Certificates
dated as of the Closing Date executed by each of their Chairmen certifying that
the representations made in Article IV are true and correct and that the
conditions specified in Sections 8.1(a) and 8.1(d) have been fulfilled;
(f) If, as a result of the transactions contemplated by this
Agreement, ICAI will own in excess of 9.5% of the outstanding common stock of
IMH, IMH shall deliver to ICAI a copy of a board resolution of IMH permitting
ICAI to own the Shares notwithstanding the stock ownership limit set forth in
IMH's charter; and
(g) Each of IMH and ICIFC shall have delivered to ICII certified
copies of resolutions of the Board of Directors of each of IMH and ICIFC
authorizing and approving the execution, delivery and performance of this
Agreement and each additional agreement or other document required hereunder.
ARTICLE IX
DELIVERY
9.1 Items/Documents Delivered and Exchanged. At the Closing Date, subject
---------------------------------------
to the other terms and conditions of this Agreement, the following items and
documents as well as any other appropriate items and documents specified herein,
properly executed, shall be delivered by and to the appropriate parties:
(a) To be delivered by IMH:
(i) stock certificate(s) evidencing the Shares;
(ii) the Services Agreement, as executed by IMH;
(iii) the Registration Rights Agreement, as executed by IMH;
(iv) resolutions of IMH's Board of Directors authorizing the
transactions referenced herein, certified by IMH's Secretary;
14
<PAGE>
(v) the Closing Calculation, including the Value of Residual
Securities and the Due Amount of Loan determined as of the Closing Date;
(vi) the Unpaid Advisory Payment;
(vii) Certificates evidencing the Residual Securities;
(viii) the Bill of Sale; and
(ix) the Officer's Certificate referenced in Section 7.1(e)
hereof.
(b) To be delivered by ICII:
(i) resolutions of ICII's Board of Directors authorizing the
transactions referenced herein, certified by ICII's Secretary; and
(ii) the Officer's Certificate referenced in Section 8.1(e)
hereof.
(c) To be delivered by ICAI:
(i) evidence that the Loan has been deemed repaid in full;
(ii) the Services Agreement, as executed by ICAI;
(iii) the Registration Rights Agreement, as executed by ICAI;
(iv) resolutions of ICAI's Board of Directors authorizing the
transactions referenced herein, certified by ICAI's Secretary; and
(v) the Officer's Certificate referenced in Section 7.1(e)
hereof.
(d) To be delivered by ICIFC:
(i) the Services Agreement, executed by ICIFC;
(ii) resolutions of ICIFC's Board of Directors authorizing the
transactions referenced herein, certified by ICIFC's Secretary; and
(iii) the Officer's Certificate referenced in Section 8.1(e)
hereof.
15
<PAGE>
ARTICLE X
INDEMNIFICATION
10.1 Indemnification.
---------------
(a) ICII and ICAI jointly and severally agree to indemnify and hold
IMH, ICIFC and each of the IMH Representatives harmless from and against any and
all liabilities, obligations, damages, losses, deficiencies, costs, penalties,
interest and expenses (collectively, "Losses") incurred or suffered by either
IMH, ICIFC or any IMH Representative arising out of, based upon, attributable to
or resulting from:
(i) any breach of representation or warranty made herein by
either ICII or ICAI;
(ii) the failure of either ICII or ICAI to comply with any of the
covenants contained in this Agreement which are required to be performed by
either ICII or ICAI;
(iii) any intentional misstatements of fact made by ICAI in
connection with the Management Agreement and the services rendered
thereunder or for any acts or omissions performed by ICAI, its directors,
officers, shareholders and employees in accordance with the Management
Agreement constituting bad faith, willful misconduct, gross negligence or
reckless disregard of their duties; and
(iv) all actions, suits, proceedings, demands, assessments,
judgments, costs, penalties and expenses, including reasonable attorneys'
fees, incident to the foregoing.
(b) Each of IMH and ICIFC jointly and severally agrees to indemnify
and hold ICII, ICAI and each of the ICII Representatives harmless from and
against any and all Losses incurred or suffered by ICII, ICAI or any ICII
Representative arising out of, based upon, attributable to or resulting from:
(i) any breach of representation or warranty made herein by
either IMH or ICIFC;
(ii) the failure of either IMH or ICIFC to comply with any of the
covenants contained in this Agreement which are required to be performed by
either IMH or ICIFC;
(iii) any acts or omissions of ICAI, its stockholders,
directors, officers and employees made in good faith in the performance of
ICAI's duties under the
16
<PAGE>
Management Agreement and not constituting bad faith, willful misconduct,
gross negligence or reckless disregard of its duties; and
(iv) all actions, suits, proceedings, demands, assessments,
judgments, costs, penalties and expenses, including reasonable attorneys'
fees, incident to the foregoing.
10.2 Notice of Indemnification. In the event any legal proceeding (an
-------------------------
"Indemnity Claim") shall be threatened or instituted or any claim or demand
shall be asserted by any person in respect of which payment may be sought by one
party hereto from the other party under the provisions of this Article X, the
party seeking indemnification (the "Indemnitee") shall promptly cause written
notice of the assertion of any such claim of which it has knowledge which is
covered by this indemnity to be forwarded to the other party (the "Indemnitor").
Any notice of a claim by reason of any of the representations, warranties or
covenants contained in this Agreement shall state specifically the
representation, warranty or covenant with respect to which the Indemnity Claim
is made, the facts giving rise to an alleged basis for the claim, and the amount
of the liability asserted against the Indemnitor by reason of the Indemnity
Claim. Within thirty (30) days of the receipt of such written notice, the
Indemnitor shall notify the Indemnitee in writing of its intent to contest its
obligation to indemnify or reimburse under this Agreement (a "Contest") or to
accept liability hereunder. If the Indemnitor does not respond within thirty
(30) days to such written notice, the Indemnitor will be deemed to accept
liability. In the event of a Contest, within ten (10) business days of the
receipt of the written notice thereof, the parties will submit the dispute
further to Section 11.5 herein.
10.3 Indemnification Procedure for Third-Party Claims. In the event of any
------------------------------------------------
Indemnity Claim brought by a third party, Indemnitor shall promptly notify the
Indemnitee of such Indemnity Claim, specifying in reasonable detail the
Indemnity Claim and the circumstance under which it arose, and the amount of the
liability asserted against the Indemnitee by reason of the Indemnity Claim.
Within ten (10) business days of the receipt of such notice (or sooner if the
nature of the Indemnity Claim so requires) the Indemnitor shall notify the
Indemnitee of its intent to compromise or defend such Indemnity Claim or to
Contest. Any Contest shall be governed by the provisions of Section 10.2
herein. The Indemnitor may elect to compromise or defend, at its own expense
and by its own counsel, any such Indemnity Claim. If the Indemnitor elects to
compromise or defend such Indemnity Claim, the Indemnitee shall cooperate, at
the expense of the Indemnitor, in the compromise of, or defense against, such
Indemnitee Claim. If the Indemnitor fails to notify the Indemnitee of its
election as herein provided or loses the Contest as provided in 10.2 herein, the
Indemnitee may pay, compromise or defend such Indemnity Claim. Except as
otherwise provided herein, in the event of the initiation of any Indemnity Claim
against an Indemnitee by a third party and the Indemnitor elects to compromise
or defend, the Indemnitor shall have the absolute right after the receipt of
notice, at its option and at its own expense, to be represented by counsel of
its choice, and to defend against, negotiate, settle or otherwise deal with any
Indemnity Claim,; provided, however, that the Indemnitee may participate in any
-------- -------
such proceeding with counsel of its choice and at its expense and the Indemnitor
shall not settle any
17
<PAGE>
such Indemnity Claim unless the Indemnitor is fully released without any
admission of liability. The parties hereto agree to cooperate fully with each
other in connection with the defense, negotiation or settlement of any such
Indemnity Claim. To the extent the Indemnitor elects not to defend such
Indemnity Claim, and the Indemnitee defends against or otherwise deals with any
such Indemnity Claim, the Indemnitee may retain counsel, at the expense of the
Indemnitor, and control the defense of such Indemnity Claim. If the Indemnitee
shall settle any such Indemnity Claim without the consent of the Indemnitor, the
Indemnitee shall thereafter have no claim against the Indemnitor under this
Article X with respect to any loss, liability, claim, obligation, damage and
expense occasioned by such settlement.
10.4 Indemnification Payments. The Indemnitor shall pay any sums due and
------------------------
owing by it to the Indemnitee by wire transfer or certified check within ten
(10) days after the date of the determination of liability pursuant to this
Article X. Any overdue amounts payable by the Indemnitor shall bear interest at
an annual rate of 9% per annum, based on a year of 365 days and the number of
days elapsed.
ARTICLE XI
MISCELLANEOUS
11.1 Assignment or Transfer. No party shall assign or transfer any of its
----------------------
rights under this Agreement without the prior written approval of the other
parties, except no such approval shall be required for an assignment to an
affiliate or a successor to all or a substantial portion of the assets or the
business of a party, provided that such affiliate or successor assumes such
party's obligations hereunder with respect to the rights assigned or
transferred.
11.2 Notices. All notices, requests, demands and other communications
-------
provided for hereunder shall be in writing (including telegraphic or facsimile
communications) and shall be mailed (return receipt requested), telegraphed,
sent by facsimile or delivered to each party at the address set forth as
follows, or at such other address as either party may designate by notice to the
other, and any such notice, request, demand or other communication shall be
effective upon receipt. All payments required in this Agreement shall be paid
to and delivered to the party as provided herein for notice.
If to IMH or ICIFC: Imperial Credit Mortgage Holdings, Inc.
20371 Irvine Avenue
Santa Ana Heights, California 92707
Telephone: (714) 556-0122
Facsimile: (714) 428-2150
Attention: Joseph R. Tomkinson
Chief Executive Officer
18
<PAGE>
If to ICII or ICAI: Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard
Building 1, Suite 240
Torrance, California 90505
Telephone: (310) 791-8040
Facsimile: (310) 791-8230
Attention: Irwin L. Gubman, Esq.
General Counsel
11.3 Severability. In the event any provision of this Agreement is held
------------
invalid or unenforceable, such holding shall not invalidate nor render
unenforceable any other provision hereof.
11.4 Governing Law. This Agreement shall be construed in accordance with
-------------
the laws of the State of California.
11.5 Reference Provision.
-------------------
(a) Each controversy, dispute or claim between the parties arising out
of or relating to this Agreement, pursuant to Article X hereof, will be settled
by a reference proceeding in Orange County, California, in accordance with the
provisions of Section 638 et seq. of the California Code of Civil Procedure, or
their successor section ("CCP") , which shall constitute the exclusive remedy
for the settlement of any controversy, dispute or claim concerning this
Agreement, including whether such controversy, dispute or claim is subject to
the reference proceeding and the parties waive their rights to initiate any
legal proceedings against each other in any court or jurisdiction other than the
Superior Court of Orange County (the "Court"). The referee shall be a retired
Judge of the Court selected by mutual agreement of the parties, and if they
cannot so agree within forty-five (45) days after the date of the Contest, the
referee shall be promptly selected by the Presiding Judge of the Orange County
Superior Court (or his representative). The referee shall be appointed to sit
as a temporary judge, with all of the powers for a temporary judge, as
authorized by law, and upon selection should take and subscribe to the oath of
office as provided for in Rule 244 of the California Rules of Court (or any
subsequently enacted Rule). Each party shall have one preemptory challenge
pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for
hearing within sixty (60) days after the date of the Contest and (b) try any and
all issues of law or fact and report a statement of decision upon them, if
possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgment shall be entered
pursuant to CCP 644 in any court in the State of California having
jurisdiction. Any party may apply for a reference at any time after thirty (30)
days following notice to any other party of the nature of the controversy,
dispute or claim, by filing a petition for a hearing and/or trial. All
discovery permitted by this Agreement shall be completed no later than fifteen
(15) days before the first hearing date established by the referee. The referee
may extend such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
19
<PAGE>
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and, request for production or inspection of documents shall be
responded to within ten (10) days after service. All disputes relating to
discovery which cannot be resolved by the parties shall be submitted to the
referee whose decision shall be final and binding upon the parties.
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter, except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the
close of the reference proceeding which shall dispose of all of the claims of
the parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions of law, a written
statement of decision, and the right to move for a new trial or a different
judgment, which new trial, if granted, is also to be a reference proceeding
under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Orange County Superior
Court, in accordance with the California Arbitration Act, Sections 1280 through
1294.2 of the CCP as amended from time to time. The limitations with respect to
discovery as set forth hereinabove shall apply to any such arbitration
proceeding.
11.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed shall be deemed to be an original,
and all of which taken together shall constitute one and the same instrument.
20
<PAGE>
IN WITNESS WHEREOF, this Termination Agreement is made as of the day and
year first above written.
IMPERIAL CREDIT INDUSTRIES, INC.
By: /s/ Irwin Gubman
------------------------------------------------
Name: Irwin Gubman
Title: General Counsel and Secretary
IMPERIAL CREDIT ADVISORS, INC.
By: /s/ Irwin Gubman
-------------------------------------------------
Name: Irwin Gubman
Title: General Counsel and Secretary
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
By: /s/ Joseph R. Tomkinson
---------------------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
ICI FUNDING CORPORATION
By: /s/ Joseph R. Tomkinson
--------------------------------------------
Name: Joseph R. Tomkinson
Title: Chief Executive Officer
/s/ Joseph R. Tomkinson
---------------------------------------------
Joseph R. Tomkinson
/s/ William S. Ashmore
-----------------------------------------------
William S. Ashmore
/s/ Richard J. Johnson
------------------------------------------------
Richard J. Johnson
21
<PAGE>
EXHIBIT 10.27
PROMISSORY NOTE SECURED BY
--------------------------
STOCK PLEDGE AND DEED OF TRUST
------------------------------
Lender: Borrower:
Imperial Credit Industries, Inc. H. Wayne Snavely
23550 Hawthorne Boulevard 2500 Paseo Del Mar
Building 1, Suite 240 Palos Verdes Estates, CA 90274
Torrance, California 90505
FOR VALUE RECEIVED, the undersigned, H. Wayne Snavely, promises to pay to
the order of the above-named Lender, its successors and assigns, at the above
address or at such other place as Lender may designate in writing, in lawful
money of the United States of America, the sum of One Million Nine Hundred
Ninety Nine Thousand Nine Hundred and Ninety Eight Dollars ($1,999,998) together
with interest thereon from the date hereof at the interest rate described below
(the "Interest Rate") on the principal balance in the manner provided below:
1. Security, Payments, Interest. At Borrower's expense, this Promissory
----------------------------
Note has been secured by Borrower having pledged to Lender (i) 143,369 shares of
common stock of Imperial Credit Commercial Mortgage Investment Corp. (the
"Stock") in the form of a Security Agreement (Pledge of Securities) and (ii)
that certain "Straight Note" and Deed of Trust, and the proceeds thereof,
executed on June 4, 1997, by Ronald P. Padilla for the benefit of H. Wayne
Snavely, in the amount of $967,500, the recorded Deed of Trust encumbering
property known as Parcel 2, Book 102, Page 32 of Parcel Maps for the City of
Huntington Beach, Orange County, California (the "Property"), and Lender shall
have all rights and remedies to which a secured party is entitled under
California law.
Payments made by Borrower shall be applied first to the payment of the
charges and interest accrued on the unpaid principal balance as of the date of
receipt and the remainder, if any, shall be applied to the reduction of the
unpaid principal, except upon default Lender will allocate payment(s) to
principal, interest, and/or charges in its discretion. This Note shall bear
interest on the unpaid principal balance hereof from time to time outstanding at
an Interest Rate of 10.4% per annum. All interest shall be calculated on the
basis of a three hundred sixty five (365) day year. Interest shall be paid to
the Lender from the date hereof semi-annually in arrears on June 15 and December
15 of each year, commencing June 15, 1998. The outstanding principal and all
remaining accrued interest shall be payable in one installment on June 14, 2002,
unless extended by Lender at its sole discretion. This Note may be prepaid, in
whole or in part, at any time without penalty.
-1-
<PAGE>
2. Default. Upon failure to pay any payment when due or to perform any
-------
obligation, covenant, or agreement contained in this Note or any other documents
provided by Borrower to Lender to induce Lender to make the loan evidenced by
this Note, or should any statement contained therein be found to be false or
misleading in any material respect; or should Borrower make an assignment for
the benefit of creditors, or if a petition be filed by or against Borrower under
any state insolvency law or under the Bankruptcy Code, as amended and not
dismissed or discharged within 60 days; or, if the Borrower shall sell,
transfer, convey or alienate the Stock or the Property, or any part thereof, or
any interest therein, or shall be divested of his title or any interest therein
in any manner or way, whether voluntarily or involuntarily, without the written
consent of the Lender being first had and obtained; then Borrower shall be in
default under this Note, and the whole sum of principal, interest, charges and
advances, if any, shall become immediately due and payable at Lender's option
and without notice. The acceptance of any payment of principal or interest by
Lender after the time when it becomes due, as herein specified, shall not be
held to establish a custom, or to waive any rights of Lender to enforce payment
or assert any other rights, nor shall any failure or delay to exercise any
rights be held to waive the same. The rights or remedies of Lender as provided
in this Note may be pursued singly, successively, or together against Borrower
at the sole discretion of the Lender.
3. Attorneys' Fees and Other Expenses. Borrower shall pay upon demand
----------------------------------
reasonable attorneys' fees, and all other out-of-pocket expenses, including
filing, recording, or other costs or fees incurred by Lender in connection with
this Note, including attorneys' fees incurred by Lender if: (a) legal counsel is
engaged to assist in the collection of this Note after a default hereunder
whether or not suit is instituted, (b) any action is brought which may
significantly affect Lender's rights, such as an action to cancel, rescind,
construe or enforce this Note or to enforce laws or regulations in connection
therewith, or (c) Borrower becomes subject to a proceeding under the provisions
of the Bankruptcy Code and Lender in the exercise of prudent business practices
engages counsel to represent the interests of Lender.
4. Compliance With Laws. All of the terms and provisions of this Note
--------------------
shall be construed in compliance with all applicable laws. If any charge or fee
due hereunder is invalid, unenforceable or excessive under any law, then such
charge or fee shall be deemed modified or reduced to the extent required by law,
and any such sums collected by Lender in excess of the maximum amount permitted
by such law shall, at Lender's option, be refunded to Borrower or reapplied to
any principal, interest, deficiency or other amounts due hereunder and Lender
shall have no further liability to Borrower as a result thereof.
-2-
<PAGE>
5. Assignment. Lender shall have the right to sell, assign, or otherwise
----------
transfer, either in part or in its entirety, this Note and any other instrument
evidencing indebtedness of this Note without Borrower's consent. This Note and
all of the covenants, promises, and agreements contained in it shall be binding
on and inure to the benefit of their respective legal representatives,
successors, and assigns.
6. Entire Agreement. This Note and the security agreements referenced in
----------------
Paragraph 2 above contain the entire agreement between the Lender and Borrower
with respect to the subject matter hereof and supersede any and all prior
arrangements, proposals or understandings, written or oral, by or between Lender
and Borrower with respect to all transactions contemplated by this Note and the
terms hereunder. In the event of any conflict or inconsistency between any
provision of this Note and any provision of any other document or writing
executed by Lender and/or Borrower, the provision of this Note shall take
precedence and shall control, unless the conflicting or inconsistent provision
in such other document or writing specifically refers to this Note and
specifically states that it shall prevail. No amendment or modification of this
Note shall be effective for any purpose unless the same be in writing and duly
executed by both Lender and Borrower.
7. Severability of Provisions. If any provision or any portion of any
--------------------------
provision of this Note or the application of any such provision or any portion
thereof to any person or circumstance, shall be held invalid or unenforceable,
to the extent permitted by law, the remaining portion of such provision and the
remaining provisions of this Note or the application of such provision or
portion of such provision as is held invalid or unenforceable to persons or
circumstances other than those to which it is held invalid or unenforceable,
shall not be affected thereby.
8. Miscellaneous. No delay or omission on the part of Lender in
-------------
exercising any rights under this Note on default by Borrower shall operate as a
waiver of such right or of any other right under this Note, for the same default
or any other default. The pleading of any statute of limitations as a defense to
the obligations evidenced by this Note is waived. Time is of the essence for
each and every obligation under this Note. This Note shall be construed
according to and governed by the laws of the State of California. IN THE EVENT
ACTION IS INSTITUTED UNDER THIS NOTE, BORROWER WAIVES RIGHT TO TRIAL BY JURY.
DATED: October 21, 1997
/s/ H. Wayne Snavely
--------------------
H. Wayne Snavely
-3-
<PAGE>
SECURITY AGREEMENT
------------------
(Pledge of Securities)
THIS SECURITY AGREEMENT is made this 21st day of October 1997, between H.
Wayne Snavely ("Debtor") and Imperial Credit Industries, Inc. ("Secured Party").
Recitals
--------
A. Secured Party as lender has entered into a loan transaction evidenced
by a promissory note of even date herewith providing for the loan of $1,999,998
(the "Loan") to Debtor as borrower.
B. As a condition of the Loan, Secured Party requires that Debtor grant to
Secured Party a security interest in certain securities owned by Debtor.
WHEREFORE, Debtor and Secured Party, intending to be legally bound, agree
as follows:
Debtor hereby transfers, assigns, pledges and grants to Secured Party a
security interest in all those certain securities and stock certificates (herein
"Collateral") described in Exhibit A appended hereto, which Debtor has this day
delivered to and deposited with Secured Party; and all new securities or other
property (except dividends) which Debtor may become entitled to receive on
account of any of the Collateral and all proceeds of the Collateral.
This Security Agreement secures: (a) Debtor's payment and performance as
and when due of all amounts and obligations under the Loan (the "Obligations")
of even date executed by Debtor in favor of Secured Party; (b) any and all
extensions, modifications and renewals of the Obligations; (c) repayment of all
sums and amounts that may be advanced or expended by Secured Party for the
protection of the Collateral or any part thereof; and (d) any and all other sums
that may hereafter be advanced by Secured Party to and for the benefit of Debtor
and other amounts due to Secured Party hereunder.
Debtor hereby warrants and represents to Secured Party that Debtor is the
sole and absolute owner of the Collateral, free and clear of all liens,
encumbrances, adverse claims and security interests, except the security
interest herein granted to Secured Party, and that Debtor has the power and
authority to pledge, transfer and deliver the interest created hereby.
Secured Party may retain custody of the Collateral until all obligations
are fully paid. Secured Party will not be responsible for loss in value of the
Collateral or have any duty to take steps to preserve rights against third
parties by legal proceedings or otherwise. Secured Party's
<PAGE>
sole duty shall be to use reasonable care in the custody and physical
preservation of the Collateral in Secured Party's possession.
In the event any of the Collateral has depreciated by fifty percent (50%)
or more of its closing value as quoted by the Wall Street Journal of even date
herewith, then Secured Party may at its option, whether or not the Obligations
are in default, upon 3 days prior notice to Debtor, and provided Debtor does not
within that time provide substitute collateral satisfactory to Secured Party,
sell such Collateral and deposit the proceeds of any such sale into a
certificate account to be held by Secured Party. The terms of this Agreement
shall continue to apply to all proceeds held in such account.
At any time, at Debtor's expense and without notice to Debtor, Secured
Party may register in its own name or that of its nominee any securities held as
Collateral, and in connection therewith, may deposit and deliver any and all
securities to any committee, depository transfer agent, registrar, or other
designated agency on such terms and conditions as it may determine.
If Debtor shall fail to pay any of the Obligations secured hereby at the
time and in the manner required, Secured Party may, at its option, immediately
proceed to enforce its security interest according to law, or Secured Party may,
at its option, sell and dispose of the same and from the proceeds of sale retain
all costs and charges incurred by it in the sale of the Collateral, including
reasonable attorneys fees thereby incurred; take all sums due it under any of
the Obligations and the provisions hereof, including reasonable attorneys fees;
and any surplus of such proceeds remaining shall be paid to Debtor. In
addition, Secured Party may exercise any and all rights and remedies of a
Secured Party as provided by law, including without limitation all rights and
remedies under the California Uniform Commercial Code. Upon the sale of
Collateral, Secured Party may bid and make a purchase of the Collateral, or any
part thereof.
No act, delay or omission, or course of dealing between Debtor and Secured
Party shall be a waiver of any of Secured Party's rights or remedies under this
Agreement. No waiver, change, modification, or discharge in whole or in part of
this Agreement or of any obligation will be effective unless in writing signed
by Secured Party. A waiver by Secured Party of any rights or remedies by
Secured Party under the terms of this Agreement or with respect to any
obligation an any occasion will not be a bar to the exercise of any right or
remedy of any subsequent occasion.
This Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, executors, administrators, successors and
assigns.
This Security Agreement shall be governed by and construed in accordance
with California law. In the event any action is instituted under this Security
Agreement, or to determine the rights or remedies of the parties thereto, the
prevailing party shall be entitled to recover reasonable attorneys fees and
expenses.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
Secured Party:
By:/s/ Irwin L. Gubman
-------------------
IRWIN L. GUBMAN
Debtor:
By:/s/ H. Wayne Snavely
--------------------
H. WAYNE SNAVELY
-3-
<PAGE>
EXHIBIT 10.28
PROMISSORY NOTE SECURED BY
--------------------------
STOCK PLEDGE AND DEED OF TRUST
------------------------------
Lender: Borrower:
Imperial Credit Industries, Inc. Kevin E. Villani
23550 Hawthorne Boulevard 5658 Dolphin Place
Building 1, Suite 240 La Jolla, CA 92037
Torrance, California 90505
FOR VALUE RECEIVED, the undersigned, Kevin E. Villani, promises to pay to
the order of the above-named Lender, its successors and assigns, at the above
address or at such other place as Lender may designate in writing, in lawful
money of the United States of America, the sum of Nine Hundred Ninety Nine
Thousand, Nine Hundred Ninety Two Dollars ($999,992) together with interest
thereon from the date hereof at the interest rate described below (the "Interest
Rate") on the principal balance in the manner provided below:
1. Security, Payments, Interest. At Borrower's expense, this Promissory
----------------------------
Note has been secured by Borrower having pledged to Lender (i) 71,684 shares of
common stock of Imperial Credit Commercial Mortgage Investment Corp. (the
"Stock") in the form of a Security Agreement (Pledge of Securities) and (ii)
that certain Deed of Trust, and the proceeds thereof, executed by Jane E.
Villani under Power of Attorney Special from Kevin E. Villani for the benefit of
Imperial Credit Industries, Inc. the recorded Deed of Trust encumbering property
known as 5322 Calumet Avenue, La Jolla, California (the "Property"), and Lender
shall have all rights and remedies to which a secured party is entitled under
California law.
Payments made by Borrower shall be applied first to the payment of the
charges and interest accrued on the unpaid principal balance as of the date of
receipt and the remainder, if any, shall be applied to the reduction of the
unpaid principal, except upon default Lender will allocate payment(s) to
principal, interest, and/or charges in its discretion. This Note shall bear
interest on the unpaid principal balance hereof from time to time outstanding at
an interest rate of 10.4% per annum. All interest shall be calculated on the
basis of a three hundred sixty five (365) day year. Interest shall be paid to
the Lender from the date hereof semi-annually in arrears on June 15 and December
15 of each year, commencing June 15, 1998. The outstanding principal and all
remaining accrued interest shall be payable in one installment on June 14, 2002,
unless extended by Lender at its sole discretion. This Note may be prepaid, in
whole or in part, at any time without penalty.
-1-
<PAGE>
2. Default. Upon failure to pay any payment when due or to perform any
-------
obligation, covenant, or agreement contained in this Note or any other documents
provided by Borrower to Lender to induce Lender to make the loan evidenced by
this Note, or should any statement contained therein be found to be false or
misleading in any material respect; or should Borrower make an assignment for
the benefit of creditors, or if a petition be filed by or against Borrower
under any state insolvency law or under the Bankruptcy Code, as amended and not
dismissed or discharged within 60 days; or, if the Borrower shall sell,
transfer, convey or alienate the Stock or the Property, or any part thereof, or
any interest therein, or shall be divested of his title or any interest therein
in any manner or way, whether voluntarily or involuntarily, without the written
consent of the Lender being first had and obtained; then Borrower shall be in
default under this Note, and the whole sum of principal, interest, charges and
advances, if any, shall become immediately due and payable at Lender's option
and without notice. The acceptance of any payment of principal or interest by
Lender after the time when it becomes due, as herein specified, shall not be
held to establish a custom, or to waive any rights of Lender to enforce payment
or assert any other rights, nor shall any failure or delay to exercise any
rights be held to waive the same. The rights or remedies of Lender as provided
in this Note may be pursued singly, successively, or together against Borrower
at the sole discretion of the Lender.
3. Attorneys' Fees and Other Expenses. Borrower shall pay upon demand
----------------------------------
reasonable attorneys' fees, and all other out-of-pocket expenses, including
filing, recording, or other costs or fees incurred by Lender in connection with
this Note, including attorneys' fees incurred by Lender if: (a) legal counsel is
engaged to assist in the collection of this Note after a default hereunder
whether or not suit is instituted, (b) any action is brought which may
significantly affect Lender's rights, such as an action to cancel, rescind,
construe or enforce this Note or to enforce laws or regulations in connection
therewith, or (c) Borrower becomes subject to a proceeding under the provisions
of the Bankruptcy Code and Lender in the exercise of prudent business practices
engages counsel to represent the interests of Lender.
4. Compliance With Laws. All of the terms and provisions of this Note
--------------------
shall be construed in compliance with all applicable laws. If any charge or fee
due hereunder is invalid, unenforceable or excessive under any law, then such
charge or fee shall be deemed modified or reduced to the extent required by law,
and any such sums collected by Lender in excess of the maximum amount permitted
by such law shall, at Lender's option, be refunded to Borrower or reapplied to
any principal, interest, deficiency or other amounts due hereunder and Lender
shall have no further liability to Borrower as a result thereof.
5. Assignment. Lender shall have the right to sell, assign, or
----------
otherwise transfer, either in part or in its entirety, this Note and any other
instrument evidencing indebtedness of this Note without Borrower's consent.
This Note and all of the covenants, promises, and
-2-
<PAGE>
agreements contained in it shall be binding on and inure to the benefit of their
respective legal representatives, successors, and assigns.
6. Entire Agreement. This Note contains the entire agreement between
----------------
the Lender and Borrower with respect to the subject matter hereof and supersedes
any and all prior arrangements, proposals or understandings, written or oral,
by or between Lender and Borrower with respect to all transactions contemplated
by this Note and the terms hereunder. In the event of any conflict or
inconsistency between any provision of this Note and any provision of any other
document or writing executed by Lender and/or Borrower, the provision of this
Note shall take precedence and shall control, unless the conflicting or
inconsistent provision in such other document or writing specifically refers to
this Note and specifically states that it shall prevail. No amendment or
modification of this Note shall be effective for any purpose unless the same be
in writing and duly executed by both Lender and Borrower.
7. Severability of Provisions. If any provision or any portion of any
--------------------------
provision of this Note or the application of any such provision or any portion
thereof to any person or circumstance, shall be held invalid or unenforceable,
to the extent permitted by law, the remaining portion of such provision and the
remaining provisions of this Note or the application of such provision or
portion of such provision as is held invalid or unenforceable to persons or
circumstances other than those to which it is held invalid or unenforceable,
shall not be affected thereby.
8. Miscellaneous. No delay or omission on the part of Lender in
-------------
exercising any rights under this Note on default by Borrower shall operate as a
waiver of such right or of any other right under this Note, for the same default
or any other default. The pleading of any statute of limitations as a defense to
the obligations evidenced by this Note is waived. Time is of the essence for
each and every obligation under this Note. This Note shall be construed
according to and governed by the laws of the State of California. IN THE EVENT
ACTION IS INSTITUTED UNDER THIS NOTE, BORROWER WAIVES RIGHT TO TRIAL BY JURY.
DATED: October 21, 1997
/s/ Kevin E. Villani
--------------------
Kevin E. Villani
-3-
<PAGE>
SECURITY AGREEMENT
------------------
(PLEDGE OF SECURITIES)
THIS SECURITY AGREEMENT is made this 21st day of October 1997, between
Kevin E. Villani ("Debtor") and Imperial Credit Industries, Inc. ("Secured
Party").
RECITALS
--------
A. Secured Party as lender has entered into a loan transaction providing
for the loan of $999,992 (the "Loan") to Debtor as borrower.
B. As a condition of the Loan, Secured Party requires that Debtor grant to
Secured Party a security interest in certain securities owned by Debtor.
WHEREFORE, Debtor and Secured Party, intending to be legally bound, agree
as follows:
Debtor hereby transfers, assigns, pledges and grants to Secured Party a
security interest in all those certain securities and stock certificates (herein
"Collateral") described in Exhibit A appended hereto, which Debtor has this day
delivered to and deposited with Secured Party; and all new securities or other
property (except dividends) which Debtor may become entitled to receive on
account of any of the Collateral and all proceeds of the Collateral.
This Security Agreement secures: (a) Debtor's payment and performance as
and when due of all amounts and obligations under the Loan (the "Obligations")
of even date executed by Debtor in favor of Secured Party; (b) any and all
extensions, modifications and renewals of the Obligations; (c) repayment of all
sums and amounts that may be advanced or expended by Secured Party for the
protection of the Collateral or any part thereof; and (d) any and all other sums
that may hereafter be advanced by Secured Party to and for the benefit of Debtor
and other amounts due to Secured Party hereunder.
Debtor hereby warrants and represents to Secured Party that Debtor is the
sole and absolute owner of the Collateral, free and clear of all liens,
encumbrances, adverse claims and security interests, except the security
interest herein granted to Secured Party, and that Debtor has the power and
authority to pledge, transfer and deliver the interest created hereby.
Secured Party may retain custody of the Collateral until all obligations
are fully paid. Secured Party will not be responsible for loss in value of the
Collateral or have any duty to take steps to preserve rights against third
parties by legal proceeding or otherwise. Secured Party's
-1-
<PAGE>
sole duty shall be to use reasonable care in the custody and physical
preservation of the Collateral in Secured Party's possession.
In the event any of the Collateral has depreciated by fifty percent (50%)
or more of its closing value as quoted by the Wall Street Journal of even date
herewith, then Secured Party may at its option, whether or not the Obligations
are in default, upon 3 days prior notice to Debtor, and provided Debtor does not
within that time provide substitute collateral satisfactory to Secured Party,
sell such Collateral and deposit the proceeds of any such sale into a
certificate account to be held by Secured Party. The terms of this Agreement
shall continue to apply to all proceeds held in such account.
At any time, at Debtor's expense and without notice to Debtor, Secured
Party may register in its own name or that of its nominee any securities held as
Collateral, and in connection therewith, may deposit and deliver any and all
securities to any committee, depository transfer agent, registrar, or other
designated agency on such terms and conditions as it may determine.
If Debtor shall fail to pay any of the Obligations secured hereby at the
time and in the manner required, Secured Party may, at its option, immediately
proceed to enforce its security interest according to law, or Secured Party may,
at its option, sell and dispose of the same and from the proceeds of sale retain
all costs and charges incurred by it in the sale of the Collateral, including
reasonable attorneys fees thereby incurred; take all sums due it under any of
the Obligations and the provisions hereof, including reasonable attorneys fees;
and any surplus of such proceeds remaining shall be paid to Debtor. In
addition, Secured Party may exercise any and all rights and remedies of a
Secured Party as provided by law, including without limitation all rights and
remedies under the California Uniform Commerical Code. Upon the sale of
Collateral, Secured Party may bid and make a purchase of the Collateral, or any
part thereof.
No act, delay or omission, or course of dealing between Debtor and Secured
Party shall be a waiver of any of Secured Party's rights or remedies under this
Agreement. No waiver, change, modification, or discharge in whole or in part of
this Agreement or of any obligation will be effective unless in writing signed
by Secured Party. A waiver by Secured Party of any rights or remedies by
Secured Party under the terms of this Agreement or with respect to any
obligation an any occasion will not be a bar to the exercise of any right or
remedy of any subsequent occasion.
This Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective heirs, executors, administrators, successors and
assigns.
This Security Agreement shall be governed by and construed in accordance
with California law. In the event any action is instituted under this Security
Agreement, or to determine the rights or remedies of the parties thereto, the
prevailing party shall be entitled to recover reasonable attorneys fees and
expenses.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
Secured Party:
By: /s/ Irwin L. Gubman
--------------------
Irwin L. Gubman
Debtor:
By: /s/ Kevin E. Villani
--------------------
Kevin E. Villani
-3-
<PAGE>
EXHIBIT A
---------
TO SECURITY AGREEMENT
---------------------
<TABLE>
<CAPTION>
Certificate No. Class Issuer No. of Shares
- -------------- ----- ------ -------------
<S> <C> <C> <C>
Common Stock Imperial Credit Commercial Mortgage 71,684
Investment Corp.
</TABLE>
-5-
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT INCOME
PER SHARE)
<S> <C> <C>
Income before extraordinary item.............................. $89,916 $75,984
------- -------
Extraordinary item--Loss on early extinguishment of debt net
of income taxes.............................................. (3,995) --
------- -------
Net income.................................................... $85,921 $75,984
======= =======
BASIC EARNINGS PER SHARE:
Weighted average number of shares outstanding................. 38,611 36,063
------- -------
Basic income per share before extraordinary item.............. $ 2.33 $ 2.11
Extraordinary item--Loss on early extinguishment of debt net
of income taxes.............................................. (0.10) --
------- -------
Basic net income per share.................................... $ 2.23 $ 2.11
======= =======
DILUTED EARNINGS PER SHARE:
Weighted average number of shares outstanding................. 38,611 36,063
Net effect of dilutive stock options--Based on treasury stock
method using end of period market price...................... 2,244 2,912
------- -------
Total average shares...................................... 40,855 38,975
======= =======
Basic income per share before extraordinary item.............. $ 2.20 $ 1.95
Extraordinary item--Loss on early extinguishment of debt net
of income taxes.............................................. (0.10) --
------- -------
Diluted net income per share.................................. $ 2.10 $ 1.95
======= =======
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY NAME STATE OF INCORPORATION
--------------- ----------------------
<S> <C>
Southern Pacific Bank California
Imperial Business Credit, Inc. California
Auto Marketing Network, Inc. Delaware
Imperial Credit Advisors, Inc. California
Imperial Credit Worldwide Ltd. California
Imperial Credit Commercial Asset California
Management Corporation
Imperial Capital Group, LLC Delaware
</TABLE>
<PAGE>
EXHIBIT 23.1.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Imperial Credit Industries, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-13805 and No. 333-15149) on Form S-8 of Imperial Credit Industries, Inc.
of our report dated January 27, 1998, relating to the consolidated balance
sheets of Imperial Credit Industries, Inc. and subsidiaries as of December 31,
1997 and 1996, 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, 1997, which report appears in the December 31, 1997
annual report on Form 10-K of Imperial Credit Industries, Inc.
KPMG Peat Marwick LLP
Los Angeles, California
April 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 50,597 74,247
<INT-BEARING-DEPOSITS> 103,738 3,369
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 120,904 25,180
<INVESTMENTS-HELD-FOR-SALE> 107,727 59,116
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,467,336 2,028,694
<ALLOWANCE> 38,047 19,999
<TOTAL-ASSETS> 2,102,094 2,470,639
<DEPOSITS> 1,156,022 1,069,184
<SHORT-TERM> 189,841 834,852
<LIABILITIES-OTHER> 142,485 163,886
<LONG-TERM> 289,813 163,209
0 0
0 0
<COMMON> 147,109 145,521
<OTHER-SE> 174,898 88,977
<TOTAL-LIABILITIES-AND-EQUITY> 2,102,094 2,470,639
<INTEREST-LOAN> 201,728 188,242
<INTEREST-INVEST> 23,531 10,807
<INTEREST-OTHER> 2,678 8,422
<INTEREST-TOTAL> 227,937 207,471
<INTEREST-DEPOSIT> 71,014 60,999
<INTEREST-EXPENSE> 126,594 135,036
<INTEREST-INCOME-NET> 101,343 72,435
<LOAN-LOSSES> 38,951 9,773
<SECURITIES-GAINS> (936) 0
<EXPENSE-OTHER> 160,897 111,075
<INCOME-PRETAX> 159,176 157,884
<INCOME-PRE-EXTRAORDINARY> 89,916 75,984
<EXTRAORDINARY> (3,995) 0
<CHANGES> 0 0
<NET-INCOME> 85,921 75,984
<EPS-PRIMARY> 2.33 2.11
<EPS-DILUTED> 2.10 1.95
<YIELD-ACTUAL> 5.11 3.40
<LOANS-NON> 70,631 50,109
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 1,256
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 19,999 13,729
<CHARGE-OFFS> 31,053 8,326
<RECOVERIES> 576 323
<ALLOWANCE-CLOSE> 38,047 19,999
<ALLOWANCE-DOMESTIC> 38,047 19,999
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 4,188 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 39,166
<INT-BEARING-DEPOSITS> 267,776
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,963
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,024,310
<ALLOWANCE> 13,729
<TOTAL-ASSETS> 2,510,635
<DEPOSITS> 1,092,989
<SHORT-TERM> 1,070,815
<LIABILITIES-OTHER> 60,062
<LONG-TERM> 192,467
0
0
<COMMON> 51,891
<OTHER-SE> 38,910
<TOTAL-LIABILITIES-AND-EQUITY> 2,510,635
<INTEREST-LOAN> 120,244
<INTEREST-INVEST> 6,630
<INTEREST-OTHER> 2,608
<INTEREST-TOTAL> 129,482
<INTEREST-DEPOSIT> 51,565
<INTEREST-EXPENSE> 95,728
<INTEREST-INCOME-NET> 33,754
<LOAN-LOSSES> 5,450
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 60,972
<INCOME-PRETAX> 24,129
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,193
<EPS-PRIMARY> .45
<EPS-DILUTED> .40
<YIELD-ACTUAL> 2.08
<LOANS-NON> 30,988
<LOANS-PAST> 0
<LOANS-TROUBLED> 870
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,054
<CHARGE-OFFS> 3,106
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 13,729
<ALLOWANCE-DOMESTIC> 13,729
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1>Restate 1995 Financial Data Schedule per FAS 128.
</FN>
</TABLE>
