<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported) March 28, 2000
IMPERIAL CREDIT INDUSTRIES, INC.
(Name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
California 0-19861 95-4054791
(State or other jurisdiction of (Commission File (I.R.S. employer
incorporation or organization) Number) identification number)
23550 Hawthorne Boulevard
Torrance, California 90505
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number: (310) 791-8020
____________________________________________________________________
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Merger or Disposition of Assets.
-------------------------------
On March 28, 2000, Imperial Credit Industries, Inc. ("ICII" or the "Company")
issued the press release included as Exhibit 2.1 to this 8-K and incorporated by
reference herein, announcing the consummation of its merger (the "Merger") with
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC").
ICCMIC's proxy statement on Form 14A (File No. 000-23089) (the "Proxy
Statement"), sets forth information regarding the Merger, including the merger
agreement, the effective time and manner of the Merger, a description of the
assets involved, the nature and amount of consideration paid, the method used
for determining the amount of such consideration, the nature of any material
relationships, the nature of ICCMIC's business and ICII's intended use of the
assets acquired in the Merger.
Item 7. Financial Statements and Exhibits.
---------------------------------
Financial Statements of Business Acquired:
ICCMIC's Consolidated Financial Statements, and the notes thereto, for the years
ended December 31, 1999 and 1998 are included as Exhibit 7.1 to this 8-K and
incorporated by reference herein.
ICII and ICCMIC Pro Forma Combined Financial Information (Unaudited)
On March 28, 2000 the Company acquired ICCMIC. The purchase price paid by the
Company was approximately $300.1 million and was paid in cash. The Merger was
accounted for as a purchase. The following unaudited pro forma combined
statement of condition and unaudited pro forma combined statement of operations
were prepared in connection with the Merger and give effect to the adjustments
described in the accompanying notes. The unaudited pro forma combined statement
of operations for the year ended December 31, 1999 is based on the consolidated
statement of income for the Company for the year ended December 31, 1999 and
the consolidated statement of income for ICCMIC for the year ended December
31, 1999. The pro forma adjustments to income and expense are the net result
of pro forma amounts that assume the Merger was consummated on January 1, 1999.
The pro forma combined statement of condition assumes the Merger was consummated
on December 31, 1999. The unaudited pro forma combined statements of operations
do not reflect any anticipated cost savings or revenue enhancements. The
unaudited pro forma combined statement of condition and unaudited pro forma
combined statement of operations and the accompanying notes should be read in
conjunction with and are qualified in their entirety by the consolidated
financial statements, including the accompanying notes, of the Company in its
Annual Report on Form 10-K for the year ended December 31, 1999. The unaudited
pro forma combined statement of condition and unaudited pro forma combined
statement of operations and the accompanying notes should also be read in
conjunction with and are qualified in their entirety by the financial
statements, including the accompanying notes, of ICCMIC in its audited balance
sheets as of December 31, 1999 and 1998 and related statements of income for
the two years then ended December 31, 1999 and the period from July 31, 1997
(inception) through December 31, 1997. (see Exhibit 7.1 to this 8-K). The pro
forma data are presented for comparative purposes only and are not necessarily
indicative of the combined results of operations in the future. The pro forma
data are also not necessarily indicative of the combined results of operations
which would have been realized had the Merger been in effect during the period
for which the unaudited pro forma combined financial statements are presented.
In addition, this Form 8-K includes forward-looking statements that involve
inherent risks and uncertainties.
INSERT PRO FORMA TABLE HERE
<PAGE>
NOTE 1: BASIS OF PRESENTATION
The Merger was accounted for as a purchase. Under this method of accounting,
assets and liabilities of ICCMIC are adjusted to their estimated fair values and
combined with the recorded book values of the assets and liabilities of the
Company. Applicable income tax effects of such adjustments are included as a
component of the Company's net deferred tax liability with a corresponding
increase to negative goodwill. The unaudited pro forma combined statement of
condition as of December 31, 1999 combines the individual historical statements
of condition of the Company and ICCMIC as of December 31, 1999 and gives effect
to the estimated fair value adjustments. The unaudited pro forma combined
statement of operations for the year ended December 31, 1999 is presented as if
the Merger was consummated on January 1, 1999. The unaudited pro forma combined
statement of operations for the year ended December 31, 1999 combines the
individual historical results of operations of the Company and ICCMIC for the
year ended December 31, 1999 after giving effect to the purchase accounting
adjustments, the sale of assets and the debt incurred by ICCMIC concurrent with
the close of the Merger. The unaudited pro forma purchase accounting adjustments
for the year ended December 31, 1999 include the amortization of negative
goodwill that would have taken place from the beginning of the period.
NOTE 2: PURCHASE PRICE AND FUNDING
Each shareholder of common stock of ICCMIC received approximately $11.575 in
cash. Based upon 25,930,000 ICCMIC shares not already owned by the Company,
total consideration to the remaining ICCMIC shareholders was approximately
$300.1 million. The Company's basis in the 2,570,000 shares of ICCMIC common
stock owned prior to the merger of $25.1 million, combined with other estimated
costs of the acquisition of $19.7 million bring the total purchase price to
$344.9 million. In addition to the costs of the acquisition, the Company
incurred total severance costs of approximately $8.4 million The table below
illustrates the sources and uses of cash on the closing date of March 28, 2000
to fund the Merger:
<TABLE>
<CAPTION>
Amount
--------------
(In thousands)
<S> <C>
Sources of Cash:
- ---------------
Cash and cash equivalents $238,582
Proceeds from assets liquidated concurrent
with closing of the Merger 67,449
Borrowings secured by assets acquired in the
Merger 15,247
--------
Total sources of cash 321,278
Uses of Cash:
- ------------
Consideration paid to ICCMIC shareholders 300,148
Merger costs paid at close 4,652
Severance costs paid at close 3,984
--------
Total uses of cash 308,784
--------
Sources in excess of uses of cash $ 12,494
========
</TABLE>
NOTE 3: PRO FORMA ADJUSTMENTS
(a) Interest on loans and leases: At the close of the Merger, the securities
representing the equity interest in loans collateralized by CMO borrowings
were sold. The loans and the CMO borrowings were transferred to the
purchaser of the CMO equity interest. As a result of the sale of the CMO
equity interest and the sale of other loans, $24.2 million of interest
income earned by ICCMIC from the loans delivered into the CMO
securitization and the other loans sold has been eliminated.
<PAGE>
(b) Interest on investments: Interest on investments are reduced by the
interest income generated on the net cash and interest bearing deposits
used in the Merger of $228.9 million which are assumed to be disbursed to
ICCMIC's shareholders on January 1, 1999. Interest income on these funds
at an assumed rate of 5.20%, or $11.9 million has been eliminated.
(c) Interest on other borrowings: In connection with the Merger, ICCMIC
received proceeds from borrowings secured by certain commercial mortgage
backed securities. The total proceeds received were $15.2 million.
Interest expense on these borrowings at 8.6325%, or $1.3 million has been
added to total interest expense.
(d) Interest on long term debt: At the close of the acquisition of ICCMIC, the
securities representing the equity interest in loans collateralized by CMO
borrowings were sold. The related loans were removed from ICCMIC's balance
sheet and the CMO borrowings were transferred to the purchaser of the CMO
equity interest. As a result of the sale, $12.0 million of interest expense
paid by ICCMIC on the CMO borrowings has been eliminated.
(e) Asset management fees: As the acquisition of ICCMIC is assumed to have
been completed on January 1, 1999, no management fees would have been
earned by Imperial Credit Commercial Asset Management Company ("ICCAMC"), a
100% owned subsidiary of ICII, from ICCMIC. The total fee incurred by
ICCMIC of $5.9 million that was paid to ICCAMC has been eliminated.
(f) Professional services: During 1999, ICCMIC incurred and expensed $2.6
million of costs associated with the proposed Merger with ICII. These costs
are non-recurring, and related solely to the proposed Merger with ICII.
Such costs are considered in the purchase price and reduce negative
goodwill.
(g) Amortization of Goodwill: Based on a purchase price of $300.1 million for
the 25.9 million shares of ICCMIC that were not already owned by ICII, a
cost basis of $25.1 million for the 2.6 million shares of ICCMIC owned by
ICII before the Merger, and estimated costs of the Merger of $19.7 million
that were included in the purchase price of ICCMIC by ICII, the total cost
of the ICCMIC acquisition by ICII was $344.9 million. When compared to the
estimated fair values of the assets acquired net of the fair values of the
liabilities assumed of $380.7 million, negative goodwill of approximately
$40.6 million, including tax benefit of $4.7 million, was created from the
Merger. The Company has assumed that this negative goodwill will be
accreted into income over 5 years, resulting in a reduction of goodwill
amortization expense of $8.1 million annually.
(h) Management fee expense: As the acquisition of ICCMIC is assumed to have
been completed on January 1, 1999, no management fees would have been paid
by ICCMIC to Imperial Credit Commercial Asset Management Company, a 100%
owned subsidiary of ICII. The total fee paid by ICCMIC of $5.9 million
to ICCAMC has been eliminated.
(i) Merger related expenses: Severance costs incurred by ICII of $8.4 million
are assumed to have been incurred on January 1, 1999.
(j) Income taxes: Since ICCMIC is assumed to have been merged with ICII on
January 1, 1999, ICCMIC's tax status as a Real Estate Investment Trust is
assumed to have been terminated on the same date. As a result, the pre tax
income of ICCMIC that previously had been exempt from income taxes is
assumed to be fully taxable for all of 1999. ICCMIC's pre tax income of
$23.2 million, and the adjustments (a) through (i) listed above of ($23.1)
million, excluding the $8.1 million reduction of goodwill expense, is
subject to the accrual of income taxes by the company at the full corporate
income tax rate of 40%. The resulting income taxes of ($3.2) million have
been credited to operations in 1999.
(k) Cash: Cash increased (decreased) due to the following transactions which
occurred in connection with the Merger; $48.3 million in proceeds from sale
of the equity securities of the CMO, ($101.4) million used to pay Merger
consideration to ICCMIC shareholders, ($4.7) million used to pay Merger
costs at ICCMIC, ($4.0) million used to pay severance costs at ICII, $15.2
million in proceeds from securities financing, and $16.4 million in
proceeds from the sale of loans held for investment.
(l) Interest bearing deposits: Interest bearing deposits decreased by $198.8
million as a result of the payment of Merger consideration to ICCMIC
shareholders.
<PAGE>
(m) Securities available for sale: Securities available for sale decreased as a
result of the elimination of investment in ICCMIC common stock of $29.2
million and a purchase accounting adjustment of $4.7 million related to
securities acquired in the Merger.
(n) Loans and leases held for investment: The decrease in loans and leases held
for investment relates to the sale of loans collateralizing CMO borrowings
of $259.0 million, the sale of loans of $16.4 million concurrent with the
Merger, and a fair value purchase accounting adjustment of $6.7 million
related to loans acquired in the Merger.
(o) Real property, net of accumulated depreciation: The increase relates
solely to a fair value purchase accounting adjustment of $1.4 million
related to real property acquired in the Merger.
(p) Goodwill: Based on a purchase price of $300.1 million for the 25.9 million
shares of ICCMIC that were not already owned by ICII, a cost basis of $25.1
million for the 2.6 million shares of ICCMIC owned by ICII before the
merger, and estimated costs of the merger of $19.7 million that were
included in the purchase price of ICCMIC by ICII, the total cost of the
ICCMIC acquisition by ICII was $344.9 million. When compared to the
estimated fair values of the assets acquired net of the fair values of the
liabilities assumed of $380.7 million, negative goodwill of approximately
$40.5 million, including income taxes of $4.7 million, was created from the
Merger.
(q) Other assets: The increase in other assets relates solely to a purchase
accounting adjustment of $1.7 million related to other assets acquired in
the Merger.
(r) Other borrowings: Other borrowings of $15.2 million are related to
securities financing at ICCMIC.
(s) Borrowings under collateralized mortgage obligations: At the close of the
Merger, the securities representing the equity interest in loans
collateralized by CMO borrowings were sold. The related loans were removed
from ICCMIC's balance sheet and the CMO borrowings of $210.7 million were
transferred to the purchaser of the CMO equity interest.
(t) Accrued income taxes payable: Estimated income tax benefit of $3.4 million
related to severance costs at ICII, $1.6 million as a result of reducing
ICII's carrying value of its investment in ICCMIC common stock, classified
as an available for sale security, and $4.7 million of fair value
adjustments.
(u) Other liabilities: Other liabilities increased due to the accrual of $19.4
million in Merger costs and the accrual of ICCMIC's first quarter 2000
dividend of $6.6 million.
(v) Common stock: Common stock decreased due to the elimination of $425.6
million of ICCMIC equity.
(w) Retained earnings: Retained earnings decreased due to the accrual of
ICCMIC's first quarter 2000 dividend of ($6.6) million, and from recording
($5.0) million of net Merger expenses at ICII, and from the elimination of
$33.1 million in retained earnings at ICCMIC.
(x) Accumulated other comprehensive income: The decrease is related to the
elimination of net mark to market adjustments on the Company's investment
in ICCMIC common stock, classified as an available for sale security, of
($2.6) million, and due to the reversal $3.4 million of mark to market
adjustments recorded at ICCMIC on its available for sale securities prior
to recording the Company's fair value purchase accounting adjustments.
ICII continues to evaluate the purchase accounting adjustments related to the
Merger. The amount of negative goodwill to be recorded as of the Merger date is
expected to be approximately $40.5 million. This negative goodwill amount
represents the preliminary estimate of the excess of the fair value of net
assets acquired and liabilities assumed over the purchase price based on
information available as of this date. No assurance can be given that the final
negative goodwill amount will not be more or less than this estimated amount.
This presentation contains forward looking statements with respect to the
financial condition, results of operations and business of ICII and ICCMIC
assuming the consummation of the Merger, including statements relating to: (i)
the cost savings and accretion to reported earnings that will be realized from
the Merger; and (ii) the integration costs expected to be incurred in connection
with the Merger. These
<PAGE>
forward looking statements involve certain risks and uncertainties. Factors that
may cause actual results to differ materially from those contemplated by such
forward looking statements include, among other things, the following
possibilities: (i) expected cost savings from the Merger cannot be fully
realized or realized within the expected time; (ii) revenues following the
Merger are lower than expected; (iii) competitive pressure among depository
institutions increase significantly; (iv) costs of the difficulties related to
the integration of the business of ICCMIC and ICII are greater than expected;
(v) changes in the interest rate environment reduces interest margins; (vi)
general economic conditions, either nationally or in California, are less
favorable than expected; (vii) legislation or regulatory requirements or changes
adversely affect the business in which the combined company will be engaged; and
(viii) changes may occur in the securities market.
(c) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as part of this
Report and are incorporated herein by reference.
SIGNATURES: Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
IMPERIAL CREDIT INDUSTRIES, INC.
Date: Date: April 12, 2000 By:/s/Brad S. Plantiko
----------------------
Brad S. Plantiko
Executive Vice President and Chief
Financial Officer
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
2.1 Press release of ICII, dated March 28, 2000.
7.1 Consolidated Financial Statements of ICCMIC
7.2 Consent of KPMG LLP
EX-2.1 PRESS RELEASE OF ICII, DATED MARCH 28, 2000
Tuesday March 28, 3:50 pm Eastern Time
Company Press Release
SOURCE: Imperial Credit Industries, Inc.
Imperial Credit Industries, Inc. Completes Merger of Imperial Credit Commercial
Mortgage Investment Corp.
TORRANCE, Calif., March 28 /PRNewswire/ -- Imperial Credit Industries, Inc.
(Nasdaq: ICII - news) announced today the merger of Imperial Credit Commercial
---- ----
Mortgage Investment Corp. (Nasdaq: ICMI - news) and a subsidiary of ICII.
---- ----
Imperial Credit Industries, Inc. effectively acquired all of the issued and
outstanding shares of ICMI's common stock (other than the 2,570,000 shares
already owned by ICII) for a cash purchase price of
<PAGE>
$11.5753246 per share. This payment will be in addition to the previously
announced final dividend of $0.23 per share that will be paid April 14, 2000 to
shareholders of record as of March 27, 2000.
H. Wayne Snavely, Chairman, President and Chief Executive Officer of ICII,
stated, ``This transaction reflects the commitment that ICII maintains to all of
its shareholders whether at ICII or ICII sponsored public companies in that we
believe our offer for ICMI to be superior to all other offers received.'' Mr.
Snavely further stated, ``Prior to the actual merger Southern Pacific Bank, an
ICII subsidiary, purchased approximately $90 million of high yielding assets
that will be retained in the Bank's loan portfolio and it is expected that over
time the remaining assets through sale and or collection will add significant
liquidity to ICII.''
Imperial Credit Industries, Inc., a financial services company, was formed in
1991 and is headquartered in Torrance, California. The Company's major business
activities are conducted through four wholly owned subsidiaries: Southern
Pacific Bank, Imperial Business Credit, Inc., Imperial Credit Asset Management,
Inc., and Imperial Credit Lender Services, Inc. The Company's majority owned
subsidiary is Imperial Capital Group, LLC (approximately 60% ownership).
Imperial Credit Industries, Inc. and its subsidiaries and affiliates offer a
wide variety of commercial banking and financial services, investment products
and asset management services.
Certain statements contained herein are ``forward-looking statements'' within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Act
of 1934, as amended. These forward-looking statements may be identified by
reference to a future period(s) or by the use of forward-looking terminology,
such as ``may,'' ``will,'' ``intend,'' ``should,'' ``expect,'' ``anticipate,''
``estimate'' or ``continue'' or the negatives thereof or other comparable
terminology. Actual results could differ materially from those anticipated in
such forward-looking statements due to a variety of factors, including, but not
limited to, changes in national, regional or local economic environments,
competitive products and pricing, government fiscal and monetary policies and
other factors generally understood to affect the real estate Merger, mortgage
and leasing markets and security investments.
<PAGE>
EX-7.1 CONSOLIDATED FINANCIAL STATEMENTS OF ICCMIC
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Imperial Credit Commercial Mortgage Investment Corp.:
We have audited the accompanying consolidated balance sheets of Imperial Credit
Commercial Mortgage Investment Corp. and subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of earnings, changes in
stockholders' equity and comprehensive income, and cash flows for the years
ended December 31, 1999 and 1998 and the period from July 31, 1997 (Inception)
through 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
Imperial Credit Commercial Mortgage Investment Corp. and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the years ended December 31, 1999 and 1998 and the period from July
31, 1997 (Inception) through December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG LLP
Los Angeles, California
February 17, 2000
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash and interest bearing deposits $101,388 $ 23,398
Repurchase agreements 32,462 -
Mortgage loans collateralizing debt obligations, net of allowance for loan
losses of $4,614 258,976 -
Mortgage loans, net of allowance for loan losses of $5,053 and $8,027,
respectively 110,415 556,648
Real property, net of accumulated depreciation 76,692 107,663
Real property held for sale 24,694 -
Securities available-for-sale, at estimated fair value 53,549 57,671
Accrued interest receivable 3,092 6,410
Other assets 3,649 5,384
----------------------------
Total Assets $664,917 $757,174
============================
Liabilities:
Dividends payable $ 9,405 $ 9,405
Borrowings under collateralized mortgage obligations 210,716 -
Borrowings under secured warehouse facility - 279,000
Borrowings under secured bank loan - 3,557
Mortgage loans secured by real property 46,162 48,575
Accrued expenses, payables and other liabilities, including amounts due to
affiliates of $2,082 at December 31, 1998 2,969 7,828
----------------------------
Total Liabilities 269,252 348,365
----------------------------
Commitments and contingencies
Stockholders' Equity:
Common stock, par value $0.0001 per share.
Authorized 500,000,000 shares, 28,500,000 shares issued and outstanding 3 3
Additional paid-in capital 425,615 425,615
Accumulated other comprehensive income (loss) (3,359) 221
Accrued dividends in excess of earnings (26,594) (17,030)
----------------------------
Total Stockholders' Equity 395,665 408,809
----------------------------
Total Liabilities and Stockholders' Equity $664,917 $757,174
============================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended December 31, 1999 and 1998 and the
period from July 31, 1997 (Inception) through December 31, 1997
(Dollars in thousands, except share and earnings per share data)
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Mortgage loans $ 42,019 $ 41,130 $ 1,676
Securities available-for-sale 6,299 6,153 1,403
Repurchase agreements and interest bearing deposits 4,039 2,454 3,388
---------------------------------------------------
Total Interest Income 52,357 49,737 6,467
Real property rental income 13,968 7,684 -
---------------------------------------------------
Total Income 66,325 57,421 6,467
---------------------------------------------------
Operating Expenses:
Management fees 5,905 6,319 940
Interest expense 18,870 11,165 -
Provision for loan losses 4,633 6,300 -
Write-down of securities available-for-sale - 4,554 -
Depreciation of real property 3,195 1,755 -
Real property operating expenses 3,150 1,872 -
Write-down of real property held for sale 1,411 - -
Due diligence expenses and professional fees 3,812 1,659 487
Stock options issued to Manager and its employees - 97 2,550
Other 2,138 1,456 331
---------------------------------------------------
Total Expenses 43,114 35,177 4,308
---------------------------------------------------
Net Earnings 23,211 22,244 2,159
Dividends ($1.15, $1.18 and $0.13 per share, respectively) 32,775 36,948 4,485
---------------------------------------------------
Accrued dividends in excess of earnings $ (9,564) $ (14,704) $ (2,326)
===================================================
Earnings per share:
Basic $ 0.81 $ 0.68 $ 0.06
Diluted 0.81 0.68 0.06
Weighted average common shares outstanding:
Basic 28,500,000 32,570,974 34,500,000
Effect of dilutive stock options 107,809 17,660 178,550
---------------------------------------------------
Diluted 28,607,809 32,588,634 34,678,550
===================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
For the years ended December 31, 1999 and 1998 and the
period from July 31, 1997 (Inception) through December 31, 1997
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Total
Number of Accumulated Accrued Stockholders'
Common Additional Other Dividends Equity and
Shares Common Paid-In Comprehensive In Excess of Comprehensive
Outstanding Stock Capital Income (Loss) Earnings Income
----------- ------ ---------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization,
July 31, 1997 100 $ - $ 2 $ - $ - $ 2
--------
Net earnings 2,159 2,159
Unrealized gain on
securities available for-sale 169 169
--------
Comprehensive income 2,328
--------
Net proceeds from initial
public offering on
October 22, 1997 34,500,000 3 479,306 479,309
Purchase and retirement of
initial shares (100) (2) (2)
Stock options issued to
Manager and its employees 2,550 2,550
Cumulative dividends
declared ($0.13 per share) (4,485) (4,485)
----------------------------------------------------------------------------------------------
Balance, December 31, 1997 34,500,000 3 481,856 169 (2,326) 479,702
-----------------------------------------------------------------------------------------------
Net earnings 22,244 22,244
Change in unrealized gain
(loss) on securities
available-for-sale (209) (209)
Foreign currency exchange
gain 261 261
--------
Comprehensive income 22,296
--------
Purchase of stock (6,000,000) (56,338) (56,338)
Stock options issued to
Manager and its employees 97 97
Cumulative dividends
declared ($1.18 per share) (36,948) (36,948)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1998,
carried forward 28,500,000 $ 3 $425,615 $ 221 $(17,030) $408,809
===============================================================================================
</TABLE>
4
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME - Continued
For the years ended December 31, 1999 and 1998 and the
period from July 31, 1997 (Inception) through December 31, 1997
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Total
Number of Accumulated Accrued Stockholders'
Common Additional Other Dividends Equity and
Shares Common Paid-In Comprehensive In Excess of Comprehensive
Outstanding Stock Capital Income (Loss) Earnings Income
----------- ------ ---------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998,
brought forward 28,500,000 $ 3 $425,615 $ 221 $(17,030) $408,809
----------------------------------------------------------------------------------------------
Net earnings 23,211 23,211
Change in unrealized loss on
securities available-for-sale (2,973) (2,973)
Foreign currency exchange
loss (607) (607)
--------
Comprehensive income 19,631
--------
Cumulative dividends
declared ($1.15 per share) (32,775) (32,775)
----------------------------------------------------------------------------------------------
Balance, December 31, 1999 28,500,000 $ 3 $425,615 $ (3,359) $(26,594) $395,665
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 and 1998 and the
period from July 31, 1997 (Inception) through December 31, 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 23,211 $ 22,244 $ 2,159
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 3,316 1,850 11
Amortization of premium (net of unearned fees) on mortgage loans 1,511 1,858 50
Amortization of discount on securities available-for-sale (4,842) (6,152) (1,404)
Provision for loan losses, net of charge-offs related to sales 1,640 6,300 -
Write-down of real property held for sale 1,411 - -
Write-down of securities available-for-sale - 4,554 -
Stock options issued to Manager and its employees - 97 2,550
Net change in:
Accrued interest receivable 3,318 (4,325) (2,085)
Other assets 1,530 (4,150) (1,120)
Other liabilities (4,814) (3,116) 10,950
--------------------------------------
Total Cash Provided by Operating Activities 26,281 19,160 11,111
--------------------------------------
Cash Flows from Investing Activities:
Purchases of securities available-for-sale - (6,096) (60,000)
Payments received on securities available-for-sale 5,992 9,135 2,252
Purchases and originations of mortgage loans, net of fees (28,232) (381,189) (273,051)
Principal reductions on mortgage loans 212,337 88,392 992
Purchase of real property and improvements, net of mortgage loans assumed (810) (73,767) -
--------------------------------------
Total Cash Provided (Used) by Investing Activities 189,287 (363,525) (329,807)
--------------------------------------
Cash Flows from Financing Activities:
Dividends paid (32,775) (32,028) -
Cash borrowings under collateralized mortgage obligations 249,086 - -
Repayments of collateralized mortgage obligations (38,370) - -
Cash borrowings under (repayments of) secured warehouse facility (279,000) 279,000 -
Cash borrowings under (repayments of) secured bank loan (3,557) 3,349 -
Cash borrowings under mortgage loans secured by real property - 13,364 -
Repayments of mortgage loans secured by real property (500) (197)
Cash borrowings under repurchase facility - 14,400 -
Repayments of repurchase facility - (14,400) -
Cash used in stock repurchases - (56,338) -
Proceeds from initial public offering, net - - 479,309
--------------------------------------
Total Cash Provided (Used) by Financing Activities (105,116) 207,150 479,309
--------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 110,452 (137,215) 160,613
Cash and cash equivalents at beginning of period 23,398 160,613 -
--------------------------------------
Cash and cash equivalents at end of period $ 133,850 $ 23,398 $ 160,613
======================================
Supplemental Disclosure of Cash Flow Activities
Mortgage loans assumed upon real property purchases $ - $ 34,580 $ -
======================================
Cash paid for interest $ 18,636 $ 9,979 $ -
======================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1. Organization and Definitive Merger Agreement
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC" or the "Company")
was incorporated in Maryland on July 31, 1997 and was initially capitalized on
that date through the sale of 100 shares of its Common Stock, par value $0.0001
per share (the "Common Stock"), for $2. On October 22, 1997, ICCMIC commenced
its operations upon consummation of an initial public offering of 34,500,000
shares of its Common Stock, with gross proceeds of $513,857 and net proceeds to
the Company of $479,309 after discounts and costs. The Company primarily
invests in mortgage loans, real property and interests in commercial mortgage-
backed securities ("CMBS"). The majority of the Company's mortgage loans and
all of the Company's interests in CMBS were acquired from Imperial Credit
Industries, Inc. ("Imperial Credit") and its affiliates. The Company's sole
activity through October 21, 1997 consisted of the organization and startup of
the Company. The Company operates so as to qualify as a real estate investment
trust ("REIT") under the requirements of the Internal Revenue Code of 1986, as
amended (the "Code").
In 1997, the Company entered into a management agreement (the "Management
Agreement") with Imperial Credit Commercial Asset Management Corp. (the
"Manager"), a wholly-owned subsidiary of Imperial Credit, under which the
Manager advised the Company on various aspects of its business and managed its
day-to-day operations, subject to the supervision of the Board of Directors of
the Company. The Management Agreement expired on October 22, 1999 (see note 14
to the consolidated financial statements). Imperial Credit currently owns
2,570,000 shares (9.0%) of the Company's outstanding common stock (2,690,053
shares or 9.4% including certain affiliates of Imperial Credit). Pursuant to
the Management Agreement, the Manager was entitled to receive a base management
fee based on a percentage of assets and a quarterly incentive fee generally
based on a percentage of Funds From Operations, as adjusted, in excess of
certain defined levels of return, as fully set forth in the Management Agreement
(see note 7 to the consolidated financial statements). Except for the quarter
ended June 30, 1999, when an incentive fee of $41 was earned, only base
management fees have been earned.
On July 22, 1999, the Company and Imperial Credit entered into a definitive
merger agreement (the "Merger Agreement") under which Imperial Credit
effectively will acquire all of the outstanding shares of the Company (other
than shares already owned by Imperial Credit and its subsidiaries) for a cash
purchase price of $11.50 per share, subject to increase under certain
circumstances. That purchase price reflects a 16.5% premium to the Company's
closing price of $9.875 on May 12, 1999, the day before Imperial Credit publicly
announced its initial proposal to acquire the Company. Completion of the merger
is conditioned on, among other things, the approval of the holders of at least a
majority of the outstanding shares of the Company's common stock held by holders
other than Imperial Credit and certain of its affiliates.
The Merger Agreement provides for the prompt appraisal of the amount of the
termination fee payable by the Company under the Management Agreement with the
Manager. Imperial Credit agreed to increase the merger consideration payable to
holders of Company shares (other than Imperial Credit and its subsidiaries) by
the amount, if any, by which $35 million exceeds the appraised value. The
appraised value has been determined to be $33 million (unaudited), and
accordingly, the merger consideration has been increased by $2 million to
approximately $11.575 per share. If the merger transaction between the Company
and Imperial Credit is completed, Imperial Credit will not receive any payment
from the Company as a result of the termination of the Management Agreement. If
the Merger Agreement is terminated, the Manager has agreed to accept the lesser
of $35 million and the appraised value of the Management Agreement termination
fee (determined to be $33 million) (unaudited) as payment in full of the
termination fee. See note 14 to the consolidated financial statements for
further information regarding completion of the appraisal process, increase in
the merger consideration and expiration of the Management Agreement.
7
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
The Merger Agreement contemplated that the Company would, during the 60 days
following the appointment of the appraisal firms that were engaged to appraise
the value of the Management Agreement termination fee, solicit and
explore alternative transactions which could provide its stockholders with a
more favorable alternative to the Imperial Credit merger. During this 60-day
market check period and thereafter, the Company may terminate the Merger
Agreement in favor of a superior proposal. In the event that the Merger
Agreement is terminated, the Company will be obligated to reimburse Imperial
Credit for certain of its expenses incurred in connection with the proposed
merger, not to exceed $2 million, in addition to payment of the Management
Agreement termination fee to the Manager. See note 14 to the consolidated
financial statements for further information regarding expiration of the 60-day
market check period.
Unless the Merger Agreement is terminated for a superior proposal, the
transaction is expected to be completed during the first quarter of 2000.
Prudential Securities Incorporated is serving as financial advisor to a special
committee of the Company's Board of Directors, comprised of the Company's four
independent directors, initially formed to evaluate Imperial Credit's
unsolicited offer.
The Company operates in four business segments: small balance mortgage loan
pools acquired ("mortgage pools"), individual large balance mortgage loans
originated or acquired ("large mortgage loans"), real property and securities
available-for-sale ("securities"). These segments are managed separately
because each requires different levels of resources and involves assets having
different risk profiles. Segment performance is measured based on net earnings.
2. Summary of Significant Accounting Policies
The consolidated financial statements of ICCMIC and its subsidiaries are
prepared in accordance with generally accepted accounting principles. All
material intercompany transactions have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates and assumptions. Material estimates
subject to change include the allowance for loan losses and the carrying values
of securities available-for-sale and real property.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consists of cash, money market mutual funds and repurchase
agreements. The Company considers investments with maturities of three months
or less at date of acquisition to be cash equivalents.
The Company enters into repurchase agreements, which are carried at the amounts
at which the securities will be subsequently resold plus accrued interest, as
specified in the respective agreements. The securities purchased are held in
custody for the benefit of the Company. All of the transactions are in United
States agency or investment grade securities. The Company's exposure to credit
risk associated with the non-performance of counterparties in fulfilling their
contractual obligations can be directly impacted by market fluctuations, which
may impair the counterparties' ability to satisfy their obligations. The
Company monitors the market value and other factors of the underlying securities
relative to the amounts due under the agreements and, when necessary, requires
prompt additional collateral or reduction in loan balance to ensure that the
market value remains sufficient to protect itself in the event of default by the
counterparty.
8
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
Mortgage Loans Held For Investment
The Company purchases and originates mortgage loans to be held as long-term
investments. Mortgage loans held for investment are recorded at cost at the
date of purchase. Premiums and discounts related to these loans are
amortized over their estimated lives using the interest method. Loans are
continually evaluated for collectibility and, if appropriate, loans may be
placed on non-accrual status. Loans are placed on non-accrual status generally
after they become 90 days past due, in which case previously accrued interest is
reversed from income. Future collections of interest are included in interest
income or applied to the loan balance based on an assessment of the likelihood
that the principal will be collected.
The Company maintains an allowance for losses on mortgage loans held for
investment at an amount which it believes is sufficient to provide adequate
protection against future losses in the mortgage loan portfolio. The allowance
for losses is determined primarily on the basis of management's judgment of net
loss potential, including specific allowances for known impaired loans and other
known factors such as changes in the nature and volume of the portfolio, value
of the collateral and current economic conditions that may affect the borrowers'
ability to pay.
A loan is impaired when it is "probable" that a creditor will be unable to
collect all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. Loans are evaluated for impairment on
an individual basis. The measurement of impairment may be based on (1) the
present value of the expected future cash flows of the impaired loan discounted
at the loan's original effective interest rate, (2) the observable market price
of the impaired loan or (3) the fair value of the collateral of a collateral-
dependent loan. The amount by which the recorded investment of the loan exceeds
the measure of the impaired loan is recognized by recording a valuation
allowance with a corresponding charge to provision for loan losses. Loans
deemed by management to be uncollectible are charged to the allowance for loan
losses. Recoveries on loans previously charged off are credited to the
allowance. Interest income on impaired loans is recognized on the cash basis
only to the extent that the carrying value of the loan is supported by its
collateral value.
Real Property
Real property is recorded at cost. Included in such costs are acquisition costs
and certain direct capitalized costs, such as legal fees, appraisal fees,
surveys, title insurance and other costs incurred by the Company during the
diligence and closing periods. Expenditures for ordinary maintenance and repairs
are expensed to operations as incurred. Significant renovations and
improvements which improve or extend the useful life of the assets are
capitalized. Except for amounts attributed to land, real property assets are
depreciated over their estimated useful lives using the straight-line method.
The estimated useful lives of buildings and improvements range from 20 to 30
years. Leasehold improvements are amortized over the life of the lease, ranging
from 3 to 10 years, or the useful life of the improvement, whichever is shorter.
The Company reviews its real property investments for impairment whenever known
events or changed circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held is measured by a
comparison of the carrying amount of the asset to its future net undiscounted
cash flows expected to be generated. If such an asset is considered to be
impaired, the impairment to be recognized is measured at the amount by which the
carrying value of the asset exceeds its fair value.
Rental revenue is reported on a straight-line basis over the terms of the
respective leases.
9
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
Real property held for sale is carried at the lower of cost or estimated fair
value.
Investment Securities
The Company classifies investment securities as held-to-maturity, available-for-
sale, and/or trading securities at the time of purchase based upon management's
intent and the Company's ability to hold the securities. Held-to-maturity
investment securities are reported at amortized cost, available-for-sale
securities are reported at fair value with unrealized gains and losses, net of
related income taxes, shown as a separate component of stockholders' equity
in accumulated other comprehensive income, and trading securities are reported
at fair value with unrealized gains and losses reported in income. Discounts
obtained or premiums paid on investment securities are amortized to interest
income over the estimated life of the investment securities using the interest
method.
The Company has a portfolio of purchased commercial mortgage-backed securities
("CMBS") consisting of subordinated and interest only securities. These
securities are classified as available-for-sale and carried at estimated fair
value. Because there is not an active market from which a fair value can be
derived, management estimates the fair value of the CMBS using a discounted cash
flow methodology. Such methodology requires estimates of future prepayments and
credit losses, as well as assumptions about appropriate rates at which the
resultant cash flows are discounted.
Unrealized losses on securities that reflect a decline in value which is judged
to be other than temporary are charged to earnings and are determined using the
specific identification method. At disposition, the realized net gain or loss
is included in earnings. Because the Company qualifies as a REIT and does not
pay income taxes, the unrealized gains and losses on securities available-for-
sale are reported gross in stockholders' equity and comprehensive income.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of
the Code. A REIT generally will not be subject to federal income taxation on
that portion of its income that qualifies as REIT taxable income to the extent
that it distributes at least 95% of its taxable income to its stockholders and
complies with certain other requirements. Accordingly, no provision has been
made for federal income taxes for ICCMIC and its subsidiaries in the
accompanying consolidated financial statements.
Income and Expense Recognition
Income and expenses are recorded on the accrual basis of accounting.
Earnings Per Share
Basic earnings per share is computed on the basis of the weighted average number
of shares of Common Stock outstanding for the period. Diluted earnings per
share is computed on the basis of the weighted average number of shares of
Common Stock and common equivalent shares outstanding for the period. The
beginning of the period utilized for purposes of the 1997 earnings per share
computation coincided with the commencement of the Company's operations on
October 22, 1997. For purposes of diluted earnings per share, the computation
of the weighted average number of shares outstanding includes the impact of the
assumed exercise of the outstanding dilutive options to purchase common stock
and assumes that the proceeds from such issuance are used to repurchase common
shares at the average market price of the Company's common stock for the period.
10
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
Stock Options
The Company has elected to account for stock based compensation arrangements
under the intrinsic value based method of accounting. Pro forma disclosures of
net earnings computed as if the fair value based method had been applied have
been included in the notes to the consolidated financial statements. Stock
options or other equity instruments granted for services provided by non-
employees or to acquire goods or services from outside suppliers or vendors have
been accounted for under the fair value method with expense recognized during
the service period.
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. Comprehensive
income generally includes net income, foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on investments in certain
debt and equity investments (i.e., securities available-for-sale). The changes
in unrealized gain (loss) on securities available-for-sale and foreign exchange
gain (loss) have been included in comprehensive income.
Translation of Foreign Currencies
The functional currencies of the Company's foreign subsidiaries are their
respective local currencies. Financial statement accounts of these subsidiaries
are translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("FASB 52"). Under
FASB 52, functional currency assets and liabilities are translated into U.S.
dollars generally using exchange rates in effect at the end of the period and
the related translation adjustments are recorded as a separate component of
comprehensive income. Income statement accounts expressed in functional
currencies are translated using average rates of exchange prevailing during the
period.
Effect of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This standard requires that all
derivative instruments be recorded in the balance sheet at fair value; the
accounting for the gain or loss due to the changes in fair value of the
derivative instrument depends on whether the derivative instrument qualifies as
a hedge. If the derivative instrument does not qualify as a hedge, the gains or
losses are reported in earnings when they occur. However, if the derivative
instrument qualifies as a hedge, the accounting varies based on the type of risk
being hedged. SFAS 133 will apply to the Company starting July 1, 2000.
Management is currently evaluating the financial statement impact, if any, of
adopting SFAS 133.
3. Mortgage Loans
Mortgage loans held for investment include various types of adjustable-rate and
fixed-rate loans secured by mortgages on commercial and multifamily real
properties. Approximately 44.9% and 40.2% of the amount of mortgage loans held
for investment at December 31, 1999 and 1998, respectively, were collateralized
by properties located in California. Mortgage loans are generally expected to
be repaid from the operating profits of the borrowers, refinancing by another
lender or sale by the borrowers of the secured collateral.
11
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
As of December 31, 1999 and 1998, the Company's mortgage loan portfolio
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
% of Number % of Number
Amount Loans Of Loans Amount Loans Of Loans
---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Principal balance:
Multifamily loans $186,917 50.4% 676 $270,170 48.8% 968
Commercial loans 165,865 44.7% 253 264,732 47.9% 374
Construction loan 18,000 4.9% 1 18,000 3.3% 1
participation
------------------------------------ ------------------------------------
Total Principal 370,782 100.0% 930 552,902 100.0% 1,343
===================== =====================
Unamortized premium 9,578 14,344
Unearned loan fees (1,302) (2,571)
Less allowance for loan (9,667) (8,027)
losses
---------- ----------
Net carrying amount $369,391 $556,648
========== ==========
</TABLE>
The Company acquired a substantial amount of mortgage loans from Southern
Pacific Bank ("SPB"), a wholly-owned subsidiary of Imperial Credit, and
Franchise Mortgage Acceptance Company ("FMAC"), a former affiliate of Imperial
Credit. SPB was formerly known as Southern Pacific Thrift and Loan Association.
The following summary reflects loans acquired from affiliates of the Manager,
which are included in the table shown above as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Amount Number Amount Number
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Principal balance of SPB loans $280,349 735 $353,477 985
Principal balance of FMAC loans - - 54,501 55
-------- --- -------- -----
Total principal balance of loans
acquired from affiliates of
Manager $280,349 735 $407,978 1,040
======== === ======== =====
</TABLE>
The change in the mortgage loan balance consisted of the following during the
periods ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Mortgage loans purchased or originated, net $ 28,232 $381,189
Less:
Collections of principal 212,337 88,392
Provision for loan losses 1,641 6,300
Amortization of premium net of fees 1,511 1,858
----------- ---------
Net change $(187,257) $284,639
=========== =========
</TABLE>
12
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
At December 31, 1999 and 1998, 423 and 602 mortgages, respectively, have fixed
interest rates and 507 and 741 mortgages, respectively, have variable interest
rates tied to the six month LIBOR, Bank of America Prime or the one-year U.S.
Treasury index. The ranges of interest rates as of December 31, 1999 and 1998
are set forth in the following table:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Principal Principal
Range of Number Balance Number Balance
Interest Rates of Loans of Loans of Loans of Loans
--------------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C>
7.5% or less 21 11,262 19 27,400
7.501 - 8.0 32 15,536 27 29,599
8.001 - 8.5 77 38,592 65 35,474
8.501 - 9.0 282 108,820 291 111,770
9.001 - 9.5 180 57,763 262 94,145
9.501 - 10.0 88 57,531 221 101,516
10.001 - 10.5 38 24,860 83 45,354
10.501 - 11.0 71 9,623 119 25,555
11.001 - 11.5 57 8,434 85 12,956
11.501 - 12.0 35 5,504 60 20,048
12.001 - 12.5 16 24,464 43 34,352
12.501 - 13.0 15 2,129 33 4,499
13.01 or more 18 6,264 35 10,234
------- --------- ------- ----------
Total 930 $370,782 1,343 $552,902
======= ========= ======= ==========
</TABLE>
The mortgage loans ranged in size from $25 to $21,414 at December 31, 1999 as
compared to from $6 to $26,240 at December 31, 1998 and as set forth in the
following table:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------------
Weighted Weighted
Average Final Number Principal Average Final Number Principal
Interest Maturity of Balance Interest Maturity of Balance
Loan Size Range Rate Date Loans of Loans Rate Date Loans of Loans
------------------ -------- -------- ------ --------- -------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$150 or less 10.171% 06/01/28 280 $ 29,531 10.472% 06/01/28 410 $ 42,168
150 - 250 9.463% 10/01/29 277 52,322 9.822% 06/01/28 371 70,086
250 - 500 9.251% 10/01/29 221 78,000 9.587% 06/01/28 314 111,278
500 - 750 9.013% 05/01/29 57 34,530 9.271% 06/01/28 97 59,535
750 - 1,000 8.932% 04/01/29 35 30,425 9.297% 06/01/28 64 55,883
1,000 - 1,500 8.971% 07/01/29 32 38,534 9.324% 04/01/28 48 58,685
1,500 - 2,000 8.237% 08/01/27 10 17,163 9.436% 08/01/27 17 29,941
2,000 - 3,000 8.837% 06/01/28 10 24,537 9.464% 06/01/27 14 34,652
Over 3,000 10.834% 08/01/09 8 65,740 9.880% 08/01/07 8 90,674
--- -------- ------ --------
Total 930 $370,782 1,343 $552,902
=== ======== ====== ========
</TABLE>
13
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
The Company's mortgage loans were secured by properties located in 34 states and
the United Kingdom as set forth in the following table:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------------------------------------------------------------------------
Number Principal Number Principal
of % by Balance % by of % by Balance % by
State Loans Number of Loans Amount Loans Number of Loans Amount
---------------------------- ------ ------- --------- ------ ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona 50 5.38% $ 18,037 4.86% 74 5.51% $ 29,009 5.25%
California-Northern 61 6.56% 26,254 7.08% 87 6.48% 44,000 7.96%
California-Southern 402 43.22% 140,185 37.80% 553 41.18% 178,089 32.21%
Colorado 42 4.52% 13,232 3.57% 62 4.62% 20,237 3.66%
Connecticut 8 0.86% 2,012 0.54% 15 1.12% 4,859 0.88%
Florida 24 2.58% 17,604 4.75% 31 2.31% 46,397 8.39%
Georgia 7 0.75% 2,942 0.79% 9 0.67% 4,664 0.84%
Illinois 13 1.40% 7,877 2.12% 22 1.64% 2,479 0.45%
Massachusetts 23 2.47% 4,395 1.19% 38 2.83% 7,268 1.31%
Maryland 6 0.65% 404 0.11% 9 0.66% 1,489 0.27%
Maine 4 0.43% 576 0.16% 8 0.60% 3,397 0.61%
New Hampshire 21 2.26% 2,981 0.80% 33 2.46% 4,951 0.90%
New Jersey 45 4.83% 9,012 2.43% 67 4.99% 16,951 3.07%
Nevada 8 0.86% 19,690 5.31% 13 0.96% 21,101 3.82%
New York 58 6.24% 11,523 3.11% 88 6.55% 20,733 3.75%
Ohio 14 1.51% 1,555 0.42% 18 1.34% 1,941 0.35%
Oregon 51 5.48% 21,346 5.76% 60 4.47% 26,947 4.87%
Pennsylvania 2 0.22% 549 0.15% 8 0.59% 2,326 0.42%
Rhode Island 5 0.54% 650 0.18% 8 0.59% 2,028 0.37%
Texas 28 3.01% 11,704 3.16% 31 2.31% 18,174 3.29%
Utah 4 0.43% 1,512 0.41% 8 0.60% 6,092 1.10%
Washington 33 3.54% 18,993 5.12% 50 3.72% 29,041 5.25%
13 states and the United 21 2.26% 37,749 10.18% 51 3.80% 60,729 10.98%
Kingdom
---------------------------------------------------------------------------------------
Total 930 100.0% $370,782 100.0% 1,343 100.0% $552,902 100.0%
=======================================================================================
</TABLE>
There were 19 loans totaling $16,504 over 90 days past due as of December 31,
1999 as compared to 38 loans totaling $5,745 over 90 days past due as of
December 31, 1998. At December 31, 1999 and 1998, all of the loans over 90
days past due were on non-accrual status and were considered impaired loans. No
specific impairment reserve was established for these loans. Interest foregone
on non-accrual loans was $648 for 1999 and $510 for 1998. The average balance
of impaired loans during 1999 was $13,083 and during 1998 was $3,347. $443 of
interest income was recognized during 1999 on those loans that were impaired as
of December 31, 1999; $223 of interest income was recognized during 1998 on
those loans that were impaired as of December 31, 1998.
A summary of the activity in the allowance for loan losses for 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Balance at beginning of year $ 8,027 $1,727
Provision charged to earnings 4,633 6,300
Charge-offs (2,993) -
Recoveries - -
------- ------
Balance at end of year $ 9,667 $8,027
======= ======
</TABLE>
14
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
In conjunction with the acquisition of mortgage loans in 1997, the Company
established an allowance for loan losses at the time of acquisition totaling
$1,727 based on the seller's loan loss experience.
The following table presents certain key data regarding the Company's mortgage
loans:
<TABLE>
<CAPTION>
Principal
Amount of
Loans
Subject to
Final Face Carrying Delinquency
Interest Maturity Prior Amount of Amount of Over 90
Description Rate Date Liens Mortgages Mortgages (A) Days (B)
----------- -------- -------- ------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Pools of small balance 1999-
multifamily and commercial
mortgage loans (C) (D) 2028 - $311,823 $321,401 $ 2,354
-------- -------- -------
Total - Loan Pools 311,823 321,401 2,354
-------- -------- -------
Construction loan
participation (E) 8.16%- 2007-
10.16% 2010 - 18,000 17,891 -
Condominium conversion
project financing (F) 12.50% 2001 - 21,414 20,692 -
8 other large mortgage loans 10.46%- 2005-
13.50% 2008 23,700 19,545 19,074 14,150
------- -------- -------- -------
Total - Large Mortgage Loans 23,700 58,959 57,657 14,150
------- -------- -------- -------
Total Loans $23,700 $370,782 $379,058 $16,504
======= ======== ======== =======
</TABLE>
_________
(A) The carrying cost for federal income tax purposes is $378,120.
(B) Of the total principal amount of loans subject to over 90 day delinquency,
$841 of the loans were acquired from SPB, a related party.
(C) No loans were greater than 2% of the total.
(D) Interest rates for this category range from 5.50% to 14.00%. The weighted
average interest rate for this category is 9.204%. The category includes
loans with fixed as well as variable interest rates. Variable interest rate
loans are tied to six month LIBOR, Bank of America Prime, or the one-year
U.S. Treasury index.
(E) Interest only is paid quarterly. Principal and interest are due beginning
two years from the earlier of the opening of the facility or first loan
draw.
(F) The loan is secured by all the unsold units of a condominium conversion
project. Principal payments are due the 1st and 15th of every month based
on unit sales. If unit sales are inadequate, the interest is paid from a
funded interest reserve. There are no minimum principal payment amounts.
15
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
4. Securities Available-For-Sale
At December 31, 1999 and 1998, the Company's securities available-for-sale
consisted of certain CMBS interests including subordinated securities and
interest only securities collateralized by commercial mortgages, certain
subordinated asset-backed notes issued by FMAC and shares of a private equity
REIT. In general, subordinated classes and interest only securities of a
particular series of securities bear all losses prior to the related senior
classes. Such securities or investments may subject the Company to credit,
interest rate and/or prepayment risks.
The amortized cost and estimated fair value of the Company's securities
available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
Balance at December 31, 1999 Gross Gross Estimated
---------------------------- Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
-------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
CMBS interests:
Non-investment grade rated subordinated interests $35,561 $ - $2,190 $33,371
Investment grade rated senior interest only interests 2,585 - 2 2,583
Non-investment grade rated subordinated interest
only interests 1,816 - 75 1,741
Non-rated subordinated interest only interests 1,287 66 - 1,353
Other non-rated subordinated interests 4,121 811 - 4,932
---------------------------------------------------
Total CMBS interests 45,370 877 2,267 43,980
Non-investment grade rated subordinated notes 6,192 - 1,623 4,569
Common stock in a private equity REIT 5,000 - - 5,000
---------------------------------------------------
Total $56,562 $877 $3,890 $53,549
===================================================
</TABLE>
<TABLE>
<CAPTION>
Balance at December 31, 1998 Gross Gross Estimated
---------------------------- Amortized Unrealized Unrealized Fair
Security Description Cost Gain Loss Value
-------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CMBS interests:
Non-investment grade rated subordinated interests $34,763 $ 90 $ - $34,853
Investment grade rated senior interest only interests 3,361 - 64 3,297
Non-investment grade rated subordinated interest
only interests 2,959 - - 2,959
Non-rated subordinated interest only interests 1,386 - - 1,386
Other non-rated subordinated interests 4,050 133 - 4,183
---------------------------------------------------
Total CMBS interests 46,519 223 64 46,678
Non-investment grade rated subordinated notes 6,193 - 200 5,993
Common stock in private equity REIT 5,000 - - 5,000
---------------------------------------------------
Total $57,712 $223 $264 $57,671
===================================================
</TABLE>
The Company's CMBS interests are secured by adjustable and fixed rate commercial
and multi-family mortgage loans. The yield to maturity on each CMBS interest
depends on, among other things, the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations), the pass-
through rate and interest rate fluctuations. The estimated yield to maturity on
the Company's CMBS interests for 2000 is 13.82%. Some of the Company's CMBS
interests are subordinated so that, in the event of a loss, payments to senior
certificate holders will be made before the Company receives its payments. All
of the Company's CMBS interests were acquired from SPB, the originator or
purchaser of the underlying mortgage loans, and Imperial Credit.
16
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
During the year ended December 31, 1998, the Company determined, based primarily
on accelerated prepayments, that certain declines in the estimated fair value of
its interest only CMBS were other than temporary. Accordingly, the Company took
a charge to earnings of $4,554 to write down the interest only securities to
estimated fair value and such charge is reflected in amortized cost.
The Company's investment in subordinated notes was acquired from FMAC and the
estimated yield to maturity on these notes for 2000 is 14.25%.
The unamortized discount on securities available-for-sale was $28,422 and $
29,317 at December 31, 1999 and 1998, respectively. The Company did not sell
any securities available-for-sale during the periods ended December 31, 1999,
1998 and 1997.
The contractual maturities of the mortgage loans underlying the Company's CMBS
interests are greater than ten years.
Because there is no active market from which to derive a fair value for the
Company's CMBS interests, management estimates the fair values using a
discounted cash flow methodology. The ranges of assumptions used in the
December 31, 1999 valuation were as follows:
<TABLE>
<S> <C>
Monthly default rate 0.15%
Loss severity 33.0%
Cumulative loss 2.15% to 2.45%
Constant prepayment rate 21%
Discount rate 10.08% to 25.01%
</TABLE>
5. Fair Value Of Financial Instruments
Financial instruments include cash and interest bearing deposits, repurchase
agreements, securities available-for-sale, mortgage loans, accrued interest
receivable, borrowings and accrued interest payable. Because no active market
exists for a portion of the Company's mortgage loans and securities, fair value
estimates are based on judgments regarding credit risk, investor expectation of
future economic conditions, normal cost of administration and other risk
characteristics, including interest rate and prepayment risk. These estimates
are subjective in nature and involve uncertainties and matters of judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. In addition, the fair value estimates
presented do not include the value of anticipated future business and the value
of assets and liabilities that are not considered financial instruments.
The Company in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:
Financial Assets
The carrying values of cash, interest bearing deposits and accrued interest
receivable are considered to approximate fair value. The carrying values of
securities available-for-sale approximate fair value - note 4 contains
information on how such fair value for CMBS was determined. The fair value of
the investment in a private equity REIT is based on cost since the REIT was
formed in late 1997, is not publicly traded and has had financing transactions
subsequent to the Company's investment at implied equity prices above that paid
by the Company. The fair value of mortgage loans 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.
17
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
Financial Liabilities
The carrying amount of accrued interest payable is considered to approximate
fair value. 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 the interest rate swap is estimated by present
valuing the future cash flows using the contract notional amount amortization
schedule, contract interest rate, one-month LIBOR at December 31, 1999 and 1998
and the yield curve.
The estimated fair values of the Company's financial instruments at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and interest bearing deposits $101,388 $101,388 $ 23,398 $ 23,398
Repurchase agreements 32,462 32,462 - -
Securities available-for-sale 53,549 53,549 57,671 57,671
Accrued interest receivable 3,092 3,092 6,410 6,410
Mortgage loans, net 369,391 369,391 556,648 556,648
Borrowings 256,878 255,000 331,132 331,132
Accrued interest payable 234 234 1,185 1,185
Interest rate swap - 1,478 - (1,669)
</TABLE>
The fair value estimates as of December 31, 1999 and 1998 are based on pertinent
information available to management as of that date. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since those dates and, therefore, current estimates
of fair value may differ significantly from the amounts presented herein.
6. Real Property
The Company's real property investments were acquired during 1998. The
following table provides information regarding each of the investments.
<TABLE>
<CAPTION>
Initial Cost to Company (A) Gross Amount at which Carried at Close of Period
----------------------- --- --------------------------------------------------------
Buildings Buildings Accumul-
and and ated Net
Improve- Improve- Improve- Deprecia- Carrying
Description Land ments ments Land ments Total tion Amount
- ------------------- -------- ---------- -------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mission Marketplace $12,909 $18,711 $ 151 $12,909 $18,862 $31,771 $1,045 $30,726
Atrium Tower 1,800 11,383 958 1,800 12,341 14,141 731 13,410
The Terraces 4,511 13,534 93 4,511 13,627 18,138 693 17,445
Axe Sud 1,676 15,992 - 1,535 14,633 16,168 1,057 15,111
------- ------- ------ ------- ------- ------- ------ -------
Total $20,896 59,620 1,202 20,755 59,463 80,218 3,526 $76,692
======= ======= ====== ======= ======= ======= ====== =======
</TABLE>
(A) - Costs capitalized subsequent to acquisition.
18
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
The difference between the amount at which the Axe Sud office building in France
is carried at December 31, 1999 as compared to the initial cost to the Company
at acquisition is due to unrealized foreign exchange losses totaling $1,500.
Real property is leased to tenants under operating leases, which provide for
rent and reimbursement of various expenses paid by the Company, such as common
area maintenance charges and real estate taxes.
The estimated future base lease rental income to be received by the Company for
the remaining minimum lease terms for all of the Company's real property
investments is $8,968 for 2000, $8,562 for 2001, $8,181 for 2002, $6,828 for
2003, $5,185 for 2004 and $32,103 thereafter.
The Company's real property investment in the Ugly Duckling properties was
reclassified at December 31, 1999 to real property held for sale and is carried
net of a valuation allowance of $1,411. The investment was sold on January 3,
2000 for $22,270 cash and a $2,424 second mortgage bearing interest at 15% per
annum. The Company has an option to unwind this transaction in the event the
merger contemplated by the Merger Agreement is not consummated. Pursuant to an
agreement between the Company and Imperial Credit, the tax loss on this sale of
$2,030 will be disregarded for purposes of computing the first quarter 2000
dividend to be paid to the Company's stockholders.
Three of the Company's real property investments are secured by mortgage loans
as further described in note 10 to the consolidated financial statements. The
construction date, acquisition date and estimated useful lives by real property
investment is as follows:
<TABLE>
<CAPTION>
Life on which
Date of Depreciation
Description Construction Date Acquired is Computed Location
- ----------- ------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Mission Marketplace (A) 1989 May 1998 30 years Oceanside, CA
Atrium Tower (B) 1982 May 1998 30 years Las Vegas, NV
The Terraces (A) 1957 and 1989 June 1998 30 years Rancho Palos Verdes, CA
Axe Sud (B) 1994 July 1998 20 years Suburb of Paris, France
- -----------
</TABLE>
(A) Shopping center
(B) Office building
The aggregate cost for Federal income tax purposes is the same as the cost for
book purposes.
7. Management Contract (Amounts in this footnote are in actual dollars, not
thousands)
ICCMIC entered into a management agreement (the "Management Agreement") with
Imperial Credit Commercial Asset Management Corp. (the "Manager"), a wholly-
owned subsidiary of Imperial Credit, pursuant to which the Manager advised the
Company on various aspects of its business and managed its day-to-day
operations, subject to the supervision of the Company's Board of Directors. The
agreement expired without renewal on October 22, 1999 (see note 14). The
Manager was entitled to receive a base management fee of 1% per annum of the
first $1 billion of average invested assets, 0.75% of the next $250 million of
average invested assets, and 0.5% of average invested assets above $1.25
billion, payable quarterly, and a quarterly incentive fee in an amount equal to
(A) 25% of the dollar amount by which (1) (a) Funds from Operations, as defined
in the Management Agreement (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),
exceeded (2) an amount equal to (a) the weighted average of the price per share
at the initial public offering and the prices per share at any secondary
offerings by ICCMIC
19
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
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. Base management fees for the periods ended
December 31, 1999, 1998 and 1997 were $5.86 million, $6.32 million and $0.94
million, respectively. The only incentive fee earned since the Company's
inception amounted to $41 thousand and was recorded during the year ended
December 31, 1999.
8. Stock Option Plan
ICCMIC adopted a stock option plan (the "Plan") to provide a means of incentive
compensation, under which the Manager, certain executive officers and employees
of the Manager and certain officers and directors of ICCMIC were granted options
to purchase 3,045,000 shares of Common Stock exercisable at the initial public
offering price. Options to purchase a total of 7,500,000 shares have been
authorized for grant under the Plan. ICCMIC granted 1,691,250 options to
purchase shares to the Manager and 9,000 options to purchase shares to an
employee of the Manager, for which $2,550 was recognized as an expense during
1997, and 1,344,750 options to purchase shares to executive officers and
directors of ICCMIC. During 1998, ICCMIC granted additional options to purchase
162,500 shares at $15.00 per share and 883,500 shares at $9.00 per share.
For those options issued to non-employees, ICCMIC recognized $97 as an expense
during 1998 based on the estimated fair value of the options. In conjunction
with the issuance of the options to purchase shares at $9.00 per share, certain
employees of the Manager exchanged options to purchase 97,000 shares at an
exercise price of $15.00 per share for options to purchase 79,000 shares at
$9.00 per share. Prior to, and in connection with the signing of the Merger
Agreement, the options granted to the Manager and two of the directors of ICCMIC
were cancelled. Options vest immediately and one third of the options are first
exercisable on each of the first three anniversaries of their grant date. The
exercisability of options will accelerate upon a change of control, such as the
transaction contemplated by the Merger Agreement. All options that have not been
exercised as of ten years from their date of grant will expire.
Included in the options granted during 1998 are options to purchase 30,000
shares granted to a Director of the Company which carried the right to put the
options back to the Company at $1.00 per share for a period of one year. The
put right was granted in recognition of the Director's extraordinary service to
the Company and expired without exercise.
Stock option activity for the periods ended December 31, 1999, 1998 and 1997
follows:
<TABLE>
<CAPTION>
Number of Shares Weighted Average Range of
---------------- Exercise Price Exercise Price
---------------- --------------
<S> <C> <C> <C>
1997:
Granted 3,125,500 $15.00
Forfeited / Cancelled (80,500) $15.00
----------
Outstanding at December 31, 1997 3,045,000 $15.00
1998:
Granted 1,046,000 $ 9.93
Forfeited / Cancelled (183,250) $15.00
----------
Outstanding at December 31, 1998 3,907,750 $13.64 $9.00 - $15.00
1999:
Granted -
Forfeited / Cancelled (2,470,500) $14.36
----------
Outstanding at December 31, 1999 1,437,250 $12.40 $9.00 - $15.00
==========
</TABLE>
20
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
At December 31, 1999, options to purchase 207,250 shares were exercisable at
$9.00 per share and 494,000 shares were exercisable at $15.00 per share. At
December 31, 1998, options to purchase 983,250 shares were exercisable at $15.00
per share. None were exercisable at December 31, 1997. The weighted average
remaining life for options outstanding at December 31, 1999 was approximately
eight years.
If the Company had determined compensation cost based on the fair value at the
grant date for stock options granted to officers and directors, the Company's
net earnings and earnings per share for the year ended December 31, 1998 and the
period from October 22, 1997 through December 31, 1997 would have decreased to
the pro forma amounts set forth below:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
As Reported Pro forma As Reported Pro forma
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings $22,224 $21,586 $2,159 $ 142
Basic and Diluted Earnings per
share $ 0.68 $ 0.66 $ 0.06 $0.00
</TABLE>
The derived fair value of the options granted during 1998 was approximately
$0.73 for the options issued at $9.00 and $1.21 for the options issued at
$15.00. The derived fair value of the options granted during 1997 was
approximately $1.50 per share. The derived fair values were estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C> <C>
Dividend yield 13.30% 8.32%
Risk free interest rate 4.70% 6.50%
Expected life 5 years 10 years
Expected volatility 33.00% 22.15%
</TABLE>
9. Stockholders' Equity
On October 22, 1997, the Company completed its initial public offering of
34,500,000 shares, with gross proceeds of $513,857 and net proceeds to ICCMIC of
$479,309. During the years ended December 31, 1999, 1998 and 1997, ICCMIC
declared dividends on common stock of $32,775, $36,948 and $4,485, respectively,
or $1.15, $1.18 and $0.13 per share, respectively. All of the dividends were
ordinary income.
During the quarter ended September 30, 1998, the Board of Directors authorized
the Company to repurchase shares of the Company's Common Stock. During the
third and fourth quarters of 1998, the Company repurchased 6,000,000 shares at a
cost of $56,338. At December 31, 1999, the Company is authorized to repurchase
an additional 6,000,000 shares under certain circumstances; however, the Merger
Agreement prohibits any share repurchases.
On September 18, 1998, the Board of Directors of the Company declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
Common Stock, par value $0.0001 per share, of the Company. The Rights dividend
was payable on September 21, 1998 to stockholders of record at the close of
business on that date. The description and terms of the Rights are set forth in
an agreement between the Company and U.S. Stock Transfer Corporation (the
"Rights Agreement"), a copy of which was included as an exhibit to the Company's
Current Report on Form 8-K, filed with the SEC on September 22, 1998. The Rights
dividend was declared in response to an unsolicited merger proposal from
Wilshire Real Estate Investment Trust Inc. and to enable the Company to induce
potentially hostile suitors to negotiate terms with the Company's Board of
Directors before initiating takeover
21
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
attempts. The Rights Agreement was amended in connection with the Merger
Agreement so that the Rights shall expire immediately prior to the effective
time of the merger contemplated by the Merger Agreement.
10. Outstanding Debt
The Company's outstanding debt at December 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Balance
---------------------
1999 1998 Interest Rate Maturity
--------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Borrowings under collateralized mortgage obligations $210,716 $ - Various Various
Borrowings under $300,000 warehouse line of credit - 279,000 LIBOR + 0.90% March 29, 1999
Mortgage loan secured by Mission Marketplace 23,580 23,798 7.365% fixed December 2012
Mortgage loan secured by The Terraces 10,581 10,658 8.500% fixed December 2027
Mortgage loan secured by Axe Sud 12,001 14,119 PIPOR + 0.85% August 2013
Borrowings under secured bank line - 3,557 PIPOR + 0.85% April 1999
-------- --------
Total outstanding debt $256,878 $331,132
======== ========
</TABLE>
On March 10, 1999, the Company closed a securitization transaction in which the
Company's wholly-owned business trust, ICCMAC Multifamily and Commercial Trust
1999-1 (the "ICCMAC Trust"), sold approximately $250 million of collateralized
mortgage obligation ("CMO") bonds. The bonds are primarily floating interest
rate bonds and carry a cost of funds which approximates the cost on the
Company's then existing warehouse line of credit. The bonds were originally
collateralized by approximately $290 million of first mortgage loans which the
Company had previously acquired from SPB. At the closing of this transaction,
the Company repaid in full and terminated its warehouse line of credit.
At December 31, 1999, the outstanding CMO bonds are summarized as follows:
<TABLE>
<CAPTION>
Class Principal Discount Net Interest Rate Maturity(A)
------- --------- -------- --- ------------- ----------
<S> <C> <C> <C> <C> <C>
A-1 $ 64,329 $ - $ 64,329 LIBOR + 0.28% 2001
A-2 94,831 - 94,831 LIBOR + 0.42% 2004
S 8,910 951 7,959 7.11% fixed rate 2004
A-3 17,447 - 17,447 LIBOR + 0.60% 2005
B 11,631 - 11,631 LIBOR + 0.88% 2006
C 14,539 20 14,519 LIBOR + 1.55% 2007
-------- ------- --------
Total $211,687 $ 971 $210,716
======== ======= ========
</TABLE>
(A) The maturity has been estimated based on the assumptions that each mortgage
loan collateralizing the CMO bonds is paid in full on its maturity date, that
the redemption option has not been exercised, that the mortgage loans will
prepay at an 18% constant prepayment rate and other factors as set forth in the
prospectus of the ICCMAC Trust. The Class S bonds do not accrue interest but
have been discounted to yield approximately 7.11%. The Class S bonds are
entitled to receive monthly payments as set forth in the prospectus of the
ICCMAC Trust.
The warehouse line of credit was repaid in full and terminated on March 10,
1999. The effective interest rate on that line at December 31, 1998 was 6.445%.
The Company entered into a forward interest rate swap in order to hedge the cost
of funds for outstanding borrowings under any facility which bears interest at
variable rates over the LIBOR index and to the extent that such facility is
secured by mortgage loans that bear interest at fixed rates. This swap became
effective May 15, 1998 for an amortizing notional balance of $77,467 over a ten-
year period. Under the swap, the Company receives monthly
22
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
payments of interest based on one-month LIBOR and remits monthly payments based
on a fixed interest rate of approximately 5.99%. During the years ended
December 31, 1999 and 1998, the Company paid monthly interest on the notional
balance at the fixed annual rate, which ranged from approximately $273 to $410
per month, and collected monthly interest at annual rates ranging from 4.90% to
5.66%, or approximately $244 to $392 per month. The net cost of the swap ranged
from $16 to $57 per month and is included in interest expense in the Company's
operating results. Such net cost was $483 and $157 for the years ended December
31, 1999 and 1998, respectively. As of December 31, 1999, the approximate net
present value of this swap was $1,478 and the notional balance was $55,344.
The secured bank line and mortgage loan secured by the Axe Sud office building
in France were obtained from the same lender. The secured bank line was repaid
upon receipt of the refund of a value added tax (VAT) in April 1999. The
mortgage loan is repayable pursuant to a set amortization schedule over a 15-
year period and had an effective annual interest rate of 4.35% at December 31,
1999.
The mortgage loan secured by Mission Marketplace is subject to a 30-year
amortization schedule with a balloon payment due in 15 years.
The mortgage loan secured by The Terraces is subject to a 30-year amortization
schedule and can be prepaid without penalty after 10 years. This loan was
subject to a rebate, which resulted in an effective interest rate of 7.85%, as
compared to the nominal rate of 8.50%.
Scheduled principal payments on Class S CMO bonds and mortgage loans secured by
real property due over the next five years are $3,761 in 2000, $2,757 in 2001,
$2,252 in 2002, $2,185 in 2003 and $1,450 in 2004.
11. Related Party Transactions
As part of ICCMIC's initial public offering, 2,970,000 shares of Common Stock
were sold to Imperial Credit and approximately 500,000 shares of Common Stock
were sold to certain directors, officers and employees of the Company, the
Manager and Imperial Credit and members of their respective immediate families,
in each case net of the underwriting discount. On December 11, 1997, Imperial
Credit acquired an additional 100,000 shares of Common Stock in an open market
transaction. In 1999, Imperial Credit sold 500,000 shares.
Concurrently with the closing of ICCMIC's initial public offering, ICCMIC
acquired 270 mortgage loans for a purchase price of $109,130 and certain CMBS
interests for $55,000 from Imperial Credit and SPB, affiliates of the Manager.
In December 1997, ICCMIC acquired 299 loans for $97,641 from SPB and two loans
for $6,385 from FMAC, affiliates of the Manager. The FMAC purchase price is
included in accrued expenses, payables and other liabilities at December 31,
1997.
During 1998, the Company acquired 480 mortgage loans at a price of $193,726 from
SPB. In addition, ICCMIC acquired certain CMBS interests for $6,069 and 95
mortgage loans for $94,679 from FMAC. Also during 1998, FMAC reacquired from
the Company 42 loans with a principal amount of $46,357.
During 1999, the Company acquired 20 mortgage loans at a price of $25,142 from
SPB and SPB repurchased from the Company certain mortgage loans with an
aggregate principal balance of $47,262. Also during 1999, FMAC reacquired from
the Company 46 loans with a principal balance of $47,458.
23
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
12. Commitments and Contingencies
ICCMIC leases approximately 6,400 usable square feet of office space for its
executive offices under a non-cancelable operating lease expiring on August 15,
2002. Rent expense for the years ended December 31, 1999 and 1998 was $216 and
$146, respectively, and future minimum rents due under the lease are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
2000 $194
2001 191
2002 107
</TABLE>
The Company has no outstanding loan funding commitments.
See note 14 to the consolidated financial statements for a description of
litigation pending in connection with the Merger Agreement.
13. Segment Reporting
The Company operates in four business segments: small balance mortgage loan
pools acquired ("mortgage pools"), individual large balance mortgage loans
originated or acquired ("large mortgage loans"), real property and securities
available-for-sale ("securities"). These segments are managed separately
because each requires different levels of resources and involves assets having
different risk profiles. Segment performance is measured based on net earnings.
The accounting policies of the segments conform to generally accepted accounting
principles as more fully described in note 2 to the consolidated financial
statements.
<TABLE>
<CAPTION>
Revenues by Segment Net Earnings (Loss) by Segment Assets by Segment
--------------------------- --------------------------------- -------------------
1999 1998 1997 1999 1998 1997 1999 1998
------- ------- ------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loan pools $30,518 $36,734 $1,676 $ 9,999 $17,908 $1,458 $317,975 $475,289
Large mortgage loans 11,501 4,396 - 7,880 3,044 - 54,508 87,769
Real property 13,968 7,684 - 2,082 1,563 - 101,386 107,663
Securities 6,299 6,153 1,403 5,798 975 1,296 53,549 57,671
Other 4,039 2,454 3,388 (2,548) (1,246) (595) 137,499 28,782
------- ------- ------ ------- ------- ------ -------- --------
Total $66,325 $57,421 $6,467 $23,211 $22,244 $2,159 $664,917 $757,174
======= ======= ====== ======= ======= ====== ======== ========
</TABLE>
Revenues by segment is comprised of interest income for all segments other than
real property, which is comprised of lease rental revenues. There are no
intersegment revenues or expenses.
As further explained in notes 1, 7 and 14 to the consolidated financial
statements, the day-to-day operations of the Company were managed by the Manager
until October 22, 1999, the date that the Management Agreement expired. At the
close of business on October 22, 1999, the Company hired all of the Manager's
employees to run the Company's operations on an internalized basis. References
to ICCMIC management hereinafter within note 13 to the consolidated financial
statements refers to the employees of the Company after October 22, 1999 and
employees of the Manager prior to that date.
The mortgage loan pools segment is represented by several pools of small balance
multifamily and commercial loans that the Company acquired from SPB, FMAC and
unrelated third parties. Most of these loans are from pools which average
approximately $150 or $350 per loan. The loans are concentrated in California
and the western and eastern coasts of the United States. These loans are
generally serviced by others, including SPB and FMAC, and are monitored by
ICCMIC management on an overall basis.
24
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
The large mortgage loans segment is primarily comprised of loans originated and
serviced by ICCMIC management. These loans are concentrated in five states and
each represents a unique investment and risk profile. These loans require much
more active monitoring and involvement by ICCMIC management than do the loans
included in the mortgage loan pools segment.
The real property segment is comprised of two operating shopping centers and two
operating office buildings managed by outside professional property managers in
California, Las Vegas and France, as well as a group of seventeen properties
located in three states and leased to the Ugly Duckling Corporation for use in
connection with that company's used car sales and finance business. The Ugly
Duckling properties were sold by the Company in January 2000. All real property
investments are monitored by ICCMIC asset management personnel.
The securities segment is comprised of the Company's CMBS securities obtained
from SPB and Imperial Credit as well as subordinated notes acquired from FMAC
and a common stock investment in a private equity REIT. The CMBS and
subordinated note investments are administered by servicers and trustees that
were put in place at the time of the applicable securitization transaction.
Personnel employed by Imperial Credit update the Company's analytic models for
valuing the securities and such personnel as well as ICCMIC management actively
monitor these securities on a quarterly basis. The private equity REIT
investment is monitored by ICCMIC management through periodic financial reviews
and communications with employees of the REIT's advisor.
Net earnings (loss) by segment is presented in the following tables for the
periods ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------------------------------------------------------------------
Large
Mortgage Mortgage Real
Loan Pools Loans Property Securities Other Total
---------- -------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $30,518 $11,501 $13,968 $6,299 $ 4,039 $66,325
------- ------- ------- ------ ------- -------
Operating Expenses
Management fee 3,202 706 883 501 613 5,905
Interest expense 15,599 - 3,247 - 24 18,870
Provision for loan loss 1,718 2,915 - - - 4,633
Depreciation - - 3,195 - - 3,195
Real property expenses - - 3,150 - - 3,150
Write-down of real
property held for sale - - 1,411 - - 1,411
Due diligence - - - - 3,812 3,812
Other - - - - 2,138 2,138
------- ------- ------- ------ ------- -------
Total Expenses 20,519 3,621 11,886 501 6,587 43,114
------- ------- ------- ------ ------- -------
Net Earnings (Loss) $ 9,999 $ 7,880 $ 2,082 $5,798 $(2,548) $23,211
======= ======= ======= ====== ======= =======
</TABLE>
25
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------------------------------------------
Large
Mortgage Mortgage Real
Loan Pools Loans Property Securities Other Total
---------- -------- -------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $36,734 $4,396 $7,684 $6,153 $ 2,454 $57,421
------- ------ ------ ------ ------- -------
Operating Expenses
Management fee 4,227 439 583 624 446 6,319
Interest expense 8,829 383 1,911 - 42 11,165
Provision for loan loss 5,770 530 - - - 6,300
Write-down of securities - - - 4,554 - 4,554
Depreciation - - 1,755 - - 1,755
Real property expenses - - 1,872 - - 1,872
Due diligence - - - - 1,659 1,659
Stock options - - - - 97 97
Other - - - - 1,456 1,456
------- ------ ------ ------ ------- -------
Total Expenses 18,826 1,352 6,121 5,178 3,700 35,177
------- ------ ------ ------ ------- -------
Net Earnings (Loss) $17,908 $3,044 $1,563 $ 975 $(1,246) $22,244
======= ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Period from July 31, 1997 to December 31, 1997
-----------------------------------------------------
Mortgage
Loan Pools Securities Other Total
---------- ---------- ----- -----
<S> <C> <C> <C> <C>
Revenues $1,676 $1,403 $3,388 $6,467
------ ------ ------ ------
Operating Expenses
Management fee 218 107 615 940
Due diligence - - 487 487
Stock options - - 2,550 2,550
Other - - 331 331
------ ------ ------ ------
Total Expenses 218 107 3,983 4,308
------ ------ ------ ------
Net Earnings (Loss) $1,458 $1,296 $ (595) $2,159
====== ====== ====== ======
</TABLE>
14. Merger Agreement and Related Transactions
At 12:01 a.m. on October 13, 1999, the 60-day market check period during which
the Company was permitted to conduct an unrestricted solicitation of potentially
superior proposals pursuant to the Merger Agreement expired. A special
committee of the Company's Board of Directors, comprised of the Company's four
independent directors, with advice from its financial advisor, determined that
none of the proposals received during the 60-day market check period was
superior to the proposed merger transaction with Imperial Credit. The Merger
Agreement provides that the Company retains the right to consider superior
proposals, if any, received on an unsolicited basis.
On October 22, 1999, the merger consideration pursuant to the Merger Agreement
was increased from $11.50 cash per share to $11.5753246 cash per share. The
merger consideration increase resulted from an appraisal process performed in
connection with the valuation of the termination fee payable by the Company to
the Manager upon termination or expiration of the Management Agreement. The
Merger Agreement provides that if the appraisal
26
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
process were to value the termination fee at less than $35 million, then the
difference between $35 million and the appraised value of the termination fee
would be paid to the Company's stockholders upon closing of the proposed merger
as an increase in the merger consideration. The appraisal process was completed
on October 22, 1999 and valued the termination fee at $33 million (unaudited).
Under the Merger Agreement, the $2 million difference resulted in the increase
in the merger consideration to $11.5753246 per share.
At the close of business on October 22, 1999, the Management Agreement expired
and the Company internalized its management. The Company, with the consent of
the Manager, hired all of the Manager's employees to run the Company's
operations on an internalized basis. This internalization of management should
have no effect on the Company's operations other than to decrease the cost of
managing the Company as compared to the asset management fee that the Company
previously paid to the Manager under the Management Agreement. If the Merger
Agreement is terminated, the Company will be obligated to pay Imperial Credit
$33 million for non-renewal of the Management Agreement.
The Merger Agreement provided that Imperial Credit or the Company may terminate
the Merger Agreement and abandon the merger and the transactions contemplated by
the Merger Agreement if the merger had not been consummated prior to January 31,
2000 (the "Sunset Date"). Effective October 29, 1999, the Merger Agreement was
amended to extend the Sunset Date to February 29, 2000 and, effective February
7, 2000, the Merger Agreement was further amended to extend the Sunset Date to
April 30, 2000.
The Company, its directors and Imperial Credit have been named as defendants in
a putative class action lawsuit filed on July 22, 1999 by Riviera-Enid, a
Florida limited partnership, in the Superior Court of the State of California
for Los Angeles County, California, docket number BC213902. The complaint
alleges that the proposed merger constitutes a breach of fiduciary duty by the
defendants because the merger price is alleged to be less than the liquidation
value of the Company's assets. The complaint also alleges that the defendants
have acted to the detriment of the Company's stockholders other than Imperial
Credit in that: (i) the defendants allegedly failed to solicit arm's-length bids
to sell the Company; (ii) the proposed price allegedly represents a low premium
over the market price and is below the book value of the Company's common stock;
(iii) Imperial Credit allegedly had an advantage over other potential bidders as
a result of the Management Agreement termination fee; and (iv) the proposed
merger allegedly does not "give fair valuation" to Company-owned property. The
complaint also alleges that Imperial Credit will receive $4 million more than it
otherwise would have received, but for the proposed merger, in connection with a
termination fee that the Company received on an unidentified mortgage loan
secured by property in the United Kingdom. Finally, the complaint alleges that
some of the directors have conflicts of interest because of their affiliation
with Imperial Credit and that the proposed merger will benefit Imperial Credit
at the expense of the Company's other stockholders. The complaint seeks
certification of a class of all stockholders of the Company whose stock will be
acquired in connection with the proposed merger and seeks injunctive relief that
would, if granted, prevent the completion of the proposed merger. The complaint
also seeks damages in an unspecified amount and other relief.
On November 1, 1999, the Company was served with an amended class action
complaint in the action. The amended complaint purports to allege a claim for
breach of fiduciary duty against each of the defendants named in the original
complaint. The amended complaint alleges that defendants have (i) engaged in a
scheme to freeze out the Company's public stockholders; (ii) created a poison
pill, other defensive measures and a tainted negotiation process that have made
it impossible to maximize stockholder value; (iii) improperly agreed to
reimburse Imperial Credit for up to $2 million of expenses under certain
circumstances if the proposed merger is not completed, which reimbursement
obligation made competing bids impossible; (iv) improperly ended the 60-day
market check period prior to determination of the Management Agreement
termination fee, thus requiring prospective bidders to bid in ignorance; (v)
failed to give consideration to competing bids, or a fair opportunity for
competing bidders to make proposals; (vi) improperly limited the pool of
potential acquisition candidates and rejected liquidation or disposition of
individual assets; (vii) improperly allowed defendants H. Wayne Snavely, Kevin
E. Villani and Mark S. Karlan to
27
<PAGE>
Imperial Credit Commercial Mortgage Investment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share amounts)
participate in negotiations with acquisition candidates; (viii) improperly
limited the ability of the Board of Directors to consider new offers after the
close of the 60-day market check period; (ix) improperly permitted Imperial
Credit to threaten a hostile takeover of the Company; and (x) negotiated an
inappropriate fee arrangement with Prudential Securities Incorporated.
The amended complaint further alleges that, by certain actions and inactions,
Imperial Credit prevented the Company from maximizing stockholder value, and
alleges conflicts of interest on the part of each of the defendants. The
amended complaint also alleges that the price agreed to in the merger agreement
is grossly unfair. The amended complaint purports to be brought as a class
action on behalf of a class of persons affected by the proposed merger. The
amended complaint seeks certification of a class, injunctive relief which, if
granted, would prevent the completion of the proposed merger, damages in an
unspecified amount and other relief.
On November 3, 1999, the Company's counsel received a letter from counsel for
the plaintiffs asserting plaintiff's intent to seek a temporary restraining
order, expedited discovery, and a date for a preliminary injunction hearing. No
motion for a preliminary injunction has been filed. By letter of November 10,
1999, counsel for the plaintiffs stated that the plaintiffs had decided not to
move forward with a motion for a temporary restraining order or preliminary
injunction at that time. On December 1, 1999, each of the defendants filed
demurrers to plaintiff's amended complaint, seeking to have the amended
complaint dismissed with prejudice. On February 4, 2000, the court granted
Imperial Credit's demurrer without leave to amend and dismissed the action with
prejudice against Imperial Credit and Messrs. Snavely and Villani in their
capacity as Imperial Credit directors and officers, but allowed the action to
proceed against the remaining defendants. The Company believes that the
material allegations of the complaint and the amended complaint are without
merit.
28
<PAGE>
EX-7.2 CONSENT OF KPMG LLP
To the Board of Directors of Imperial Credit Commercial Mortgage Investment
Corp.
We consent to the inclusion of our report dated February 17, 2000, with respect
to the consolidated balance sheets of Imperial Credit Commercial Mortgage
Investment Corp. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, changes in stockholders' equity and
comprehensive income, and cash flows for the years ended December 31, 1999 and
1998, and the period from July 31, 1997 (inception) through December 31, 1997,
which report appears in the Form 8-K of Imperial Credit Industries, Inc. dated
April 12, 2000.
/s/ KPMG LLP
Los Angeles, California
April 12, 2000
<PAGE>
Imperial Credit Industries, Inc. and Imperial Credit
Commercial Mortgage Investment Corp.
Pro Forma Combined Statement of Operations
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Historical
----------------------
ICII ICCMIC Adjustments Combined
--------- -------- ------------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Revenue:
Interest on loans and leases $178,229 $42,019 $(24,206)(a) $196,042
Interest on investments 25,841 10,338 (11,903)(b) 24,276
Interest on other financing activities 3,368 - 3,368
-------- ------- -------- --------
Total interest income (expense) 207,438 52,357 (35,134) 224,661
-
Interest on deposits 86,582 - 86,582
Interest on other borrowings 4,550 6,916 1,316 (c) 12,782
Interest on long term debt 30,475 11,954 (11,954)(d) 30,475
-------- ------- -------- --------
Total interest expense (income) 121,607 18,870 (10,638) 129,839
-
Net interest income (expense) 85,831 33,487 (25,471) 93,847
Provision for loan and lease losses 35,340 4,633 39,973
-------- ------- -------- --------
Net interest income (expense) after -
provision for loan and lease losses 50,491 28,854 (25,471) 53,874
-
Gain on sale of loans and leases 6,480 6,480
Asset management fees 10,054 (5,905)(e) 4,149
Investment banking and brokerage fees 27,198 27,198
Loan servicing income 6,885 6,885
Gain on sale of securities 32,742 32,742
Equity in net loss of Franchise Mortgage
Acceptance Comoany (53) (53)
Mark to market on securities and loans
held for sale (28,641) (28,641)
Real property rental income - 13,968 13,968
Other income 13,894 13,894
-------- ------- -------- --------
Total other income 68,559 13,968 (5,905) 76,622
-------- ------- -------- --------
Total revenue 119,050 42,822 (31,376) 130,496
-------- ------- -------- --------
Expenses:
Personnel expenses 50,034 50,034
Commission expense 10,307 10,307
Amortization of servicing rights 4,223 4,223
Occupancy expense 5,658 5,658
Net expenses of other real estate owned 1,386 1,411 2,797
Professional services 10,265 3,812 (2,629)(f) 11,448
Telephone and other communication 3,768 3,768
Amortization of goodwill 14,506 (8,111)(g) 6,395
Management fees 5,905 (5,905)(h) -
General and administrative expense 26,453 8,483 34,936
-------- ------- -------- --------
Operating expenses 126,600 19,611 (16,645) 129,566
-------- ------- -------- --------
Merger related expenses - - 8,397 (i) 8,397
-------- ------- -------- --------
Total expenses 126,600 19,611 (8,248) 137,963
(Loss) income from continuing operations
before income taxes, minority interest,
and extraordinary item (7,550) 23,211 (23,128) (7,467)
Income taxes (3,074) (3,211)(j) (6,285)
Minority interest in income of consolidated
subsidiaries 1,474 1,474
-------- ------- -------- --------
(Loss) income from continuing operations
before extraordinary item (5,950) 23,211 (19,917) (2,656)
Operating loss from discontinued operations
of AMN (net of $557,000 of income taxes) (899) (899)
-------- ------- -------- --------
(Loss) income before extraordinary item (6,849) 23,211 (19,917) (3,555)
Extraordinary item-gain on early
extinguishment of debt, net of income taxes 4,021 4,021
-------- ------- -------- --------
Net (loss) income $ (2,828) $23,211 $(19,917) $ 466
======== ======= ======== ========
</TABLE>
<PAGE>
Imperial Credit Industries, Inc. and
Imperial Credit Commercial Mortgage Investment Corp.
Pro Forma Combined Statement of Condition
As of December 31, 1999
<TABLE>
<CAPTION>
Historical
-----------------------
ICII ICCMIC Adjustments Combined
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash $ 33,898 $101,388 $ (30,137)(k) $ 105,149
Interest bearing deposits 248,182 32,462 (198,761)(l) 81,883
Investment in Federal Home Loan Bank stock 6,960 - 6,960
Securities held for trading, at market 160,805 - 160,805
Securities available for sale, at market 74,374 53,549 (33,904)(m) 94,019
Loans and leases held for sale 289,398 - 289,398
Loans and leases held for investment, net 1,241,232 369,391 (282,077)(n) 1,328,546
Real property, net of accumulated depreciation - 76,692 1,367 (o) 78,059
Real property held for sale - 24,694 - 24,694
Servicing rights 802 - 802
Retained interest in loan and lease securitizations 10,220 - 10,220
Accrued interest receivable 8,272 3,092 - 11,364
Premises and equipment, net 13,576 - 13,576
Other real estate owned, net 4,894 - 4,894
Goodwill 34,961 (40,555)(p) (5,594)
Other assets 36,549 3,649 1,706 (q) 41,904
Net assets of discontinued operations 37,492 - 37,492
---------- -------- --------- ----------
Total assets $2,201,615 $664,917 $(582,361) $2,284,171
========== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $1,614,758 $ - $1,614,758
Other borrowings 74,309 46,162 15,247 (r) 135,718
Borrowings under collateralized mortgage obligations - 210,716 (210,716)(s) -
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding soley
debentures of the company ("ROPES") 61,750 - 61,750
Senior Notes 185,185 - 185,185
Accrued interest payable 18,811 - 18,811
Accrued income taxes payable 16,101 (9,587)(t) 6,514
Minority interest in consolidated subsidiaries 2,684 - 2,684
Other liabilities 22,637 12,374 26,000 (u) 61,011
---------- -------- --------- ----------
Total liabilities 1,996,235 269,252 179,056 2,086,431
---------- -------- --------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, 8,000,000 shares authorized; none
issued or outstanding - - - -
Common stock, no par value. Authorized 80,000,000
shares; 33,198,661 shares issued and outstanding
at December 31, 1999 97,220 425,618 (425,618)(v) 97,220
Retained earnings 98,437 (26,594) 21,556 (w) 93,399
Shares held in deferred executive compensation plan 7,107 - 7,107
Accumulated other comprehensive income (loss) -
unrealized gain (loss) on securities available for
sale, net 2,616 (3,359) 757 (x) 14
---------- -------- --------- ----------
Total shareholders' equity 205,380 395,665 (403,305) 197,740
---------- -------- --------- ----------
Total liabilities and shareholders' equity $2,201,615 $664,917 $(582,361) $2,284,171
========== ======== ========= ==========
</TABLE>
