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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-19861
IMPERIAL CREDIT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 95-4054791
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
</TABLE>
23550 Hawthorne Boulevard, Building 1, Suite 110, Torrance, California 90505
(Address of principal executive offices) (Zip Code)
(310) 373-1704
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
Common Stock, no par value Nasdaq National Market
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sales price of its Common Stock on March 28,
2000 on the Nasdaq National Market was approximately $145,331,423.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of Common Stock outstanding as of March 28, 2000:
33,218,611
DOCUMENTS INCORPORATED BY REFERENCE (not applicable)
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<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 42
ITEM 3. LEGAL PROCEEDINGS............................................. 43
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 44
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS........................................... 45
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................... 47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 49
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.... 81
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 82
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 146
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 146
ITEM 11. EXECUTIVE COMPENSATION........................................ 148
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 155
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 156
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-
K............................................................. 159
</TABLE>
Forward-Looking Statements
Certain statements contained herein are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1955, 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. The Company's actual results could differ materially
from those anticipated in such forward-looking statements due to a variety of
factors. These factors include but are not limited to, the demand for our
products; competitive factors in the businesses in which we compete; adverse
changes in the securities markets; inflation and changes in the interest rate
environment that reduce margins or the fair value of financial instruments;
changes in national, regional or local business conditions or economic
environments; government fiscal and monetary policies; legislative or
regulatory changes that affect our business; factors inherent to the valuation
and pricing of commercial loans; other factors generally understood to affect
the value of commercial loans; and the other risks detailed in the Company's
8-K dated May 17, 1999 as filed with the Securities and Exchange Commission
(the "SEC"); periodic reports on Forms 10-Q, 8-K and 10-K and any amendments
with respect thereto filed with the SEC; and other filings made by the Company
with the SEC.
2
<PAGE>
We wish to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. We do not undertake,
and specifically disclaim any obligation, to update any forward-looking
statements to reflect occurrences or unanticipated events or circumstances
after the date of such statements.
ITEM 1. BUSINESS
General
Imperial Credit Industries, Inc. ("ICII") is a diversified commercial
lending, financial services, and investment banking holding company with
consolidated assets of $2.2 billion as of December 31, 1999. We were first
organized in 1986 and our headquarters are located in Torrance, California.
Over the course of 1999, we substantially completed our exit from non-core
operations and concentrated on our core commercial lending and investment
banking and brokerage service businesses. Each of our remaining core
businesses operate in niche segments of the financial services industry, which
include; business finance lending, multifamily and commercial lending, asset
management activities, investment banking and brokerage services.
In October 1999, we added to our commercial lending business by purchasing
a commercial finance lending business specializing in the entertainment
industry.
Our near-term focus is to expand our commercial banking and investment
banking business. We continuously monitor and review the performance of our
subsidiaries and lines of business for profitability and performance.
Business Strategy
For an explanation of our current business strategy, see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
The Company's operations are divided into several operating segments
segregated by product line. See "Imperial Credit Industries, Inc., Notes to
Consolidated Financial Statements", Note 13--Business Segments for a
description of each of our business segments.
We group our core business segments into four broad categories.
Business Finance Lending
Coast Business Credit
Imperial Warehouse Finance, Inc.
Loan Participation and Investment Group
The Lewis Horwitz Organization
Imperial Business Credit, Inc.
Multifamily and Commercial Mortgage Lending
Income Property Lending Division
Asset Management Activities
Imperial Credit Asset Management, Inc.
Imperial Credit Commercial Asset Management Corporation
Investment Banking and Brokerage Services.
Imperial Capital Group, LLC
3
<PAGE>
We also segregate certain business segments as:
Other Core Operations
Equity Interests, and
De-emphasized/Discontinued/Exited Businesses
Business Finance Lending
Coast Business Credit
General
Coast Business Credit ("CBC") is the asset based lending division of our
principal subsidiary, Southern Pacific Bank, ("SPB"), that makes revolving
lines of credit and term loans available to growth companies in manufacturing,
distribution, technology, telecommunications and retail industries. CBC is
headquartered in Los Angeles, California, and conducts its lending business
activities throughout the United States. CBC has 16 loan production offices
located in the following cities at December 31, 1999:
<TABLE>
<S> <C> <C> <C>
Atlanta Chicago Minneapolis San Francisco
Baltimore Cleveland New York City Santa Clara
Boston Irvine Phoenix Seattle
Charlotte Kansas City Portland Stamford
</TABLE>
CBC's Loan Portfolio
CBC's principal business is asset-based lending to small-to-medium-sized
businesses with annual revenues ranging from approximately $10 million to $100
million. Typically, revolving lines of credit are secured by accounts
receivable and inventory. Term loans are usually secured by real property,
equipment or other fixed assets. CBC's primary niche is the high-technology
sector which includes businesses involved in computer hardware and software,
telecommunications, internet services, industrial automation and office
equipment. These customers provide CBC with opportunities for long-term
relationships in industries with above average growth prospects.
4
<PAGE>
Set forth below is a table showing CBC's outstanding loan and commitment
balances by industry at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
------------------------------------- -------------------------------------
Outstanding % of Commitment % of Outstanding % of Commitment % of
Balance Total Balance Total Balance Total Balance Total
----------- ------ ---------- ------ ----------- ------ ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transportation & public
utilities.............. $215,665 28.83% $ 371,380 26.68% $163,262 25.78% $ 236,077 22.47%
Wholesale trade--durable
goods.................. 57,075 7.63 100,600 7.23 90,663 14.32 131,646 12.53
Retail stores........... 44,861 6.00 85,500 6.14 43,128 6.81 67,500 6.43
Electronic and
electrical equipment
manufacturing.......... 44,045 5.89 94,793 6.81 36,280 5.73 85,826 8.17
Equipment leasing....... 43,341 5.79 82,900 5.95 18,939 2.99 35,400 3.37
Fabricated metal
products............... 36,357 4.86 48,000 3.45 16,844 2.66 43,000 4.09
Computer software....... 31,318 4.18 44,000 3.16 10,509 1.66 19,000 1.81
Industrial & commercial
equipment.............. 23,133 3.09 54,867 3.94 36,057 5.69 58,017 5.52
Computer systems
design................. 22,131 2.96 43,000 3.09 12,398 1.96 22,000 2.09
Transportation
equipment.............. 22,075 2.95 26,250 1.89 11,225 1.77 15,200 1.45
Food product
manufacturing.......... 20,326 2.72 42,500 3.05 18,441 2.91 14,500 1.38
Wholesale trade--
nondurable goods....... 18,559 2.48 42,000 3.02 8,487 1.34 15,000 1.43
Health services......... 16,665 2.23 20,000 1.44 14,947 2.36 17,500 1.67
Management services..... 16,110 2.15 41,500 2.98 7,154 1.13 11,500 1.10
Other................... 136,461 18.24 294,678 21.17 144,965 22.89 278,260 26.49
-------- ------ ---------- ------ -------- ------ ---------- ------
Total................. $748,122 100.00% $1,391,968 100.00% $633,299 100.00% $1,050,426 100.00%
======== ====== ========== ====== ======== ====== ========== ======
</TABLE>
Set forth below is a summary of CBC's loan portfolio at December 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1999 1998 1997
---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Commitments.............................. $1,391,968 $1,050,426 $803,300
Outstanding loans........................ 748,122 633,299 484,800
Outstanding loans to technology
companies............................... 293,521 208,800 201,800
Outstanding unfunded commitments......... 643,846 417,127 318,500
Average outstanding balance per
customer................................ 4,310 3,700 3,400
Weighted average yield................... 13.17% 13.09% 13.88%
</TABLE>
Loan Products and Originations
CBC's loans typically have maturities of two to five years, providing
borrowers with greater flexibility to manage their borrowing needs. These
loans have an automatic renewal for an additional year at the end of the
contract term and each renewal year unless terminated by either party (usually
requiring 90 days written notice prior to the end of the term). Loans are
categorized based on the type of collateral securing the loan.
Accounts Receivable Loans. These loans are revolving lines of credit that
are secured principally by accounts receivable from their customers. Each
borrower's customers normally make their payments to a blocked account,
lockbox or directly to CBC. CBC deposits the payments daily and applies the
funds to the borrower's loan balances. CBC typically lends up to 80% of the
principal balance of accounts receivable that meet its eligibility
requirements. However, advance rates vary depending on the borrower's
historical performance with CBC. CBC's internal auditors conduct quarterly
examinations of the collateral and financial condition of each borrower.
5
<PAGE>
Inventory Loans. These loans are typically revolving lines of credit
secured by eligible inventory that is restricted to raw materials and finished
goods. Inventory loans are generally made in conjunction with accounts
receivable loans to qualifying borrowers. Borrowers are required to provide
CBC with monthly inventory designations and these reports are compared to each
borrower's financial statements for accuracy. CBC typically advances loan
proceeds in amounts ranging from 25% to 75% of the eligible inventory value,
with the percentage advanced determined based on the characteristics of the
inventory and the expected orderly liquidation of the inventory based on an
appraisal by a qualified appraisal firm with experience in that industry.
Term Loans. CBC also originates term loans secured by real property,
equipment or other fixed assets. These loans typically have three-to-five year
amortization periods, but are due and payable upon termination of the master
loan and security agreement.
Participation Loans. Participation loans consist of both term loans and
revolving lines of credit which CBC and other lenders (banks or other asset-
based lenders) jointly lend to borrowers under one loan agreement.
Set forth below is a table showing the principal amount of CBC's
outstanding loans and the percentage of CBC's portfolio of each loan type at
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Outstanding % of Outstanding % of Outstanding % of
Balance Total Balance Total Balance Total
----------- ----- ----------- ----- ----------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable
loans.................. $411.2 55.0 % $520.4 82.2 % $344.2 71.0%
Inventory loans......... 61.4 8.2 94.5 14.9 55.1 11.4
Term loans.............. 162.9 21.8 -- -- -- --
Participation loans
purchased.............. 152.2 20.3 50.0 7.9 85.5 17.6
Participation loans
sold................... (39.6) (5.3) (31.6) (5.0) -- --
------ ----- ------ ----- ------ -----
Total................. $748.1 100.0 % $633.3 100.0 % $484.8 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Underwriting
Before a credit line proposal letter is issued and a line of credit is
established, CBC conducts a due diligence review of the prospective client
that includes all or part of the following:
. An audit of the company's records which include verification of its
accounts receivable and inventory, along with reviews of its financial
statements, management information systems, accounts payable and
reporting capability,
. Independent appraisals of inventory, equipment or real estate,
. Background checks on the principals and investors of the company,
. Extensive research on the prospective client, its industry, suppliers,
competitors and products,
. Detailed analysis of the prospective client's audited financial
statements including ratio analysis, trend analysis, comparison to budget
projections, interim results and multi-year analysis,
. Uniform Commercial Code searches and filings, and
. Legal documentation review by outside attorneys.
6
<PAGE>
For high technology borrowers, particular emphasis is placed on
understanding the underlying value of the technology itself, including the
value of the borrower's intangible assets. When necessary, filings at the
patent and trademark office are made on copyrights, patents, trade names or
other intangibles. Outside experts are sometimes consulted to assess the
viability and value of intangibles.
The underwriting process begins after a proposal letter is issued. At that
time, CBC requires the prospective borrower to provide a deposit for the due
diligence and audit. If the prospective borrower is providing inventory,
equipment or real estate as collateral for the loan, then CBC will order
appraisals for the various types of collateral. CBC's auditing staff conducts
an audit generally consisting of a due diligence review of the prospective
borrower's accounting and financial records, including a statistical review of
accounts receivable and charge-off history. CBC auditors then submit their
reports and work papers to CBC's credit committee along with the other due
diligence being conducted by the underwriting department and appraisals by an
outside appraisal firm.
When CBC decides to approve a credit line, an appropriate credit limit is
established under the revolving credit line. CBC analyzes the prospective
borrower's customer base to assure compliance with CBC's policies. These
policies generally limit CBC's overall exposure to borrowers, especially with
respect to privately held or non-investment grade borrowers. When deemed
necessary for credit approval, CBC may obtain guarantees or other types of
security from a client or its affiliates and may also obtain subordination and
intercreditor agreements from the borrower's other lenders. Although CBC's
underwriting guidelines specify a review of the factors described above, CBC
does not rely on a rigid scoring system to approve prospective borrowers.
Decisions to enter into a relationship with a prospective client are made on a
case-by-case basis.
Credit Monitoring and Controls
An assigned CBC account executive monitors each borrower's credit,
collateral and advances. All account executives are required to meet with each
of their assigned borrowers at least quarterly to:
. monitor the borrower's business,
. physically inspect the borrower's facilities and equipment, and
. discuss any potential problems or opportunities the borrower may be
experiencing.
CBC monitors borrowers' accounts receivable using three reports. The first
is an accounts receivable aging analysis report prepared monthly by the loan
processor and reviewed by the account executive. This report includes details
pertaining to account concentrations and aging trends. The second is an
accounts receivable activity summary prepared weekly by the loan processor and
reviewed by the account executive, summarizing borrowings, repayments and
pledged collateral. The third is a daily report prepared by the borrower and
reviewed by the account executive to determine credit availability for a
particular day. If liquidation is required for a borrower to repay an
outstanding loan, then CBC attempts to effect a consensual possession of the
collateral property and joint collection of accounts receivable. In certain
instances, court action may be required to ensure collection of receivables
and to obtain possession of pledged assets.
Pricing and Funding
CBC typically charges its customers prime plus 1% to 3% (exclusive of loan
fees) on the outstanding balance of their loans depending upon the credit
quality of the borrower. In addition, CBC attempts to be flexible in the
structuring of its revolving credit lines and to provide prompt service in
order to gain an advantage over its competitors. When competing against more
traditional lenders, CBC competes less on price and more on flexibility and
speed of funding. CBC strives to fund its initial loan advance within three
weeks of receiving the required information, and future advances generally by
the next business day after receiving required documentation. CBC also charges
fees for prepayments, line of credit facilities, loan originations and
renewals, and may charge other special fees.
7
<PAGE>
Asset Quality
The amounts of non-performing assets attributable to CBC's business at
December 31, 1999, 1998 and 1997 were $22.2 million, $1.1 million and $0
million, respectively. The amount of net charge-offs relating to CBC's loans
for 1999, 1998 and 1997 were $17.4 million, $67,000 and $295,000,
respectively. The increase in CBC's non-accrual loans and charge-offs for the
year ended December 31, 1999 resulted from recent bank regulatory guidance
that prevents, among other things, CBC from considering the liquidation value
of certain intangible assets of its customers in determining a loan's accrual
status or, if necessary, the required charge-off amount. The effect of this
guidance resulted in CBC changing its charge-off policy in the second quarter
of 1999, and charging off gross amounts of outstanding problem loans as
opposed to CBC's previous practice of reserving for and, if necessary,
ultimately charging off the net deficiency amount of problem loans.
Marketing
CBC obtains business through referrals from:
<TABLE>
<S> <C> <C>
. banks . existing borrowers . investment banks
. venture capitalists . other finance companies . mezzanine funds
. accounting firms . independent brokers
. management . other affiliates of our company
consultants
</TABLE>
CBC's marketing officers call on CBC's referral sources to identify and
receive introductions to potential clients and to also identify potential
clients from database searches. CBC pays its marketing personnel competitive
base salaries and commissions based on funded transactions. Commissions can be
a significant portion of the total compensation paid to CBC's marketing
personnel. CBC believes that this will motivate and reward the creation of new
business and the retention of existing business. CBC's marketing personnel do
not have credit decision authority. CBC's marketing efforts also include in-
house telemarketing, magazine and newspaper advertising, attendance at and
sponsorship of seminars and trade shows, banner ads and internet advertising.
Imperial Warehouse Finance, Inc.
General
Imperial Warehouse Finance, Inc. ("IWF") is a wholly owned subsidiary of
SPB with its primary business being residential mortgage warehouse lending
provided under short-term revolving credit agreements to mostly small to
medium sized mortgage bankers on a national basis. SPB acquired the assets of
IWF in October 1997. During 1999 IWF relocated to Torrance, California. Prior
to the relocation, IWF conducted its lending activities from Voorhees, New
Jersey, although it has customer relationships nationwide. During 1999 and
1998, IWF's average outstanding loan commitments were $357.7 million and
$352.6 million, respectively. IWF's mortgage warehouse lending provides short-
term interim funding to finance residential mortgages originated by mortgage
bankers until the mortgages are sold in the secondary market. The warehouse
funding allows the mortgage bankers to accumulate and pool the loans until
resale.
IWF's Loan Portfolio
Typically, IWF, through SPB, serves as the sole funding source for its
mortgage warehouse lending customers. IWF has entered into a participation
agreement with SPB pursuant to which SPB funds 100% of IWF's warehouse loans
to brokers.
IWF generates revenues from fees and net interest income on its loan
portfolio based on the amount of warehouse loan advances extended and
transaction fees from the mortgage bankers for each loan advance processed.
Mortgage bankers pay interest on funds drawn based on the prime rate plus a
percentage. The transaction fees are determined pursuant to an established fee
schedule.
8
<PAGE>
The following table sets forth certain information regarding IWF's
warehouse lines at December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
At December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Commitments.................................... $300,415 $401,500 $247,100
Outstanding warehouse lines.................... 78,068 181,001 122,488
Outstanding unfunded commitments............... 222,347 220,499 124,612
Average outstanding balance per customer....... 940 1,602 1,655
Weighted average yield......................... 8.28% 9.94% 10.27%
</TABLE>
IWF's outstanding balances to customers by geographic location were as
follows at December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1999 1998
-------------------- ---------------------
% of Loans % of Loans
Amount in Portfolio Amount in Portfolio
------- ------------ -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
New York.......................... $24,720 31.66% $ 41,177 22.75%
Maryland.......................... 22,188 28.42 26,865 14.84
California........................ 6,140 7.86 241 0.13
Michigan.......................... 4,780 6.12 40,854 22.57
Florida........................... 3,369 4.32 25,844 14.28
New Jersey........................ 2,915 3.73 14,700 8.12
Indiana........................... 128 0.16 10,757 5.94
Other............................. 13,828 17.73 20,563 11.37
------- ------ -------- ------
Total........................... $78,068 100.00% $181,001 100.00%
======= ====== ======== ======
</TABLE>
During 1999, we made the decision to relocate IWF's operations from New
Jersey to Torrance, California. As a result of the relocation, none of the
employees of IWF made the move from New Jersey to California. We believe that
as a result of the personal contacts that IWF's former employees had with the
existing client base, a substantial number of customers have paid off their
warehouse lines and moved their relationships to the new employers of our
former IWF employees. Additionally, during the fourth quarter of 1999, we
implemented stricter underwriting guidelines and changed our marketing focus
to the Western United States. We believe that these factors are the primary
cause of the overall decrease in the outstanding balance of IWF's warehouse
lines. Recently, we retained a new director of marketing which has resulted in
an increase in applications for new warehouse lines.
Loan Products and Originations
IWF is a full recourse lender whose advances on approved warehouse lines of
credit are collateralized by individual mortgages. Before providing an advance
on the warehouse line, IWF's policy requires that the pledged loan have in
place a purchase commitment from an approved investor. To limit credit risk,
IWF's customers must meet and maintain minimum levels of net worth and
liquidity, and in certain cases, personal guarantees are required of the
principals.
9
<PAGE>
Underwriting
During the fourth quarter of 1999, we initiated changes to our underwriting
policies. In general, these new policies require borrowers to maintain a
higher net worth and lower overall leverage ratios, among other things.
Warehouse loans are underwritten in accordance with both IWF's and SPB's
policies and procedures. Prospective loan originators prepare a loan
application that requires detailed information on the originator's business.
After evaluating the application and independently verifying the applicant's
credit history, if the originator appears to be a likely candidate for
approval, IWF personnel will visit the originator and review, among other
things, its:
<TABLE>
<S> <C>
. Business organization . Risk management
. Management . Loan volume and historical delinquency rate
. Reputation . Financial condition
. Quality control . Contingent obligations
. Funding sources . Regulatory compliance
</TABLE>
If the originator meets the established criteria, its application is
submitted for approval and the mortgage banker enters into a credit facility
agreement with IWF. The credit facilities set forth the maximum percentage of
any single mortgage loan that will be advanced, the fees received for each
advance, the interest rate and the terms of repayment. Warehousing lines are
generally renewable annually if the broker continues to meet all applicable
requirements.
All funds advanced to the mortgage bankers are secured by the underlying
mortgages including assignment of the promissory note, deed of trust and all
instruments and documents comprising the loan documentation on each loan
funded by IWF, and may also be secured by a personal guaranty by the
principals of the mortgage banker. The loans are normally sold no more than 45
days after origination to third party private investors.
Credit Monitoring and Controls
IWF attempts to minimize the risks associated with making warehouse loans
by, among other things:
. generally requiring that each pledged loan be committed for purchase by a
third party investor,
. directly receiving payment from secondary market investors when the loans
are sold and remitting any balance to the borrower after deducting the
amount borrowed for that particular advance,
. visiting the originator's office from time to time to review its
financial and other records, and
. monitoring each originator by periodically reviewing each originator's
financial statements, auditor's report to the originator's board of
directors, loan production, delinquency, and commitment reports.
Pricing and Funding
IWF typically charges its customers prime plus 0.75%-2% (exclusive of loan
fees) on the outstanding balance under their warehouse lines. Loan fees range
between $50 and $140 dollars per loan placed on the line.
Asset Quality
The amount of non-performing assets attributable to IWF's business at
December 31, 1999, 1998 and 1997 were $7.8 million, $4.1 million, and $0
respectively. We believe that as a result of our new underwriting policies and
stricter collection policies that IWF's non-performing assets will increase in
the short term. The amount of net charge-offs relating to IWF's loans during
the year ended December 31, 1999 was $1.6 million. IWF experienced no charge-
offs for the years ended December 31, 1998 and 1997.
Marketing
IWF expects to shift its marketing focus from the Eastern United States to
the Western United States. IWF markets its business by attending industry
tradeshows, and through advertising in such publications as the Mortgage
Banker, the National Mortgage Professional and the National Mortgage News.
10
<PAGE>
Loan Participation and Investment Group
General
SPB formed the Loan Participation and Investment Group ("LPIG") in
September 1995 to invest in and purchase senior secured debt of other
companies (referred to as a "participation") offered by commercial banks in
the secondary market. The principal types of loans acquired by LPIG are
senior-secured bank loans, in the form of revolving lines of credit and long-
term loans or letters of credit. As a part of its business, LPIG invests in
loan participations through both on and off balance sheet financing
arrangements. The on balance sheet investments are funded by the FDIC insured
deposits of SPB, while LPIG's off balance sheet financing is primarily
conducted through various trust and total return swap instruments.
LPIG's Loan Portfolio
The following table sets forth certain information regarding LPIG's
commitments and outstanding balances at December 31, 1999, 1998 and 1997 as
follows:
<TABLE>
<CAPTION>
At December 31,
----------------------------
(Dollars in thousands)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Commitments.................................. $459,500 $523,300 $483,700
Loans outstanding............................ 217,000 222,100 196,400
Average yield................................ 7.55% 8.21% 8.72%
</TABLE>
Underwriting/Credit Monitoring and Controls
By purchasing loan participations, LPIG builds its loan portfolio without
loan origination costs or ongoing loan servicing costs and with minimal
administrative costs. LPIG attempts to minimize the risk of investing in loan
participations by performing a comprehensive analysis of a borrower's
creditworthiness including analysis of operating performance, cash flow,
capital structure, collateral, customers, suppliers, industry and competition.
Once a loan is booked it is monitored on at least a quarterly basis for
performance against projections and compliance with loan covenants. Risk is
managed through diversification of the LPIG portfolio by number of borrowers,
size of loans, industry and debt ratings.
11
<PAGE>
Set forth below is a table showing LPIG's outstanding loan and commitment
balances by industry at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
------------------------------------- -------------------------------------
Outstanding % of Commitment % of Outstanding % of Commitment % of
Balance Total Balance Total Balance Total Balance Total
----------- ------ ---------- ------ ----------- ------ ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing........... 26,469 12.20% 63,189 13.75% 12,407 5.59% 38,778 7.41%
Television
broadcasting........... 13,773 6.35 44,483 9.68 27,796 12.51 45,000 8.60
Entertainment........... 36,332 16.74 43,453 9.46 17,632 7.94 40,308 7.70
Packaging............... 19,432 8.96 31,545 6.86 14,500 6.53 49,838 9.52
Hotels.................. 18,135 8.36 28,774 6.26 26,022 11.72 30,523 5.83
Automobile rentals ..... -- -- 25,000 5.44 1,364 0.61 25,000 4.78
Telecommunications...... 20,238 9.33 25,000 5.44 2,701 1.22 28,165 5.38
Mining.................. 7,000 3.23 23,000 5.00 -- -- 16,000 3.06
Food processing ........ 11,216 5.17 18,697 4.07 10,593 4.77 19,710 3.77
Food distribution....... -- -- -- -- -- -- 16,800 3.21
Waste disposal
services............... 8,433 3.89 18,643 4.06 2,821 1.27 14,326 2.74
Party goods
distribution........... 3,780 1.74 14,940 3.25 2,280 1.03 12,000 2.29
Office products......... 6,624 3.05 14,725 3.20 6,545 2.95 25,000 4.78
Defense................. 4,131 1.90 14,421 3.14 4,876 2.19 15,165 2.90
Air carrier............. 9,106 4.20 13,400 2.92 18,400 8.28 18,400 3.51
Park management......... 7,636 3.52 13,091 2.85 9,818 4.42 14,318 2.73
Rail transportation..... 12,360 5.70 12,600 2.74 12,306 5.54 12,600 2.41
Chemicals............... -- -- 10,557 2.30 10,828 4.87 18,145 3.47
Healthcare.............. 9,687 4.46 9,835 2.14 8,256 3.72 10,595 2.02
Automobile parts........ -- -- 9,000 1.96 10,172 4.58 25,050 4.79
Electronics............. -- -- 7,143 1.55 -- -- -- --
Equipment rentals....... -- -- 6,750 1.47 -- -- -- --
Garment................. -- -- 5,400 1.18 2,027 0.91 5,400 1.03
Paper................... 2,323 1.07 3,030 0.66 1,616 0.73 3,030 0.58
Radio broadcasting...... -- -- -- -- 3,447 1.55 15,000 2.87
Amusement parks......... -- -- -- -- 3,545 1.60 9,234 1.76
Supermarkets............ -- -- -- -- 4,850 2.18 4,850 0.93
Restaurants............. -- -- -- -- 930 0.42 930 0.18
Collection services .... -- -- -- -- 6,374 2.87 9,145 1.75
Ecological.............. 286 0.13 2,857 0.62 -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------
Total.................. $216,961 100.00% $459,533 100.00% $222,106 100.00% $523,310 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
Pricing and Funding
LPIG loans are typically priced based on the 6 month LIBOR rate plus a
spread on the outstanding balance of loans.
Asset Quality
At December 31, 1999, 1998, and 1997, LPIG had no outstanding balance of
non-performing assets. During the year ended December 31, 1999, LPIG
experienced a $3.9 million charge-off related to one loan. LPIG did not
experience any net loan charge-offs during 1998 and 1997.
Loan Products, Origination and Marketing
LPIG invests in senior secured commercial debt through participation in
nationally syndicated bank credits by participating with the primary
syndication group and by purchasing participations in the secondary market.
12
<PAGE>
Lewis Horwitz Organization ("LHO")
General
We acquired LHO in October 1999. See "Management's Discussion and
Analysis--The Lewis Horwitz Organization" for more information regarding the
acquisition.
LHO is an internationally recognized commercial finance lender engaged in
providing financing for independent motion picture and television production.
Typically, LHO lends to independent producers of film and television on a
senior secured basis, basing its credit decisions on the creditworthiness and
reputation of distributors and sales agents who have contracted to distribute
the films.
Loan Products and Originations
LHO provides loans (with a typical term of 12 to 18 months) and letters of
credit for the production of motion pictures and television shows or series
that have a predictable market worldwide, and therefore, a predictable level
of revenue arising from licensing of the distribution rights throughout the
world. LHO is a widely-recognized leader in film financing with over 30 years
of experience. LHO's lending officers have a combined total of over 100 years
in financing experience. LHO believes it has a competitive advantage due to
its extensive worldwide contacts among sales agents, distributors and
independent producers in an industry where name recognition and personal
contacts are crucial to success. LHO's experience has allowed it to rapidly
adapt to changing industry standards in order to maintain its competitive
position.
LHO lends to "independent" producers of film and television, many of which
are located in California. LHO, however, has borrowing clients based all over
the world. LHO considers "independent" producers to be those producers that do
not have major studio distribution outlets for their product. Large film and
television studios generally maintain their own distribution outlets and
finance their projects with internally generated financing. In addition to
funding production loans against a number of distribution contracts, LHO has
pioneered a conservative valuation of selected unsold rights to cover a modest
portion of the production budget (gap). Several risks are inherent in the type
of lending conducted by LHO, including the non-completion of the production,
failure to perform on the part of the distributors and political and currency
risks, each of which are mitigated by various means. For example, LHO requires
an insurance policy (called a completion bond) to insure the project will be
completed on budget. Distributor risks are minimized by adhering to strict
credit limits and periodic reviews. Currency risks are mitigated by currency
hedge contracts.
Underwriting
LHO's lending officers review the quality of the distributors and their
contracts, the budget, the schedule of advances, and valuation of all
distribution rights when considering a new lending opportunity. After closing,
each requested advance is approved by the lending officer and the bonding
company on a weekly basis to ensure that LHO is not advancing ahead of an
agreed-upon cash flow schedule. The assigned lending officer also periodically
speaks with the producer, bonding company and sales agent regarding the
progress of the film. LHO's lending officers perform extensive follow-up on
every loan to ensure that any unsold distribution rights are sold (i.e.,
distribution contracts are generated by the sales agent) prior to and after
the delivery of the film or television production. Generally, a lending
officer will speak to the sales agent at least monthly regarding the agent's
progress on sales of distribution rights. The loan documentation grants LHO
the right to impose certain penalties on the borrower and exercise certain
other rights, including replacing the sales agent, if sales are not
consummated within the appropriate time. Loans are repaid principally from
revenue received from distribution contracts. In many instances, the
distribution contracts provide for multiple payments payable at certain
milestones (such as execution of contract, commencement of principal
photography or completion of principal photography). The maturity date of the
loan is generally six to nine months after completion of the production in
order to permit all payments from distributors to be received within the
maturity of the loan. Delivery of the
13
<PAGE>
completed production is made to the various distributors only upon or after
their minimum guarantees have been paid in full.
From the acquisition date of October 1, 1999 to December 31, 1999, LHO
originated $23.2 million of new film and television production commitments.
Pricing and Funding
LHO typically charges its customers an interest rate ranging from the Prime
Rate to Prime plus 2.00% (exclusive of loan fees) on the outstanding balance
of their loans. Loan fees typically range from, 1.00% to 2.50% with an
additional fee up to 7.0% depending on the level of gap. See Item 7.
"Management's Discussion and Analysis--The Lewis Horwitz Organization" for
more information regarding the acquisition.
Asset Quality
The amount of non-accrual loans attributable to the LHO division at
December 31, 1999 were $8.2 million. All of these loans were on non-accrual
status at the time of their acquisition.
Imperial Business Credit, Inc.
General
Imperial Business Credit, Inc. ("IBC") is a wholly owned subsidiary with
corporate headquarters located in San Diego, California. IBC carries out its
business equipment leasing operations from both its headquarters and its sales
offices in Denver, Colorado and Atlanta, Georgia.
IBC's Lease Portfolio
The focus of IBC's lease activities has historically been equipment lease
financing to small and medium- sized businesses. During the quarter ended
December 31, 1999, defaults on leases originated through IBC's broker and
small-ticket lease programs increased significantly. The increase in defaults
caused us to reassess and increase the projected level of lease losses related
to IBC's securitized leases. The reassessment resulted in a $7.7 million
write-down of the carrying balance of retained interest in lease
securitizations at IBC. As a result of the reassessment of the level of
expected losses from IBC's small ticket and broker originated business, we
decided to significantly curtail IBC's small ticket lease originations from
brokers. We closed IBC's broker business in its San Diego and Irvine offices,
and discontinued relationships with over 200 brokers in IBC's Denver office.
We intend to focus IBC's future lease originations on middle market leasing
programs.
Generally, IBC funds the origination or acquisition of its leases through
its short term warehouse credit facility with SPB and subsequently sells its
receivables in the private asset securities market through its securitization
program. The following table sets forth the lease activity for IBC for the
years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
At December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Leases funded.................................... $125,202 $114,318 $151,412
Lease securitizations............................ 132,359 117,724 130,335
Leases serviced for others....................... 243,463 242,624 246,996
</TABLE>
Lease Finance Operations
IBC specializes in originating, acquiring, selling, securitizing and
servicing non-cancellable, full-payout equipment leases for small and medium-
sized business in various industries throughout the United States. IBC has
historically focused on small-ticket leases with contract amounts between
$5,000 and $75,000. IBC derives
14
<PAGE>
its earnings from gains recognized on the securitization or sale of leases,
from the spread on portfolios held for investment and loans held for sale
during the warehouse period and from servicing and related ancillary fees on
its servicing portfolio. In each securitization, IBC receives advances based
on a percentage which is less than the aggregate present value of cash flows
from an undifferentiated pool of leases, effectively overcollaterizing lease -
backed notes or certificates. Over the life of the lease pool securitized, IBC
is eligible to receive the excess cash flow resulting from the difference
between the lease payments received and the payment of (i) principal and
interest to investors in lease-backed notes or certificates and (ii) backup
servicing and trustee fees and other securitization expenses.
In consideration for servicing the leases in the securitized portfolios,
IBC receives a servicing fee of 1.15% (IBC received actual servicing fees of
1.225% through November 14, 1999) of the aggregate contract balances
outstanding and, in addition, is entitled to receive all late fees and other
miscellaneous fees related to the serviced portfolio.
Lease Products and Originations
IBC has historically emphasized full payout leases with terms of 24 to 60
months. Generally, these leases are categorized as direct finance leases.
IBC uses a standard, non-cancellable, full-payment finance lease. The
substantial majority of the leases originated by IBC provides that the lessee
may purchase the equipment for $1.00 at the expiration of the lease, with the
remainder of the leases calling for either a mandatory 10% firm price buy-out
or an optional fair market value buy-out. IBC records a maximum residual value
of 10% of the original equipment cost of leases other than those leases with a
$1.00 buy-out.
The following table sets forth IBC's lease originations by equipment type
for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997
---------------------------------- ---------------------------------- ----------------------------------
Number Principal Number Principal Number Principal
Of Leases Amount % of Total of Leases Amount % of Total of Leases Amount % of Total
Originated Originated Originations Originated Originated Originations Originated Originated Originations
---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Computers........ 910 $ 19,016 15.2% 1,130 $ 22,990 20.1% 1,981 $ 39,294 26.0%
Automotive....... 1,465 16,092 12.9 1,574 17,474 15.3 1,843 15,879 10.5
Furniture and
fixtures........ 778 16,778 13.4 522 12,232 10.7 984 18,407 12.2
Heavy equipment.. 549 12,829 10.2 524 10,775 9.4 430 9,449 6.2
Restaurant....... 770 11,762 9.4 864 10,074 8.8 1,047 13,072 8.6
Manufacturing/Machine
Work............ 323 8,226 6.6 178 5,174 4.5 441 12,003 7.9
Health/Sports
equipment....... 104 3,131 2.5 117 3,719 3.3 152 4,005 2.6
Print/Typeset
equipment....... 89 2,403 1.9 107 2,337 2.0 136 3,418 2.3
Dry
cleaning/Washing.. 32 875 0.7 34 1,235 1.1 102 2,385 1.6
Clothing
manufacture..... 41 1,533 1.2 10 520 0.5 38 1,451 1.0
Radio and
television
Production
equipment....... 896 7,756 6.2 527 7,277 6.4 374 7,883 5.2
Other............ 1,234 24,801 19.8 1,092 20,511 17.9 1,251 24,166 15.9
----- -------- ----- ----- -------- ----- ----- -------- -----
Total........... 7,191 $125,202 100.0% 6,679 $114,318 100.0% 8,779 $151,412 100.0%
===== ======== ===== ===== ======== ===== ===== ======== =====
</TABLE>
Underwriting
IBC carefully screens its origination sources by checking personal and
company financial and credit information, and verifying the reputations of
these sources in the industry. Broker and certain vendor originators are
compensated by IBC on a commission basis. Origination sources retain liability
for leases only insofar as there is any fraud or misrepresentation in the
applications or documentation. Because each of the lease originators is an
independent contractor, IBC cannot require its lease originators to direct
lease funding opportunities to IBC.
15
<PAGE>
Upon receipt of an application, IBC begins an investigation of the
creditworthiness of the applicant. Based upon management's experience, IBC has
developed credit underwriting policies and procedures intended to select
creditworthy equipment lessees. IBC credit underwriting procedures are based
upon the use of, among other things, pre-screened broker referrals,
standardized lease application documents, credit investigations, and in
certain transactions, tax returns, financial statements and other relevant
credit information concerning the lessee. IBC focuses on the time the business
has been owned and operated, type of business and the applicant's credit
requirements.
Once a lease has been approved, a standardized lease agreement and other
documents are prepared. Lease approvals are applicable for 90 days and with
quoted rates for 60 days. When the equipment is shipped and installed, IBC
verifies that the lessee has received and accepted the equipment before paying
the vendor's invoice. In general, IBC makes payments to vendors within one day
of receipt of the lessee's acceptance of equipment.
Credit Monitoring and Controls
IBC services all leases that it originated or purchased. IBC's servicing
activities, with respect to both leases retained by IBC or leases securitized
or sold to third parties, consist of:
. collecting, accounting for and posting all payments received
. responding to lessee inquiries
. taking all necessary action to maintain the security interest granted in
the leased equipment
. investigating delinquencies and taking appropriate action
. communicating with the lessee to obtain timely payments
. repossessing and reselling the collateral when necessary and
. generally monitoring each lease
IBC believes that its ability to monitor lessee performance and collect
payments is primarily a function of its collection and support systems. IBC's
customer service and collection staff are centralized in its San Diego,
California office. IBC's collections policy is designed to identify payment
problems sufficiently early to permit IBC to quickly address delinquencies
and, when necessary, to act to preserve equity in the equipment leased.
Collection procedures are intended to commence immediately upon payments
becoming 11 days past due.
Pricing
IBC typically charges its customers a fixed rate of 10.5% to 17% on the
original equipment cost financed. We believe IBC's lease pricing is
competitive.
16
<PAGE>
Asset Quality
The following table sets forth the amount of on balance sheet non-
performing assets attributable to IBC's leasing operations at December 31,
1999, 1998 and 1997.
<TABLE>
<CAPTION>
At December 31,
------------------------
1999 1998 1997
------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual leases.................................. $ 77 $ 669 $ 981
Other assets owned................................. 643 702 4,437
------- ------ -------
Total NPA's........................................ 720 1,371 5,418
======= ====== =======
Total leases and other assets owned................ $13,859 $8,115 $21,015
Total NPA's as a percentage of leases and other
assets owned...................................... 5.2% 16.9% 25.8%
</TABLE>
The following table sets forth the amount and delinquency status for IBC's
lease servicing portfolio at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(Dollars in thousands)
Amount % of total Amount % of total Amount % of total
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Current......... $235,884 96.9% $233,535 96.3% $238,380 96.5%
30-60 days...... 2,925 1.2 3,534 1.5 4,463 1.8
60-90 days...... 1,508 0.6 2,037 0.8 1,747 0.7
90+ days........ 3,146 1.3 3,519 1.4 2,407 1.0
-------- ----- -------- ----- -------- -----
Total........... $243,463 100.0% $242,625 100.0% $246,997 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Marketing and Origination Network
IBC originates new lease contracts primarily from vendors and brokers. Each
lease originator has been reviewed and approved by IBC. From its offices in
Colorado and Georgia. IBC employs 13 sales representatives to originate lease
contracts from approximately 225 vendors and 100 brokers.
The small ticket broker/lessor business is processed primarily through the
Denver marketing unit. The vendor referral originated business is generated
primarily by the Atlanta marketing unit.
Multifamily and Commercial Mortgage Lending
We conduct our commercial mortgage lending operations through the Income
Property Lending Division of SPB.
Income Property Lending Division
General
The Income Property Lending Division ("IPL") of SPB was formed in February
1994 to expand our apartment and commercial property lending business. As of
December 31, 1999, IPL had 12 loan origination offices in California, Oregon,
Colorado, Texas, Arizona, Illinois, Massachusetts and Florida.
17
<PAGE>
Loan Portfolio
The focus of IPL's lending activities is the small loan market for 4 to 20
unit multi-family apartments and commercial buildings.
The following table sets forth the loan activity for IPL for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
At December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans funded..................................... $339,666 $366,074 $295,896
Average loan size................................ 442 394 390
Loan securitizations............................. -- -- 203,100
Whole loan sales................................. 283,674 304,169 196,800
Loans outstanding................................ 254,140 145,456 59,373
Loans serviced for others........................ 25,110 759,247 665,598
</TABLE>
Loan Products and Originations
IPL generally seeks to make 70% of its loans secured by apartment buildings
and 30% of its loans secured by commercial properties. Most of IPL's business
is generated through in-house loan representatives who market the loans
directly to mortgage brokers and borrowers. IPL also uses direct mailing,
referrals from brokers and real estate developers. Most of IPL's loans have
been secured by properties in California. Margins varied over the 6-month LIBOR
index ranging from 2.75% to 5.0% depending on product type, property location
and credit history of the borrower. IPL's loan programs include 30-year
adjustable rate loans tied to the 6-month LIBOR, 1-year Treasury, or Bank of
America prime indexes. IPL also originates fixed rate loans which accounted for
approximately 42% and 67% of IPL's loan production in 1999 and 1998. During
1999, 50.3% of IPL's total loan originations were secured by property located
in California. During 1998, 45.0% of IPL's total loan originations were secured
by property located in California. Historically, IPL has sold the majority of
its loan production to outside purchasers. Beginning in January 2000, we intend
to retain IPL's multi-family loans, which qualify for favorable regulatory
capital treatment, while continuing to sell IPL's commercial loans in the
secondary market.
Substantially all of IPL's loans contain prepayment restrictions. Prepayment
provisions included in fixed rate loan documents provide for a prepayment fee
equal to a percentage of the unpaid loan balance. Such restrictions may
prohibit prepayments in whole or in part during a specified period of time
and/or require the payment of a prepayment fee in connection with the loan's
prepayment. Such prepayment restrictions can, but do not necessarily, provide a
deterrent to prepayments.
IPL may from time to time originate loans with a balloon payment due at
maturity. The ability of a borrower to pay such amount will normally depend on
its ability to fully refinance the loan or sell the related property at a price
sufficient to permit the borrower to make balloon payments.
Underwriting
IPL generally uses underwriting criteria that require a maximum loan-to-
value ratio of 70% and minimum debt coverage ratio of 1.2x on all loans. Loan
originations not following this criteria may be funded based on other
mitigating factors such as downpayment size, strength of borrower, etc. With
respect to apartment loans, IPL uses standard government agency documentation
and approved independent appraisers. IPL's underwriting is intended to assess
the economic value of the mortgaged property and the financial capabilities,
credit standing and managerial ability of the borrower. Appraisals and field
inspections, performed by SPB approved appraisers and certified inspectors, and
title insurance are required for each loan. With respect to the loans secured
by commercial properties, IPL's policies typically require that usage comply
with local zoning and use ordinances and the use of the commercial space is
compatible with the property and neighborhood. The property must have a stable
occupancy history, be located in a good market and have adequate parking. IPL
reviews the state of
18
<PAGE>
repairs of the property, whether there are any unacceptable covenants, if the
property is built to code, and any environmental hazards. IPL also looks at
the borrower's financial statements to determine the borrower's equity in the
property. IPL analyzes whether the borrower will be able to meet all of the
mortgaged property's loan obligations and if the borrower holds other property
and how those other properties are performing. IPL also looks at the
borrower's income as a possible source of repayment for the loan.
Pricing
IPL establishes loan pricing at least once every business day based on
prevailing interest rates and general market conditions. The standard pricing
is based on factors such as the anticipated price IPL would receive upon sale
or securitization of the loan, the anticipated interest spread realized during
the period of accumulating loans, the targeted profit margin and the
anticipated costs associated with sale or securitization.
Credit Monitoring and Controls
SPB services all loans held for investment or available for sale. These
servicing activities consist of:
<TABLE>
<S> <C>
. collecting, accounting for and . communicating with the borrowers to
posting all payments received, obtain timely payments,
. responding to inquires, . repossessing and reselling the
collateral when necessary, and
. investigating delinquencies and . generally monitoring each loan.
taking appropriate action,
</TABLE>
Asset Quality
The following table sets forth the amount of non-performing assets
attributable to IPL's operations at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At December 31,
---------------------------
1999 1998 1997
-------- -------- -------
(Dollars In thousands)
<S> <C> <C> <C>
Nonaccrual loans........ $ 237 $ 992 $ 497
OREO.................... 222 197 465
-------- -------- -------
Total NPA's............. $ 459 $ 1,189 $ 962
======== ======== =======
Total loans and OREO.... $254,362 $145,653 $59,838
======== ======== =======
Total NPA's as a
percentage of loans and
OREO................... 0.18% 0.82% 1.61%
</TABLE>
Asset Management Activities
We conduct advisory and asset management services through our wholly owned
subsidiary Imperial Credit Asset Management, Inc. Through October 22, 1999, we
also conducted asset management services through Imperial Credit Commercial
Asset Management Corp.
Imperial Credit Asset Management, Inc.
Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998.
ICAM manages Pacifica Partners I L.P., and Cambria Investment Partnership I,
L.P. Pacifica Partners I is a $500 million collateralized loan obligation fund
we launched in August 1998. Pacifica Partners I's assets consist of
approximately $400 million in nationally syndicated bank loans and
approximately $100 million in high yield bonds. We have invested net cash of
$25.9 million in the subordinated and equity interests of Pacifica Partners
through December 31, 1999. The return on our cash investment was 22.3% for the
year ended December 31, 1999 and for the period of August 1, 1998 through
December 31, 1998. Additionally, we received net management fees of
19
<PAGE>
approximately 60 basis points on total assets under management. For the year
ended December 31, 1999 and 1998, ICAM earned net management fees before
expenses of $3.1 million and $1.1 million, respectively, from managing
Pacifica Partners I.
We also invested $10.0 million in Cambria which is a hedge fund that
invests in syndicated bank loans. At December 31, 1999 and 1998, Cambria had
total assets under management of approximately $134.9 million and $130.0
million, respectively. The return on our investment was 14.0% for the year
ended December 31, 1999 and 1% for the year ended December 31, 1998. ICAM
earns fees equal to one percent of assets under management plus a 20%
incentive fee for positive returns for each calendar year. For the years ended
December 31, 1999 and 1998, ICAM earned management fees of $833,000 and
$139,000 from managing Cambria.
Imperial Credit Commercial Asset Management Corp.
Imperial Credit Commercial Asset Management Corp. ("ICCAMC") was formed in
1997. See "Item 13. Certain Relationships and Certain Transactions--
Relationships with ICCMIC--ICCMIC Management Agreement". ICCMIC is a publicly
traded corporation which elects to be taxed as a real estate investment trust
that invests primarily in performing multi-family and commercial real estate
loans, direct investments in real estate and commercial mortgage-backed
securities.
In October 1997, ICCMIC completed its initial public offering and sold
approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. We purchased
2,970,000 shares of ICCMIC common stock in the offering and an additional
100,000 shares in December 1997 for a total of $43.0 million. During 1998, we
wrote down our investment in ICCMIC common stock by $13.0 million to $9.75 per
share due to an other than temporary decline in the value of ICCMIC's common
stock. In 1999, we sold 500,000 shares of ICCMIC common stock at $10.88 per
common share, generating net proceeds of $5.4 million, resulting in a gain on
sale of securities totaling $562,000. As of December 31, 1999, we owned 9.0%
of the common stock of ICCMIC. ICCAMC, a wholly-owned subsidiary, managed the
day to day operations of ICCMIC through October 22, 1999. For the year ended
December 31, 1999, 1998 and from the period of initial public offering through
December 31, 1997, ICCAMC earned $5.9 million, $6.3 million and $940,000,
respectively, in gross management fees from ICCMIC. In addition, we received
cash dividends of $3.1 million, $3.6 million and $399,000 during the years
ended December 31, 1999, 1998 and from the period of initial public offering
through December 31, 1997, respectively.
On July 23, 1999, we announced the signing of a definitive merger agreement
by which a wholly owned subsidiary of ours would acquire all of the
outstanding shares of ICCMIC (consisting of the 25,930,000 shares not already
owned by us and certain of our affiliates and subsidiaries) for a cash
purchase price of $11.575 per share. See "Liquidity and Capital Resources--The
ICCMIC Acquisition," for further details.
Investment Banking and Brokerage
Imperial Capital Group, LLC
Imperial Capital Group, LLC ("ICG") is a majority-owned subsidiary formed
in July 1997. ICG together with its subsidiaries, Imperial Capital, LLC and
Imperial Asset Management, LLC, offer individual and institutional investors
financial products and services. Imperial Capital, LLC, is a registered
broker/dealer with the United States Securities and Exchange Commission and is
a member of the National Association of Securities Dealers, Inc. It provides
investment opportunities and research to individual and institutional
investors, raises private and public capital for middle market companies, and
trades debt, equity and asset backed securities. Imperial Asset Management,
LLC, is an investment advisor registered with the United States Securities and
Exchange Commission, and provides investment management services to high net
worth individuals and institutional clients. ICG raised total debt and equity
proceeds of $137.3 million in 1999 and $190.0 million in 1998 for its
corporate clients through private placement offerings. For the year ended
December 31, 1999, ICG generated $27.2 million in investment banking and
brokerage fee revenues compared to $18.5 million in 1998 and $7.7 million in
1997. ICG earned net income (loss) of $2.5 million, ($3.9) million and $2.4
million for the
20
<PAGE>
years ended December 31, 1999, 1998 and the period from its formation in July
1997 through December 31, 1997.
Other Core Operations
Imperial Credit Lender Services, Inc.
In July 1998, we acquired the assets of Imperial Credit Lender Services,
Inc. ("ICLS") formerly Statewide Documentation, Inc., for a purchase price of
$5.0 million worth of our common stock. ICLS initially began its operations in
1981. Its primary business is providing loan documentation preparation and
loan closing services nationwide. Additionally, ICLS provides national notary
and recording services.
ICLS has developed a proprietary document preparation and delivery system
that provides new document preparation for ICLS's clients with substantial
flexibility and speed, often allowing new documents to be processed within an
hour of original receipt. ICLS utilizes a remote ordering system, whereby,
rather than completing a document order form, a client can input all necessary
data into its own desktop computer and transmit that information using ICLS's
internet site. ICLS has implemented a four-step quality control system to
ensure reliability and confidentiality upon receipt of a document order. The
information is immediately transferred into ICLS's data entry department where
it is entered into the document preparation system. Once entered, it is
reviewed by the quality control department, then transferred to ICLS's
printing department. All information is reviewed before allowing the loan
documents to be printed. Once the loan documents have been signed, they are
returned to ICLS's office for an additional review to verify the documents are
returned and dated correctly. Completed documents are returned to the clients'
offices the next business day. ICLS uses a pool of over 1,200 active field
representatives to support over 2,000 loan closings per month. During the
fourth quarter of 1999, ICLS entered into an agreement to provide document and
closing services for a major financial institution. For the year ended
December 31, 1999 and the period from our acquisition in July of 1998 through
December 31, 1998, ICLS earned loan closing fees of $1.4 million and $845,000,
respectively. ICLS's net losses were $694,000 and $135,000 for the year ended
December 31, 1999 and the period from our acquisition in July 1998 through
December 31, 1998, respectively.
Total Return Swaps
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund we launched in August 1998, we delivered subordinate bonds of
approximately $51.3 million into a total rate of return swap with the Canadian
Imperial Bank of Commerce ("CIBC"). The provisions of the swap entitle us to
receive the total return on the subordinate bonds delivered and pay CIBC a
floating payment of LIBOR plus a weighted average spread of 1.36%. We
delivered $25.9 million in cash at December 31, 1999 and $17.8 million in cash
at December 31, 1998 to CIBC as collateral for the swap. These amounts are
classified as Trading Securities on the consolidated balance sheet at December
31, 1999 and 1998.
During the years ended December 31, 1999 and 1998, we entered into total
rate of return swap contracts for investment purposes with various investment
bank counterparties, the provisions of which entitle our company to receive
the total return on various commercial loans and pay for a floating payment of
one month LIBOR plus a spread. These contracts are off balance sheet
instruments. As of December 31, 1999 and 1998, we were party to total rate of
return swap contracts with a total notional amount of syndicated bank loans of
$83.6 million and $280.4 million, under which we were obligated to pay one
month LIBOR plus a weighted average spread of 0.88%. The weighted average
remaining life of these contracts was 60.0 months and 31.2 months at
December 31, 1999 and 1998. For the years ended December 31, 1999, 1998 and
1997, we recognized $2.9 million, $5.4 million and $448,000 in income on total
return swaps, respectively.
21
<PAGE>
NON CORE BUSINESS LINES
We also operate "non-core" businesses, which consist of businesses that
we've decided to de-emphasize or exit. We call these businesses Equity
Interests and De-emphasized/Discontinued/Exited Businesses. Our exit from
these non-core businesses will allow our management to focus on our core
business lines that have proven to be our most profitable businesses.
Equity Interests
At December 31, 1999, we had no equity interests in publicly traded
entities. During the years ended December 31, 1998 and 1997, we held equity
interests in three publicly traded entities, Franchise Mortgage Acceptance
Company ("FMC"), Impac Mortgage Holdings, Inc. ("IMH") and Southern Pacific
Funding Corporation ("SPFC").
FMC
FMC was a publicly traded company through November 1, 1999 (Nasdaq Symbol:
FMAX) that originated and serviced loans and equipment leases to small
businesses. We sponsored FMC's initial public offering in November 1997 and
sold a portion of our holdings raising $59.7 million. As part of the initial
public offering of FMC, we recorded a total gain on sale of FMC common stock
of $92.1 million in 1997. Our investment in FMC contributed $30.0 million,
$3.2 million and $41.8 million to our revenues in 1999, 1998 and 1997,
respectively. During the fourth quarter of 1999, FMC was acquired by Bay View
Capital Corporation ("BVC") and we sold our 38.3% common stock ownership
interest resulting in a pre-tax gain on sale of $30.1 million for the year
ended December 31, 1999. As of December 31, 1999 and 1998, we owned none and
11,023,492 shares or 38.3% of the outstanding common stock of FMC,
respectively. For the year ended December 31, 1998, our investment in FMC was
reflected on our consolidated balance sheet as "Equity Interest in Franchise
Mortgage Acceptance Company" and was accounted for pursuant to the equity
method of accounting until the third quarter of 1999. During the third quarter
we determined that we did not have the ability to exercise significant
influence over FMC and, therefore, we changed to the cost method of accounting
for this investment.
IMH
IMH is a publicly traded real estate investment trust (AMEX symbol: IMH).
We sponsored IMH as a publicly traded company in November 1995 and our
subsidiary, Imperial Credit Advisors, Inc., acted as its manager until
December 31, 1997. Pursuant to a Termination Agreement entered into in
December 1997, related to the Management Agreement between Imperial Credit
Advisors, Inc. and IMH, we received 2,009,310 shares of IMH common stock and
certain securitization-related assets, and, in exchange, we canceled a note
receivable from IMH's subsidiary, Impac Funding. During 1998, we wrote down
our investment in IMH common stock by $24.5 million to $5.00 per share due to
an other than temporary decline in the value of IMH's common stock. During the
years ended December 31, 1999 and 1998, we sold 1,887,110 shares and 122,200
shares of IMH stock, resulting in a gain of $929,000 and a loss of $185,000
respectively. We received cash dividends of $157,000 and $2.9 million for the
years ended December 31, 1999 and 1998. At December 31, 1999, we did not own
any shares of IMH common stock.
SPFC
SPFC was a publicly traded sub-prime mortgage banking company which
originated, purchased and sold high yielding, single family sub-prime mortgage
loans. We sponsored SPFC as a public company in June 1996 and sold a portion
of our holdings raising $64.6 million. At December 31, 1999, we did not own
any shares of SPFC common stock. As of December 31, 1998, we owned 9,742,500
shares of SPFC common stock, representing 47.0% of the outstanding common
stock. Our investment in SPFC contributed none, $12.7 million and $25.9
million to our revenues in 1999, 1998 and 1997, respectively. In October 1998,
SPFC petitioned for Chapter 11 bankruptcy protection under Federal bankruptcy
law. In 1998, as a result of SPFC's bankruptcy filing, we wrote-off our entire
equity interest and other assets totaling $82.6 million. Our stockholdings in
SPFC were reflected on our consolidated balance sheet as "Equity Interest in
SPFC" and, until SPFC's bankruptcy filing and termination of new business
activities, were accounted for pursuant to the equity method of accounting.
22
<PAGE>
Discontinued/De-emphasized Operations/Exited Businesses
De-emphasized/Discontinued/Exited Businesses--represents those business
units we decided to either de-emphasize, discontinue, or exit. We decided to
de-emphasize, discontinue or exit these business lines because they were not
meeting our expectations for a variety of reasons. These reasons included:
significant credit losses, insufficient loan production volumes, inadequate
gross profit margins, and risks associated with international lending
operations. We include the following significant operations in Exited
Businesses: the Auto Lending, the Alternative Residential Mortgage, and the
Consumer Loan Divisions of SPB, and Credito Imperial Argentina ("CIA"), our
residential loan production business in Argentina.
Auto Marketing Network, Inc.
During the third quarter of 1998, we discontinued the operations of Auto
Marketing Network, Inc ("AMN"). AMN financed the purchase of new and used
automobiles primarily to sub-prime borrowers on a nationwide basis. Since the
acquisition of AMN in March 1997, it had recorded losses and experienced
significant increases in non-performing assets, loan charge-offs and loan loss
provisions.
Losses from AMN's discontinued operations, net of taxes were as follows:
<TABLE>
<CAPTION>
Disposition
For the Period from Period from
year ended August 1, 1998 to January 1, 1998
December 31, 1999 December 31, 1998 to July 31, 1998
----------------- ----------------- ----------------
(In thousands)
<S> <C> <C> <C>
Loss from discontinued
operations............. $899 $ -- $3,232
Loss on disposal of
AMN.................... -- 11,276 --
---- ------- ------
Net loss from
discontinued
operations............. $899 $11,276 $3,232
==== ======= ======
</TABLE>
For the year ended December 31, 1999, AMN incurred additional operating
losses from discontinued operations of $899,000, net of income taxes,
primarily related to legal expenses and mark-to-market adjustments on AMN
securities. In 1998 we recorded a loss on disposal of AMN totaling $11.3
million including charges (net of taxes) of $5.6 million for securities
valuation, $1.2 million for disposition of furniture and equipment and other
assets, $5.6 million for estimated future servicing obligations to a third
party servicer, $1.3 million in liquidation allowances for nonaccrual loans
and repossessed autos, $2.1 million in severance costs, occupancy and general
and administrative expenses. These charges were partially offset by the
estimated net interest income on loans and securities for the next year
(disposition period) of $4.5 million.
At December 31, 1999, AMN had no outstanding warehouse lines of credit. At
December 31, 1998 AMN's $9.2 million warehouse line of credit with Greenwich
Capital Financial is classified as other borrowings in the consolidated
financial statements. The net assets of AMN's discontinued operations were as
follows:
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Loans....................................................... $ 5,207 $15,161
Securities.................................................. 8,685 7,844
Retained interests in securitization........................ 12,436 11,280
Income taxes receivable..................................... 8,971 10,725
Other net assets............................................ 2,193 1,802
------- -------
$37,492 $46,812
======= =======
</TABLE>
On July 31, 1998 (measurement date), we determined that we would cease
operations at AMN. Accordingly, a disposal plan was formulated, whereby the
daily operations of AMN were terminated over the course of two months.
23
<PAGE>
Consumer Credit Division
Consumer Credit Division ("CCD"), a division of SPB, closed its operations
in December 1998. The costs of closing this division were immaterial. We
decided that the returns generated by CCD were not meeting our profitability
expectations, and that the time necessary to improve profitability did not
justify further investment. CCD was formed in early 1994 to offer loans
primarily to finance home improvements and consumer goods. Home improvement
loans ranged from $5,000 to $350,000 and the loans were typically secured by a
junior lien. CCD also purchased unsecured installment sales contracts to
finance certain home improvements.
Total CCD loans outstanding were $18.7 million at December 31, 1999, $30.5
million at December 31, 1998 and $40.8 million at December 31, 1997. We sold
$11.7 million, $14.6 million and $5.9 million of these loans in 1999, 1998 and
1997, respectively. At December 31, 1999, 1998 and 1997 we held $14.1 million,
$29.4 million and $0 of these loans for sale. At December 31, 1999, 1998 and
1997, CCD had $633,000, $253,000, and $250,000 in non-accrual loans,
respectively.
Auto Lending Division
The Auto Lending Division ("ALD"), a division of SPB, closed its operations
in February 1999 due to significant losses on non-performing assets in 1998.
We made the decision to close the operations of ALD in the fourth quarter of
1998. ALD offered loans primarily to finance automobile purchases by sub-prime
borrowers. ALD also purchased automobile loans from other independent loan
originators. We determined that ALD would not meet our future profitability
expectations, and that the time necessary to improve profitability did not
justify further investment in this business line. The costs of closing this
division were immaterial. During the year ended December 31, 1999, we incurred
additional significant losses on the existing auto loan portfolio and wrote-
down the value of the portfolio by $24.3 million. At December 31, 1999, we
held $6.0 million of ALD loans, which are being carried at 32.0% of their
contractual amount. During the year ended December 31, 1998, we wrote down the
value of ALD's loans held for sale by $21.5 million. At December 31, 1998, we
held $94.2 million of ALD loans. During the year ended December 31, 1997, we
did not incur any write downs of ALD's loans held for sale. During the years
ended December 31, 1999, 1998 and 1997, we sold $45.3 million, $71.6 million
and $0 of ALD's loans, respectively. The amount of non-performing assets
attributable to ALD at December 31, 1999, 1998 and 1997 were $245,000, $5.8
million and $5.4 million, respectively.
Imperial Credit Worldwide, Ltd.
Imperial Credit Worldwide ("ICW") closed its operations in October 1998.
ICW was the holding company for our international finance activities and was
the majority owner of Credito Imperial Argentina ("CIA"), our former mortgage
banking company conducting residential mortgage business in Argentina. Due to
the decline in the Latin American financial markets, CIA ceased originating
loans for its portfolio in October 1998. In May 1999, we sold the remaining
balance of CIA's net mortgage loan portfolio totaling $22.8 million, for a
loss of $112,000. Total CIA loans held for sale at December 31, 1999 and 1998
were zero and $30.0 million, respectively. These loans were carried on our
company's books at their estimated fair value of $22.8 million at December 31,
1998.
24
<PAGE>
Loans and Leases Held for Investment
The following table sets forth certain information regarding our loans and
leases held for investment. Substantially all of our company's loans and
leases held for investment are held by Southern Pacific Bank and are funded by
FDIC insured deposits:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans secured by real
estate:
One to four family...... $ 93,914 $ 125,616 $ 205,788 $ 375,476 $228,721
Multi-family............ 35,249 56,229 17,261 2,527 7,028
Commercial.............. 14,022 25,677 13,202 11,011 133,189
---------- ---------- ---------- ---------- --------
143,185 207,522 236,251 389,014 368,938
Leases.................. 1,125 1,048 7,745 99,717 7,297
Installment loans....... 7,072 26,511 147,603 34,248 1,900
Franchise loans......... 18,277 50,520 62,219 115,910 46,766
Asset based loans....... 748,122 633,299 484,828 288,528 154,252
Loan participations..... 216,961 222,106 196,420 160,672 87,726
Mortgage warehouse
lines.................. 78,068 181,001 122,488 -- --
Film and television
productions loans...... 23,985 -- -- -- --
Commercial loans........ 48,853 34,509 35,861 13,260 22,378
---------- ---------- ---------- ---------- --------
1,285,648 1,356,516 1,293,415 1,101,349 689,257
Loans in process........ (5,472) (5,636) (7,081) -- --
Unamortized premium
(discount)............. 1,389 3,109 2,211 (6,336) (5,217)
Deferred loan fees...... (8,492) (9,014) (9,104) (6,415) (1,540)
---------- ---------- ---------- ---------- --------
1,273,073 1,344,975 1,279,441 1,088,598 682,500
Allowance for loan
losses................. (31,841) (24,880) (26,954) (19,999) (13,729)
---------- ---------- ---------- ---------- --------
Total................. $1,241,232 $1,320,095 $1,252,487 $1,068,599 $668,771
========== ========== ========== ========== ========
</TABLE>
Our loans and leases held for investment are primarily:
. asset-based loans to middle market companies mainly in California,
. syndicated commercial loan participations,
. first and second lien mortgages secured by residential and income
producing real property mainly in California,
. warehouse loans to residential mortgage loan brokers, and
. television and motion picture production loans to independent producers.
Although we continue to diversify our portfolio, a substantial portion of
our debtors' ability to honor their contracts is dependent upon the economy of
California. A decline in California real estate values may adversely affect
certain underlying loan collateral. In order to reduce our risk of loss on any
one credit, we have historically sought to maintain a fairly low average loan
size within the portfolio of loans held for investment. The average loan size
and single largest loan held for investment, excluding loans originated by
CBC, at December 31, 1999 were $58,000 and $20.3 million compared to $118,000
and $21.6 million at December 31, 1998. The largest loan held for investment
at December 31, 1999 and December 31, 1998 was a performing real estate loan
secured by a first deed of trust. See "Item 1. Business--Coast Business
Credit" for more information on CBC's average loan size.
25
<PAGE>
Non-performing assets consist of nonaccrual loans, loans with modified
terms, other real estate owned ("OREO") and other repossessed assets. Our
policy is to place all loans 90 days or more past due on nonaccrual unless the
loan is in the process of collection.
See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Asset Quality" for more information about our allowance
for loan and lease losses.
26
<PAGE>
The following table sets forth the amount of non-performing assets
attributable to our core lending activities and our Exited Businesses.
<TABLE>
<CAPTION>
1999 1998 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
Core Lending Exited Core Lending Exited Core Lending Exited Core Lending Exited
Activities Businesses Activities Businesses Activities Businesses Activities Businesses
------------ ---------- ------------ ---------- ------------ ---------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-accrual
loans:
IPL............. $ 237 $ -- $ 992 $ -- $ 497 $ -- $ -- $ --
IWF............. 7,757 -- 4,141 -- -- -- -- --
CBC............. 22,173 -- 1,117 -- -- -- -- --
IBC............. 77 -- 669 -- 981 -- -- --
Film and
television
production
loans........... 8,161 -- -- -- -- -- -- --
LPIG............ -- -- -- -- -- -- -- --
One to four
family.......... -- 16,926 -- 18,576 -- 34,447 -- 44,639
Consumer loans.. -- 633 -- 253 -- 250 -- --
Auto loans...... -- 1,803 -- 5,476 -- 28,057 -- 152
Other
commercial...... 656 996 -- 8,305 192 6,207 -- 5,318
---------- -------- ---------- -------- ---------- -------- -------- ----------
Total non-
accrual loans... 39,061 20,358 6,919 32,610 1,670 68,961 -- 50,109
---------- -------- ---------- -------- ---------- -------- -------- ----------
OREO:
IPL............. 222 -- 197 -- 465 -- -- --
One to four
family.......... -- 3,220 -- 7,180 -- 8,326 -- 10,147
Other
commercial...... -- 771 -- 1,307 -- 2,114 -- 2,067
---------- -------- ---------- -------- ---------- -------- -------- ----------
Total OREO...... 222 3,991 197 8,487 465 10,440 -- 12,214
---------- -------- ---------- -------- ---------- -------- -------- ----------
Loans with
modified terms:
One to four
family.......... -- -- -- -- -- -- -- 800
Other
commercial...... -- -- -- -- -- -- -- 456
---------- -------- ---------- -------- ---------- -------- -------- ----------
Total OREO...... -- -- -- -- -- -- -- 1,256
---------- -------- ---------- -------- ---------- -------- -------- ----------
Repossessed
property:
IBC............. 643 -- 702 -- 4,437 -- -- --
Auto Lending.... -- 127 -- 5,169 -- 4,563 -- --
---------- -------- ---------- -------- ---------- -------- -------- ----------
Total
repossessed
property........ 643 127 702 5,169 4,437 4,563 -- --
---------- -------- ---------- -------- ---------- -------- -------- ----------
Total NPA's..... $ 39,926 $ 24,476 $ 7,818 $ 46,266 $ 6,572 $ 83,964 $ -- $ 63,579
========== ======== ========== ======== ========== ======== ======== ==========
Total loans,
OREO and
repossessed
property........ $1,431,996 $148,033 $1,310,283 $384,487 $1,023,007 $443,782 $953,809 $1,099,850
Total NPA's as a
percentage of
loans, OREO and
repossessed
property........ 2.79% 16.53% 0.60% 12.03% 0.64% 18.92% N/A 5.78%
<CAPTION>
1995
------------------------
Core Lending Exited
Activities Businesses
------------ -----------
<S> <C> <C>
Non-accrual
loans:
IPL............. $ -- $ --
IWF............. -- --
CBC............. -- --
IBC............. -- --
Film and
television
production
loans........... -- --
LPIG............ -- --
One to four
family.......... -- 23,642
Consumer loans.. -- --
Auto loans...... -- 7,062
Other
commercial...... -- 284
------------ -----------
Total non-
accrual loans... -- 30,988
------------ -----------
OREO:
IPL............. -- --
One to four
family.......... -- 6,110
Other
commercial...... -- 1,069
------------ -----------
Total OREO...... -- 7,179
------------ -----------
Loans with
modified terms:
One to four
family.......... -- 870
Other
commercial...... -- --
------------ -----------
Total OREO...... -- 870
------------ -----------
Repossessed
property:
IBC............. -- --
Auto Lending.... -- --
------------ -----------
Total
repossessed
property........ -- --
------------ -----------
Total NPA's..... $ -- $ 39,037
============ ===========
Total loans,
OREO and
repossessed
property........ $670,642 $1,367,604
Total NPA's as a
percentage of
loans, OREO and
repossessed
property........ N/A 2.85%
</TABLE>
Excludes non-accrual loans held for sale which we carried at the lower of
cost or market, includes non-accrual loans and non-performing assets from the
discontinued operations of AMN.
27
<PAGE>
Funding
Our liquidity requirements are met primarily by SPB deposits and to a
lesser extent warehouse lines and securitizations. Business operations
conducted through divisions of SPB are primarily financed through deposits,
our capital contributions, and Federal Home Loan Bank borrowings.
Southern Pacific Bank Deposits
SPB is an FDIC insured industrial bank which is regulated by the California
Department of Financial Institutions and the FDIC. See "--Regulation" for a
more detailed description of regulations governing SPB.
At December 31, 1999 and 1998, SPB had total deposits of approximately $1.6
billion and $1.7 billion, respectively (amounts in both years exclude our
deposits maintained with SPB). SPB solicits both individual and institutional
depositors for new accounts through print advertisements and computerized
referral networks. SPB currently maintains two deposit gathering facilities in
Southern California. At these facilities, tellers provide banking services to
customers such as accepting deposits and making withdrawals. However,
customers are not offered check writing services or comparable demand deposit
accounts. Generally, certificates of deposit are offered for terms of one to
12 months. See "--Regulation--Industrial Bank Operations--Limitations on Types
of Deposits" for a description of limitations on types of deposits that SPB,
as an industrial bank, can accept.
The following table sets forth the distribution of SPB's deposit accounts
(prior to eliminating inter-company transactions) and the weighted average
nominal interest rates on each category of deposits:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
% of Interest % of Interest % of Interest
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
---------- -------- -------- ---------- -------- -------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings accounts........ $ 66,415 4.1% 4.79% $ 57,249 3.3% 4.27% $ 62,274 5.2% 3.55%
Time deposits of less
than $100,000.......... 1,235,468 76.0 5.82 1,199,825 69.9 5.61 891,102 74.4 5.91
Time deposits of
$100,000 and over...... 324,271 19.9 5.49 459,614 26.8 5.62 244,320 20.4 5.89
---------- ----- ---------- ----- ---------- -----
Total.................. $1,626,154 100.0% 5.71% $1,716,688 100.0% 5.57% $1,197,696 100.0% 5.79%
========== ===== ========== ===== ========== =====
</TABLE>
The following table sets forth the dollar amount of deposits by time
remaining to maturity:
<TABLE>
<CAPTION>
At December 31
-----------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
---------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months or less.... $ 459,128 28.3% $ 552,077 32.2% $ 457,269 38.2%
Over three months
through six months..... 353,999 21.8 452,782 26.4 296,512 24.8
Over six months through
twelve months.......... 583,338 35.9 478,000 27.8 357,326 29.8
Over twelve months...... 227,689 14.0 233,829 13.6 86,589 7.2
---------- ----- ---------- ----- ---------- -----
Total................. $1,626,154 100.0% $1,716,688 100.0% $1,197,696 100.0%
========== ===== ========== ===== ========== =====
</TABLE>
28
<PAGE>
The following table sets forth the time certificates greater than $100,000
by time remaining to maturity:
<TABLE>
<CAPTION>
At December 31
-----------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
% of % of % of
Amount Deposits Amount Deposits Amount Deposits
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Three months or less.... $ 95,964 29.6% $129,479 28.1% $ 87,771 37.1%
Over three months
through six months..... 75,403 23.2 148,832 32.4 76,277 32.3
Over six months through
twelve months.......... 103,129 31.8 114,803 25.0 55,330 23.4
Over twelve months...... 49,847 15.4 66,500 14.5 17,087 7.2
-------- ----- -------- ----- -------- -----
Total................. $324,343 100.0% $459,614 100.0% $236,465 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
Interest expense associated with certificates of deposit of $100,000 and
over was approximately $18.2 million for the year ended December 31, 1999,
$24.2 million for the year ended December 31, 1998 and $15.6 million for the
year ended December 31, 1997.
SPB has historically increased its deposits as necessary so that deposits
together with its cash, liquid assets, Federal Home Loan Bank ("FHLB")
borrowings and warehouse borrowings, have been sufficient to provide funds for
all of SPB's lending activities. At December 31, 1999, there were no
outstanding FHLB borrowings.
Repurchase and Warehouse Facilities
We use repurchase facilities and warehouse lines of credit in order to fund
certain loan and lease originations and purchases. As of December 31, 1999, we
had the following warehouse lines, reverse repurchase facilities and notes
payable:
<TABLE>
<CAPTION>
Interest Index
Rate Commitment Outstanding (basis points) Expiration Date
-------- ---------- ----------- -------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Lehman Bros (Corona Film
Finance Fund)(1)....... 5.50% $66,398 $66,398 Fixed rate January 13, 2000
Imperial Bank (ICII).... 9.25 6,691 6,691 Prime plus 100 September 29, 2000
Other notes payble
(ICII)................. 8.00 -- 1,220 Fixed rate None
------- -------
5.88 $73,089 $74,309
======= =======
</TABLE>
- --------
(1) The borrowings from Greenwich Capital were repaid on January 13, 2000.
Securitization Transactions and Loan Sales
Securitizations of Assets
As a fundamental part of our business and financing strategy prior to 1998,
we sold a significant amount of our loans and leases through securitization,
except for loans held for investment by SPB. Securitizations were performed
historically by our prior divisions and subsidiaries: FMC, SPFC and AMN. We
have, however, de- emphasized the use of securitizations as part of our
refocused business strategy. During 1999 and 1998, IBC was the only subsidiary
that sold assets through securitizations.
In a securitization, the cash flows of the underlying receivables, such as
loans and leases, are apportioned to bonds having various credit ratings,
yields and maturities. These bonds, which are collateralized by the underlying
loans and leases, are sold to investors at market prices. In most cases, we
retained the servicing of the loans and leases; servicing is the process of
collecting the payments from the borrowers and remitting the required payments
to the investors. We are paid a fee for such servicing, which is earned monthly
and collected from the remittances on the assets securitized.
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<PAGE>
When we sell loans and leases in a securitization, we recognize a gain to
the extent that the selling price in cash exceeds the carrying value of the
loans and leases sold based on the estimated relative fair values of the loans
and leases sold, any assets we obtain and any liabilities we incur in the
securitization. When we securitize loans and leases, we generally retain an
interest in the securitized assets which may be one or more of the bonds,
servicing assets and/or call options created through the securitization. The
liabilities we incur when we securitize loans and leases include, generally,
recourse obligations, put options and servicing liabilities. The retained
interest in a securitization represents, generally, a credit enhancement for
the investors in that this interest is either subordinated to the other bonds
sold or represents an overcollateralization amount. In either case, as holder
of the retained interest, we incur the risk of loss and prepayment on the
underlying loans and leases and will be last to receive the cash flows
apportioned to such retained interests.
At the time of the securitization, the retained interest and servicing
assets are recorded at their fair values. Because an active market does not
typically exist for these types of assets, we generally estimate their fair
values by discounting cash flows we expect to receive. In discounting the cash
flows, we make estimates of loan prepayments, loan defaults and loan losses.
These estimates are based on actual historical prepayments in our servicing
portfolios tempered by our expectation of how future changes in interest rates
will impact prepayments, and actual default and loss rates we have experienced
for the types of loans and leases sold. The discount rate we use is the rate
determined by us to be the rate used by other market participants under
similar circumstances.
We evaluate the carrying value of the retained interests and servicing
assets on a quarterly basis by re-estimating their fair values using updated
assumptions for prepayments, default and loss rates, and discount rate. When
the estimated fair value of these assets is less than their carrying value, we
take a loss for the deficiency by writing down the carrying value of the
asset. Based on our comparison of the carrying values of these assets to their
estimated fair values, we realized a loss of $15.0 million and $4.4 million
during 1999 and 1998, respectively. Similar losses could occur in the future
and may have a material adverse effect on our net income. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations".
At December 31, 1999, and 1998 our consolidated balance sheets include the
following retained interests, interest-only and subordinated securities and
servicing assets (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
Retained interest and servicing assets 1999 1998
-------------------------------------- ------- -------
<S> <C> <C>
Interest only securities included with trading
securities............................................... $11,980 $17,189
Servicing rights.......................................... 802 4,329
Retained interest in loan and lease securitizations....... 10,220 27,011
</TABLE>
For further information, see notes 1, 6 and 10 of Notes to Consolidated
Financial Statements included in Item 8.
During 1999 and 1998, we only securitized leases originated by IBC. For the
years ended December 31, 1999, 1998 and 1997, we securitized loans and leases
totaling $132.4 million, $117.7 million and $919.0 million, respectively. We
sold $283.7 million of loans in 1999 and $288.5 million of loans in 1998
through whole loan sale transactions. Most of the loans sold through whole
loan sales were originated by IPL.
Competition
The businesses in which we operate are highly competitive. We face
significant competition from companies that may be substantially larger and
have more capital than we do. These competitors include:
<TABLE>
<S> <C>
. other commercial finance lenders . savings and loan associations
. commercial banks . other thrift and loan companies
. credit unions . money market mutual funds
. securities firms
</TABLE>
30
<PAGE>
Competition can take many forms, including convenience in obtaining a loan
or lease, customer service, marketing and distribution channels and interest
rates and fees charged to borrowers.
Regulation
We are subject to extensive Federal and State regulation in the United
States. This regulation affects our:
. warehouse lending business,
. maximum interest rates, finance and other charges,
. loan origination and credit activities,
. disclosure to customers,
. terms of secured transactions,
. collection, repossession and claims handling procedures,
. multiple qualification and licensing requirements for doing business in
various jurisdictions, and
. other trade practices.
Our subsidiary ICG's operating companies are registered as a broker-dealer
with the Securities and Exchange Commission ("SEC") and state securities
regulatory agencies, and with the SEC as an investment advisor. We are also a
member of the National Association of Securities Dealers.
Truth in Lending
The Truth in Lending Act ("TILA") and the regulations of the Board of
Governors of the Federal Reserve System, in particular Regulation Z, are
designed to provide consumers with uniform, understandable information with
respect to the terms and conditions of loans and credit transactions. This
give consumers the ability to compare credit terms from different financial
institutions. TILA also guarantees consumers a three-day right to cancel
certain credit transactions, including loans of the type we originate. We
believe that we are in compliance with TILA in all material respects. The
enforcement provisions applicable to TILA grant broad powers to the
appropriate federal regulatory agencies or the Federal Trade Commission to
enforce TILA against those entities not otherwise subject to federal
regulations, such as our company. TILA also contains criminal penalties for
willful violations and grants a private right of action with specified
statutory damage awards for certain violations. If we were found to violate
TILA in our lending activities, aggrieved borrowers could have the right to
cancel their mortgage loan transactions and to demand the return of finance
charges paid to us, and other damages provided under TILA. However, under
Regulation Z, minor discrepancies in the finance charge would not necessarily
require or allow the borrower to rescind the loans. In addition, rescission
rights may be restricted after the initiation of foreclosure proceedings under
certain circumstances.
TILA applies to all individuals and businesses that regularly extend
consumer credit which is subject to a finance charge or is payable by a
written agreement in more than four installments and is primarily for
personal, family or household purposes. Hence, TILA is applicable to our
company and our subsidiaries. Generally, TILA requires a creditor to make
certain disclosures of information such as, finance charges and annual
percentage rates. In addition to these general requirements, TILA also
requires additional disclosures in connection with certain types of mortgage
loans.
These additional disclosure requirements apply to loans (other than
mortgage loans to finance the acquisition or initial construction of a
dwelling) with (i) total points and fees upon origination above of eight
percent of the loan amount or $435, whichever is greater or (ii) an annual
percentage rate of more than ten percentage points higher than comparably
maturing United States Treasury securities ("Covered Loans"). Effective
January 1, 1999, the $435 figure was adjusted by the Board of Governors of the
Federal Reserve System to $441 until December 31, 1999, in accordance with
Regulation Z. These TILA provisions prohibit lenders from originating
31
<PAGE>
Covered Loans that are underwritten solely on the basis of the borrower's home
equity without regard to the borrower's ability to repay the loan.
We believe that only a small portion of loans we originated after October
1995 (the effective date of the requirements) are covered loans of the type
that are subject to these additional restrictions. Our policy is to apply
underwriting criteria to all Covered Loans that take into consideration the
borrower's ability to repay.
TILA also prohibits lenders from including prepayment fee clauses in
Covered Loans to borrowers except in cases in which the penalty can be
exercised only during the first five years following closing of the loan, the
consumer's total monthly debt-to-income ratio does not exceed 50% and the
Covered Loans are not used to refinance existing loans originated by the same
lender or affiliate. We will continue to collect prepayment fees on loans
originated prior to October 1995 (the effective date of the prepayment
provision of TILA) and on non-Covered Loans, as well as on Covered Loans where
we are allowed to do so, but the level of our prepayment fee revenue may
decline in future years. TILA imposes other restrictions on Covered Loans,
including restrictions on balloon payments and negative amortization features,
which we do not believe will have a material impact on our operations.
Other Lending Laws
We are also required to comply with the Equal Credit Opportunity Act of
1974, as amended ("ECOA"), which prohibits creditors from discriminating
against applicants on the basis of race, color, religion, sex, age or marital
status. ECOA also prohibits creditors from discriminating based on the fact
that all or part of the applicant's income derives from a public assistance
program or the fact that the applicant has in good faith exercised any right
under the Consumer Credit Protection Act. Regulation B under ECOA restricts us
from obtaining certain types of information from loan applicants. It also
requires certain disclosures regarding consumer rights and requires us to
advise applicants of the reasons for any credit denial. If the applicant is
denied credit or the rate or charge for loans increases as a result of
information obtained from a consumer credit agency, another statute, the Fair
Credit Reporting Act of 1970 ("FCRA") requires us to supply the applicant with
the name and address of the reporting agency. In addition, FCRA also imposes
other reporting and disclosure requirements on creditors. We are also subject
to the Real Estate Settlement Procedures Act of 1974, as amended, and are
required to file an annual report with the Department of Housing and Urban
Development under the Home Mortgage Disclosure Act. In addition, we are
subject to various other Federal and state laws, rules and regulations
governing, among other things, the licensing of, and procedures which must be
followed by, mortgage lenders and servicers, and disclosures which must be
made to consumer borrowers. We may incur civil and criminal liability if we
fail to comply with the requirements and, in some cases, consumer borrowers
have the right to rescind their mortgage loans and to demand the return of
finance charges they paid to us. In addition, some of the loans we originate
or purchase, such as Title I home improvement loans, are insured by an agency
of the Federal government. These loans are subject to extensive government
regulation.
Environmental Liability
We may foreclose on properties securing loans that are in default in the
course of our business. There is a risk that hazardous or toxic substances or
petroleum constituents could be on such properties. In such event, we could be
held responsible for the cost of cleaning up or removing such waste depending
upon our activities, and such cost could exceed the value of the underlying
properties. Under the laws of certain states, contaminated property may be
subject to a lien on the property to assure payment for cleanup costs. In
several states, this lien has priority over the lien of an existing mortgage
or owner's interest. In addition, under the laws of some states and under the
Federal Comprehensive Environmental Response, Compensation, and Liability Act
of 1980 ("CERCLA"), we may become liable for cleanup of a property and
adjacent properties that are contaminated by releases from the mortgaged
property if we engage in certain activities.
In 1996, CERCLA was amended to eliminate lender liability under CERCLA in
certain circumstances, including foreclosure if the lender resells the
property at the earliest practicable, commercially reasonable time
32
<PAGE>
on commercially reasonable terms. In addition, CERCLA was changed to provide
more guidance to lenders about the nature of activities that would and would
not give rise to liability under CERCLA. These amendments do not apply to
state environmental laws. Also, foreclosure and our other activities on
contaminated property may subject us to state tort liability.
Gramm-Leach-Bliley Act of 1999
On November 12, 1999, the federal Gramm-Leach-Bliley Act ("GLB") was
enacted. The GLB, which is a major piece of financial reform legislation,
repealed sections of the federal Glass-Steagall Act generally prohibiting
affiliations and management interlocks between banking organizations and
securities firms, and added new substantive provisions to the Bank Holding
Company Act. Specifically, the GLB created a new entity, the "financial
holding company" ("FHC"), which is authorized to engage in activities which
are "financial" in nature and "incidental" to financial activities. Several of
these new activities, such as insurance underwriting and agency activities,
are activities which bank holding companies generally were not allowed to
conduct prior to GLB. In addition, insured banks such as SPB have new
authority under GLB, subject to certain limitations, to engage in various
activities of a "financial" nature.
GLB also makes major changes to the federal regulation of a bank's
securities activities, and contains provisions governing (i) the insurance
activities of FHCs and the regulation of these activities, (ii) the privacy of
customer information, (iii) changes to the structure of and access to the
Federal Home Loan Bank system, (iv) modifications of the Community
Reinvestment Act, and (v) other changes to banking laws. Major provisions of
GLB will begin to come into effect starting March 11, 2000.
Our Company is not currently subject to the Bank Holding Company Act, and
therefore this new law is not expected to have an immediate material effect on
the nature and scope of our current operations. While the future impact of GLB
on our Company's and SPB's operations cannot be predicted at this time, GLB
may allow our Company, through SPB and otherwise, authority to engage in new
activities of a banking and financial nature. In addition, the new law may
increase the ability of other financial services providers to compete with us
by permitting certain firms (such as securities firms and insurance companies)
for the first time to establish or acquire banks, and allowing banking firms
to enter into new lines of financial business.
The customer privacy requirements of the GLB, which are expected to be
effective in November 2000, will require SPB, as well as any of our other
affiliates which are engaged in a financial business with retail customers, to
disclose to these customers, when they establish the customer relationship and
at least annually thereafter, their privacy policies and practices for
disclosing and protecting customer financial information. In addition, a
financial institution will not be able to share with a nonaffiliated third
party any nonpublic personal information of its customers and consumers unless
that financial institution provides advance notice of its information-sharing
policies to these persons, and will be obliged to permit a customer or
consumer to "opt out" of the financial institution's ability to share
nonpublic customer information with nonaffiliated third parties.
Several Federal regulatory agencies have proposed regulations implementing
the privacy provisions of the GLB. Generally, these proposals (i) outline the
type and content of notice initially required to customers and consumers of
the institution's privacy policies and practices, (ii) limit the right to
disclose nonpublic personal information to nonaffiliated third parties, and
(iii) describe the form and method of providing information-sharing "opt out"
notices to consumers and customers. When these regulations become final, SPB,
as well as our Company's affiliates which are "financial institutions"
(generally meaning any of our affiliates which engages in a retail financial
business), will be required to comply with these requirements.
At this time, the specific impact of GLB's new privacy and other regulatory
requirements on our operations cannot be precisely determined. It is possible,
however, that GLB will result in some increases in our federal regulatory and
compliance costs and responsibilities as these new privacy and regulatory
changes become effective. Further, the new law gives states authority to
regulate, among other things, the insurance, privacy and information-sharing
activities of financial organizations, and changes in state regulatory
requirements may also have an impact on our compliance costs and
responsibilities.
33
<PAGE>
Future Laws
Because each of our businesses is highly regulated, the applicable laws,
rules and regulations are subject to change. There are currently proposed
various laws, rules and regulations which, if adopted, could affect our
operations. We cannot assure you that these proposed laws, rules and
regulations, or other such laws, rules or regulations will not be adopted in
the future. If adopted, they could make compliance more difficult or
expensive, restrict our ability to originate, broker, purchase or sell loans,
further limit or restrict the amount of commissions, interest and other
charges we earn on loans we originate, broker, purchase or sell, or otherwise
adversely affect our business or prospects.
Industrial Bank Operations
SPB is subject to regulation, supervision and examination by the California
Department of Financial Institutions (the "DFI") and by the FDIC. In states
other than California where SPB operates loan production offices, SPB may be
subject to certain state and local laws, including those governing
qualifications to do business.
Our company is not otherwise regulated or supervised by the DFI, the FDIC,
the Federal Reserve Board or any other bank regulatory authority, except
indirectly with respect to: (1) transactions and dealings between our company
or any of our affiliates and SPB: (2) the specific limitations regarding
ownership of the capital stock of a parent company of any industrial bank; and
(3) the specific limitations regarding the payment of dividends from SPB.
General
SPB is governed by the California Industrial Banking Law ("CIBL"), and the
rules and regulations of the DFI. Among other things, these laws and
regulations describe in certain limited circumstances the maximum interest
rates payable on, and the terms of, certain industrial bank deposits as well
as the collateral requirements, maximum maturities and repayment terms of the
various types of loans that are permitted to be made by California chartered
industrial banks, (also known as industrial loan companies, thrift and loan
companies or thrifts). As SPB's primary regulator, the DFI has broad
supervisory and enforcement authority over SPB and its subsidiaries. The DFI
may impose penalties for and seek correction of violations of laws or
regulations or unsafe or unsound practices by: (1) assessing monetary
penalties; (2) issuing cease and desist or removal and prohibition orders
against a company, its directors, officers or employees and other persons; (3)
initiating injunctive actions; or (4) taking possession of the business and
property of an industrial bank. Certain provisions of the CIBL also provide
for the institution of civil or criminal actions against industrial banks and
their officers, directors, employees and affiliates for violations of the law
and related regulations.
SPB's investment certificates (also referred to as "deposits") are insured
by the Bank Insurance Fund of the FDIC to the full extent permissible by law.
As an insurer of deposits, the FDIC issues regulations, conducts examinations,
requires the filing of reports and generally regulates the operations of
institutions to which it provides deposit insurance. SPB is subject to the
rules and regulations of the FDIC to the same extent as other state financial
institutions that are insured by that entity. Either notice to or approval by
the FDIC and the DFI is required before any merger, consolidation or change in
control, or the establishment, relocation or closing of a branch office of
SPB. However, only the DFI's approval is required to establish a loan
production office limited to the solicitation of loans. The DFI may exempt, by
order or regulation, from the application requirement, the establishment of a
branch or loan production office if the DFI finds such application and
approval not necessary to regulate a company. To date, no regulation has been
adopted. Orders are commonly issued on a case-by-case basis.
The FDIC completed an information systems exam of SPB in May 1998 and the
FDIC and DFI completed a joint examination of SPB for the period ended March
31, 1998. As a result of the examinations, the FDIC requested that SPB enter
into two written memoranda of understanding ("MOUs") addressing deficiencies
identified by the FDIC in SPB's accounting systems and controls, and perceived
deficiencies in SPB's Y2K readiness and contingency planning.
34
<PAGE>
The first MOU addressing these issues was signed by the FDIC on November 2,
1998. Under that MOU, SPB was required to take a number of actions to address
and correct the accounting and Y2K preparedness concerns of the FDIC. SPB,
under the direction of its board of directors, developed and implemented a Y2K
readiness plan and budget, with specific deadlines and action steps. As a
result of the progress SPB made in implementing its Y2K readiness plan, the
FDIC terminated the November 2, 1998 MOU primarily relating to Y2K concerns,
during the third quarter of 1999.
On January 19, 1999, the FDIC and DFI issued a second MOU as a result of
the 1998 joint exam, which addressed accounting controls and policies and
apparent violations of law. Under the second MOU, SPB is required to:
. adopt and implement policies to provide adequate accounting controls
consistent with safe and sound banking practices,
. eliminate or correct violations of law described in the FDIC/DFI
examination, and
. achieve and maintain regulatory capital requirements applicable to a
"well capitalized" depository institution. SPB is allowed to pay
dividends to ICII in accordance with its normal dividend policy. SPB's
policy permits cash payment dividends of up to 35% of SPB's net income
and prohibits paying any cash dividend if SPB is not, immediately prior
and subsequent to the dividend, a "well-capitalized" institution within
the meaning of FDIC regulations.
We responded to the FDIC's criticisms in its May 1998 information systems
examination by retaining an internationally-recognized independent accounting
firm to conduct a general ledger account reconciliation project in order to
identify, trace and resolve all outstanding unreconciled general ledger items
on SPB's books and records. Work on this reconciliation project was
substantially completed by December 31, 1998. In consultation with the
independent accounting firm, SPB has developed and implemented new policies
and procedures which are designed to improve the efficiency and timeliness of
general ledger reconciliation tasks and related financial accounting matters.
SPB continues to reconcile all general ledger accounts on a timely basis.
SPB has addressed all items of concern described in the FDIC/DFI
examination and referenced in the second MOU.
The FDIC and DFI each have the authority to take a variety of informal and
formal remedial and other enforcement actions with regard to violations of
law, and unsafe and unsound banking practices, including, among other things,
the institution of proceedings or actions imposing or seeking memoranda of
understanding, injunctions, cease and desist orders, criminal or civil
penalties, removal from office, the placing of SPB into conservatorship or
receivership, or the revocation of SPB's charter. The MOU is one such instance
of an informal remedial action which the FDIC or DFI may take. The FDIC is
required to notify the DFI of its intent to take certain types of enforcement
actions against a California chartered, FDIC-insured industrial bank and of
the reasons for action. If satisfactory corrective action is not taken within
an appropriate time, the FDIC may proceed with its enforcement action. The
FDIC may also terminate the deposit insurance of any insured depository
institution if it determines that the institution has engaged or is engaging
in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, order or
any condition imposed in writing by the FDIC. The DFI also has the authority,
independent of the FDIC, to issue cease and desist orders, impose operating
restrictions, and take other actions to assure the safety and soundness of the
institution. Although we do not believe that further enforcement action is
warranted at this time, any such enforcement could have a material adverse
effect on our company.
Limitations on Investments
Subject to restrictions imposed by California law, SPB is permitted to make
secured and unsecured consumer and non-consumer loans. The maximum term for
repayment of loans made by industrial banks may be as long as 40 years and 30
days depending upon collateral and priority of the lender's lien on the
collateral.
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<PAGE>
However, loans with repayment terms in excess of 30 years and 30 days may not
in the aggregate exceed five percent of total outstanding loans and
obligations of the industrial bank. Although secured loans may generally be
repayable in unequal periodic payments during their respective terms, consumer
loans secured by real property with terms in excess of three years must be
repayable in substantially equal periodic payments unless such loans were made
or purchased by the industrial bank under the Garn-St. Germain Depository
Institutions Act of 1982 (which applies primarily to one to four unit
residential loans).
California law limits SPB's lending activities outside of California to no
more than 20% of its total assets, or 40% with the approval of the DFI.
Effective January 1, 2000, these percentages increased to 25% and 50%,
respectively. California law contains requirements for the diversification of
the loan portfolios of industrial banks. An industrial bank with outstanding
deposits may not, among other things:
. make any loan secured primarily by unimproved real property in an amount
in excess of 10% of its paid-up and unimpaired capital stock and surplus
not available for dividends and all loans secured by unimproved real
property shall not exceed in the aggregate 5% of the industrial bank's
assets;
. lend an amount in excess of five percent of its paid-up and unimpaired
capital stock and surplus not available for dividends upon the security
of the stock of any one corporation;
. make loans to, or hold the obligations of, any one person as primary
obligor in an aggregate principal amount exceeding 20% of its paid-up and
unimpaired capital stock and surplus not available for dividends;
. have more than 70% of its total assets in loans that have remaining terms
to maturity in excess of seven years (as defined) and are secured solely
or primarily by real property, which limitation is effective January 1,
2000; and
. have more than 40% of its assets in loans to borrowers who do not reside
in or have a place of business in the state of California; provided,
however, that certain loans that are sold within 90 days are excluded
from such portfolio limitation. This percentage increases to 50% on
January 1, 2000.
Additionally, any loan or obligation primarily secured by real property, or
real and personal property, having a principal balance in excess of $10,000,
must have a loan-to-value ratio as defined, of 90% or less, subject to certain
exceptions, including loans or obligations held for 90 days or less or
saleable to institutional investors evidenced by irrevocable commitments to
buy.
SPB had paid-up and unimpaired capital stock and surplus not available for
dividends of $150.0 million at December 31, 1999 and 1998.
At December 31, 1999 and 1998, SPB was in compliance with its California
investment law restrictions. SPB originates and holds a portion of our loans
held for sale, of which a majority have a maturity of greater than seven
years. SPB believes that it will be able to continue to meet its requirements
by managing the types of loans originated and where the loans are domiciled.
Under California law, industrial banks are generally limited to investments
that are legal investments for commercial banks. An industrial bank may
acquire real property only in satisfaction of debts previously contracted,
pursuant to certain foreclosure transactions, or as may be necessary as
premises for the transaction of its business, in which case such investment is
limited to one-third of an industrial bank's paid-in capital stock and surplus
not available for dividends. Effective January 1, 1997, as a result of changes
in the CIBL passed in 1996, SPB may invest in the capital stock, obligations,
or other securities of one or more corporations, subject to rules or orders
prescribed by the DFI, if such investment would be lawful for commercial
banks. California chartered commercial banks may invest in equity securities
of one or more subsidiary corporations upon receiving authorization from the
DFI.
Under Federal law, SPB is considered an insured non-member state bank, and
therefore, it may make any equity investment, including an investment in the
equity securities of an operating subsidiary, that is permissible for a
national bank.
36
<PAGE>
Operating subsidiaries include corporations, limited liability companies or
similar entities. In turn, operating subsidiaries of national banks may engage
in activities that are part of, or incidental to the business of banking, as
determined by the Office of the Comptroller of the Currency (the "OCC").
Transactions With Affiliates
Under California law, an industrial bank generally may not make any loan
to, or hold an obligation of, any of its directors or officers or any director
or officer of its holding company or affiliates, except in specified cases and
subject to regulation by the DFI. In addition, an industrial bank may not make
any loan to, or hold an obligation of, any of its shareholders or any
shareholder of its holding company or affiliates, except to persons who own
less than 10% of the stock of a holding company or an affiliate that is listed
on a national securities exchange. As a result of these requirements, SPB may
not make loans to our company or any of our affiliates or purchase a contract,
loan or chose in action from us or our affiliates other than subsidiaries of
SPB. Exemptions from these restrictions are available for:
. purchase of loans from affiliates which are licensed mortgage brokers or
other certain types of licensed lenders, subject to prior approval of the
DFI;
. purchase of loans pursuant to a sale and repurchase agreement between SPB
and an affiliated company; or
. purchase of loans from a subsidiary of SPB or a corporation in which SPB
owns 50% or more of its common stock.
However, these purchases would also be subject to strict limitations under
Federal law. Generally, such transactions must be on terms and under
conditions, that are substantially the same, or at least as favorable to SPB,
as those prevailing at the time for comparable transactions with or involving
other nonaffiliated companies. In addition, SPB is prohibited from engaging in
"covered transactions" with an affiliate if the aggregate amount of such
transactions with any one affiliate would exceed 10% of SPB's capital stock
and surplus, or in the case of all affiliates, if the aggregate amount of such
transactions exceeds 20% of SPB's capital stock and surplus. "Covered
transactions" include loans or extensions of credit to an affiliate, a
purchase of or investment in securities issued by an affiliate, a purchase of
assets from an affiliate (subject to certain exemptions), the acceptance of
securities issued by an affiliate as collateral security for a loan or
extension of credit to any person or company, or the issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. For certain
"covered transactions," collateral requirements in specified amounts will be
applicable. SPB also is prohibited from purchasing low-quality assets from its
affiliates, except under limited circumstances. SPB engages in many
transactions which involve its affiliates, including our company and our other
subsidiaries. As such, many of the transactions between ICII, our affiliates
and SPB are subject to Federal and state affiliate transaction regulations.
Further, under Federal law, a transaction by SPB with any person shall be
deemed to be a transaction with an affiliate to the extent that the proceeds
of the transaction are used for the benefit of, or transferred to that
affiliate.
The term "affiliate" excludes any company (other than a bank), that is a
subsidiary of SPB, unless the federal authorities have determined by
regulation or order not to exclude such subsidiary. Absent such determination,
transactions conducted between SPB and its non-bank subsidiaries would not be
subject to the amount limitations and collateral requirements under federal
law. This exemption, however, is unavailable for transactions between a bank
and a subsidiary that engages in activities not permissible for the parent
depository institution.
Under the CIBL, unless the DFI has issued a permit authorizing such sale,
it is unlawful for SPB to offer or sell any security in an issuer transaction
which offer or sale is subject to applicable provisions of the California
Corporate Securities Act of 1968, as amended. Effective July 1, 1997, any
offer to an affiliate or institutional or registered investor under the
California Corporate Securities Act of 1968, as amended, is exempt from the
permit requirement, subject to certain conditions.
37
<PAGE>
The DFI, however, has authority to exempt any such transaction which the
DFI determines is not within the purposes of the qualification requirements
and which the DFI finds not necessary or appropriate in the public interest or
for the protection of investors. The DFI also has authority to impose
conditions in any permit, including legends restricting transferability,
impounding proceeds, or other conditions deemed reasonable and necessary in
the public interest.
Capital; Limitations on Borrowings
Under California law, an industrial bank is subject to certain leverage
limitations that are not generally applicable to commercial banks or savings
and loan associations. In particular, an industrial bank that has been in
operation for over 60 months may have outstanding at any time deposits no more
than 20 times paid-up and unimpaired capital and surplus as restricted in its
by-laws as not available for dividends, with the exact limitation subject to
order by the DFI. The DFI has issued an order to SPB authorizing the maximum
20 times leverage standard.
Industrial banks are not permitted to borrow, except by the issuance of
investment certificates, in an amount exceeding 300% of outstanding capital
stock, surplus and undivided profits, without the DFI's prior consent. All
sums borrowed in excess of 150% of outstanding capital stock, surplus and
undivided profits must be unsecured borrowings or, if secured, approved in
advance by the DFI, and be included as certificates of deposit for purposes of
computing the above ratios. However, collateralized FHLB advances and, as of
January 1, 1999, borrowings from the FDIC and the Federal Reserve Bank, are
excluded from this test of secured borrowings and are not specifically limited
by California law.
FDIC regulations contain risk-based capital adequacy standards applicable
to financial institutions like SPB whose deposits are insured by the FDIC.
These guidelines provide a measure of capital adequacy and are intended to
reflect the degree of risk associated with both on and off balance sheet
items, including residential loans sold with recourse, legally binding loan
commitments and standby letters of credit. Unlike SPB, our company because it
is not directly regulated by any bank regulatory agency, is not subject to any
minimum capital requirements. See "--Holding Company Regulations."
A financial institution's risk-based capital ratio is calculated by
dividing its qualifying capital by its risk-weighted assets. Risk-based
capital ratios are determined by allocating assets and specified off-balance
sheet items to four risk-weighted categories ranging from 0% to 100%, with
higher levels of capital being required for the categories perceived as
representing greater risk. Financial institutions generally are expected to
meet a minimum ratio of qualifying total capital to risk-weighted assets of
8%, of which at least 50% of qualifying total capital must be in the form of
core capital (Tier 1), which includes common stock, noncumulative perpetual
preferred stock, minority interests in equity capital accounts of combined
subsidiaries and mortgage servicing rights and a percentage of purchased
credit card relationships, subject to certain amount limitations.
Supplementary capital (Tier 2) consists of the allowance for loan and lease
losses up to 1.25% of risk-weighted assets, cumulative preferred stock,
intermediate-term preferred stock, hybrid capital instruments and term
subordinated debt. The risk-based capital standards were amended in September
1998 so that up to 45 percent of the pre-tax net unrealized holding gains on
certain available-for-sale equity securities could be included in the Tier 2
capital calculation. The maximum amount of Tier 2 capital that may be
recognized for risk-based capital purposes is limited to 100% of Tier 1
capital (after any deductions for disallowed intangibles).
The aggregate amount of term subordinated debt and intermediate term
preferred stock that may be treated as Tier 2 capital is limited to 50% of
Tier 1 capital. Certain other limitations and restrictions apply as well. At
December 31, 1999 and 1998, the Tier 2 capital of SPB consisted of its
allowance for loan losses and $35.0 million in term subordinated indebtedness.
The FDIC has adopted a 3% minimum leverage ratio that is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions, even those that invest predominantly in low risk assets,
continue to maintain a minimum level of core capital. A financial
institution's minimum leverage ratio is determined by dividing its Tier 1
capital by its quarterly average total assets, less intangibles not includable
in Tier 1 capital.
38
<PAGE>
The FDIC rules provide that a minimum leverage ratio of 3% is required for
institutions that have been determined to be in the highest category used by
regulators to rate financial institutions. All other organizations are
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. At December 31, 1999 and 1998, SPB was in compliance with all
of its capital requirements.
Prompt Corrective Action
The FDIC regulations contain a prompt corrective action rule which was
adopted in response to requirements under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking
regulators to take "prompt corrective action" with respect to banks that do
not meet minimum capital requirements. The FDIC's rules provide that an
institution is "well capitalized" if its risk-based capital ratio is 10% or
greater; its Tier 1 risk-based capital ratio is 6% or greater; its leverage
ratio is 5% or greater; and the institution is not subject to a capital
directive of a federal bank regulatory agency. A bank is "adequately
capitalized" if its risk-based capital ratio is 8% or greater; its Tier 1
risk-based capital ratio is 4% or greater; and its leverage ratio is 4% or
greater (3% or greater for the highest rated institutions).
An institution is considered "undercapitalized" if its risk-based capital
ratio is less than 8%; its Tier 1 risk-based capital ratio is less than 4%, or
its leverage ratio is 4% or less (less than 3% for the highest rated
institutions). An institution is "significantly undercapitalized" if its risk-
based capital ratio is less than 6%; its Tier 1 risk-based capital ratio is
less than 3%; or its leverage ratio is less than 3%. A bank is deemed to be
"critically undercapitalized" if its ratio of tangible equity (Tier 1 capital)
to total assets is equal to or less than 2%. An institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it engages in unsafe or unsound banking practices. The
"well capitalized" this classification, however, is a regulatory capital
classification used for internal regulatory purposes, and is not necessarily
indicative of SPB's financial condition and operations.
Undercapitalized institutions are required to submit a capital restoration
plan for improving capital. In order to be accepted, such plan must include a
financial guaranty from the institution's holding company that the institution
will return to capital compliance. If such a guarantee were deemed to be a
commitment to maintain capital under the Federal Bankruptcy Code, a claim for
a subsequent breach of the obligations under such guarantee in a bankruptcy
proceeding involving the holding company would be entitled to a priority over
third party general unsecured creditors of the holding company.
Undercapitalized institutions: are prohibited from making capital
distributions or paying management fees to controlling persons; may be subject
to growth limitations; are restricted from ongoing acquisitions, branching and
entering into new lines of business, and transactions with affiliates; and are
limited in the appointment of additional directors or senior executive
officers. Finally, the institution's regulatory agency has discretion to
impose certain of the restrictions generally applicable to significantly
undercapitalized institutions.
In the event an institution is deemed to be significantly undercapitalized,
it may be required to: sell stock; merge or be acquired; restrict transactions
with affiliates; restrict interest rates paid; divest a subsidiary; or dismiss
specified directors or officers. If the institution is a bank holding company,
it may be prohibited from making any capital distributions without prior
approval of the Federal Reserve Board and may be required to divest its
subsidiaries. Our parent company is not a bank holding company.
A critically undercapitalized institution is generally prohibited from
making payments on subordinated debt and may not, without the approval of its
principal bank supervisory agency, enter into a material transaction other
than in the ordinary course of business; engage in any covered transaction; or
pay excessive compensation or bonuses. Critically undercapitalized
institutions are subject to appointment of a receiver or conservator.
Effectively, the FDIC would have general enforcement powers over SPB and our
company in the event that SPB were deemed undercapitalized.
39
<PAGE>
SPB's Capital Ratios. The following tables indicate SPB's capital ratios
under (1) the California leverage limitation, (2) the FDIC risk-based capital
requirements, and (3) the FDIC minimum leverage ratio at December 31, 1999 and
1998.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------- ----------------------------------------------
Well Well
Minimum Capitalized Minimum Capitalized
Actual Requirement Requirement Actual Requirement Requirement
-------------- -------------- -------------- -------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation............. $169,962 10.45% $ 81,308 5.00% $ N/A N/A% $179,022 10.45% $ 85,688 5.00% $ N/A N/A%
Risk-based Capital...... 219,278 10.67 164,445 8.00 205,557 10.00 221,657 11.12 159,410 8.00 199,264 10.00
Risk-based Tier 1
Capital................ 160,018 7.78 82,223 4.00 123,334 6.00 167,823 8.42 79,705 4.00 119,558 6.00
FDIC Leverage Ratio..... 160,018 8.94 71,610 4.00 89,512 5.00 167,823 8.62 77,861 4.00 97,326 5.00
</TABLE>
Limitations on Types of Deposits
Because of limitations contained in the CIBL, and to maintain the exemption
from the BHCA ("Holding Company Regulations"), SPB currently offers investment
certificates in the form of passbook accounts and certificates of deposit. SPB
does not offer nor is it authorized to offer demand deposit accounts.
Insurance Premiums
The FDIC administers two separate deposit insurance funds, the Bank
Insurance Fund ("BIF"), which insures the deposits of institutions which were
insured by the FDIC prior to the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), and the Savings Association Insurance Fund
("SAIF"), which insures the deposits of institutions which were insured by the
Federal Savings and Loan Insurance Corporation prior to the enactment of
FIRREA. SPB's insurance premium for the year ended December 31, 1999 was
approximately $672,000.
As required by FDICIA, the FDIC has established a risk-based system for
setting deposit insurance assessments. Under the risk-based assessment system,
an institution's insurance assessments vary depending on the level of capital
the institution holds and the degree to which it is of supervisory concern to
the FDIC. Once an insurance fund has reached its designated reserve ratio of
1.25%, and as long as there are no outstanding borrowings by the FDIC from the
United States Treasury, the FDIC is not permitted to charge assessment
premiums that would increase the reserve ratio of the insurance fund above its
designated reserve ratio. The BIF reached its designated reserve ratio in
1995.
Recent Legislation
A new California state regulatory department was created in 1996 known as
the Department of Financial Institutions. The DFI became effective July 1,
1997. All California state chartered depository institutions are now licensed
and regulated after July 1, 1997 by the DFI, which includes banks, savings
associations, credit unions, and industrial banks. SPB, an industrial bank, is
subject to the jurisdiction of the DFI as its state regulator. In effect, the
California State Department of Banking was renamed as the DFI. The
Superintendent of Banks was named as the Acting Commissioner of the DFI.
Certain industrial loan administrative and examination staff personnel
transferred to the DFI from the California Department of Corporations. Most
administrative and examination staff of the former California State Banking
Department remained with the renamed department. Consequently, the former
California Department of Banking senior staff personnel, including persons in
the office of general counsel and senior examination staff of the DFI, who
prior to 1997 were generally unfamiliar with the Industrial Banking Law will
be interpreting the Industrial Banking Law.
The 1996 California legislation that created the DFI also authorized the
use of the word "bank" by industrial banks, such as SPB, in their names.
Effective October 8, 1997, Southern Pacific Thrift and Loan changed its name
to "Southern Pacific Bank." That legislation also granted the DFI jurisdiction
over the issuance of securities by a thrift and loan company requiring
application and permit unless otherwise exempt.
40
<PAGE>
On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("Funds
Act") was enacted which, among other things, imposes on BIF-insured deposits a
special premium assessment on domestic deposits at one-fifth the premium rate
imposed on SAIF-insured deposits, which will be used to pay the interest on
Financial Corporation ("FICO") bonds issued by the federal government as part
of the savings association bailout provisions of the 1989 FIRREA legislation.
In the year 2000, however, the Funds Act requires BIF-insured institutions to
share in the payment of the FICO obligations on a pro rata basis with all
savings institutions, with annual assessments expected to equal approximately
2.4 basis points until the year 2017, and to be completely phased out by 2019.
In addition, on December 6, 1996, the FDIC determined to continue the
current downward adjustment to the assessment rate schedule applicable to
deposits of BIF institutions for the semi-annual assessment period beginning
January 1, 1997. For such period, and for succeeding semi-annual periods, the
BIF assessment rates will range from 0 to 27 basis points. In addition, in
accordance with the Funds Act, the FDIC eliminated the minimum assessment
amount for BIF-insured institutions. SPB's combined FDIC and FICO assessment
rate for 1999 and 1998 was approximately 1.2 and 4.2 cents per $100 of
deposits. We cannot predict if, when and how frequently SPB's deposit
insurance assessment rates will change or whether such changes will have a
material effect on the bank.
Holding Company Regulations
We are exempt from regulation as a bank holding company because SPB is not
considered a "bank" under the BHCA. The Competitive Equality Banking Act of
1987 ("CEBA") subjected certain previously unregulated companies to regulation
as bank holding companies by expanding the definition of the term "bank" in
the BHCA. Notwithstanding, the FDIC does view the source of strength doctrine
applicable to bank holding companies to be relevant to the continued capital
strength of non-member state banks such as SPB. SPB may cease to fall within
those exceptions if it engages in certain operational practices, including
accepting demand deposit accounts. SPB currently has no plans to engage in any
operational practice that would cause it to fall outside of one or more of the
exceptions to the term "bank" as defined by CEBA. Under CEBA, we are treated
as if we are a bank holding company for the limited purposes of applying
certain restrictions on loans to insiders, transactions with affiliates and
anti-tying provisions.
Limitations on Dividends
Under the CIBL, an industrial bank may declare dividends on its capital
stock only if it has at least $750,000 of unimpaired capital stock plus
additional capital stock of $50,000 for each branch office. In addition, no
distribution of dividends is permitted unless such distribution would not
exceed an industrial bank's retained earnings; any payment would not result in
a violation of the approved minimum capital to thrift and loan certificate of
deposit ratio; and/or after giving effect to the distribution, both
(a) the sum of an industrial bank's assets (net of goodwill, capitalized
research and development expenses and deferred charges) would be at least
125% of its liabilities (net of deferred taxes, deferred income and other
deferred credits), and
(b) current assets would be not less than current liabilities (except
that if a thrift and loan's average earnings before taxes for the last two
fiscal years had been less than average interest expense, current assets
must be at least 125% of current liabilities).
Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their bylaws to restrict such capital
from the payment of dividends. The amount of restricted capital maintained by
an industrial bank also provides the basis for establishing the maximum amount
that a thrift may lend to one borrower. As of December 31, 1999, 1998 and
1997, $150.0 million, $150.0 million and $125.0 million, respectively, of
SPB's capital was so restricted.
41
<PAGE>
The FDIC has advised insured institutions that the payment of cash
dividends in excess of current earnings from operations is inappropriate and
may be cause for supervisory action. As a result of this policy, SPB may find
it difficult to pay dividends out of retained earnings from historical periods
prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items. Under the Financial Institutions Supervisory
Act and FIRREA, federal regulators also have authority to prohibit financial
institutions from engaging in business practices which are considered to be
unsafe or unsound. It is possible, depending upon the financial condition of
SPB and other factors, that such regulators could assert that the payment of
dividends in some circumstances might constitute unsafe or unsound practices
and prohibit payment of dividends even though technically permissible.
Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment of
such dividends would cause it to become "undercapitalized." These limitations
on the payment of dividends may restrict our ability to use cash from SPB
which may have been otherwise available to us for working capital.
Limitations on Acquisitions of Voting Stock of the Company
Any person who wishes to acquire 10% or more of the capital stock or
capital of a California industrial bank or 10% or more of the voting capital
stock or other securities giving control over management of its parent company
must obtain the prior written approval of the DFI. Similarly, the federal
Change in Bank Control Act of 1978 requires any person or company that obtains
"control" of an insured depository institution to notify the appropriate
Federal banking agency, which would be the FDIC in the case of SPB, 60 days
prior to the proposed acquisition. If the FDIC has not issued a notice
disapproving the proposed acquisition within that time period (including a
possible 120-day extension), the person may retain its interest in such
institution. Any person acquiring 10% or more of the common stock of our
company is subject to these requirements. For purposes of the statute,
"control" is defined as the power, directly or indirectly, to direct the
management or policies of an insured depository institution or to vote 25% or
more of any class of voting securities of an insured depository institution.
However, there is a rebuttable presumption that any person acquiring 10% or
more of any class of voting securities of said institution is presumed to have
"control." In such cases, such person must file an application for approval
with the FDIC or rebut the presumption.
Employees
As of December 31, 1999, we had 581 employees on a full-time equivalent
("FTE") basis, as follows:
<TABLE>
<S> <C>
Southern Pacific Bank.................................................. 324
Imperial Business Credit, Inc.......................................... 94
Imperial Capital Group, LLC............................................ 79
Imperial Credit Industries, Inc........................................ 48
The Lewis Horwitz Organization (ICII).................................. 12
Imperial Credit Lender Services, Inc................................... 10
Imperial Credit Asset Management Inc................................... 9
Imperial Credit Advisors, Inc.......................................... 4
ICII Ventures, Inc..................................................... 1
---
Total................................................................ 581
===
</TABLE>
We believe that our relations with these employees are satisfactory. We are
not a party to any collective bargaining agreement.
ITEM 2. PROPERTIES
Our executive offices occupy approximately 22,116 square feet of space in
Torrance, California at a current monthly rental of approximately $31,200.
SPB's executive offices occupy approximately 28,749 square feet of space in
Torrance, California at a current monthly rental of $41,700. In February 2000,
we moved SPB's executive offices from Los Angeles to Torrance, California.
42
<PAGE>
Not including SPB, we currently lease offices in Beverly Hills, San Diego,
Santa Ana Heights and Irvine, California, as well as in Denver, Colorado. SPB
and its divisions operate in California through branches and loan production
offices and in other states through loan production offices and
representatives.
ITEM 3. LEGAL PROCEEDINGS
Our company is a defendant in a consolidated federal securities class
action, In re Southern Pacific Funding Corporation Securities Litigation, Lead
Case No. CV98-1239-MA, in the U.S. District Court for the District of Oregon.
The action also names as defendants two current directors of ours, and others.
This action was initially filed in October 1998. Plaintiffs allege that SPFC
failed to properly mark down the value of its residual interests, failed to
properly reflect increased levels of prepayments and actual prepayment and
default rates on its loans and made false and misleading public statements
concerning its financial condition. Following a number of motions to dismiss,
defendants answered and alleged affirmative defenses to the second
consolidated complaint on June 22, 1999. On July 21, 1999, the Court certified
a class of persons who purchased the securities of SPFC during the period
October 7, 1997 through October 1, 1998. On September 10, 1999, plaintiffs
filed a third consolidated complaint, alleging claims against our company and
two of its directors (and others) under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934. On September 21, 1999, plaintiffs sought
leave to file a fourth consolidated complaint, alleging claims under
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11
and 12 of the Securities Act of 1933. On December 7, 1999, the Court granted
plaintiffs' motion to file a fourth amended consolidated complaint, denied
defendants' motions to dismiss except as to the Section 12 claim, and granted
plaintiffs' motion to file a supplemental memorandum to add allegations to the
complaint.
Our company and three of its directors are defendants in a consolidated
federal securities class action, In re Imperial Credit Industries, Inc.
Securities Litigation, Case No. 98-8842 SVW, in the U.S. District Court for
the Central District of California. This action, purportedly filed on behalf
of a class of persons who purchased our company's securities during the period
January 29, 1998 through October 1, 1998, was originally filed in November
1998. Plaintiffs allege that defendants made false and misleading statements
and omitted to reveal the truth concerning the value of Imperial Credit
Industries, Inc.'s investments in SPFC and FMC, resulting in an artificial
inflation of the price of our securities. On June 21, 1999, defendants moved
to dismiss plaintiffs' complaints. The matter was fully briefed and the Court
held a hearing on July 26, 1999. At the hearing, the Court granted defendants'
motions to dismiss plaintiffs' complaints, with leave to amend. The Court
subsequently issued a written order on September 7, 1999. Plaintiffs filed a
consolidated amended class action complaint on October 4, 1999, alleging a
claim against our company and three of its directors for violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On October
22, 1999, defendants moved to dismiss the consolidated amended class action
complaint. On November 22, 1999, plaintiffs were granted leave to file an
amended class action complaint, which plaintiffs filed on December 13, 1999.
The Court held a hearing on defendants' motion to dismiss the second
consolidated amended complaint on January 24, 2000. The motion was denied on
February 22, 2000. The Court has not certified a class, nor have plaintiffs
filed a motion for class certification.
We are a defendant in Steadfast Insurance Company v. Auto Marketing Network
Inc. and Imperial Credit Industries, Inc., filed on August 12, 1997 in the
Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking
damages in the amount of $27 million allegedly resulting from the fraudulent
inducement to enter into, and the subsequent breach of, a motor vehicle
collateral enhancement insurance policy. In May 1998, we filed a counterclaim
against the plaintiff for $54 million in damages based on the allegation that
the underlying claim was filed in bad faith. In January 1999, the Court
entered a preliminary injunction which enjoined us from transferring assets of
Auto Marketing Network, Inc., in amounts that would cause the total assets of
Auto Marketing Network to be less than $20 million in value. The injunction
has since been removed and the parties are presently engaged in pretrial
discovery. We have moved to dismiss ICII from the lawsuit.
We intend to vigorously defend all of the above lawsuits.
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<PAGE>
We were a defendant along with ICCMIC and its directors, which includes one
of our current directors and one former director, in a putative class action
lawsuit filed on July 22, 1999 by Riviera-Enid, a Florida limited partnership,
in Los Angeles Superior Court, Case No. BC213902. The complaint alleges that
the proposed merger between a subsidiary of ours and ICCMIC constitutes a
breach of fiduciary duty by the defendants in that, allegedly, the merger
price is unfair to stockholders, the merger price is less than the liquidation
value of ICCMIC's assets and the termination fee for the management contract
is excessive. The complaint also alleges that certain of the directors have
conflicts of interest because of their affiliation with us and that the merger
will benefit us at the expense of ICCMIC's other stockholders. The complaint
seeks certification of a class of all stockholders of ICCMIC whose stock will
be acquired in connection with the 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
October 8, 1999, we filed a demurrer to plaintiff's complaint, which was set
to be heard by the Court on November 22, 1999. On November 1, 1999, plaintiff
served an amended class action complaint alleging the same claims but adding
details from ICCMIC's preliminary proxy statement filed with the SEC. The
Court has not certified a class, nor has plaintiff filed a motion for class
certification. On November 3, 1999, ICCMIC's counsel received a letter from
counsel for the plaintiffs asserting their 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 have decided not to move forward with a motion for a temporary
restraining order or permanent injunction at this time. All defendants filed
demurrers to the amended complaint, and on February 4, 2000, the Court granted
ICII's demurrer and dismissed the action against ICII and the individual ICII
defendants with prejudice and without leave to amend. We and ICCMIC believe
that the material allegations of the complaint are without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
44
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market under the
symbol "ICII" since May 18, 1992. The following table sets forth the high and
low closing sales prices for our common stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
1999 High Low 1998 High Low
---- ----- ----- ---- ------ ------
<S> <C> <C> <C> <C> <C>
First Quarter $9.94 $7.06 First Quarter $27.38 $17.25
Second Quarter 9.44 6.94 Second Quarter 27.00 18.88
Third Quarter 6.97 4.31 Third Quarter 26.25 5.75
Fourth Quarter 6.50 4.00 Fourth Quarter 11.63 3.63
</TABLE>
At March 28, 2000, the closing sales price of our common stock as reported
by the Nasdaq National Market was $4.375. At March 28, 2000, there were
approximately 1,000 shareholders of record.
We have not paid cash dividends on our common stock and we do not
anticipate paying cash dividends on our common stock in the foreseeable
future. We intend to retain earnings for use in our operations and the
expansion of our business. The indentures for our 9 7/8% Senior Notes and our
Resettable Rate Debentures restrict our payment of cash dividends. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources". SPB is subject to certain
regulatory restrictions on the payment of dividends. See "Item 7. Business--
Management's Discussion and Analysis--Limitations on Dividends".
Share Repurchase Programs. In the fourth quarter of 1997, our board of
directors authorized the repurchase of up to 1.9 million shares, or
approximately 5%, of our outstanding shares of common stock. During 1998, we
repurchased and retired 1.9 million shares of common stock under this program
at an average price of $10.62 per share. In the third quarter of 1998, our
board of directors authorized an additional share repurchase program to buy
back up to 3.7 million shares, or approximately 10%, of our outstanding shares
of common stock. As of December 31, 1998, we had repurchased and retired
570,878 shares of common stock under this program at an average price of $6.72
per share. On May 8, 1999, our board of directors amended its repurchase
authorization and increased the remaining number of shares available for
repurchase by 600,000 shares to total of 3.8 million shares.
On May 14, 1999, we entered into an agreement with our former parent
Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999,
we repurchased 10% or 3,682,536 shares of our outstanding common stock for
$8.00 per share or $29.5 million. The repurchase from Imperial Bank was
financed through the private issuance of $30.0 million of Series B 11.50%
Mandatorily Redeemable Cumulative Preferred Stock to a group of independent
investors. As of December 31, 1999, we had repurchased and retired 4,253,414
shares of common stock under our second share repurchase program at an average
price of $7.83 per share. The authorized share repurchase under the second
repurchase program is 4,334,276 shares.
Since beginning share repurchases in December of 1997, we have repurchased
under both the first and second share repurchase programs a total of 6,193,220
shares of common stock at an average price of $8.70 per share. All of our
repurchases effected under our stock repurchase programs were effected in
compliance with Rule 10b-18 under the Securities Exchange Act of 1934.
Preferred Share Purchase Rights. On October 12, 1998, we distributed
preferred share purchase rights as a dividend to our shareholders of record at
the rate of one right for each outstanding share of our common stock. The
rights are attached to our common stock and will only be exercisable and trade
separately if a person or group acquires or announces the intent to acquire
15% or more of our common stock (25% or more for any
45
<PAGE>
person or group holding 15% or more of our common stock on October 12, 1998).
Each right will entitle shareholders to buy one-hundredth of a share of a new
series of junior participating preferred stock at an exercise price of $40. If
our company is acquired in a merger or other transaction after a person has
acquired 15% or more of our outstanding common stock (25% or more for any
person or group holding 15% or more of our common stock on October 12, 1998),
each right will entitle the shareholder to purchase, at the right's then-
current exercise price, a number of the acquiring company's common shares
having a market value of twice such price. The acquiring person would not be
entitled to exercise these rights. In addition, if a person or group acquires
15% or more of our company's common stock, each right will entitle the
shareholder (other than the acquiring person) to purchase, at the right's
then-current exercise price, a number of shares of our company's common stock
having a market value of twice such price. Following the acquisition by a
person of 15% or more of our common stock and before an acquisition of 50% or
more of our common stock, our board of directors may exchange the rights
(other than the rights owned by such person) at an exchange ratio of one share
of common stock per right. Before a person or group acquires beneficial
ownership of 15% (or 25% as applicable) or more of our common stock, the
rights are redeemable for $.0001 per right at the option of our board of
directors. The rights will expire on October 2, 2008 unless redeemed prior to
that date. Our board is also authorized to reduce the ownership thresholds
referred to above to not less than 10%. The rights are intended to enable all
of our shareholders to realize the long-term value of their investment in our
company.
46
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following schedules set forth selected consolidated financial data as
of or for each of the years in the five-year period ended December 31, 1999.
Such selected consolidated financial data should be read in conjunction with
the consolidated financial statements and notes thereto and Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
-------- --------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Interest on loans and
leases..................... $178,229 $ 200,827 $176,146 $188,242 $120,244
Interest on investments..... 25,841 28,965 24,776 10,807 6,630
Interest on other finance
activities................. 3,368 6,048 2,678 8,422 2,608
-------- --------- -------- -------- --------
Total interest income..... 207,438 235,840 203,600 207,471 129,482
Interest expense............ 121,607 123,106 118,213 135,036 95,728
-------- --------- -------- -------- --------
Net interest income....... 85,831 112,734 85,387 72,435 33,754
Provision for loan and
lease losses............... 35,340 15,450 20,975 9,773 5,450
-------- --------- -------- -------- --------
Net interest income after
provision for loan and
lease losses............. 50,491 97,284 64,412 62,662 28,304
Gain on sale of loans and
leases..................... 6,480 14,888 69,737 88,156 39,557
Asset management fees....... 10,054 7,591 5,810 3,347 --
Investment banking and
brokerage fees............. 27,198 18,463 7,702 -- --
Loan servicing income....... 6,885 11,983 9,474 1,680 12,718
Gain (loss) on sale of
securities................. 32,742 (592) 112,185 82,690 --
Equity in net income of
SPFC....................... -- 12,739 25,869 -- --
Equity in net (loss) income
of FMC..................... (53) 3,235 (3,050) -- --
Mark to market on
securities and loans held
for sale................... (28,641) (42,388) (341) -- --
Loss on impairment of
securities................. -- (120,138) -- -- --
Gain on termination of REIT
advisory agreement......... -- -- 19,046 -- --
Gain on sale of servicing
rights..................... -- -- -- 7,591 3,578
Other income................ 13,894 13,118 4,060 10,807 1,152
-------- --------- -------- -------- --------
Total other income
(loss)................... 68,559 (81,101) 250,492 194,271 57,005
-------- --------- -------- -------- --------
Total revenues............ 119,050 16,183 314,904 256,933 85,309
Expenses:
Personnel expense........... 60,341 61,636 51,609 48,355 34,053
Other expenses.............. 66,259 59,200 63,252 50,694 27,127
-------- --------- -------- -------- --------
Total expenses............ 126,600 120,836 114,861 99,049 61,180
-------- --------- -------- -------- --------
(Loss) income from
continuing operations
before income taxes,
minority interest and
extraordinary item....... (7,550) (104,653) 200,043 157,884 24,129
Income taxes................. (3,074) (44,064) 74,267 69,874 10,144
Minority interest in income
(loss) of consolidated
subsidiaries................ 1,474 (1,464) 10,513 12,026 (208)
-------- --------- -------- -------- --------
(Loss) income from
continuing operations
before extraordinary
item....................... (5,950) (59,125) 115,263 75,984 14,193
Operating loss from
discontinued operations of
AMN, net of income taxes.... (899) (3,232) (25,347) -- --
Loss on disposal of AMN, net
of income taxes............. -- (11,276) -- -- --
-------- --------- -------- -------- --------
(Loss) income before
extraordinary item......... (6,849) (73,633) 89,916 75,984 14,193
Extraordinary item--gain
(loss) on early
extinguishment of debt, net
of income taxes............. 4,021 -- (3,995) -- --
-------- --------- -------- -------- --------
Net (loss) income........... $ (2,828) $ (73,633) $ 85,921 $ 75,984 $ 14,193
======== ========= ======== ======== ========
Comprehensive income
(loss)..................... $ 974 $ (76,745) $ 82,837 $ 77,783 $ 15,992
======== ========= ======== ======== ========
Basic (loss) income per
share(1):
(Loss) income from
continuing operations...... $ (0.17) $ (1.55) $ 2.99 $ 2.11 $ 0.45
Loss from discontinued
operations, net of income
taxes...................... (0.02) (0.08) (0.66) -- --
Loss on disposal of AMN,
net of income taxes........ -- (0.30) -- -- --
Extraordinary item--gain
(loss) on early
extinguishment of debt, net
of income taxes............. 0.11 -- (0.10) -- --
-------- --------- -------- -------- --------
Net (loss) income per
common share............... $ (0.08) $ (1.93) $ 2.23 $ 2.11 $ 0.45
======== ========= ======== ======== ========
Diluted (loss) income per
share(1):
(Loss) income from
continuing operations...... $ (0.17) $ (1.55) $ 2.82 $ 1.95 $ 0.40
Loss from discontinued
operations, net of income
taxes...................... (0.02) (0.08) (0.62) -- --
Loss on disposal of AMN,
net of income taxes........ -- (0.30) -- -- --
Extraordinary item--gain
(loss) on early
extinguishment of debt, net
of income taxes............. 0.11 -- (0.10)
-------- --------- -------- -------- --------
Net (loss) income per
common share............... $ (0.08) $ (1.93) $ 2.10 $ 1.95 $ 0.40
======== ========= ======== ======== ========
Weighted average diluted
shares outstanding.......... 34,517 38,228 40,855 38,975 35,122
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Cash Flow Data:
Net cash provided by
(used in) operating
activities............. $ 151,622 $ (37,135) $ 18,563 $ (31,135) $(1,173,703)
Net cash (used in)
provided by investing
activities............. (202,863) (174,982) (320,627) 244,177 140,961
Net cash (used in)
provided by financing
activities............. (212,633) 464,510 273,196 (177,961) 1,047,004
--------- --------- --------- --------- -----------
Net (decrease)
increase in cash.... $(263,874) $ 252,393 $ (28,868) $ 35,081 $ 14,262
========= ========= ========= ========= ===========
SPB Regulatory Capital
Ratios (at end of
period):
California leverage
limitation(1).......... 10.45 % 10.45 % 13.20 % 13.50 % 11.58 %
Risk-based--Tier 1...... 7.78 8.42 8.75 9.71 11.72
Risk-based--Total....... 10.67 11.12 12.25 10.87 13.18
FDIC Leverage Ratio..... 8.94 8.62 8.30 9.35 8.04
Asset Quality Ratios (at
end of period):
Nonperforming assets as
a percentage of total
assets................. 2.84 % 2.06 % 4.31 % 2.64 % 1.55 %
Allowance for loan and
lease losses as a
percentage of non-
performing loans....... 53.59 65.11 53.87 38.94 44.30
Net charge-offs as a
percentage of average
total loans and leases
held for
investment(2).......... 1.79 1.92 2.72 0.94 0.36
Selected Ratios:
Ratio of earnings to
fixed charges......... 0.9x 0.2x 2.7x 2.2x 1.2x
Pre-tax interest
coverage ratio........ 0.8x N/a 8.1x 17.4x 3.9x
Ratio of indebtedness
to total
capitalization (at
period end)(3)........ 54.6 % 55.4 % 47.2 % 40.5 % 46.1 %
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash...................... $ 33,898 $ 297,772 $ 45,379 $ 74,247 $ 39,166
Interest-bearing
deposits................. 248,182 1,415 103,738 3,369 267,776
Securities................ 242,139 235,423 227,468 84,296 5,963
Loans and leases held for
sale..................... 289,398 319,061 153,469 940,096 1,341,810
Loans and leases held for
investment, net.......... 1,241,232 1,320,095 1,252,487 1,068,599 668,771
Retained interests in loan
and lease
securitizations.......... 10,220 27,011 22,895 159,707 58,272
Total assets.............. 2,201,615 2,417,183 2,094,389 2,470,639 2,510,635
Deposits.................. 1,614,758 1,714,252 1,156,022 1,069,184 1,092,989
Borrowings from FHLB...... -- 20,000 45,000 140,500 190,000
Company obligated
mandatorily redeemable
preferred securities of
subsidiary trust holding
solely debentures of the
company ("ROPES")........... 61,750 70,000 70,000 -- --
Other borrowings.......... 74,309 102,270 144,841 694,352 992,810
Senior and convertible
subordinated notes....... 185,185 219,858 219,813 163,209 80,472
Total liabilities......... 1,996,235 2,183,662 1,770,456 2,231,131 2,416,533
Shareholders' equity...... $ 205,380 $ 233,521 $ 323,933 $ 239,508 $ 94,102
</TABLE>
- --------
(1) Ratio of (i) SPB's total shareholders' equity to (ii) total deposits.
(2) Excluding charge-offs at AMN, the ratio of charge-offs to average loans
held for investment was 1.73% in 1999, 0.59% in 1998 and 1.16% in 1997.
(3) Ratio of (i) non-funding indebtedness to (ii) non-funding indebtedness plus
total shareholders' equity.
48
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Organization
We are a diversified commercial lending, financial services, and investment
banking holding company that was incorporated in 1991 in the State of
California. Our headquarters are located in Torrance, California. Our business
activities are conducted through four wholly owned subsidiaries: Southern
Pacific Bank ("SPB"), Imperial Business Credit Inc. ("IBC"), Imperial Credit
Lender Services, Inc. ("ICLS") formerly Statewide Documentation, Inc., and
Imperial Credit Asset Management, Inc. ("ICAM"). Imperial Capital Group, LLC
("ICG") is a majority owned consolidated subsidiary which is approximately 65%
owned by us and approximately 35% owned by ICG's management. Prior to November
1, 1999, we held a significant equity interest in a publicly traded company--
Franchise Mortgage Acceptance Company ("FMC") (Nasdaq Symbol: FMAX) (See
"Recent Developments--"FMAX Transaction"). Our company also owns a 9% equity
interest in a commercial REIT, Imperial Credit Commercial Mortgage Investment
Corp. ("ICCMIC") (Nasdaq Symbol: ICMI). Through October 22, 1999, a wholly
owned subsidiary of ours, Imperial Credit Commercial Asset Management Corp.
("ICCAMC"), managed the assets and operations of ICCMIC (See--"Liquidity and
Capital Resources--The ICCMIC Acquisition"). Our parent company, our
subsidiaries, and affiliates offer a wide variety of deposit and commercial
loan products, asset management, investment banking and brokerage, and loan
documentation and closing services. Our core businesses originate loans and
leases funded primarily by FDIC insured deposits. Our business strategy
currently emphasizes:
. holding the majority of the loans and leases that we originate for
investment, except for equipment leases originated by IBC for sale and
certain fixed-rate commercial loans originated by SPB's Income Property
Lending Division ("IPL"),
. investing in and managing businesses in high margin niche segments of the
financial services industry,
. maintaining conservative, disciplined underwriting and credit risk
management,
. originating loans and leases on a wholesale basis, where possible, and
. providing investment banking and broker/dealer services to middle market
companies and private individuals.
Overview of Consolidated Operations
At December 31, 1999, our total assets were $2.2 billion as compared to
$2.4 billion at December 31, 1998. Our total net loans decreased to $1.5
billion at December 31, 1999 as compared to $1.6 billion at December 31, 1998.
Our loan and lease originations from SPB's IPL division and IBC were $339.7
million and $125.2 million for 1999 as compared to $366.1 million and $114.3
million for 1998, respectively. Fundings of new commitments at Coast Business
Credit ("CBC") were $511.0 million for 1999 as compared to $447.7 million for
1998.
On a consolidated basis, our cash and interest bearing deposits decreased
to $282.1 million at December 31, 1999 as compared to $299.2 million at
December 31, 1998. At our parent company, cash and interest bearing deposits
increased to $46.2 million at December 31, 1999 as compared to $5.5 million at
December 31, 1998.
Our deposits at SPB decreased $90.5 million to $1.6 billion at December 31,
1999 as compared to $1.7 billion at December 31, 1998. Our long term debt
decreased to $246.9 million at December 31, 1999 as compared to $289.9 million
at December 31, 1998 due to our repurchase of $43.1 million of our Senior
Notes and company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the company ("ROPES").
Additionally, we paid off certain other borrowings and Federal Home Loan Bank
advances during 1999. The repurchase of the Senior Notes and ROPES for the
year ended December 31, 1999 will result in annual pre-tax interest savings of
approximately $4.3 million.
49
<PAGE>
Our non-performing assets and non-accrual loans and leases increased to
$64.4 million and $59.4 million at December 31, 1999 from $54.1 million and
$39.5 million at December 31, 1998. The increase in non-performing assets and
non-accrual loans occurred primarily in the CBC, Imperial Warehouse Finance,
Inc. (formerly "PrinCap Mortgage Warehouse, Inc."), single family residential
mortgage and purchased entertainment loan portfolios. The increase in non-
accrual loans in the entertainment loan portfolio was solely related to non-
accrual loans purchased from Imperial Bank in connection with the Lewis
Horwitz Organization ("LHO") acquisition. See "Item 7. Management's Discussion
and Analysis--The Lewis Horwitz Organization" for more information on the
acquisition of LHO.
Our retained interests in loan and lease securitizations were $10.2 million
at December 31, 1999 as compared to $27.0 million at December 31, 1998.
Approximately $6.5 million of the retained interest balance at December 31,
1999 resulted from lease securitizations at IBC. The decrease in retained
interests primarily resulted from a $15.0 million write-down, coupled with
cash collections, and sales of retained interests.
Our securities available for sale and trading securities were $74.4 million
and $160.8 million at December 31, 1999 as compared to $60.0 million and
$170.8 million at December 31, 1998.
At December 31, 1999 our shareholders equity decreased to $205.4 million as
compared to $233.5 million at December 31, 1998. The decrease in shareholders'
equity was primarily the result of our repurchase of 3,682,000 shares of our
common stock. Our book value per share and tangible book value per share
decreased to $6.19 and $5.50 at December 31, 1999 as compared to $6.35 and
$5.76 at December 31, 1998, respectively.
Consolidated Results of Operations
We reported a net loss for the year ended December 31, 1999 of $2.8 million
or $0.08 diluted net loss per share as compared to a net loss of $73.6 million
or $1.93 diluted net loss per share for the prior year.
The loss for 1999 included an extraordinary gain on the early
extinguishment of debt of $4.0 million or $0.11 diluted net income per share
and operating losses relating to the discontinued operations of AMN of
$899,000 or $0.02 diluted net loss per share, respectively. The net loss for
the same period last year included operating losses of $3.2 million or $0.08
diluted net loss per share relating to the discontinued operations of AMN and
a loss on the disposal of AMN of $11.3 million or $0.30 diluted net loss per
share.
During 1999, our operating results included the following items:
. A gain on sale of Franchise Mortgage Acceptance Company ("FMC") totaling
$30.1 million resulting from the sale of our 38.3% interest in FMC.
. The write-off of IBC's remaining balance of goodwill totaling $11.3
million.
. The write-down of retained interests in lease securitizations at IBC
totalling $11.9 million. The write downs for 1999 were primarily the
result of increased lease defaults in the last quarter of 1999.
. The write-down of auto loans at SPB totaling $24.8 million. An increase
in delinquencies and non-accrual loans were the primary cause of the
decline in the value of SPB's held for sale auto loan portfolio.
. The acceleration of SPB's originated servicing rights amortization of
$4.3 million due to SPB's exit from its third party loan servicing
operations.
Consolidated Net Revenue
Our total net revenue increased to $119.1 million for 1999 as compared to
$16.2 million for the prior year. The increase in net revenue was primarily
due to the sale of our 38.3% equity ownership in FMC for a pre-tax gain of
$30.1 million, an increase in investment banking and brokerage fees, and lower
impairment and mark-to-market write-downs of loans and securities. These items
were partially offset by lower net interest income and an increased provision
loan and lease losses.
50
<PAGE>
Our total net interest income decreased to $85.8 million for 1999 as
compared to $112.7 million for 1998. The decrease in net interest income was
primarily due to a decrease in the average yield on earning assets. The
decrease in yield primarily relates to the sale and run-off of non-core loans
which were $143.9 million at December 31, 1999 as compared to $371.5 million
at December 31, 1998. Non-core loans included higher yielding, higher risk
loans such as sub-prime auto loans. Additionally, the higher level of non
performing loans had a negative impact on net interest income in 1999 as
compared to 1998. Interest expense on long term debt increased to
$30.5 million for the year ended December 31, 1999 as compared to $30.3
million for the prior year primarily due to the issuance of $30.0 million of
Series B Mandatorily Redeemable Cumulative Preferred Stock, partially offset
by lower average balances of Senior Notes and ROPES. During the third and
fourth quarters of 1999 we repurchased $34.8 million and $8.3 million of
Senior Notes and ROPES resulting in an extraordinary net gain of $5.2 million
on the early extinguishment of debt. Additionally, we retired the Series B
Mandatorily Redeemable Cumulative Preferred Stock in the fourth quarter of
1999 resulting in an extraordinary net loss of $1.2 million on the early
extinguishment of debt. Due to the above factors, our net interest margin
decreased to 4.52% for 1999 as compared to 5.86% for 1998.
Our gain on sale of loans and leases decreased to $6.5 million for the year
ended December 31, 1999 as compared to $14.9 million for the same period last
year primarily due to lower gains on whole loan sales of multifamily real
estate loans originated by IPL. During 1999 we continued our plan to sell
loans from our exited and non-core businesses. During 1999, we sold $45.3
million of auto loans, $33.4 million of single family loans, $11.7 million of
consumer loans, and the remaining Argentine mortgage loan portfolio of $22.8
million, generating a net gain on sale of $321,000.
Asset management fees increased to $10.1 million for 1999 as compared to
$7.6 million for 1998. The increase was primarily due to increased average
outstanding assets under management at ICCMIC and Pacifica Partners I.
Investment banking and brokerage fees increased to $27.2 million for 1999
as compared to $18.5 million for 1998. The increased income from ICG primarily
resulted from increased trading gains, partially offset by lower commission
revenues. ICG raised total proceeds for their clients through corporate
finance transactions of $137.3 million during the year ended December 31, 1999
as compared to $190.0 million during the prior year.
Loan servicing income decreased to $6.9 million for 1999 as compared to
$12.0 million for 1998 primarily due to our exit from the third party
multifamily and commercial mortgage loan servicing businesses.
Net mark-to-market losses of loans and securities held for sale were $28.6
million for 1999 as compared to $42.4 million in 1998. The mark-to-market
adjustments for 1999 were primarily related to SPB's sub-prime auto loan
portfolio and IBC's retained interest on lease securitizations. The mark-to-
market losses for 1998 primarily related to our Argentinean residential
mortgage, sub prime auto loan, and consumer loan portfolios.
Our equity in the net loss of FMC for 1999 was $53,000 as compared to
income of $3.2 million for the prior year. We accounted for our equity
interest in FMC using the equity method from January 1, 1999 through June 30,
1999. From July 1, 1999 through the sale of FMC's stock we accounted for our
equity interest using the cost method. Our equity interest in FMC was sold
during the fourth quarter of 1999. See "Item 7. Management's Discussion and
Analysis--Equity Interests--Equity Interest and Gain on Sale of FMC."
Consolidated Total Expenses
Our total expenses increased to $126.6 million for 1999 as compared to
$120.8 million for 1998. The increase was primarily related to increased
goodwill amortization expense as a result of the write-off of $11.3 million of
goodwill at IBC, and increased amortization of loan servicing rights as a
result of SPB's exit from third party loan servicing. Our personnel expense
decreased to $60.3 million for 1999 as compared to $61.6 million for 1998.
During 1999, we reduced our full time equivalent ("FTE") employees by 11.6% to
581 at December 31, 1999 from 657 at December 31, 1998.
51
<PAGE>
Our amortization of servicing rights was $4.2 million for 1999 as compared
to $1.5 million for 1998. The increase for 1999 as compared to 1998 was
primarily due to accelerated amortization of servicing rights on our non-core
multifamily and commercial real estate loan servicing operations at SPB due to
the release of the servicing rights to a third party in connection with our
exit from this non-core business.
IBC's unamortized balance of goodwill totaling $11.3 million was written
off during the fourth quarter of 1999. The write-off of IBC's goodwill was
based on our estimate of future operations and cash flows. Based on our
estimate, we determined that IBC's goodwill was not recoverable from
continuing IBC's existing lines of business. Our amortization of goodwill was
$14.5 million for 1999 as compared to $2.7 million for 1998.
Our professional, occupancy, telephone and other communications, and
general and administrative expenses decreased to $46.1 million for 1999 as
compared to $51.2 million for 1998. The overall decrease was primarily due to
the exit from non-core businesses and our related focus on increasing
operating efficiencies at our core business operations.
We have diversified our business lines to include investment products and
asset management services in order to reduce our dependency on commercial
lending. We operate as a diversified commercial lending, financial services
and investment banking and brokerage holding company.
We manage our business by looking at the results of operations from each of
our business units. Our core businesses include:
. Coast Business Credit ("CBC")--an asset-based lending business;
. Imperial Warehouse Finance, Inc. ("IWF")--a residential loan warehouse
line business;
. Loan Participation and Investment Group ("LPIG")--a division of SPB
investing in nationally syndicated bank loans;
. The Lewis Horwitz Organization ("LHO")--a film and television production
lending business;
. Imperial Business Credit, Inc. ("IBC")--an equipment leasing business;
. Income Property Lending Division ("IPL")--a multifamily origination and
commercial mortgage banking business;
. Imperial Capital Group, LLC ("ICG")--an investment banking and brokerage
business;
. Asset Management Activities ("AMA")--an investment fund management
business;
. Other Core Operations ("OCO")--our holding company investments and
support functions, our loan documentation service operations, and the
administrative and servicing operations of Southern Pacific Bank.
We also operated some other businesses in 1999, 1998 and 1997 that we
consider our "non-core" businesses. These are businesses that we have made the
decision to de-emphasize during 1999 and 1998. We group these businesses into
the following categories:
. Equity Interests--Franchise mortgage lending, sub prime residential
mortgage banking business;
. De-emphasized/Discontinued/Exited Businesses--Consumer lending, auto
lending, residential lending, foreign mortgage lending businesses, and
third party mortgage servicing operations.
Our exit from these non-core businesses has allowed our management to focus
on our core business lines that have proven to be our most profitable
businesses. Following is a summary of these businesses' results of operations
in 1999 as compared to 1998.
52
<PAGE>
CORE BUSINESS LINES
The following table reflects average loans and leases outstanding and the
average yields earned on our core business units for 1999 and 1998:
<TABLE>
<CAPTION>
Average Loans and
Leases Average
Outstanding Yield
----------------- ------------
Business Line 1999 1998 1999 1998
------------- -------- -------- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
CBC.......................................... $658,764 $592,600 13.17% 13.09%
IWF.......................................... 130,075 164,300 8.28 9.94
LPIG......................................... 240,621 240,100 7.55 8.21
LHO.......................................... 6,056 -- 14.77 --
IBC.......................................... 10,700 11,300 12.54 13.60
IPL.......................................... 226,548 96,400 8.85 10.16
</TABLE>
Our largest subsidiary is SPB, a $1.8 billion industrial bank, which
operates as of January 1, 2000, five of our core businesses: CBC, IPL, LPIG,
IWF-formerly known as PrinCap Mortgage Warehouse, Inc., and LHO. The FDIC
insured deposits of SPB are the primary source of funding for each of these
businesses.
Coast Business Credit
CBC's net revenues were $40.4 million for 1999 as compared to $42.9 million
for 1998. CBC's net income for 1999 was $9.7 million as compared to $12.4
million for 1998. Net revenues include a provision for loan losses of $21.8
million for 1999 as compared to $3.5 million for 1998.
CBC increased its average loans outstanding for 1999 to $658.8 million as
compared to $592.6 million for 1998. Fundings of new commitments at CBC were
$511.0 million for 1999 as compared to $447.7 million for 1998.
As a result of the increase in CBC's average loans outstanding, CBC's net
interest income increased $11.4 million to $54.0 million for 1999 from $42.6
million for 1998. The average yield on CBC's loans for 1999 increased to
13.17% as compared to 13.09% for the prior year primarily as a result of an
increase in the prime rate and loan prepayment fees.
CBC also earned other income primarily consisting of gain on sale of stock
acquired through the exercise of warrants and loan administration and audit
fees charged to its customers. CBC earned other income totaling $8.2 million
in 1999 as compared $3.8 million in 1998.
CBC's total expenses were $24.3 million for 1999 as compared to $21.2
million for 1998. Total expenses increased for 1999 as compared to the prior
year primarily due to higher occupancy and telephone and other communications
expenses associated with CBC's continued geographic expansion into several
major metropolitan areas of the United States. These increases in expenses
were partially offset by lower administrative expenses resulting from CBC's
efforts to increase operating efficiencies. Additionally, personnel expense
decreased for 1999 as compared to 1998 due to decreased bonus expense
resulting from decreased profitability. CBC's FTE increased to 135 FTE at
December 31, 1999 as compared to 122 FTE at December 31, 1998.
At December 31, 1999, CBC's non-accrual loans were $22.2 million as
compared to $1.1 million at December 31, 1998. At December 31, 1999, one CBC
loan totaling $2.7 million was 90 days delinquent and accruing interest as
compared to none for the same period last year. As of February 28, 2000 there
was no change in the accrual status of this loan, and it was in the process of
collection. CBC incurred net charge-offs of non-accrual loans of $17.4 million
for 1999 as compared to $67,000 for 1998. Non-performing loans at CBC are
collateralized by accounts receivable and inventory. The increase in CBC's
non-accrual loans, loan loss provision, and charge-offs resulted from recent
regulatory guidance that prevents CBC from considering the liquidation of
certain intangible assets of its customers in determining a loan's accrual
status or, if necessary, the required charge-off amount. The effect of this
guidance resulted in CBC reserving for, and charging off the gross amount of
outstanding problem loans as opposed to CBC's previous practice of reserving
for and, if necessary, ultimately charging off the net deficiency amount of
problem loans.
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Imperial Warehouse Finance, Inc.
IWF's net revenues were $4.4 million for 1999 as compared to $8.5 million
for 1998. IWF's net income for 1999 was $1.1 million as compared to $3.2
million for 1998.
Net revenues includes a provision for loan losses of $1.2 million for 1999
and $704,000 for 1998. The increased loan loss provision for 1999 is primarily
related to the increase in the balance of non-accrual loans.
Net interest income was $4.1 million for 1999 as compared to $6.9 million
for 1998. The decrease in IWF's net interest income is related to a decrease
in the average outstanding balance of loans outstanding and an increase in
non-accrual loans. IWF's average loans outstanding and average yields for 1999
decreased to $130.1 million and 8.28% as compared to $164.3 million and 9.94%
for 1998. The decrease in IWF's loan yields, were primarily due to an increase
in IWF's non-accrual loans.
During 1999, we made the decision to relocate the IWF's operations from New
Jersey to Torrance, California. As a result of the relocation, none of the
employees of IWF made the move from New Jersey to California. We believe that
as a result of the personal contacts that IWF's former employees had with the
existing client base a substantial number of customers have paid off their
warehouse lines with us and moved their relationships to the new employers of
our former IWF employees. Additionally, during the fourth quarter of 1999, we
implemented stricter underwriting guidelines and changed our marketing focus
to the Western United States. We believe these factors are the primary cause
of the overall decrease in the average outstanding balance of IWF's warehouse
lines. Recently, we retained a new director of marketing which has resulted in
an increase in applications for new warehouse lines.
IWF earned other income consisting primarily of loan fees charged to its
customers of $1.5 million for 1999 as compared to $2.3 million for 1998.
IWF's total expenses decreased to $2.6 million for 1999 as compared to $3.0
million for 1998. Total expenses decreased for 1999 as compared to 1998
primarily due to lower personnel, general and administrative, telephone and
other communications expenses resulting from our focus on increasing operating
efficiencies. IWF's FTE decreased to 12 FTE at December 31, 1999 as compared
to 14 FTE at December 31, 1998.
At December 31, 1999, IWF's non-accrual loans increased to $7.8 million as
compared to $4.1 million at December 31, 1998. We believe that as a result of
our new underwriting policies and stricter collection policies, IWF's non-
performing assets will increase in the short term. IWF incurred net charge-
offs of non-accrual loans of $1.6 million for 1999 and $0 for 1998. IWF's non-
performing loans are collateralized by mortgage loans on single family
residences.
Loan Participation and Investment Group
LPIG's total net revenues were $3.4 million and net income was $1.2 million
for 1999 as compared to net revenues and net income of $8.9 million and $3.8
million for 1998, respectively. LPIG's net revenues and net income decreased
in 1999 as compared 1998 as a result of a significant increase in the
provision for loan losses during 1999. Net revenues include a provision for
loan losses of $7.0 million for 1999 and a net recovery of $391,000 for 1998.
The provision for loan losses increased in 1999 as compared to 1998 as a
result of increased charge-offs related to one single loan participation. At
December 31, 1999 and 1998, LPIG had no loans classified as non-performing
loans.
LPIG's net interest income was $8.4 million for 1999 as compared to $8.3
million for 1998. The decrease in LPIG's loan yields to 7.55% for 1999 as
compared to 8.21% for 1998 was primarily due to an increase in LPIG's average
outstanding non-accrual loans. LPIG's average outstanding loans for 1999 and
1998 were approximately $240 million.
For 1999 LPIG earned other income, which consisted primarily of loan fees
and mark-to-market losses on securities of $2.0 million as compared to
$166,000 for 1998. The decrease in loan fees resulted from reduced funding of
new LPIG loan commitments.
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LPIG's total expenses were $1.4 million for 1999 as compared to $2.3
million for 1998. Total expenses decreased for 1999 as compared to 1998
primarily due to lower personnel, commission, telephone and other
communications, and lower general and administrative expenses relating to our
focus on increasing operating efficiencies. LPIG had 4 FTE at December 31,
1999 and December 31, 1998.
We are not originating any new commitments for LPIG at this time since we
believe that the capital that is currently being deployed at SPB to support
LPIG's business could be more profitably used in CBC's, IWF's, IPL's and LHO's
businesses. As such, we anticipate that the current outstanding balance of
LPIG's loans will decrease over time as this portfolio runs-off. We do expect
to expand our investments in LPIG-type loan products through off-balance sheet
financing instruments such as total rate of return swaps.
The Lewis Horwitz Organization
On October 1, 1999, we purchased from Imperial Bank substantially all of
the assets and assumed certain liabilities of The Lewis Horwitz Organization
("LHO"). The acquisition was accounted for as a purchase, and the purchase
price of $7.0 million was allocated to the net assets acquired based on their
fair values resulting in goodwill of $12.0 million.
As part of the acquisition, we acquired all right, title and interest in
$98.2 million of motion picture and television production loans. The purchase
price of the loans is equal to the gross carrying value of the loans on the
books and records of Imperial Bank, except the purchase price of the first $20
million in non-accrual loans were allocated a discount of $3.6 million. Under
the terms of the acquisition, we receive all contractually due interest and
fees on the $98.2 million of LHO originated loans and pay Imperial Bank Prime
minus 2.50%. We have agreed to immediately purchase all loans that either are
currently or become classified as non-accrual, when an interest or principal
payment is 90 days or more past due. Imperial Bank has agreed to finance 50%
of all non-accrual purchases at the Prime rate + 1.00%. As of December 31,
1999, we acquired non-accrual loans with a fair market value of $8.2 million.
We have also agreed to purchase a minimum of $50 million of the above
referenced loans, inclusive of all non-accrual loans purchased, on or before
March 31, 2000. Additionally, we have agreed to purchase any remaining above
referenced loans on or before December 31, 2000.
We also acquired other assets totaling $362,000 and assumed liabilities of
$1.2 million in connection with the acquisition.
LHO's net revenues were $768,000 for 1999. LHO was acquired by our company
in October of 1999 and did not have any comparable net revenues, net income,
or expenses in 1998. LHO's net income for the 1999 was $4,000. Net revenues
include a provision for loan losses of $351,000 for 1999.
LHO's net revenues and net income for 1999 are for the period from the date
of acquisition (October 1, 1999) through December 31, 1999. Since October 1,
1999, LHO has originated $23.2 million of new film and television production
commitments. LHO's average loans outstanding for 1999 were $6.1 million.
From October 1, 1999 to December 31, 1999, LHO reported net interest income
of $992,000. The average yield on LHO's loans from October 1, 1999 to December
31, 1999 was 14.77%.
LHO also earned other income primarily consisting of loan fees totaling
$127,000 for the period from October 1, 1999 to December 31, 1999.
LHO's total expenses were $761,000 from October 1, 1999 to December 31,
1999. LHO had 12 FTE at December 31, 1999.
At December 31, 1999, LHO's non-accrual loans were $8.2 million. LHO did
not incur any charge offs of non-accrual loans from October 1, 1999 to
December 31, 1999. Non-performing loans at LHO are collateralized by the
distribution rights of the film or television production. All of LHO's non-
accrual loans were acquired from Imperial Bank under the terms of the LHO
purchase agreement.
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Imperial Business Credit, Inc.
IBC's net revenues decreased to $37,000 and net loss increased to $13.3
million in 1999 as compared to net revenues of $9.6 million and net loss of
$960,000 for 1998, respectively. IBC's net revenues decreased and net loss
increased for 1999 as compared to 1998 primarily due to the write-off of the
remaining unamortized balance of goodwill and larger negative mark-to-market
adjustments on retained interests in lease securitizations.
IBC's unamortized balance of goodwill totaling $11.3 million was written
off during the fourth quarter of 1999. The write-off of IBC's goodwill was
based on our estimate of future operations and cash flows. Based on our
estimate, we determined that IBC's goodwill was not recoverable from
continuing IBC's existing lines of business.
During the quarter ended December 31, 1999, defaults on leases originated
through IBC's broker and small-ticket lease programs increased significantly.
The increase in defaults caused us to reassess and increase the projected
level of lease losses related to IBC's securitized leases. The reassessment
resulted in a $11.9 million write-down of the carrying balance of retained
interest in lease securitizations at IBC for 1999 as compared to a $2.3
million write-down for 1998. As a result of the reassessment of the level of
expected losses from IBC's small ticket and broker originated business, we
decided to significantly curtail IBC's lease originations from brokers. We
closed IBC's broker business in its San Diego and Irvine offices, and
discontinued relationships with over 200 brokers in IBC's Denver office. We
intend to heavily weight IBC's future lease originations to middle market
leasing and vendor leasing programs.
IBC originated $125.2 million of leases for 1999, as compared to $114.3
million for 1998. IBC securitized $132.4 million of leases for 1999 generating
gain on sale revenue of $4.5 million, or 3.4% of the principal balance
securitized. For 1998, IBC securitized leases of $117.7 million, generating
gain on sale revenue of $4.1 million, or 3.5% of the principal balance
securitized. As a result of curtailing certain small ticket and broker
business and increased loss assumptions in securitized leases, IBC expects
lower originations and revenue in the near term.
Currently, all of IBC's leases are initially funded with a warehouse line
of credit from SPB, and then permanently funded through a revolving
securitization facility. IBC's net interest income decreased to $1.1 million
for 1999 as compared to $3.6 million for 1998 primarily due to an increase in
borrowing costs and a decrease in the average balance and yield on outstanding
leases held for sale.
IBC also earned other income from servicing leases sold into its
securitization facility of $4.5 million for 1999 as compared to $4.7 million
for 1998. IBC earned other income of $1.5 million for 1999 as compared to
$972,000 for 1998.
IBC's total expenses were $22.2 million for 1999 as compared to $11.3
million for 1998. Total expenses increased for 1999 as compared to 1998
primarily due to the $11.3 million write-down of goodwill. IBC's FTE decreased
to 94 FTE at December 31, 1999 compared to 99 FTE at December 31, 1998.
At December 31, 1999, IBC's non-accruing leases were $77,000 as compared to
$669,000 at December 31, 1998.
Income Property Lending Division
IPL's net revenues and net income decreased to $12.0 million and $2.0
million for 1999 as compared to net revenues and net income of $17.5 million
and $3.3 million for 1998. The decrease in revenues and net income for 1999 as
compared to the same periods last year primarily resulted from lower gain on
sale of loans partially offset by increased interest income earned on higher
average outstanding balances of income property loans.
IPL originated $339.7 million of loans in 1999 as compared to $366.1
million of loans in 1998. During 1999, IPL sold $283.7 million of its loans
generating a gain on sale of $2.0 million, or 0.7% of the principal
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balance of loans sold. During 1998, IPL sold $304.2 million of its loans,
generating a gain on sale of $8.8 million, or 2.9% of the principal balance of
loans sold.
Gain on sale of loan revenues as a percentage of IPL's loans sold decreased
for 1999 as compared to 1998 due to decreased interest margins and a decrease
in demand for small balance income property loans in the secondary market.
IPL's net interest income for 1999 increased to $9.2 million as compared to
$6.7 million for 1998. The increase was primarily the result of an increased
average balance of outstanding loans. IPL's average outstanding loan balance
increased to $226.5 million for 1999 as compared to $96.4 million for 1998.
The increase was primarily the result of our strategy to retain for portfolio
a higher level of multifamily real estate loans originated by IPL. The
decrease in IPL's average loan yields to 8.85% in 1999 as compared to 10.16%
in 1998, was primarily due to increased competition and reduced interest
margins among income property loan originators.
IPL's total expenses were $8.7 million for 1999 as compared to $11.7
million for 1998. Total expenses decreased for 1999 as compared to 1998
primarily due to lower personnel, telephone and other communications, and
lower general and administrative expenses relating to our focus on increasing
operating efficiencies partially offset by higher professional fees. FTE
decreased to 69 FTE at December 31, 1999 compared to 70 FTE at December 31,
1998.
IPL's non-accrual loans were $237,000 or 0.09% of its outstanding loan
portfolio at December 31, 1999, as compared to $992,000 or 0.68% of its
outstanding loan portfolio at December 31, 1998.
Imperial Capital Group, LLC
ICG's net revenues and pre-tax income increased to $26.7 million and $2.5
million for 1999 as compared to net revenues of $18.4 million and a pre-tax
loss of $3.9 million for 1998, respectively. ICG's net revenue primarily
consists of investment banking and brokerage fees. The increase in net revenue
and pre-tax income for 1999 primarily resulted from increased trading gains
and fees received for successful corporate finance transactions completed by
ICG through private placements and a lower level of negative mark to market
adjustments on trading securities. ICG raised total debt and equity proceeds
of $137.3 million in 1999 and $190.0 million in 1998 for its corporate clients
through private placement offerings.
ICG's total expenses were $24.2 million for 1999 as compared to $22.3
million for 1998. Total expenses increased for 1999 as compared to 1998
primarily due to higher personnel, commission, telephone and other
communications, and general and administrative expenses resulting from higher
revenues received. ICG's FTE decreased to 79 FTE at December 31, 1999 compared
to 93 FTE at December 31, 1998.
Asset Management Activities
AMA's net revenues and net (loss) income were $9.7 million and ($3,000) for
1999 as compared to $7.0 million and $1.8 million for 1998. AMA net revenues
increased primarily as a result of growth in the average balance of assets
under management. The average balance of assets under management increased to
$1.3 billion for 1999 as compared to $1.1 billion for 1998. Through October
22, 1999, we managed a commercial mortgage and equity REIT (See--"Liquidity
and Capital Resources--The ICCMIC Acquisition"), and for all of 1999, we
managed a collateralized loan obligation fund, and two leveraged bank debt
hedge funds.
Total expenses from AMA activities were $9.8 million for 1999 as compared
to $3.8 million for 1998. Total expenses increased for the period as compared
to the same period last year due to increased management activities as a
result of growth in the balance of assets under management in 1999 as compared
to 1998. Total AMA FTE decreased to 13 FTE at December 31, 1999 compared to 20
FTE at December 31, 1998.
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Other Core Operations
For 1999, net revenues of OCO were $4.0 million and net loss was $962,000,
as compared to ($42.2) million of net revenues and a net loss of $31.4 million
for 1998. The net loss for 1999 includes a $4.0 million net gain from the
early extinguishment of debt. The significant negative net revenues and net
income for 1998 were primarily the result of impairment and mark-to-market
charges relating to our investments in ICCMIC and IMH, and loan and leases
held for sale. OCO includes but is not limited to interest and dividend income
from parent company loans, equity investments, interest expense on our long-
term debt, mark-to-market charges on the securities we invested in at our
holding company, and the costs of our support functions. We provide support to
our subsidiaries through executive management oversight and advice,
accounting, audit, operations, legal services, merger and acquisitions advice,
human resources administration, insurance programs, office services, premises
administration, and management information systems support.
For 1999 and 1998, OCO earned interest and dividend income of $20.0 million
and $30.1 million and incurred interest expense of $30.8 million and $30.4
million, respectively.
During 1999 the net revenues of other core operations includes a gain on
sale of securities totaling $562,000 from the sale of 500,000 shares of ICCMIC
common stock. At December 31, 1999, we owned 9.0% of ICCMIC's outstanding
common stock and 100% of the company that managed ICCMIC's assets through
October 22, 1999. (See--"Liquidity and Capital Resources--The ICCMIC
Acquisition").
Total expenses of OCO were $10.8 million for 1999 as compared to $12.5
million for the prior year. Total expenses of OCO for 1998 included a
provision for loan repurchases on former mortgage banking operations of $4.8
million; no such provision was needed in 1999. In addition, total expenses
decreased for 1999 as compared to 1998 primarily due to lower personnel,
telephone and other communications, and lower general and administrative
expenses relating to reductions in personnel expense, partially offset by
higher professional fees. OCO's FTE decreased to 53 FTE at December 31, 1999
as compared to 71 FTE at December 31, 1998.
NON CORE BUSINESS LINES
We also operate "non-core" businesses, which consist of businesses that
we've decided to de-emphasize. We group these businesses into the following
categories:
. Equity Interests--Represents our equity investments in other publicly
traded companies. Effective July 1, 1999, we began accounting for our
equity investment in FMC under the cost method of accounting. Prior to
July 1, 1999, we accounted for our investment in FMC under the equity
method of accounting. From January 1, through October 31, 1999, we owned
an equity interest of 38.3% in FMC. We changed our method of accounting
for FMC since we determined that we did not have the ability to exercise
significant influence over FMC, and the quarterly results of FMC were not
made available to our company. In November 1999 we sold substantially all
of our shares of the Bay View Capital Corporation ("Bay View") common
stock we received in the FMC/Bay View merger resulting in a gain of
approximately $30.1 million. This segment's source of revenue includes
our common stock ownership percentage in the equity interests' reported
net income or loss in addition to our gains on sales of the equity
interests' stock;
. De-emphasized/Discontinued/Exited Businesses--represents our business
units we decided to either de-emphasize, discontinue, or exit. We decided
to de-emphasize, discontinue or exit these business lines because they
were not meeting our expectations for a variety of reasons. These reasons
included: significant credit losses, insufficient loan production
volumes, inadequate gross profit margins, and risks associated with
international lending operations. We include the following significant
operations in Exited Businesses: Auto Lending, Alternative Residential
Mortgage, and Consumer Loan Divisions of SPB, and Credito Imperial
Argentina ("CIA"), our residential loan production business in Argentina.
Exited Businesses also includes our former mortgage banking operations,
certain problem loan or securities portfolios, SPB's income property
servicing operations, and any loan portfolios at SPB from businesses
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which are no longer originating new loans. Exited Businesses' principal
sources of net revenue are interest earned on mortgage and consumer loans
and mark to market valuations on loan portfolios. Exited Businesses'
principal expenses are interest expense allocations incurred from deposits
and inter-company borrowings, and general and administrative expenses.
Our exit from these non-core businesses will allow our management to focus
on our core business lines that have proven to be our most profitable
businesses.
Equity Interests
In 1999, our Equity Interests included our percentage ownership of the net
income of FMC, as compared to 1998, which included FMC and Southern Pacific
Funding Corporation ("SPFC"). For 1999, our Equity Interests generated net
revenues of $31.2 million and a net income of $18.5 million as compared to net
revenues of ($66.5) million and a net loss of ($38.2) million for 1998. The
significant negative net revenues and net loss for 1998 were primarily the
result of impairment charges on our equity investment in SPFC.
Equity Interest and Gain on sale of FMC
During 1999 and 1998, equity in the net (loss) income of FMC was $(53,000)
and $3.2 million, respectively. On November 1, 1999, the merger between FMC
and Bay View was completed. We received $27.7 million in cash and 4.4 million
shares of Bay View common stock from the sale and exchange of our 38.3%
interest in FMC. On November 5, 1999, we announced the sale of 4,342,451
shares of the Bay View common stock we received from the FMC/Bay View merger.
As a result of these transactions, we received approximately $86.3 million in
total cash proceeds and we recorded a pre-tax gain from both transactions of
$30.1 million.
Equity Interest in SPFC
On October 1, 1998, SPFC petitioned for Chapter 11 bankruptcy protection
under Federal bankruptcy laws in the U.S. Bankruptcy Court for the District of
Oregon. As a result of SPFC declaring Chapter 11 bankruptcy and the
corresponding decline in its common stock to below one dollar per share, and
subsequent de-listing from the New York Stock Exchange, we wrote-off our total
investment in and loan to SPFC. During 1999 and 1998 equity in the net income
of SPFC was $0 and $12.7 million, respectively.
De-emphasized/Discontinued/Exited Businesses
The Exited Businesses' net revenues and net loss were ($11.1) million and
$23.0 million for 1999 as compared to $12.3 million and $26.3 million for
1998, respectively. The decrease in net revenue for 1999 as compared to 1998
primarily resulted from a decline in net interest income, partially offset by
a lower provision for loan losses. The Exited Businesses incurred negative
mark-to-market charges of $28.3 million in 1999 and $31.6 million in 1998.
Total expenses at our Exited Businesses decreased to $21.6 million for 1999
as compared to $32.8 million for 1998. The decrease in total expenses was
primarily due to the closure of non-core businesses.
Our non-core loans decreased to $143.9 million at December 31, 1999 as
compared to $371.5 million at December 31, 1998. The remaining non-core
portfolios primarily consist of lower risk single family mortgage loans of
$104.0 million, franchise loans of $18.3 million, and consumer loans of $15.6
million.
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The following table reflects the ending outstanding balances of the loans
from our Exited Businesses:
<TABLE>
<CAPTION>
Loans and Leases
Outstanding at
December 31,
-----------------
Exited Business Line 1999 1998
-------------------- -------- --------
(In thousands)
<S> <C> <C>
Auto Lending Division of SPB............................... $ 5,991 $ 94,225
Alternative Residential Mortgage Division of SPB .......... 6,884 34,280
Consumer Lending Division of SPB........................... 15,639 42,565
Credito Imperial Argentina................................. -- 22,772
Single family loans........................................ 97,124 127,125
Franchise loans............................................ 18,277 50,520
-------- --------
Total loans and leases from exited businesses............ $143,915 $371,487
======== ========
</TABLE>
The above table does not include net outstanding loans from the
discontinued operations of AMN which were $5.2 million and $15.2 million at
December 31, 1999 and 1998, respectively.
During 1999 we continued to sell loans from our exited businesses. We sold
$45.3 million of auto loans, $33.4 million of single family loans, $11.7
million of consumer loans, and the remaining Argentine mortgage loan portfolio
of $22.4 million, generating an aggregate net gain on sale of $321,000.
Additionally, we reduced our sub-prime auto loan balances to $6.0 million at
December 31, 1999 as compared to $94.2 million at December 31, 1998. At
December 31, 1999, the remaining sub-prime auto loans are carried at 32.0% of
the outstanding contractual balance.
During 1999 we sold 1,887,110 shares of Impac Mortgage Holdings, Inc.
("IMH") stock resulting in a gain of $929,000. At December 31, 1999, we did
not own any shares of IMH common stock.
FTE at our Exited Businesses decreased to 5 FTE at December 31, 1999 as
compared to 100 FTE at December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
We reported a consolidated net loss for the year ended December 31, 1998 of
$73.6 million or $1.93 diluted loss per share. For the year ended December 31,
1997, we reported net income of $85.9 million or $2.10 diluted income per
share. We reported a basic consolidated loss per share for the year ended
December 31, 1998 of $1.93. For the year ended December 31, 1997 we reported
basic net income per share of $2.23. Our consolidated net income for the year
ended December 31, 1997, included an extraordinary item "Loss on early
extinguishment of debt, net of income taxes," of $4.0 million, or $0.10 in
basic and diluted loss per common share.
The $298.7 million decrease in our revenues and the $159.6 million decrease
in our net income was due primarily to non-recurring non-cash impairment and
mark-to-market charges of $162.5 million that we incurred as a result of the
financial and liquidity crisis in the capital markets during the third quarter
of 1998. Comparatively, we recorded large gains on sales of stock in SPFC, FMC
and IMH, along with a large gain on the termination of our advisory agreement
with IMH which aggregated $131.2 million in 1997. The lack of such gains
coupled with the impairment and mark-to-market charges we recognized in 1998
were the primary drivers for the significant difference in our operating
results over the two year period. Our net interest income increased by $27.3
million to $112.7 million in 1998 as compared to $85.4 million in 1997. The
increase in net interest income was primarily due to increased average
balances of outstanding loans from our higher yielding commercial loan
portfolios in 1998 as compared to 1997. We fund the vast majority of the loans
we originate with the Federal Deposit Insurance Corporation ("FDIC") insured
deposits of SPB. The weighted average cost of SPB's deposits was 5.57% at
December 31, 1998 as compared to 5.79% at December 31, 1997.
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Our total expenses increased by $5.9 million to $120.8 million in 1998 as
compared to $114.9 million in 1997. Our personnel expense increased by $10.0
million, our occupancy expense increased by $1.4 million, and our professional
services, telephone and other communications, and general and administrative
expenses increased by $7.7 million in 1998 as compared to 1997. The primary
reason for these increases was the inclusion of Imperial Capital Group's
("ICG") and Imperial Warehouse Finance, Inc.'s ("PrinCap") operations, which
were formed or acquired in the fourth quarter of 1997, for the entire year of
1998. Our total expenses also increased at Coast Business Credit ("CBC") as a
result of its continuing national expansion over the course of 1998. Partially
offsetting these increases were decreases in our amortization of servicing
rights of $1.6 million, and our real estate owned expenses of $7.4 million.
To summarize our results for 1998, the decrease in our net income in 1998
from 1997 was attributable to several factors. These factors included:
. Impairment losses on equity securities;
. Negative mark-to-market adjustments on our loans and securities held for
sale;
. Reduced revenues from the sale of our loans and leases;
. No gains from the sales of equity securities;
. No gain on the termination of advisory agreements;
. Reduced revenues from our equity investments;
. Increased overall levels of expenses.
These factors were partially offset by the following positive items:
. Increasing net interest income and an improved net interest margin;
. Increasing investment banking and brokerage fees;
. Increasing asset management fees.
Coast Business Credit
CBC had total net revenues of $42.9 million, total expenses of $21.2
million, and net income of $12.4 million in 1998. CBC had total net revenues
of $30.0 million, total expenses of $15.3 million and net income of $9.0
million in 1997.
CBC was able to increase both its net revenues and net income by
substantially increasing the amount of loans it made and increasing its
average outstanding loan balance. CBC's average loans outstanding for 1998
were $592.6 million, and its loans outstanding at year end were $633.3
million. CBC's average loans outstanding for 1997 were $406.1 million, and its
loans outstanding at year end were $484.8 million. CBC has been able to
increase its average loans outstanding as a result of geographic expansion
across the United States, and by offering its customers extended loan
commitment periods. As a result of the $186.5 million increase in CBC's
average loans outstanding, CBC's net interest income has increased $12.8
million to $42.6 million in 1998 from $29.8 million in 1997. Our average yield
on CBC's loans decreased to 13.09% in 1998 from 13.88% in 1997. The decrease
in CBC's yield resulted from downward movements in the prime rate during the
3rd & 4th quarters of 1998. All of CBC's loans were funded with the FDIC
insured deposits of SPB.
CBC recorded loan loss provisions of $3.5 million in 1998 and $4.9 million
in 1997. At December 31, 1998 CBC had non-accrual loans totaling $1.1 million,
or 0.18% of its outstanding loans. At December 31, 1997, CBC had non-accrual
totaling $1.0 million.
CBC also earned other income in the form of loan, prepayment, and audit
fees charged to its customers. CBC earned other income totaling $3.8 million
in 1998 as compared $5.2 million in 1997. In 1997, one of CBC's
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larger credits prepaid, resulting in a prepayment fee of $2.5 million on one
single credit. In 1998, while CBC did receive prepayment fees, there were no
prepayments of similar large credit accounts.
CBC's total expenses increased by approximately $6.0 million in 1998 as
compared to 1997. During 1998, CBC's personnel expense increased by $3.5
million to $13.3 million, and general and administrative expenses increased by
$600,000 to $2.9 million as compared to 1997. These increases were primarily
the result of CBC's geographic expansion into several major metropolitan areas
of the United States throughout 1998.
Imperial Warehouse Finance, Inc.
IWF had total net revenues of $8.5 million, total expenses of $3.0 million,
and net income of $3.2 million in 1998. IWF had total net revenues of $1.6
million, total expenses of $738,000, and net income of $515,000 in 1997. We
acquired the assets of IWF in October of 1997.
IWF was also able to increase both its net revenues and net income by
substantially increasing the amount of loans it made and increasing its
average outstanding loan balance. IWF's average loans outstanding for 1998
were $164.3 million, and its loans outstanding at year end were $181.0
million. IWF's loans outstanding at year end 1997 were $122.5 million. The
average balance of IWF's loans from the date of our acquisition through
December 31, 1997 was $118.0 million. As a result of the increase in loans
outstanding and a full year of operations with our company, IWF's net interest
income increased $5.5 million to $6.9 million in 1998 from $1.4 million in
1997. We earned an average yield on IWF's loans of 9.94% in 1998 and 10.27% in
1997, and all of IWF's loans were funded with the FDIC insured deposits of
SPB. The decrease in IWF's yield reflects downward movement in the prime rate
during the 3rd & 4th quarters of 1998.
IWF recorded loan loss provisions of $704,000 in 1998 and $435,000 in 1997.
Since our acquisition, IWF has not charged off any loans. At December 31, 1998
IWF had non-accrual loans totaling $4.1 million, or 2.29% of its outstanding
loans. At December 31, 1997, IWF had no non-accrual loans. IWF also earned
other income in the form of loan and audit fees charged to its customers of
$2.3 million in 1998 and $588,000 in 1997.
IWF's total expenses increased primarily as a result of our owning IWF for
all of 1998 as compared to three months in 1997. IWF's total expenses of $3.0
million in 1998 were largely made up of $1.3 million in personnel expense,
$453,000 in amortization of goodwill, and $723,000 in general and
administrative expenses.
Loan Participation and Investment Group
LPIG had total net revenues of $8.9 million, total expenses of $2.3
million, and net income of $3.8 million in 1998. LPIG had total net revenues
of $6.5 million, total expenses of $2.2 million, and net income of
$2.6 million in 1997.
LPIG was also able to increase both its net revenues and net income by
increasing the amount of participations it invested in and increasing its
average outstanding loan balance, while maintaining its expense levels.
LPIG's average loans outstanding for 1998 were $240.1 million, and its
loans outstanding at year end were $222.1 million. LPIG's average loans
outstanding for 1997 were $187.7 million, and its loans outstanding at year
end were $196.4 million. We earned an average yield on LPIG's loans of 8.21%
in 1998 and 8.72% in 1997, and all of LPIG's loans were funded with the FDIC
insured deposits of SPB. As a result of the $52.4 million increase in LPIG's
average loans outstanding, LPIG's net interest income has increased $1.2
million to $8.3 million in 1998 from $7.1 million in 1997.
LPIG recorded a loan loss recovery of $391,000 in 1998 and a loan loss
provision of $564,000 in 1997. LPIG has never had a loan charge-off. At both
December 31, 1998 and December 31, 1997, LPIG had no
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non-accrual loans. LPIG also earned other income, primarily in the form of
loan fees. In 1998, LPIG earned other income totaling $156,000. In 1997, LPIG
earned no other income.
The total expenses of LPIG were relatively unchanged in 1998 as compared to
1997. The major components of LPIG's expenses in 1998 were personnel expense
of $1.1 million, professional services of $225,000 and general and
administrative expense of $694,000.
We have made the decision to let LPIG's existing balance of loans run-off
over the next few quarters. While LPIG has earned a reasonable risk-adjusted
return in 1998 and 1997, we believe that the capital that is currently being
deployed at SPB to support LPIG's business could be more profitably used in
CBC's, IWF's, and IPL's businesses. As such, we anticipate that the current
outstanding balance of LPIG's loans will decrease over time as this on-balance
sheet portfolio runs-off. We do expect to expand our investments in LPIG-type
loan products through off-balance sheet financing instruments such as total
rate of return swaps or collateralized loan obligation funds.
Imperial Business Credit, Inc.
IBC had total net revenues of $9.6 million, total expenses of $11.3
million, and a net loss of $1.0 million in 1998. IBC had total net revenues of
$18.3 million, total expenses of $11.6 million, and net income of $4.1 million
in 1997.
IBC's total net revenues decreased significantly in 1998 as compared to
1997. In early and mid 1998, several of IBC's competitors lowered the interest
rates charged to their borrowers for their leases, increasing the demand for
their leases in comparison to IBC's lease products. We made the decision not
to significantly lower the rates we were charging borrowers for the leases
originated by IBC. This had the effect of lowering IBC's total lease
originations and increasing the average cost of each lease originated by IBC
in 1998 as compared to 1997. The average rate charged to IBC's borrowers was
13.6% in 1998 and 14.6% in 1997. IBC originated $114.3 million of leases in
1998 and $151.4 million of leases in 1997. Even though IBC was able to
substantially maintain the rate it charged its lease customers in 1998 as
compared to 1997, the increased cost per lease originated by IBC resulted in
significantly decreased profit margins for IBC. IBC securitized $118.7 million
of its loans in 1998 generating gain on sale revenue of $4.1 million, or 3.4%
of the principal balance of leases securitized. IBC securitized $213.6 million
of its leases in 1997 generating gain on sale revenue of $7.9 million, or 3.7%
of the principal balance of leases securitized. In late 1998, several of IBC's
competitors increased the rates they charged their borrowers. As a result, the
demand for leases from IBC's competitors decreased and IBC was able to
originate an increased number of leases in a less competitive environment.
IBC's net interest income also decreased in 1998 as compared to 1997
primarily due to a lower average outstanding balance of leases. IBC's average
leases outstanding for 1998 were $11.3 million, and its leases outstanding at
year end were $7.4 million. IBC's average leases outstanding for 1997 were
$46.7 million, and its leases outstanding at year end were $16.6 million. We
earned an average yield on IBC's leases of 13.6% in 1998 and 14.6% in 1997.
All of IBC's leases are initially funded with a warehouse line of credit, and
then permanently funded through a securitization facility. Primarily as a
result of the significant decrease in the average balance of IBC's leases
outstanding in 1998 as compared to 1997, IBC's net interest income decreased
$2.0 million to $3.6 million in 1998 from $5.6 million in 1997.
IBC also earned other income from servicing leases delivered into its
securitization facility, and incurred mark-to-market charges related to its
retained interests and securities from its securitizations. IBC earned total
net other income of $3.3 million in 1998 and $5.9 million in 1997. The
decrease in other revenue results primarily from mark-to-market charges on
IBC's retained interests and securities from its lease securitizations of $2.3
million in 1998.
IBC's total expenses remained relatively constant in 1998 as compared to
1997. The major components of IBC's expenses in 1998 were personnel expense of
$5.6 million, professional services of $1.2 million, and
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general and administrative expenses of $2.6 million. The major components of
IBC's expenses in 1997 were personnel expense of $6.3 million, professional
services of $697,000, and general and administrative expenses of $2.4 million.
IBC recorded a loan loss provision of $1.3 million in 1998 and $1.1 million
in 1997. IBC had net recoveries of $239,000 in 1998 and net charge-offs of
$3.9 million in 1997. At December 31, 1998 IBC had non-accrual leases totaling
$669,000 or 9.0% of its outstanding loans. At December 31, 1997 IBC had non-
accrual leases totaling $981,000 or 5.9% of its outstanding leases.
Income Property Lending
IPL had total net revenues of $17.5 million, total expenses of $11.7
million, and net income of $3.3 million in 1998. IPL had total net revenues of
$41.2 million, total expenses of $7.4 million, and net income of $20.6 million
in 1997.
IPL's total net revenues decreased significantly in 1998 as compared to
1997. In early and mid 1998, several of IPL's competitors lowered the interest
rates charged to their borrowers for their loans. In order to remain
competitive, we also lowered the interest rates that IPL charged to its
borrowers. IPL originated $366.1 million of loans in 1998 and $295.9 million
of loans in 1997. Even though IPL was able to originate more loans in 1998
than in 1997, the lower average interest rate on the loans originated in 1998
as compared to 1997 decreased the value of IPL's loan portfolio. IPL sold
$288.5 million of its loans in 1998 generating cash gain on sale of
$8.8 million, or 3.05% of the principal balance of loans sold. IPL sold for
cash and securitized $399.9 million of its loans in 1997 generating gain on
sale of $25.3 million, or 6.33% of the principal balance of loans sold. IPL's
net interest income for 1998 also decreased $4.0 million to $6.7 million due
to the lower average rate charged to IPL's borrowers, and due to a lower
average balance of loans outstanding. IPL's average loans outstanding for 1998
were $96.4 million, and its loans outstanding at year end were $145.5 million.
IPL's average loans outstanding for 1997 were $144.2 million, and its loans
outstanding at year end were $59.4 million. All of IPL's loans were funded
with the FDIC insured deposits of SPB.
IPL recorded net recoveries of $345,000 in 1998 and $1.9 million in 1997.
IPL had no net charge-offs in 1998 or 1997. At December 31, 1998 IPL had non-
accrual loans totaling $992,000, or 0.69% of its outstanding loans. At
December 31, 1997, IPL had non-accrual loans totaling $1.6 million, or 2.70%
of its outstanding loans.
IPL also earned other income from servicing loans that it sold to other
companies and charged various fees to its borrowers. IPL earned total other
revenues of $1.6 million in 1998 and $3.3 million in 1997. These amounts
include all servicing fees on loans serviced for others. The decrease was
primarily due to increased competition in 1998, which required IPL to reduce
the amount of fees charged to its borrowers.
IPL's total expenses increased by $4.3 million in 1998. IPL's personnel
costs increased by $2.6 million in 1998 for a total of $6.9 million. IPL's
general and administrative costs increased by $832,000 for a total of
$2.5 million. These expenses increased primarily as a result of increased
activity in IPL's loan origination and servicing operations related to the
continued expansion of IPL's business.
Imperial Capital Group
ICG, which began operations in December 1997, had total net revenues of
$18.4 million, total expenses of $22.3 million, and a net loss of $1.4 million
in 1998. ICG had total net revenues of $8.5 million, total expenses of $6.1
million, and net income of $878,000 in 1997. We formed ICG in the fourth
quarter of 1997. ICG's business includes a registered broker/dealer and an
asset manager that offer individual and corporate investors a wide range of
financial products and services.
ICG's revenues declined in 1998 as compared to 1997 since ICG raised less
money for their customers through corporate finance transactions. ICG's
investment banking and brokerage fees were $18.5 million for
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1998 as compared to $7.7 million for 1997. ICG raised $190.0 million for its
corporate clients in 1998 and $323.0 million in 1997 through private placement
debt and equity offerings.
ICG's total expenses increased by $16.2 million in 1998 as compared to
1997, as we operated ICG for the entire year of 1998, and only one quarter in
1997. The major components of ICG's expenses in 1998 were personnel expense of
$13.7 million, occupancy expense of $756,000, telephone and other
communications expense of $1.2 million, and general and administrative expense
of $5.3 million.
Asset Management Activities
AMA had total net revenues of $7.0 million, total expenses of $3.8 million,
and net income of $1.8 million in 1998. AMA had total net revenues of $25.0
million, total expenses of $8.7 million, and net income of $9.9 million in
1997.
Our AMA revenues decreased significantly in 1998 as compared to 1997
primarily due to the large revenues we generated from the termination of our
management agreement with IMH in 1997. Excluding the gain we recognized from
the Termination Agreement (discussed below), our net AMA revenues increased by
$1.0 million in 1998 as compared to 1997. Our AMA revenues increased primarily
due to growth in our assets under management. Currently we manage three
different classes of assets for others. These classes include a commercial
mortgage and equity REIT, a collateralized loan obligation fund, and leveraged
bank debt hedge funds. Our total assets under management were $1.5 billion at
December 31, 1998 and $495.1 million at December 31, 1997.
Our total expenses from our AMA decreased by $4.8 million in 1998 as
compared to 1997. Excluding expenses incurred in 1997 in connection with the
Termination Agreement (discussed below) of $6.0 million, our AMA expenses
increased by $1.2 million. This increase was primarily due to increased
personnel expenses from additional employees conducting our AMA business.
In 1997, we recognized a nonrecurring gain on the termination of a REIT
advisory agreement of $19.0 million. In 1995, we entered into a management
agreement with Impac Mortgage Holdings, Inc. ("IMH"), in which we agreed to
advise IMH on its day-to-day operations, a service for which we were paid a
management fee. In 1997, we negotiated the termination with IMH of the
management agreement (the "Termination Agreement"). Under the Termination
Agreement, we received 2,009,310 shares of IMH common stock and certain
securitization-related assets, and we agreed to cancel a $29.1 million note
receivable that we had from ICI Funding Corporation ("ICIFC"), which is now
known as Impac Funding Corporation, the loan origination unit of IMH. We
recorded the IMH common stock on our books at its fair value of approximately
$35.0 million, and the securitization-related assets on our books at their
fair values of approximately $13.1 million, for a total value of $48.1
million. This amount ($48.1 million), when netted with the $29.1 million
cancellation of our ICIFC note receivable resulted in a net gain to us from
the Termination Agreement of approximately $19.0 million.
Other Core Operations
OCO had negative net revenues of $39.5 million, total expenses of $18.3
million, and a net loss of $33.1 million in 1998. OCO had total net revenues
of $6.9 million, total expenses of $26.7 million, and net loss of $16.0
million in 1997.
Our OCO include those areas of business we conduct at our holding company
and support operations. Such areas include interest and dividend income from
parent company loans and equity investments, loan servicing income, interest
expense on our long-term debt, mark-to-market charges on the securities we
invested in at our holding company, and the costs of our support functions. We
provided support to our subsidiaries through executive management's oversight
and advice, accounting and legal services, merger and acquisitions advice,
human resources administration, office services, and management information
systems support.
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OCO earned interest and dividend income of $30.1 million in 1998 and $28.9
million in 1997. OCO incurred interest expense of $30.4 million in 1998 and
$25.6 million in 1997. The increase in OCO's interest expense was primarily
attributable to increased borrowing costs associated with the Company's $70.0
million of Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the company issued during 1997.
In 1998, OCO recognized impairment charges on our equity investments in
Impac Mortgage Holdings, Inc. ("IMH") and Imperial Credit Commercial Mortgage
Investment Corp. ("ICMI"). Our book value of IMH stock was $4.56 per share and
our book value of ICMI stock was $9.375 per share at December 31, 1998. During
the third quarter of 1998 the market value of our equity holdings in IMH and
ICMI declined substantially. We determined that the declines in IMH's and
ICMI's stock prices were other than temporary. Therefore, we recorded pre-tax
write-downs of $24.5 million on our IMH common stock and $13.0 million on our
ICMI common stock. These write-downs reduced our book value of IMH from $17.88
to $5.00 per common share and our book value of ICMI from $13.98 to $9.75 per
share. There were no impairment charges in 1997.
In 1998 OCO also recognized negative mark-to-market charges on our trading
securities. These securities included our investment in Pacifica Partners I
and various mortgage backed securities. We wrote down the securities at OCO by
$5.0 million in 1998 and $341,000 in 1997.
Total expenses of OCO decreased by $8.4 million. The decrease was primarily
due to two factors. First, in 1997 we recognized a $3.7 million charge on the
restructuring of our investment in DRI (discussed below) for which there was
no comparable expense incurred in 1998. Second, we had much better experience
in the liquidation and administration of our real estate owned in 1998 as
compared to 1997. We recognized net income from our real estate owned of
$548,000 in 1998 and net expense of $4.5 million in 1997.
In 1997, OCO incurred a loss on the restructuring of our loan to
Dabney/Resnick/Imperial LLC ("DRI") of $3.7 million. In 1996, we made a loan
to DRI, an investment banking firm. DRI offered full service investment
banking, brokerage, and asset management services. In late 1997, we formed a
new business, ICG (discussed above). In connection with the formation of ICG,
we recognized a pre-tax charge of $3.7 million relating to the restructuring
of our loan to DRI. Substantially all of the assets and personnel of DRI were
acquired or hired by ICG.
NON-CORE BUSINESS LINES
Equity Interests
The Equity Interests generated negative net revenues of $66.5 million,
total expenses of $122,200, and a net loss of $38.2 million in 1998. Equity
Interests generated total net revenues of $159.9 million, total expenses of
$16.2 million, and net income of $81.5 million in 1997.
Equity Interests include our portion of the net income or loss from
Southern Pacific Funding Corporation ("SPFC") and Franchise Mortgage
Acceptance Company ("FMC"). The Equity Investments generated equity in the net
income of SPFC and FMC of $16.0 million in 1998 and $22.8 million in 1997.
This represents our share of SPFC's and FMC's net income or loss for 1998 and
1997, based on our ownership percentage of SPFC and FMC. The decrease was due
primarily to SPFC's bankruptcy in 1998. As a result of the bankruptcy, we only
recognized income from SPFC for the first half of 1998 as compared to the
entire year of 1997.
Our Equity Interests also incurred a large impairment loss in 1998 as
compared to no such loss in 1997. On October 1, 1998, SPFC petitioned for
Chapter 11 bankruptcy protection under Federal bankruptcy laws in the U.S.
Bankruptcy Court for the District of Oregon. As a result of SPFC declaring
Chapter 11 bankruptcy and the corresponding decline in its common stock to
below one dollar per share, we wrote-off our total investment in and loan to
SPFC. Our write-off was $82.6 million for the year ended December 31, 1998.
In 1997, we recognized a significant gain on the sale of our FMC stock. We
had no gains from the sale of FMC stock in 1998. In 1997, we sold 3.6 million
of our FMC shares in FMC's initial public offering at
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$18.00 per share, generating net proceeds of $59.7 million and a corresponding
gain of $48.9 million. We also recognized a gain of $43.2 million as a result
of an adjustment to the basis of our investment in FMC due to FMC's capital
raised in the offering and our reduced ownership percentage in FMC. As a result
of FMC's initial public offering, our ownership percentage of FMC common stock
was reduced to 38.4%. Accordingly, we account for our investment in FMC under
the equity method.
In 1997 we also recognized gains from the sale of our SPFC stock. In 1997,
we sold 370,000 shares of our SPFC common stock at $16.63 per share generating
net proceeds of $6.2 million and a gain of $4.3 million. We also sold an
additional 500,000 shares of our SPFC common stock in 1997, generating net
proceeds of $7.6 million and a gain of $5.2 million. These sales reduced our
ownership percentage of SPFC common stock to 47%. Accordingly, until its
bankruptcy and our corresponding write-off of our investment in SPFC, we
accounted for our investment in SPFC under the equity method.
The total expenses from our Equity Interests decreased by $16.0 million in
1998 as compared to 1997. This decrease results from the consolidation of FMC
in the first nine months of 1997, as compared to no consolidation in 1998.
Throughout the first nine months of 1997, our ownership percentage in FMC was
66.7%, and accordingly, FMC 's operating results were consolidated with ours.
De-emphasized/Discontinued/Exited Businesses
The De-emphasized/Discontinued/Exited Businesses ("Exited Businesses")
generated net revenues of $9.6 million, total expenses of $27.0 million, and a
net loss of $24.6 million in 1998. The Exited Businesses generated total net
revenues of $15.6 million, total expenses of $19.2 million, and a net loss of
$27.5 million in 1997.
We have decided to either discontinue or exit some of the businesses we had
been conducting as divisions of SPB, or separate consolidated subsidiaries. We
decided to de-emphasize, discontinue or exit these business lines because they
were not meeting our expectations for a variety of reasons. These reasons
included; significant credit losses, insufficient loan production volumes,
inadequate gross profit margins, and risks associated with international
lending operations. None of our de-emphasized, discontinued, or exited business
lines was a profitable business.
We classify the following significant operations as Exited Businesses: our
Auto Lending, Alternative Residential Mortgage, and Consumer Loan Divisions of
SPB; Credito Imperial Argentina, ("CIA") our residential loan production
business in Argentina; and Auto Marketing Network, Inc., our sub-prime
automobile finance company. Our Exited Businesses also include our former
mortgage banking operations, certain problem loan or securities portfolios, and
any loan portfolios at SPB from businesses for which we are no longer
originating new loans.
Our Exited Businesses earned interest income of $77.7 million in 1998 and
$59.3 million in 1997. The Exited Businesses incurred interest expense of $31.6
million in 1998 and $35.6 million in 1997. The increase in interest income and
expense was primarily attributable to a larger average outstanding balance of
loans and securities from those operations classified as Exited Businesses in
1998 as compared to 1997.
In 1998, the Exited Businesses recognized impairment charges on our held for
sale loan and securities portfolios, of $31.6 million. Our affected loan
portfolios included our automobile loans at SPB and our Argentinean residential
mortgage loans at CIA. We wrote down SPB's automobile loans by $21.5 million
and CIA's residential loans by $7.3 million. Our affected securities portfolios
include the retained interests we received from IMH in connection with the
Termination Agreement discussed under Asset Management Activities. We wrote
down the retained interests in our Exited Businesses by $2.0 million in 1998.
There were no mark-to-market charges on any of these portfolios in 1997.
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Total expenses at our Exited Businesses were $27.0 million in 1998 as
compared to $19.2 million in 1997. The increase in total expenses of $7.8
million was primarily due to increased personnel, professional services, and
general and administrative expenses at SPB's Auto and Consumer Credit
divisions.
In 1998 and 1997, our Exited Businesses recognized provisions for losses on
the repurchase of our former mortgage banking operation loans. The provision
in 1998 was $4.8 million and the provision in 1997 was $5.4 million. These
provisions resulted from our analysis of our potential exposure to losses on
the future repurchase of loans sold to investors from our former mortgage
banking operations. We believe that these provisions adequately provide for
known and estimated future losses from the repurchase of our former mortgage
banking operations loans.
Also included in our Exited Businesses are the results of our discontinued
operation, AMN, for 1998 and 1997. We recognized net losses from these
discontinued operations of $14.5 million in 1998 and $25.3 million in 1997.
Year 2000 Compliance
We have successfully negotiated the century date change. All mission-
critical systems are functioning normally and since January 1, 2000, we are
experiencing "business as usual". Our application processing systems are
properly accounting for the leap year.
The expenses we incurred in executing our Year 2000 Project were not
material for any of our subsidiaries and were funded out of our normal
operating budget. Our largest subsidiary, SPB, spent less than $700,000 during
the two-year life of the project. Nearly half of that amount was spent on
converting our asset based loan processing to a more sophisticated and
functional system.
SPB received a Memorandum of Understanding (MOU) from the FDIC that was
related to deficiencies with its Year 2000 Project. The MOU was issued in
November 1998 and was terminated in August 1999 when it was determined that
all of the concerns had been satisfied.
We will continue to carefully monitor all of our systems over the next
several months and are confident that we can quickly address any date-related
problems that might occur.
Liquidity and Capital Resources
General
We generate liquidity at our holding company from a variety of sources,
including interest income from loans and investments, income tax payments
received from our subsidiaries, dividends from subsidiary earnings, dividends
from common stock holdings in publicly traded companies, and sales of non-core
assets. An industrial bank such as SPB may declare dividends only in
accordance with California Industrial Banking Law and FDIC regulations which
impose legal limitations on the payment of dividends. Our holding company's
primary cash requirements include income tax payments and interest payments on
outstanding debt and preferred stock obligations. We also use available cash
to make loans to our operating companies and investments in subsidiaries and
asset management vehicles. At December 31, 1999 we held $46.2 million of cash
and interest bearing deposits at our holding company as compared to $5.5
million of cash and interest bearing deposits at December 31, 1998.
We have an ongoing need for capital to finance our lending activities. This
need is expected to increase as the volume of our loan and lease originations
and acquisitions increases. Our primary cash requirements include the funding
of (i) loan and lease originations and acquisitions, (ii) points and expenses
paid in connection with the acquisition of wholesale loans, (iii) ongoing
administrative and other operating expenses, (iv) the costs of our warehouse
credit and repurchase facilities with certain financial institutions, (v)
overcollateralization or reserve account requirements in connection with loans
and leases pooled and sold and (vi) fees and expenses incurred in connection
with our securitization.
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We have financed our lending activities through warehouse lines of credit
and repurchase facilities with financial institutions, equity and debt
offerings in the capital markets, deposits or borrowings at SPB and
securitizations. We believe that such sources will be sufficient to fund our
known liquidity requirements in the future on both a short and long term
basis. However, there can be no assurance that we will have access to the
capital markets in the future or that financing will be available to satisfy
our operating and debt service requirements or to fund our future growth.
SPB obtains the liquidity necessary to fund its investing activities
through deposits and, if necessary through borrowings under lines of credit
and from the FHLB. At December 31, 1999 and 1998, SPB had maximum FHLB
borrowings available equal to $35.7 million and $36.6 million, respectively.
These borrowings must be fully collateralized by qualifying mortgage loans and
may be in the form of overnight funds or term borrowings at SPB's option.
The highest balance of FHLB advances outstanding during the year ended
December 31, 1999 was $30.0 million, with an average outstanding balance of
$7.6 million. The outstanding balance of FHLB advances was $0 at December 31,
1999. The FHLB advances are secured by certain real estate loans with a
carrying value of $56.5 million and $49.9 million at December 31, 1999 and
1998, respectively.
As of December 31, 1999, SPB's deposit portfolio, which consists primarily
of certificate accounts decreased approximately $90.5 million to $1.6 billion
at December 31, 1999 from $1.7 billion at December 31, 1998.
SPB has been able to acquire new deposits through its local marketing
strategies as well as domestic money markets. Additionally, SPB maintains
liquidity in the form of cash and interest-bearing deposits with financial
institutions. SPB tracks on a daily basis all new loan applications by office
and, based on historical closing statistics, estimates expected fundings. Cash
management systems at SPB allow SPB to anticipate both funding and sales and
adjust deposit levels and short-term investments against the demands of SPB's
lending activities.
In addition to warehouse lines of credit and SPB borrowings, we have also
accessed the capital markets to fund our operations.
1999 Activity
Our operating activities produced cash of $151.6 million in 1999. The
majority of this cash was generated by the interest income from our loan and
investment portfolios after paying interest expense on our deposits,
borrowings, and long term debt.
Our investing activities used $202.9 million of cash in 1999. The most
significant use of cash in our investing activities was a $246.8 million
investment of available liquidity into short term interest bearing deposits.
At December 31, 1999 our interest bearing deposits totaled $248.2 million. We
also used cash to make net purchases of $21.9 million of securities available
for sale. The most significant item of cash generation in our investing
activities was from the proceeds we received on sales of stock we held in
other publicly traded companies. In 1999, we received total proceeds from
these sales of $100.6 million. These proceeds were primarily generated from
the sales of our holdings in FMC and IMH. In 1999, we received cash and 4.4
million shares of Bay View common stock from the sale and exchange of our
38.3% interest in FMC. On November 5, 1999, we announced the sale of the Bay
View common stock we received from the FMC/Bay View merger. As a result of
these transactions, we received approximately $86.3 million in total cash
proceeds. Also in 1999, we sold 1.9 million shares of our common stock
investment in IMH generating net proceeds of $10.4 million. Additionally, in
the second quarter of 1999, we sold 500,000 shares of common stock investment
in ICCMIC, generating net proceeds of $5.4 million. We also generated $27.2
million of cash through investing activities in 1999 as a result of a net
reduction in outstanding loans held for investment.
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Our financing activities used $212.6 million of cash in 1999. We used $99.5
million to repay deposits at SPB, $20.0 million to repay borrowings by SPB
from the FHLB, and $28.0 million to repay other borrowings. On May 14, 1999,
we entered into an agreement with our former parent Imperial Bank, a
subsidiary of Imperial Bancorp (NYSE:IMP) to repurchase 10% or 3.7 million
shares of our outstanding common stock for $8.00 per share for a total use of
cash of $29.5 million. The repurchase from Imperial Bank was financed through
the private issuance of $30.0 million of Series B 11.50% Mandatorily
Redeemable Cumulative Preferred Stock to a group of independent investors. In
November 1999, we repurchased and retired the $30.0 million of the Mandatorily
Redeemable Cumulative Preferred Stock. The issuance and subsequent repurchase
and retirement used a net $1.4 million of cash during 1999. We also used $34.1
million of cash through our financing activities to repurchase $43.1 million
of our long term debt. The repurchase generated an extraordinary gain on the
early extinguishment of debt of $5.2 million, net of income taxes.
1998 Activity
Our operating activities used $37.1 million of cash in 1998. The majority
of this cash was used in the operations of our discontinued businesses.
Our investing activities used $175.0 million of cash in 1998. The most
significant use of cash in our investing activities was a $276.6 million net
investment in loans held for investment. The most dramatic increase in loans
occurred in the portfolio of asset based loans generated by CBC, which
increased $148.5 million in 1998. The most significant source of cash from our
investing activities was the liquidation of interest bearing deposits of
$102.3 million.
Our financing activities generated $464.5 million of cash in 1998. The most
significant source of cash from financing activities was the receipt of $555.3
million in increased net deposits at SPB. Our financing activities used $25.0
million to repay net borrowings from the FHLB and $42.6 million to repay other
borrowings. Through our financing activities, we also repurchased 2.5 million
shares of our outstanding common stock for $9.78 per share for a total use of
cash of $24.3 million.
1997 Activity
Our operating activities produced cash of $18.6 million in 1997. The
majority of this cash was generated by the net interest income from our loan
and investment portfolios after paying interest expense on our deposits,
borrowings, and long term debt, as well as from sales of loans generated by
FMC.
Our investing activities used $320.6 million of cash in 1997. The most
significant use of cash in our investing activities was a $174.0 million net
investment in loans held for investment. The most dramatic increase in loans
occurred in the portfolio of asset based loans generated by CBC, which
increased $196.3 million in 1997. We also used $100.4 of million cash to
invest in interest bearing deposits in 1997. The last significant use of cash
in 1997's investing activities was a $124.5 million use of cash to acquire all
of the assets of PrinCap Mortgage Warehouse Inc. (since renamed IWF). The most
significant item of cash generation in our investing activities during 1997
was from the proceeds we received on sales of stock we held in other publicly
traded companies. In 1997, we received total proceeds from these sales of
$85.4 million. These proceeds were primarily generated from the sales of our
holdings in SPFC, FMC and IMH. In the first quarter of 1997, we sold
370,000 shares of common stock investment in SPFC, generating net proceeds of
$6.2 million. During the fourth quarter of 1997, FMC completed an initial
public offering of its common stock pursuant to which we were was a selling
stockholder. We received net proceeds from FMC's offering of $59.7 million.
During 1997, we also sold 462,269 shares of IMH generating cash proceeds of
$12.0 million. We also used $37.5 million in net cash to make net purchases of
securities available for sale, primarily 3.0 million shares of ICCMIC.
Our financing activities generated $273.2 million of cash in 1997. We
generated $86.8 million by increasing deposits at SPB. We used $95.5 million
of cash to repay borrowings by SPB from the FHLB. Our financing activities in
1997 included the January 1997 issuance of $200.0 million principal amount of
9.875% Senior
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Notes, generating net proceeds of $194.5 million. We used a portion of these
proceeds to repurchase approximately $69.8 million of the 9.75% Senior Notes,
using cash of $73.2 million, and generating an extraordinary loss on the early
extinguishment of debt of $4.0 million, net of income taxes. Also, during the
second quarter of 1997, we issued $70.0 million of company obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
debentures of the company under a proprietary product known as "ROPES." These
securities can be redeemed at par upon their maturity or remarketed as 30 year
capital instruments. The issuance of the ROPES generated net cash proceeds of
$68.1 million in 1997. Under current tax law, the interest payments on these
securities are tax-deductible. The proceeds from the offering are being used
for capital contributions to subsidiaries, strategic acquisitions, investments
and general corporate purposes.
Limitations on Dividends
Under the California Industrial Banking Law, an industrial bank may declare
dividends on its capital stock only if it has at least $750,000 of unimpaired
capital stock plus additional capital stock of $50,000 for each branch office.
In addition, no distribution of dividends is permitted unless such
distribution would not exceed an industrial bank's retained earnings; any
payment would not result in a violation of the approved minimum capital to
thrift and loan certificate of deposit ratio; and/or after giving effect to
the distribution, both
(a) the sum of an industrial bank's assets (net of goodwill, capitalized
research and development expenses and deferred charges) would be at least
125% of its liabilities (net of deferred taxes, deferred income and other
deferred credits), and
(b) current assets would be not less than current liabilities (except
that if a thrift and loan's average earnings before taxes for the last two
fiscal years had been less than average interest expense, current assets
must be at least 125% of current liabilities).
Under California law, in order for capital (including surplus) of an
institution to be included in calculating the leverage limitation described
above, thrift institutions must amend their bylaws to restrict such capital
from the payment of dividends. The amount of restricted capital maintained by
an industrial bank also provides the basis for establishing the maximum amount
that a thrift may lend to one borrower. As of December 31, 1999, 1998 and
1997, $150.0 million, $150.0 million and $125.0 million, respectively, of
SPB's capital was so restricted.
The FDIC has advised insured institutions that the payment of cash
dividends in excess of current earnings from operations is inappropriate and
may be cause for supervisory action. As a result of this policy, SPB may find
it difficult to pay dividends out of retained earnings from historical periods
prior to the most recent fiscal year or to take advantage of earnings
generated by extraordinary items. Under the Financial Institutions Supervisory
Act and FIRREA, federal regulators also have authority to prohibit financial
institutions from engaging in business practices which are considered to be
unsafe or unsound. It is possible, depending upon the financial condition of
SPB and other factors, that such regulators could assert that the payment of
dividends in some circumstances might constitute unsafe or unsound practices
and prohibit payment of dividends even though technically permissible.
Pursuant to FDICIA, SPB is prohibited from paying dividends if the payment of
such dividends would cause it to become "undercapitalized." These limitations
on the payment of dividends may restrict our ability to use cash from SPB
which may have been otherwise available to us for working capital.
Imperial Business Credit, Inc.
IBC primarily funds its lease originations through the use of an interim
bank warehouse facility at SPB and a permanent revolving securitization
facility. The securitization facility utilizes a trust structure and has a
five-year revolving period, which expires in November 2002, and a three and
one-half year amortization period.
The IBC Lease Receivables Trust 1997-2 ("1997-2 Trust") was created
pursuant to a pooling and servicing agreement among IBC, as originator, IBC
Funding Corp. ("IFC"), IBC's wholly-owned special purpose subsidiary, as
seller, and Norwest Bank Minnesota, as trustee and back-up servicer. IBC sells
its lease
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originations to IFC under a sale and contribution agreement ("IBC Agreement"),
which simultaneously assigns its rights in the leases to the Trust in exchange
for trust certificates. The Class A certificates are sold to Triple-A One
Funding Corp., a special purpose corporation administered by Capital Markets
Assurance Corporation ("CAPMAC"), which issues commercial paper to fund its
acquisitions. The Class A purchase limit under the facility is $250 million
and as of December 31, 1999 and 1998, there was approximately $218.6 million
and $197.9 million, respectively, of Class A Certificates outstanding.
IFC assigns all receivables acquired pursuant to the IBC Agreement to the
1997-2 Trust. The transactions are accounted for as sales for reporting
purposes under generally accepted accounting principles ("GAAP") and as
financings for tax purposes. IFC assigns all its rights, title and interest in
the leases, together with a security interest in the underlying leased
equipment, which ownership and security interests have been perfected under
the Uniform Commercial Code. Payments of the purchase price are made directly
from payments by lessees on the lease receivables.
Multifamily and Commercial Mortgage Lending
During the years ended December 31, 1999 and 1998, SPB did not securitize
IPL multi-family and commercial mortgage loans. However, during the years
ended December 31, 1999 and 1998, IPL sold for cash $283.7 million and $304.2
million of loans, respectively.
The ICCMIC Acquisition
ICCMIC has entered into a merger agreement with us under which, subject to
certain conditions including ICCMIC stockholder approval, we will acquire all
of the outstanding shares of the ICCMIC that we do not already own for a cash
purchase price of approximately $11.575 per share. The merger agreement was
amended effective as of February 7, 2000 to extend to April 30, 2000 the date
after which any party to the merger agreement may terminate the proposed
merger transaction. Our offer was subjected to a 60-day market check process
last year during which ICCMIC determined that no superior proposal for ICCMIC
or its assets was received. ICCMIC's stockholder meeting to approve the merger
will be held on Monday, March 20, 2000 and, if approved at that time, the
merger is expected to close by March 31, 2000. We estimate that the total cost
of the ICCMIC acquisition will be approximately $315.1 million. We intend to
fund the acquisition of ICCMIC from a combination of cash and liquid assets
held by our company and its subsidiaries, cash and cash equivalents held by
ICCMIC, and to the extent, if any, that additional cash may be required to
complete the merger, we would obtain those funds from borrowings or other
financing arrangements with third parties.
On March 28, 2000, we acquired all of the issued and outstanding shares of
ICCMIC's common stock (other than the 2,570,000 shares already owned by us)
for a cash purchase price of $11.5753246 per common share. At December 31,
1999 ICCMIC had total assets of $664.9 million, and total liabilities of
$269.3 million.
Inflation
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of our operations. Unlike industrial companies, nearly all of the assets
and liabilities of our company are monetary in nature.
As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Inflation
affects the Company primarily through its effect on interest rates, since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation.
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Asset Quality
The provision for loan and lease losses for 1999 increased to $35.3 million
as compared to $15.5 million for 1998 and $21.0 million for 1997. The increase
in 1999 was primarily due to increased non accrual loans and net charge-offs.
Net charge-offs increased to $30.2 million for 1999 as compared to $17.5
million for 1998 and $13.0 million for 1997. The increase in charge-offs in
1999 primarily resulted from higher net charge-offs at
LPIG and CBC. Net charge-offs at CBC were $17.4 million for 1999 as compared
to $67,000 for 1998 and $295,000 for 1997. Net charge-offs at LPIG were $3.9
million in 1999 and related to one single loan participation. LPIG did not
have any net charge-offs in 1998 and 1997. Total nonaccrual loans increased to
$59.4 million at December 31, 1999, as compared to $39.5 million at December
31, 1998 and $70.6 million at December 31, 1997. Total nonaccrual loans as a
percentage of loans and leases held for investment were 4.73% at December 31,
1999 as compared to 2.92% at December 31, 1998 and 5.46% at December 31, 1997.
The increase in CBC's non-accrual loans and charge-offs at December 31, 1999
as compared to December 31, 1998 resulted from recent regulatory guidance that
prevents CBC from considering the liquidation value of certain intangible
assets of its customers in determining a loan's accrual status or, if
necessary, any required charge-off amount. The effect of this guidance
resulted in CBC changing its loan impairment and charge-off policies in the
second quarter of 1999. The changes require CBC to charge-off gross amounts of
outstanding problem loans as opposed to CBC's previous practice of reserving
for and, if necessary, ultimately charging off the net deficiency amount of
problem loans.
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The following table summarizes certain information regarding our allowance
for loan and lease losses and losses on OREO:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance as of
January 1,................... $ 24,880 $ 26,954 $ 19,999 $13,729 $ 7,054
Provision for loan and lease
losses....................... 35,340 15,450 20,975 9,773 5,450
Business acquisition and bulk
loan purchases............... 1,846 -- 578 4,500 4,320
Sale of leases................ -- -- (900) -- --
Deconsolidation of ICIFC...... -- -- (687) -- --
-------- -------- -------- ------- -------
62,066 42,404 39,965 28,002 16,824
-------- -------- -------- ------- -------
Loans and Leases charged off--
Core Business Lines:
Multifamily and commercial
loans........................ (857) (918) (3,021) (1,560) (503)
Asset based loans............. (17,530) (112) (295) -- --
Loan Participations........... (3,882) -- -- -- --
Mortgage warehouse lines...... (1,625) -- -- -- --
Leases........................ (2,217) (1,496) (4,860) (3,318) (466)
-------- -------- -------- ------- -------
(26,111) (2,526) (8,176) (4,878) (969)
-------- -------- -------- ------- -------
Loans charged off--Non-Core
Business:
Single family residential..... (2,960) (4,661) (2,164) (2,485) (2,013)
Consumer loans................ (2,611) (15,487) (3,933) (963) (124)
-------- -------- -------- ------- -------
(5,571) (20,148) (6,097) (3,448) (2,137)
-------- -------- -------- ------- -------
Total Charge-offs............. (31,682) (22,674) (14,273) (8,326) (3,106)
-------- -------- -------- ------- -------
Recoveries on loans and leases
previously charged off--Core
Business:
Multifamily and commercial
loans........................ 55 142 29 -- --
Asset based loans............. 163 45 -- -- --
Leases........................ 1,086 1,721 900 176 5
-------- -------- -------- ------- -------
1,304 1,908 929 176 5
-------- -------- -------- ------- -------
Net charge-offs--Core Business
Lines........................ (24,807) (618) (7,247) (4,702) (964)
-------- -------- -------- ------- -------
Recoveries on loans previously
charged off--Non-Core
Business:
Single family residential..... 3 2,401 30 -- --
Consumer...................... 150 841 303 147 6
-------- -------- -------- ------- -------
153 3,242 333 147 6
-------- -------- -------- ------- -------
Total recoveries.............. 1,457 5,150 1,262 323 11
-------- -------- -------- ------- -------
Net charge-offs--Non-core
business lines............... (5,418) (16,906) (5,764) (3,301) (2,131)
-------- -------- -------- ------- -------
Total net-charge-offs......... (30,225) (17,524) (13,011) (8,003) (3,095)
-------- -------- -------- ------- -------
Balance as of December 31, ... 31,841 24,880 26,954 19,999 13,729
Loan loss allowance at AMN as
of December 31,.............. 30 857 11,093 -- --
-------- -------- -------- ------- -------
Total loan loss allowance..... $ 31,871 $ 25,737 $ 38,047 $19,999 $13,729
======== ======== ======== ======= =======
OREO losses:
OREO writedowns (recovery)
and expenses............... $ 617 $ (1,498) $ 2,074 $ 4,171 $ 2,870
Loss (gain) on sale of
OREO....................... 769 597 4,453 2,843 (957)
-------- -------- -------- ------- -------
Total OREO (gains)
losses................... $ 1,386 $ (901) $ 6,527 $ 7,014 $ 1,913
======== ======== ======== ======= =======
</TABLE>
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The percentage of the allowance for loan and lease losses to nonaccrual
loans will not remain constant due to the changing nature of our portfolio. We
analyze the collateral for each non-performing loan to determine potential
loss exposure, and in conjunction with other factors, this loss exposure
contributes to the overall assessment of the adequacy of the allowance for
loan and lease losses. On an ongoing basis, we monitor the loan and lease
portfolio and evaluate the adequacy of the allowance for loan and lease
losses.
In determining the adequacy of the allowance for loan and lease losses, we
consider such factors as:
. historical loss experience
. underlying collateral values
. evaluations made by bank regulatory authorities
. assessment of economic conditions and
. other appropriate data to identify the risks in the portfolio.
Loans and leases that we believe are uncollectible are charged to the
allowance for loan and lease losses. Recoveries on loans and leases previously
charged off are credited to the allowance. Provisions for loan and lease
losses are charged to expense and credited to the allowance in amounts we
believe are appropriate based upon our evaluation of the known and inherent
risks in the loan and lease portfolio. While we believe that the current
allowance for loan and lease losses is sufficient, future additions to the
allowance may be necessary.
The allocation of the Company's allowance for loan and lease losses and the
percentage of loans and leases by loan type to total loans and leases as of
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Percentage of Percentage of
Loans and Leases Loans and Leases
to Total Loans To Total Loans
and Leases And Leases
Allocated Held for Allocated Held for
Allowance Investment Allowance Investment
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Loans secured by real
estate:
One to four family.... $ 4,034 7.3% $ 2,664 9.3%
Multi-family.......... 228 2.7 1,299 4.1
Commercial............ 282 1.1 128 1.9
------- ----- ------- -----
4,544 11.1 4,091 15.3
Leases.................. 126 0.1 -- 0.1
Consumer and auto
loans.................. 812 0.6 1,567 1.9
Franchise loans......... 307 1.4 934 3.7
Asset based loans....... 15,018 58.2 10,764 46.7
Other commercial loans.. 9,498 28.6 7,310 32.3
------- ----- ------- -----
25,761 88.9 20,575 84.7
Unallocated............. 1,536 -- 214 --
------- ----- ------- -----
$31,841 100.0% $24,880 100.0%
======= ===== ======= =====
</TABLE>
Although the above table allocates the allowance for loan and lease losses
by loan types, the total allowance is available to absorb losses on all loans
and leases.
The ratio of the allowance for loan and lease losses to total loans held
for investment was 2.50%, 1.85%, and 2.10% at December 31, 1999, 1998, and
1997, respectively. The ratio of the allowance for loan losses to nonaccrual
loans was 53.59% at December 31, 1999 as compared to 65.11% at December 31,
1998 and 53.87% at December 31, 1997. We evaluate expected losses on
nonaccrual loans on a loan-by-loan basis and we believe that the allowance is
adequate to cover both expected losses on nonaccrual loans and inherent losses
in the remainder of our loans and leases held for investment portfolio. The
percentage of the allowance for loan and
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lease losses to nonaccrual loans does not remain constant due to the changing
nature of our loan portfolio. We analyze the collateral for each nonperforming
loan to determine our potential loss exposure, and in conjunction with other
factors, this loss exposure contributes to the overall assessment of the
adequacy of the allowance for loan and lease losses. On an ongoing basis, we
monitor the loan portfolio and evaluate the adequacy of the allowance for loan
and lease losses.
In determining the adequacy of the allowance for loan and lease losses, we
consider such factors as historical loan loss experience, underlying
collateral values, evaluations made by bank regulatory authorities, assessment
of economic conditions and other appropriate data to identify the risks in the
loan portfolio. Loans we deem to be uncollectible are charged to the allowance
for loan losses. Recoveries on loans previously charged off are credited to
the allowance. Provisions for loan and lease losses are charged to expense and
credited to the allowance in amounts we deem appropriate based on our
evaluation of the known and inherent risks in the loan portfolio. Future
additions to the allowance for loan and lease losses may be necessary. For
further information, see Item 1--"Business--Loans Held for Investment."
Asset/Liability Management and Market Risk
General
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of falling interest rates, the net earnings of an institution with a
positive gap theoretically may be adversely affected due to its interest-
earning assets repricing to a greater extent than its interest-bearing
liabilities. Conversely, during a period of rising interest rates,
theoretically, the net earnings of an institution with a positive gap position
may increase as it is able to invest in higher yielding interest-earning
assets at a more rapid rate than its interest-bearing liabilities reprice. In
addition, a positive gap may not protect an institution with a large portfolio
of ARM's from increases in interest rates for extended time periods as such
instruments generally have periodic and lifetime interest rate caps. Our ARM's
are predominantly tied to LIBOR. Interest rates and the resulting cost of
funds increases in a rapidly increasing rate environment could exceed the cap
levels on these loan products and negatively impact net interest income.
We manage portfolio interest rate risk through the aggressive marketing and
funding of adjustable rate loans, which generally reprice at least semi-
annually and are generally indexed to Prime or LIBOR. As a result of this
strategy, at December 31, 1999, our total interest-earning assets maturing or
repricing within one year exceeded our total interest-bearing liabilities
maturing or repricing in the same time by $286.9 million, representing a
positive cumulative gap ratio of 119.6%. We closely monitor our interest rate
risk as such risk relates to operational strategies. Our cumulative gap
position is at a level satisfactory to management and we are attempting to
maintain a positive gap position in light of the current interest rate
environment. However, there can be no assurances that we will be able to
maintain a positive gap position or that our strategies will not result in a
negative gap position in the future. The level of the movement of interest
rates, up or down, is an uncertainty and could have a negative impact on the
earnings of our company.
Total Rate of Return Swaps
During 1999, 1998 and 1997, we entered into total rate of return swap
contracts for investment purposes with various counterparties, the provisions
of which entitle our company to receive the total return on various commercial
loans in exchange for a floating payment of one month LIBOR plus a spread.
These contracts are off balance sheet instruments.
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As of December 31, 1999, 1998 and 1997, we were party to total rate of
return swap contracts with a total notional amount of $83.6 million, $280.4
million and $150.6 million, under which our company was obligated to pay one
month LIBOR plus a weighted average spread of 0.88%, 0.88% and 0.78%,
respectively. The weighted average remaining life of these contracts was 60.0
months, 31.2 months and 37.1 months as of December 31, 1999, 1998 and 1997.
For the years ended December 31, 1999, 1998 and 1997, our company recognized
income of $2.9 million and $5.4 million and $448,000 on our total return
swaps, respectively.
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund launched by the Company in August 1998, the Company delivered
subordinate bonds of approximately $51.3 million into a total rate of return
swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of
the swap entitle the Company to receive the total return on the subordinate
bonds delivered and pay a floating payment of LIBOR plus a weighted average
spread of 1.36%. The Company delivered cash and various equity securities to
CIBC as collateral for the swap. At December 31, 1999 and 1998, $25.9 million
and $17.8 million was outstanding and classified as Trading Securities on the
consolidated balance sheet.
Risk Management and Market Sensitive Instruments
Interest rate risk is managed within a tight duration band, and credit risk
is managed by maintaining high average quality ratings and diversified sector
exposure within the securities and loan portfolios. In connection with our
investment and risk management objectives, we also use financial instruments
whose market value is at least partially determined by, among other things,
levels of or changes in domestic interest rates (short-term or long-term),
prepayment rates, equity markets or credit ratings/spreads.
Using financial modeling and other techniques, we regularly evaluate the
appropriateness of investments relative to management-approved investment
guidelines and the business objective of the portfolios. We operate within
these investment guidelines by maintaining a mix of loans and investments that
diversifies our assets.
The following discussion about our risk management activities includes
"forward-looking statements" that involve risk and uncertainties. Set forth
below are management's projections of hypothetical net losses in fair value of
shareholders' equity of our market sensitive financial instruments if certain
assumed changes in market rates and prices were to occur (sensitivity
analysis). While we believe that the assumed market rate changes are
reasonably possible in the near term, actual results may differ, particularly
as a result of any management actions that would be taken to mitigate such
hypothetical losses in fair value of shareholders' equity. Based on our
overall exposure to interest rate risk and equity price risk, we believe that
these changes in market rates and prices would not materially affect the
consolidated near-term financial position, results of operations or cash flows
of our company.
Interest Rate Risk. Assuming immediate increases of 100 and 200 basis
points in interest rates the net hypothetical increase of net income and the
value of shareholders' equity related to financial and derivative instruments
is estimated to be $9.0 million and $17.7 million (after tax), or 4.38% and
8.61%, of total shareholders' equity, respectively, at December 31, 1999. We
believe that an interest rate shift of this magnitude represents a moderately
advantageous scenario. Assuming immediate decreases of 100 and 200 basis
points in interest rates the net hypothetical loss of net income and the value
of shareholders' equity related to financial and derivative instruments is
estimated to be ($9.4) million and ($19.0) million (after tax), or 4.55% and
9.27%, of total shareholders' equity, respectively, at December 31, 1999. The
Company believes that an interest rate shift of this magnitude represents a
moderately adverse scenario.
The effect of interest rate risk on potential near-term net income, cash
flow and fair value was determined based on commonly used models. The models
project the impact of interest rate changes on a wide range of factors,
including duration, prepayment, put options and call options. Fair value was
estimated based on the net present value of cash flows or duration estimates,
using a representative set of likely future interest rate scenarios.
Equity Price Risk. Our available for sale equity securities includes the
common stock of ICCMIC. Assuming an immediate decrease of 10% in equity prices
for such equity securities, the hypothetical loss in fair
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value of shareholders' equity related equity securities is estimated to be
$1.7 million after tax or 0.82% of total shareholders' equity at December 31,
1999. Assuming an immediate increase of 10% in equity prices for such equity
securities, the hypothetical gain in fair value of shareholders' equity
related equity securities is estimated to be $1.7 million after tax or 0.82%
of total shareholders' equity at December 31, 1999.
Repricing/Maturity of Interest-Earning Assets and Interest-Bearing Liabilities
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which we
anticipate to reprice or mature in each of the future time periods shown. The
amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of term to
repricing or the contractual terms of the asset or liability.
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------------------------------------------------------
More than More than More than More than More than More Non
3 Months 3 Months to 6 Months 1 Year to 3 Years to 5 Years to than Interest
or Less 6 Months to 1 Year 3 Years 5 Years 10 Years 10 Years Bearing Total
---------- ----------- --------- --------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Cash.................. $ 33,898 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 33,898
Interest earning
deposits............. 248,182 -- -- -- -- -- -- -- 248,182
Trading securities.... 160,805 -- -- -- -- -- -- -- 160,805
Securities available
for sale............. 61,546 -- -- -- -- -- 12,828 -- 74,374
FHLB stock............ 6,960 -- -- -- -- -- -- -- 6,960
Mortgage loans held
for sale............. 289,398 -- -- -- -- -- -- -- 289,398
Loans held for
investment, net of
unearned discount and
deferred loan
fees(1)............... 814,793 78,157 53,922 27,551 10,681 62,307 170,963 54,699 1,273,073
---------- -------- --------- --------- -------- --------- -------- -------- ----------
Total interest-earning
assets............... 1,615,582 78,157 53,922 27,551 10,681 62,307 183,791 54,699 2,086,690
Less:
Allowance for loan
losses............... -- -- -- -- -- -- -- (31,841) (31,841)
---------- -------- --------- --------- -------- --------- -------- -------- ----------
Net interest-earning
assets............... 1,615,582 78,157 53,922 27,551 10,681 62,307 183,791 22,858 2,054,849
Non-interest-earning
assets............... -- -- -- -- -- -- -- 146,766 146,766
---------- -------- --------- --------- -------- --------- -------- -------- ----------
Total assets.......... $1,615,582 $ 78,157 $ 53,922 $ 27,551 $ 10,681 $ 62,307 $183,791 $169,623 $2,201,615
========== ======== ========= ========= ======== ========= ======== ======== ==========
Interest-bearing
liabilities:
Deposits.............. $ 449,092 $454,906 $ 482,451 $ 227,349 $ 440 $ -- $ -- $ 520 $1,614,758
Other borrowings...... 74,309 -- -- -- -- -- -- -- 74,309
Senior Notes.......... -- -- -- -- -- 185,185 -- -- 185,185
ROPES................. -- -- -- -- 61,750 -- -- -- 61,750
---------- -------- --------- --------- -------- --------- -------- -------- ----------
Total interest-bearing
liabilities.......... 523,401 454,906 $ 482,451 $ 227,349 $ 62,190 $ 185,185 $ -- 520 1,936,002
Non-interest bearing
liabilities.......... -- -- -- -- -- -- -- 60,233 60,233
Shareholders' equity.. -- -- -- -- -- -- -- 205,380 205,380
---------- -------- --------- --------- -------- --------- -------- -------- ----------
Total liabilities and
shareholders'
equity............... $ 523,401 $454,906 $ 482,451 $ 227,349 $ 62,190 $ 185,185 $ -- $266,133 $2,201,615
========== ======== ========= ========= ======== ========= ======== ======== ==========
Interest rate
sensitivity gap(2)... 1,092,181 (376,749) (428,529) (199,798) (51,509) (122,878) 183,791 22,338 118,847
Cumulative interest
Sensitivity Gap...... $1,092,181 $715,432 $ 286,903 $ 87,105 $ 35,596 $(87,282) $ 96,509 $118,847
Cumulative interest
sensitivity gap as a
% of total assets.... 49.61% 32.50% 13.03% 3.96% 1.62 % -3.96 % 4.38%
Cumulative net
interest earning
assets as a
percentage of
cumulative interest-
bearing liabilities.. 308.67% 173.13% 119.64% 105.16% 102.03 % 95.49 % 104.99% 106.14 %
</TABLE>
- -------
(1) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for loans receivable.
(2) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
78
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM's, have
features which restrict changes in interest rates on a short term basis and
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those reflected in the table. Finally, the ability of many
borrowers to service their ARM's may decrease in the event of an interest rate
increase.
79
<PAGE>
Average Balance Sheet
The following tables set forth certain information relating to our company
for 1999, 1998, and 1997. The yields and costs are derived by dividing income
or expense by the average balance of assets or liabilities, respectively, for
the periods shown except where noted otherwise. Average balances are derived
from average month-end balances. Management does not believe that the use of
average monthly balances instead of average daily balances has caused any
material differences in the information presented. The average balance of
loans receivable includes loans on which we have discontinued accruing
interest. The yields and costs include fees which are considered adjustments
to yields.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Yield/ Yield/ Yield/
Average Average Average Average Average Average
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
ASSETS:
-------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investments and
interest-earning
deposits.............. $ 295,197 25,520 8.65% $ 242,246 $ 28,674 11.84% $ 219,664 $ 24,157 11.00%
FHLB stock............. 6,166 321 5.21 5,031 291 5.78 10,334 619 5.99
Loans held for sale
and investment,
net(1)................ 1,572,668 178,229 11.33 1,643,147 200,827 12.22 1,616,263 176,146 10.90
Retained interest and
capitalized excess
servicing fees
receivable............ 24,926 3,368 13.51 31,956 6,048 18.93 29,064 2,678 9.21
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Total interest-
earning assets...... 1,898,957 207,438 10.92 1,922,380 235,840 12.27 1,875,325 203,600 10.86
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Non interest-earning
assets................. 268,728 361,593 299,782
Total assets......... $2,167,685 $2,283,973 $2,175,107
========== ========== ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY:
---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
liabilities:
Deposits............... $1,579,605 $ 86,582 5.48% $1,512,057 $ 87,030 5.76% $1,218,123 $ 71,014 5.83%
Borrowings from FHLB... 7,590 630 8.30 24,451 1,631 6.67 57,154 3,327 5.82
Other borrowings....... 69,306 3,920 5.66 69,844 4,150 5.94 327,076 17,896 5.47
Senior Notes........... 207,706 21,540 10.37 219,837 22,392 10.19 209,672 21,671 10.34
Company obligated
mandatorily
redeemable preferred
securities of
subsidiary trust
holding solely
debentures of the
company............... 66,192 7,390 11.16 70,000 7,903 11.29 39,101 4,305 11.01
Preferred Stock Series
B..................... 11,539 1,545 13.39 -- -- -- -- -- --
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Total interest-bearing
liabilities........... 1,941,938 121,607 6.26 1,896,189 123,106 6.49 1,851,126 118,213 6.39
---------- -------- ----- ---------- -------- ------ ---------- -------- ------
Non interest-bearing
liabilities............ 11,461 95,122 78,117
Shareholders' equity.... 214,286 292,662 245,864
---------- ---------- ----------
Total liabilities and
shareholders'
equity................ $2,167,685 $2,283,973 $2,175,107
========== ========== ==========
Net interest rate
spread................. $ 85,831 4.66% $112,734 5.78% $ 85,387 4.47%
======== ======== ========
Net interest margin..... 4.52% 5.86% 4.55%
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 97.79% 101.38% 101.31%
</TABLE>
- -------
(1) Net of deferred income and the allowance for loan losses, includes
nonaccrual loans.
80
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends upon the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our net interest income and interest expense during
the periods indicated. Information is provided in each category with respect
to (i) changes attributable to changes in volume (changes in volume multiplied
by prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume), (iii) changes in interest due to both rate and
volume and (iv) the net change.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1999 Over 1998 1998 Over 1997
--------------------------------------- ---------------------------------------
Volume Rate Rate/Volume Total Volume Rate Rate/Volume Total
------- -------- ----------- -------- -------- ------- ----------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase/(decrease) in:
Investments and
interest-- bearing
deposits $ 6,269 $ (7,728) $(1,695) $ (3,154) $ 2,484 $ 1,845 $ 188 $ 4,517
FHLB stock............ 66 (29) (7) 30 (318) (22) 12 (328)
Loans held for sale... -- -- -- -- (35,500) 2,790 (1,476) (34,186)
Loans held for
investment, net...... (8,613) (14,624) 639 (22,598) 30,053 22,624 6,190 58,867
Retained interest and
capitalized excess
servicing fees
receivable........... (1,331) (1,732) 383 (2,680) 266 2,825 279 3,370
------- -------- ------- -------- -------- ------- ------- --------
Total interest
income.............. (3,609) (24,113) (680) (28,402) (3,015) 30,062 5,193 32,240
------- -------- ------- -------- -------- ------- ------- --------
Deposits.............. 3,891 (4,234) (105) (448) 17,136 (853) (267) 16,016
Borrowings from
Imperial Bank........ -- -- -- -- -- -- -- --
FHLB borrowings....... (1,125) 399 (275) (1,001) (1,903) 486 (279) (1,696)
Other borrowings...... (32) (196) (2) (230) (14,071) 1,537 (1,212) (13,746)
Senior Notes.......... (1,236) 396 (12) (852) 1,051 (315) (15) 721
ROPES................. (430) (91) 8 (513) 3,402 109 87 3,598
Mandatorily redeemable
cumulative preferred
stock................ -- -- 1,545 1,545 -- -- -- --
------- -------- ------- -------- -------- ------- ------- --------
Total interest
expense............. 1,068 (3,726) 1,159 (1,499) 5,615 964 (1,686) 4,893
------- -------- ------- -------- -------- ------- ------- --------
Change in net interest
income................. $(4,677) $(20,387) $(1,839) $(26,903) $ (8,630) $29,098 $ 6,879 $ 27,347
======= ======== ======= ======== ======== ======= ======= ========
</TABLE>
Recent Accounting Pronouncements
The Company is affected by recent accounting pronouncements. For a
description of these standards and the effect, if any, adoption has had or
will have on the Company's consolidated financial statements, see "Note 3 of
Notes to Consolidated Financial Statements."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Asset/Liability Management and Market Risk."
81
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. 83
Consolidated Balance Sheets............................................... 84
Consolidated Statements of Operations and Comprehensive Income (Loss)..... 85
Consolidated Statements of Changes in Shareholders' Equity................ 87
Consolidated Statements of Cash Flows..................................... 88
Notes to Consolidated Financial Statements................................ 90
</TABLE>
All supplemental schedules are omitted as inapplicable or because the
required information is included in the consolidated financial statements or
notes thereto.
82
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Imperial Credit Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations and comprehensive income
(loss), changes in shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of Imperial Credit Industries, Inc. and
subsidiaries' management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Imperial
Credit Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Los Angeles, California
January 24, 2000
83
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash.................................................... $ 33,898 $ 297,772
Interest bearing deposits............................... 248,182 1,415
Investment in Federal Home Loan Bank stock.............. 6,960 4,657
Securities held for trading, at market.................. 160,805 170,752
Securities available for sale, at market................ 74,374 60,015
Loans and leases held for sale, net..................... 289,398 319,061
Loans and leases held for investment, net............... 1,241,232 1,320,095
Servicing rights........................................ 802 4,329
Retained interest in loan and lease securitizations..... 10,220 27,011
Accrued interest receivable............................. 8,272 10,114
Premises and equipment, net............................. 13,576 11,664
Other real estate and other assets owned, net........... 4,894 14,024
Goodwill................................................ 34,961 37,498
Investment in Franchise Mortgage Acceptance Company..... -- 56,334
Other assets............................................ 36,549 35,630
Net assets of discontinued operations................... 37,492 46,812
---------- ----------
Total assets.......................................... $2,201,615 $2,417,183
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits................................................ $1,614,758 $1,714,252
Borrowings from Federal Home Loan Bank.................. -- 20,000
Other borrowings........................................ 74,309 102,270
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
debentures of the company ("ROPES").................... 61,750 70,000
Senior Notes............................................ 185,185 219,858
Accrued interest payable................................ 18,811 25,421
Accrued income taxes payable............................ 16,101 3,840
Minority interest in consolidated subsidiaries.......... 2,684 3,217
Other liabilities....................................... 22,637 24,804
---------- ----------
Total liabilities..................................... 1,996,235 2,183,662
---------- ----------
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 and 36,785,898 shares issued and
outstanding at December 31, 1999 and 1998,
respectively........................................... 97,220 129,609
Retained earnings....................................... 98,437 101,265
Shares held in deferred executive compensation plan..... 7,107 3,833
Accumulated other comprehensive income (loss)--
unrealized gain (loss) on securities available for
sale, net.............................................. 2,616 (1,186)
---------- ----------
Total shareholders' equity............................ 205,380 233,521
---------- ----------
Total liabilities and shareholders' equity............ $2,201,615 $2,417,183
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
84
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Revenue:
Interest on loans and leases................... $178,229 $ 200,827 $176,146
Interest on investments........................ 25,841 28,965 24,776
Interest on other finance activities........... 3,368 6,048 2,678
-------- --------- --------
Total interest income........................ 207,438 235,840 203,600
Interest on deposits........................... 86,582 87,030 71,014
Interest on other borrowings................... 4,550 5,781 21,223
Interest on long term debt..................... 30,475 30,295 25,976
-------- --------- --------
Total interest expense....................... 121,607 123,106 118,213
-------- --------- --------
Net interest income.......................... 85,831 112,734 85,387
Provision for loan and lease losses............ 35,340 15,450 20,975
-------- --------- --------
Net interest income after provision for loan
and lease losses.............................. 50,491 97,284 64,412
-------- --------- --------
Gain on sale of loans and leases............... 6,480 14,888 69,737
Asset management fees.......................... 10,054 7,591 5,810
Investment banking and brokerage fees.......... 27,198 18,463 7,702
Loan servicing income.......................... 6,885 11,983 9,474
Gain (loss) on sale of securities.............. 32,742 (592) 112,185
Equity in net income of Southern Pacific
Funding Corporation........................... -- 12,739 25,869
Equity in net (loss) income of Franchise
Mortgage Acceptance Company................... (53) 3,235 (3,050)
Mark to market on securities and loans held
for sale...................................... (28,641) (42,388) (341)
Loss on impairment of equity securities........ -- (120,138) --
Gain on termination of REIT advisory
agreement..................................... -- -- 19,046
Other income................................... 13,894 13,118 4,060
-------- --------- --------
Total other income (loss).................... 68,559 (81,101) 250,492
-------- --------- --------
Total revenue.................................. 119,050 16,183 314,904
-------- --------- --------
Expenses:
Personnel expense.............................. 50,034 52,003 45,192
Commission expense............................. 10,307 9,633 6,417
Amortization of servicing rights............... 4,223 1,486 3,088
Occupancy expense.............................. 5,658 5,750 4,319
Net expenses (income) of other real estate
owned......................................... 1,386 (901) 6,527
Professional services.......................... 10,265 10,848 9,665
Telephone and other communications............. 3,768 3,692 2,222
Amortization of goodwill....................... 14,506 2,686 2,491
Provision for loss on repurchase of former
mortgage banking loans........................ -- 4,750 5,400
Loss on restructuring of loan to
Dabney/Resnick/Imperial, LLC.................. -- -- 3,709
General and administrative expense............. 26,453 30,889 25,831
-------- --------- --------
Total expenses............................... 126,600 120,836 114,861
-------- --------- --------
(Loss) income from continuing operations
before income taxes, minority interest and
extraordinary item............................ (7,550) (104,653) 200,043
Income taxes................................... (3,074) (44,064) 74,267
Minority interest in income (loss) of
consolidated subsidiaries..................... 1,474 (1,464) 10,513
-------- --------- --------
(Loss) income from continuing operations
before extraordinary item..................... (5,950) (59,125) 115,263
Operating loss from discontinued operations of
AMN (net of $557,000, $2.1 million and
$15.5 million of income taxes in 1999, 1998
and 1997, respectively)....................... (899) (3,232) (25,347)
Loss on disposal of AMN including provision of
$3.7 million for operating losses during
phase-out period (net of $6.6 million of
income taxes)................................. -- (11,276) --
-------- --------- --------
(Loss) income before extraordinary item........ (6,849) (73,633) 89,916
Extraordinary item--gain (loss) on early
extinguishment of debt, net of income taxes... 4,021 -- (3,995)
-------- --------- --------
Net (loss) income............................ $ (2,828) $ (73,633) $ 85,921
-------- --------- --------
Other comprehensive income:
Unrealized gains (losses) on securities
available for sale............................ 7,890 (5,333) 3,332
Reclassification adjustment for gains included
in noninterest income......................... (1,492) (53) (8,668)
Income taxes................................... 2,596 (2,274) (2,252)
-------- --------- --------
Other comprehensive income (loss)............ 3,802 (3,112) (3,084)
-------- --------- --------
Comprehensive income (loss).................. $ 974 $ (76,745) $ 82,837
======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
85
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)--(Continued)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Basic (loss) income per share:
(Loss) income from continuing operations before
extraordinary item.................................. $(0.17) $(1.55) $ 2.99
Loss from discontinued operations, net of income
taxes............................................... (0.02) (0.08) (0.66)
Loss on disposal of AMN, net of income taxes......... -- (0.30) --
Extraordinary item--gain (loss) on early
extinguishment of debt, net of income taxes......... 0.11 -- (0.10)
------ ------ ------
Net (loss) income per common share................... $(0.08) $(1.93) $ 2.23
====== ====== ======
Diluted (loss) income per share:
(Loss) income from continuing operations before
extraordinary item.................................. $(0.17) $(1.55) $ 2.82
Loss from discontinued operations, net of income
taxes............................................... (0.02) (0.08) (0.62)
Loss on disposal of AMN, net of income taxes......... -- (0.30) --
Extraordinary item--gain (loss) on early
extinguishment of debt, net of income taxes......... 0.11 -- (0.10)
------ ------ ------
Net (loss) income per common share................... $(0.08) $(1.93) $ 2.10
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
86
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares
Held Accumulated
Common in Other Total
Shares Common Retained DEC Comprehensive Shareholders'
Outstanding Stock Earnings Plan Income (Loss) Equity
----------- -------- -------- ------ ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... 38,291 $145,521 $ 88,977 $ -- $ 5,010 $239,508
Exercise of stock
options................ 530 1,332 -- -- -- 1,332
Unrealized depreciation
on securities available
for sale, net.......... -- -- -- -- (3,084) (3,084)
Tax benefit from
exercise of stock
options................ -- 807 -- -- -- 807
Repurchase and
retirement of stock and
warrants............... (30) (551) -- -- -- (551)
Net income, 1997........ -- -- 85,921 -- -- 85,921
------ -------- -------- ------ ------- --------
Balance, December 31,
1997................... 38,791 147,109 174,898 -- 1,926 323,933
Exercise of stock
options................ 244 1,037 -- -- -- 1,037
Stock held for deferred
compensation plan...... -- (3,833) -- 3,833 -- --
Issuance of common stock
for Imperial Credit
Lender Services, Inc.
acquisition............ 236 5,000 -- -- -- 5,000
Unrealized depreciation
on securities available
for sale, net.......... -- -- -- -- (3,112) (3,112)
Tax benefit from
exercise of stock
options................ -- 4,601 -- -- -- 4,601
Repurchase and
retirement of stock and
warrants............... (2,485) (24,305) -- -- -- (24,305)
Net loss, 1998.......... -- -- (73,633) -- -- (73,633)
------ -------- -------- ------ ------- --------
Balance, December 31,
1998................... 36,786 $129,609 $101,265 $3,833 $(1,186) $233,521
Exercise of stock
options................ 95 249 -- -- -- 249
Stock held for deferred
compensation plan...... -- (3,274) -- 3,274 -- --
Unrealized appreciation
on securities available
for sale, net.......... -- -- -- -- 3,802 3,802
Tax benefit from
exercise of stock
options................ -- 96 -- -- -- 96
Repurchase and
retirement of stock and
warrants............... (3,682) (29,460) -- -- -- (29,460)
Net loss, 1999.......... -- -- (2,828) -- -- (2,828)
------ -------- -------- ------ ------- --------
Balance, December 31,
1999................... 33,199 $ 97,220 $ 98,437 $7,107 $ 2,616 $205,380
====== ======== ======== ====== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
87
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------
1999 1998 1997
--------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
(Loss) income from continuing operations.. $ (5,950) $ (59,125) $ 115,263
Adjustments to reconcile (loss) income
from continuing operations to net cash
provided by (used in) operating
activities:
Cash used in discontinued operations.... (2,513) (1,824) (22,112)
Provision for loan and lease losses..... 35,340 15,450 20,975
Loss on impairment of equity
securities............................. -- 120,138 --
Mark to market on securities and loans
held for sale.......................... 28,641 42,388 --
Loss on restructuring of loan to
Dabney/Resnick/Imperial, LLC........... -- -- 3,709
Provision for loss on repurchase of
former mortgage banking loans.......... -- 4,750 5,400
Depreciation............................ 4,394 3,714 4,180
Amortization of goodwill................ 14,506 2,686 2,491
Amortization of servicing rights........ 4,223 1,486 3,088
Accretion of discount................... (3,368) (6,048) (2,678)
Gain on sale of loans and leases........ (6,480) (14,888) (69,737)
(Gain) loss on sale of securities....... (32,742) 592 (112,185)
Gain on termination of REIT advisory
agreement.............................. -- -- (19,046)
Equity in net earnings of SPFC.......... -- (12,739) (25,869)
Equity in net loss (income) of FMC...... 53 (3,235) 3,050
Loss on sale of OREO.................... 769 597 4,453
Writedowns (recovery) on other real
estate owned........................... 287 (2,075) 892
(Benefit) provision for deferred income
taxes.................................. (6,253) (55,540) 40,294
Originations of loans held for sale..... (466,000) (660,000) (1,061,500)
Sales and collections on loans held for
sale................................... 540,672 673,426 1,149,839
Purchase of trading securities.......... (71,997) (146,187) (126,083)
Sales of trading securities............. 100,469 113,819 48,369
Other, net.............................. 17,571 (54,520) 55,770
--------- --------- -----------
Net cash provided by (used in) by operating
activities................................. 151,622 (37,135) 18,563
--------- --------- -----------
Cash flows from investing activities:
Net (increase) decrease in interest
bearing deposits......................... (246,767) 102,323 (100,369)
Proceeds from sale of servicing rights.... -- -- 2,213
Proceeds from sale of other real estate
owned.................................... 10,351 13,743 21,171
Purchase of securities available for
sale..................................... (26,757) (17,551) (42,938)
Sales of securities available for sale.... 4,875 8,818 5,404
Net change in loans held for investment... (27,241) (276,629) (173,965)
Purchases of premises and equipment....... (7,767) (7,833) (4,549)
Proceeds from sale of securities.......... 100,558 867 85,388
Purchases of Federal Home Loan Bank
stock.................................... (1,983) -- (3,634)
Redemption of stock in Federal Home Loan
Bank..................................... -- 1,280 15,140
Cash utilized for acquisitions............ (8,132) -- (124,488)
--------- --------- -----------
Net cash used in investing activities....... (202,863) (174,982) (320,627)
--------- --------- -----------
</TABLE>
88
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IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1999 1998 1997
--------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits.......... $ (99,494) $555,306 $ 86,838
Advances from Federal Home Loan Bank......... 30,000 44,500 50,000
Repayments of advances from Federal Home Loan
Bank........................................ (50,000) (69,500) (145,500)
Net change in other borrowings............... (27,961) (42,571) 143,505
Proceeds from issuance of mandatorily
redeemable cumulative preferred stock....... 30,000 -- --
Repurchase and retirement of mandatorily
redeemable cumulative preferred stock....... (31,353) -- --
Proceeds from issuance of Senior Notes due
2007........................................ -- -- 194,500
Proceeds from issuance of Company obligated
mandatorily redeemable preferred securities
of subsidiary trust holding solely
debentures of the company ("ROPES")......... -- -- 68,075
Repurchase of Company obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely debentures
of the company ("ROPES").................... (6,628) -- --
Repurchase and retirement of common stock and
warrants.................................... (29,460) (24,305) (551)
Repurchase of Senior Notes................... (27,453) -- (73,241)
Net change in minority interest.............. (533) 43 (51,762)
Proceeds from exercise of stock options...... 249 1,037 1,332
--------- -------- ---------
Net cash (used in) provided by financing
activities.................................... (212,633) 464,510 273,196
--------- -------- ---------
Net change in cash............................. (263,874) 252,393 (28,868)
Cash at beginning of year...................... 297,772 45,379 74,247
--------- -------- ---------
Cash at end of year............................ $ 33,898 $297,772 $ 45,379
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
89
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1999, 1998 and 1997
1. Organization
Imperial Credit Industries, Inc., is a diversified commercial lending,
financial services, and investment banking company that was incorporated in
1986 in the State of California. The consolidated financial statements include
Imperial Credit Industries, Inc. ("ICII"), and its wholly or majority owned
consolidated subsidiaries (collectively, the "Company"). The wholly-owned
subsidiaries include but are not limited to Southern Pacific Bank ("SPB"),
Imperial Business Credit Inc. ("IBC"), Imperial Credit Lender Services, Inc.
("ICLS") formerly Statewide Documentation, Inc., and Imperial Credit Asset
Management, Inc. ("ICAM"). Imperial Capital Group, LLC ("ICG") is a majority
owned consolidated subsidiary which is approximately 65% owned by our company
and approximately 35% owned by ICG's management. Prior to November 1, 1999, we
held a significant equity interest in a publicly traded company--Franchise
Mortgage Acceptance Company ("FMC") (Nasdaq Symbol: FMAX) (See "Franchise
Mortgage Acceptance Company"). Our company also owns a 9% equity interest in a
commercial REIT, Imperial Credit Commercial Mortgage Investment Corp.
("ICCMIC") (Nasdaq Symbol: ICMI). Through October 22, 1999, a wholly owned
subsidiary of ours, Imperial Credit Commercial Asset Management Corp.
("ICCAMC"), managed the assets and operations of ICCMIC. All material
intercompany balances and transactions with consolidated subsidiaries have been
eliminated.
2. Operating Activities
General Business Activities
In 1995, the Company began to diversify away from the conforming residential
mortgage lending business, the Company's traditional focus, and into other
select lending businesses. The Company expanded several existing businesses and
commenced several new businesses, including non-conforming residential mortgage
banking, commercial mortgage banking, business lending and consumer lending.
The Company's loans and leases by operating segments consist primarily of the
following: commercial mortgage loans, income producing property loans and
business lending--equipment leasing, asset-based lending, film and television
productions loans, and participations in syndicated commercial loans. The
Company solicits loans and leases from brokers on a wholesale and portfolio
basis and originates loans directly with borrowers. The majority of the
Company's loans and leases are funded by FDIC insured deposits at SPB.
Coast Business Credit
Coast Business Credit ("CBC"), a division of SPB, was acquired from Coast
Federal Bank in 1995 and provides senior secured loans that are secured by
accounts receivable, inventory and other assets of the borrower. Coast is
headquartered in Los Angeles, California, and it has 3 loan production offices
in California and has opened additional offices in Atlanta, Baltimore, Chicago,
Cleveland, Detroit, Houston, Minneapolis, Phoenix, Portland, Providence and
Seattle. At December 31, 1999 CBC had total commitments of $1.4 billion and
loans outstanding of $748.1 million, respectively. At December 31, 1998 CBC had
total commitments of $1.1 billion and loans outstanding of $633.3 million,
respectively.
Imperial Warehouse Finance, Inc.
In October 1997, the Company's wholly-owned subsidiary, SPB, acquired
substantially all of the assets of PrinCap Mortgage Warehouse, Inc. and PrinCap
Mortgage Backed, L.P. (collectively, "PrinCap") and contributed such assets to
a subsidiary. The acquisition was accounted for as a purchase, and the purchase
price of $123.7 million was allocated to the net assets acquired based on their
fair value resulting in goodwill of $6.8 million. In 1999, PrinCap changed its
name to Imperial Warehouse Finance, Inc. ("IWF"). IWF's primary business is to
arrange for the extension of short-term lines of credit to mortgage companies
to fund their
90
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
residential mortgage loan originations until such loans are sold. SPB provides
the funding for each draw on a line, and therefore outstanding loans
receivable from mortgage companies are assets of SPB. Loans are secured by the
mortgage note of the property being funded. At December 31, 1999 IWF had total
commitments and warehouse lines outstanding of $300.4 million and $78.1
million, respectively. At December 31, 1998 IWF had total commitments and
loans outstanding of $401.5 million and $181.0 million, respectively.
Loan Participation and Investment Group
The Loan Participation and Investment Group ("LPIG") was formed by SPB in
September 1995. This Group invests in and purchases senior secured debt of
other companies (referred to as a "participation") in the secondary market. At
December 31, 1999, LPIG had total commitments and outstanding loans of $459.5
million and $217.0 million, respectively, as compared to $523.3 million and
$222.1 million, respectively at December 31, 1998.
The Lewis Horwitz Organization
On October 1, 1999, we purchased from Imperial Bank substantially all of
the assets and assumed certain liabilities of The Lewis Horwitz Organization
("LHO"). The acquisition was accounted for as a purchase, and the purchase
price of $7.0 million was allocated to the net assets acquired based on their
fair values resulting in goodwill of $12.0 million.
As part of the acquisition, we acquired all right, title and interest in
$98.2 million of motion picture and television production loans. The purchase
price of the loans is equal to the gross carrying value of the loans on the
books and records of Imperial Bank, except the purchase price of the first $20
million in non-accrual loans were allocated a discount of $3.6 million. Under
the terms of the acquisition, we receive all contractually due interest and
fees on the $98.2 million of LHO originated loans and pay Imperial Bank Prime
minus 2.50%. We have agreed to immediately purchase all loans that either are
currently or become classified as non-accrual, when an interest or principal
payment is 90 days or more past due. Imperial Bank has agreed to finance 50%
of all non-accrual purchases at the Prime rate + 1.00%. As of December 31,
1999, we acquired non-accrual loans with a fair market value of $8.2 million.
We have also agreed to purchase a minimum of $50 million of the above
referenced loans, inclusive of all non-accrual loans purchased, on or before
March 31, 2000. Additionally, we have agreed to purchase any remaining above
referenced loans on or before December 31, 2000.
We also acquired other assets totaling $362,000 and assumed liabilities of
$1.2 million in connection with the acquisition.
Imperial Business Credit, Inc.
The Company conducts its commercial equipment leasing business through its
wholly owned subsidiary, Imperial Business Credit ("IBC"). IBC began its
commercial leasing business through the acquisition of First Concord
Acceptance Corporation in 1995 and Avco Leasing Services, Inc. in 1996. IBC's
lease originations were $125.2 million and $114.3 million, and it securitized
and sold $132.4 million and $117.7 million during the years ended December 31,
1999, and 1998, respectively. At December 31, 1999 and 1998, IBC serviced a
total of $243.5 million and $242.6 million of leases, respectively.
Income Property Lending Division
The Income Property Lending Division ("IPL") of SPB was formed in February
1994 to expand our apartment and commercial property lending business. As of
December 31, 1999, it had 12 loan origination offices
91
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in California, Oregon, Colorado, Texas, Arizona, Illinois, Massachusetts and
Florida. At December 31, 1999 and 1998, IPL's loans outstanding were $254.1
million and $145.5 million, respectively. For the year ended December 31, 1999
and 1998, IPL originated $339.7 million and $366.1 million of loans,
respectively.
Imperial Credit Asset Management, Inc.
Imperial Credit Asset Management, Inc. ("ICAM") was formed in April 1998.
ICAM manages Pacifica Partners I L.P., Cambria Investment Partnership I, L.P.,
and Catalina Investment Partnership I, L.P. Pacifica Partners I is a
collateralized loan obligation fund the Company launched in August 1998.
Pacifica Partners I's assets consist of nationally syndicated bank loans and
high yield bonds. Cambria is a hedge fund that invests in syndicated bank
loans.
Imperial Credit Commercial Asset Management Corp.
In October 1997, ICCMIC completed its initial public offering and sold
approximately 34.5 million shares of common stock at $15.00 per share
resulting in net proceeds of approximately $481.2 million. The Company
purchased 2,970,000 shares of ICCMIC common stock in the offering and an
additional 100,000 shares in December 1997 for a total of $43.0 million. In
1999, we sold 500,000 shares of ICCMIC common stock at $10.88 per common
share, generating net proceeds of $5.4 million, resulting in a gain on sale of
securities totaling $562,000. As of December 31, 1999, the Company owned 9.0%
of the common stock of ICCMIC. ICCAMC, a wholly-owned subsidiary, managed the
day to day operations of Imperial Credit Commercial Mortgage Investment Corp.
("ICCMIC") through October 22, 1999, an investment trust which invests
primarily in performing multi-family and commercial real estate loans and
mortgage-backed securities. For the year ended December 31, 1999, 1998 and
from the period of initial public offering (October 1997) through December 31,
1997, ICCAMC earned $5.9 million $6.3 million and $940,000, respectively, in
gross management fees from ICCMIC. In addition, the Company has received cash
dividends of $3.1 million, $3.6 million and $399,000 during the years ended
December 31, 1999, 1998 and from the period of initial public offering
(October 1997) through December 31, 1997, respectively. During the third
quarter of 1998 the market value of the Company's equity holdings in ICCMIC
declined substantially to $9.75 per common share as compared to the Company's
book value of $13.98 per common share. In the third quarter of 1998, we
recorded an impairment charge of $13.0 million due to the other-than-temporary
decline in the value of our ICCMIC stock.
On July 23, 1999, we announced the signing of a definitive merger agreement
by which a wholly owned subsidiary of ours would acquire all of the
outstanding shares of ICCMIC (consisting of the 25,930,000 shares not already
owned by us and certain of our affiliates and subsidiaries) for a cash
purchase price of $11.50 per share. The merger agreement contemplated that
ICCMIC will solicit and explore alternative transactions which would provide
its stockholders with a more favorable alternative to the ICII merger during
the 60 days following the appointment of an appraisal firm to be engaged to
appraise the value of our management agreement with ICCMIC. On October 18,
1999, ICCMIC reported that the 60-day market check period during which ICCMIC
was permitted to conduct an unrestricted solicitation of potentially superior
proposals pursuant to the previously announced merger agreement with the
Company had expired. The special committee of the ICCMIC board of directors,
comprised of ICCMIC's four independent directors, with advice from Prudential
Securities Incorporated, determined that none of the proposals received during
the 60-day market check period was superior to the proposed merger transaction
with the Company. The merger agreement provides that ICCMIC retains the
ability to consider superior proposals, if any, received on an unsolicited
basis. Upon completion of the proposed merger, ICCMIC's stockholders (other
than ICII) will receive approximately $11.575 in cash per share.
92
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The final purchase price was determined based on the Company's offer of
$11.50 per share, plus a price adjustment of $0.07 per share in connection
with the results of an appraisal of ICII's management contract which expired
on October 22, 1999. The proposed merger is expected to be completed during
March 2000.
Imperial Capital Group, LLC
In 1996, the Company acquired a 1% interest in Dabney/Resnick/Imperial LLC
("DRI"), an investment banking firm located in Beverly Hills, California and
purchased a warrant to acquire an additional 48% ownership. During the fourth
quarter of 1997, the Company formed a new subsidiary, ICG, which includes a
registered broker/dealer and an asset management company offering individual
and corporate investors a wide range of financial products and services. For
the year ended December 31, 1997, in connection with the formation of ICG, the
Company recognized a pre-tax charge of $3.7 million relating to the
restructuring of its loan to DRI. As part of the DRI restructuring,
substantially all of the assets and personnel of DRI were acquired or hired by
ICG. During the year ended December 31, 1999 and 1998, ICG raised $137.3
million and $190.0 million for corporate clients through private placement
debt and equity offerings generating investment banking and brokerage fees of
$27.2 million and $18.5 million, respectively. At December 31, 1999, the
Company's ownership interest in ICG was approximately 65%.
Impac Mortgage Holdings, Inc. and Impac Funding Corporation
During 1995, the Company sold its mortgage conduit operations and SPB's
warehouse lending operations to Impac Mortgage Holdings, Inc. ("IMH"),
formerly Imperial Credit Mortgage Holdings, Inc. In exchange for these assets,
the Company received approximately 11.8% of the common stock of IMH.
Additionally, Imperial Credit Advisors, Inc. ("ICAI") entered into a
management agreement with IMH pursuant to which ICAI advised upon the day-to-
day operations of IMH and for which it was paid a management fee. During 1997,
the Company sold its common stock interest in IMH for a gain of approximately
$11.5 million. In December 1997, IMH and the Company negotiated a termination
of the management agreement (the "Termination Agreement"). The consideration
received by the Company pursuant to the Termination Agreement was $44 million,
comprised of 2,009,310 shares of IMH common stock and certain securitization-
related assets. Additionally, the Company agreed to cancel its note receivable
from ICI Funding Corporation ("ICIFC"), a former subsidiary of ICII which is
now known as Impac Funding Corporation and is the origination unit of IMH, in
the amount of $29.1 million. During the first quarter of 1997, the Company
disposed of its common stock interest in ICIFC at a loss of $100,000.
At December 31, 1997, the IMH common stock and the securitization-related
assets were recorded by the Company at their estimated fair values of
approximately $35.0 million and $13.1 million, respectively, for a total of
$48.1 million. This amount, when netted with the $29.1 million cancellation of
the ICIFC note receivable, resulted in the gain on termination of the
management agreement of approximately $19.0 million. During the third quarter
of 1998 the market value of the Company's equity holdings in IMH declined
substantially. Management judged the decline in IMH's stock price to be other
than temporary, therefore, the Company recorded a pre-tax writedown of $24.5
million. This writedown reduced the Company's book value from $17.88 to $5.00
per common share. During 1999, the Company sold 1,887,110 common shares of IMH
for an average price of $5.49 per common share, generating net proceeds of
$10.4 million, resulting in a gain on sale of $929,000. At December 31, 1999,
the Company did not own any shares of IMH.
Franchise Mortgage Acceptance Company
On March 11, 1999, FMC and Bay View Capital Corporation ("Bay View")
announced that they had executed a definitive merger agreement providing for
the merger of FMC with Bay View. This agreement
93
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IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
included selling our 38.3% ownership in FMC to Bay View. In accordance with
the terms of the definitive agreement, Bay View acquired all of the common
stock of FMC. Each share of FMC common stock was converted into, at the
election of the holder, either $9.80 in cash, or .5444 shares of Bay View's
common stock. On November 1, 1999, the merger between FMC and Bay View was
completed. We received $27.7 million in cash and 4.4 million shares of Bay
View common stock from the sale and exchange of our 38.3% interest in FMC. On
November 5, 1999, we announced the sale of 4,342,451 shares of our Bay View
common stock. As a result of these transactions, we received approximately
$86.3 million in total cash proceeds and recorded a gain on sale of $30.1
million.
Southern Pacific Funding Corporation
In 1996, a substantial portion of the Company's operations were conducted
through its sub-prime residential lending subsidiary, Southern Pacific Funding
Corporation ("SPFC"). In June 1996, SPFC completed an initial public offering
of its common stock pursuant to which ICII was a selling shareholder. SPFC and
the Company sold 5.2 million shares and 3.5 million shares, respectively, at
$11.33 per share. In a secondary offering, the Company sold 1.5 million SPFC
shares at $19.83 per share. The Company recognized a gain on sale of the SPFC
shares it owned of $51.2 million, which is net of offering expenses and the
Company's cost basis in the shares. The Company also recognized a gain of
$31.4 million related to the stock sold by SPFC. The gain related to the stock
sold by SPFC was based on the difference between the Company's equity
ownership in SPFC after the sale and such equity ownership prior to the sale,
using the Company's respective SPFC ownership percentages. During the first
quarter of 1997, the Company sold 370,000 shares of SPFC common stock at
$16.63 per share generating net proceeds of $6.2 million and a gain of $4.3
million. Such transactions reduced the Company's ownership percentage in SPFC
from 51.2% at December 31, 1996, to 49.4% at March 31, 1997. Accordingly,
SPFC's operating results were no longer consolidated with those of the Company
and the Company's investment in SPFC was accounted for under the equity
method.
During the third quarter of 1997, the Company sold an additional 500,000
shares of SPFC common stock generating net proceeds of $7.6 million and a gain
of $5.2 million, reducing the Company's ownership percentage to 9,742,500
common shares or 47.0% of SPFC's outstanding common stock at December 31,
1997. The Company did not sell shares of SPFC stock during the years ended
December 31, 1999 and 1998. On October 1, 1998, SPFC petitioned for Chapter 11
bankruptcy protection under the Federal bankruptcy laws in the U.S. Bankruptcy
Court for the District of Oregon.
As a result of SPFC declaring Chapter 11 bankruptcy and the resultant
decline in its common stock to below one dollar per share, the Company wrote-
off its total investment in and loan to SPFC. The write-off was $82.6 million
for the year ended December 31, 1998.
3. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities and disclosure of
contingent liabilities as of the dates of the balance sheets and revenues and
expenses for the periods presented. Significant balance sheet items which
could be materially affected by such estimates include: the allowance for loan
and lease losses, securities held for sale or available for sale, and the
carrying value of the Company's trading securities, securitization related
assets and loans held for sale. Actual results could differ significantly from
management's estimates. Prior years' consolidated financial statements have
been reclassified to conform to the 1999 presentation including the
94
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
discontinuation of the operations of AMN in 1998. Factors affecting the
comparability of the financial statements between periods include the
deconsolidation of FMC in the fourth quarter of 1997.
Investment Securities
The Company classifies investment securities as trading or available for
sale. Securities held for trading are reported at fair value with unrealized
gains and losses included in operations, and securities available for sale are
reported at fair value with unrealized gains and losses, net of related income
taxes, included as a separate component of shareholders' equity in accumulated
other comprehensive income.
Realized gains and losses on investment securities are included in income
and are derived using the specific identification method for determining the
cost of securities sold.
Premiums and discounts are amortized over the life of the securities by use
of the interest method. When a decline in value of a security is judged to be
other than temporary, it is written down to fair value by a charge to
earnings.
Loans and Leases Held for Sale
Loans and leases held for sale are carried at the lower of aggregate cost
or market, which is based on sale commitments, discounted cash flow analysis
or prices for similar products. Loans and leases which are ineligible for
sale, generally those 90 days past due, are transferred to loans held for
investment at the lower of cost or market on the date of transfer.
Loans and Leases Held for Investment
Loans and leases held for investment are recorded at the contractual
amounts owed by borrowers adjusted for unamortized discounts, premiums,
unearned income, undisbursed funds, deferred loan fees and the allowance for
loan and lease losses. Interest income is recorded on the accrual basis in
accordance with the terms of receivables, except that interest accruals are
discontinued when the payment of principal or interest is 90 or more days past
due or when repayment of principal and interest in full is doubtful. In
general, payments received on nonaccrual loans are applied to the principal
outstanding until the loan is restored to accrual status.
A loan is impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The measurement of impairment may be based on (i) the present value
of the expected future cash flows of the impaired loan discounted at the
loan's original effective interest rate, (ii) the observable market price of
the impaired loan or (iii) the fair value of the collateral. If the recorded
investment of the loan exceeds the measure of impairment, a valuation
allowance is recorded in the amount of the excess. For all loans secured by
real estate, the Company measures impairment by utilizing the fair value of
the collateral; for other loans, discounted cash flows are used to measure
impairment. The Company's income recognition policies for impaired loans are
consistent with those on nonaccrual loans. All loans designated as impaired
are either placed on nonaccrual status or are designated as restructured.
Payments received on impaired loans are applied to the principal outstanding
until the loan is returned to accrual status.
On an ongoing basis, management monitors the loan and lease portfolio and
evaluates the adequacy of the allowance for loan and lease losses. In
determining the adequacy of the allowance for loan and lease losses,
management considers such factors as historical loss experience, underlying
collateral values, known problem loans, evaluations made by bank regulatory
authorities, assessment of economic conditions and other appropriate data to
identify the risks in the loan and lease portfolio. The amount of the
allowance for loan and lease losses is based on estimates and ultimate losses
may vary from current estimates. Loans deemed by management to be
95
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
uncollectible are charged to the allowance for loan and lease losses.
Recoveries on loans previously charged off are credited to the allowance for
loan losses. Provisions for loan and lease losses are charged to expense and
credited to the allowance for loan and lease losses in amounts that satisfy
regulatory requirements and are deemed appropriate by management based upon
its evaluation of the known and inherent risks in the portfolio.
Management believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the SPB allowance for
loan losses. Such agencies may require SPB to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Servicing Assets
Servicing assets are recorded when the Company sells or securitizes loans
or leases and retains the servicing rights. The total cost of the mortgage
loans is allocated to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values. Purchased
servicing rights represent the cost of acquiring the rights. Servicing rights
are amortized in proportion to, and over the period of, estimated future net
servicing income.
The Company assesses the servicing rights portfolio for impairment based on
the fair value of those rights with any impairment recognized through a
valuation allowance. In order to determine the fair value of the loan
servicing assets, the company uses market prices under comparable servicing
sales contracts, when available. Alternatively, it uses a valuation model that
calculates the present value of future cash flows. Assumptions used in the
valuation model include market discount rates, estimated default rates and
estimated prepayment speeds. Prepayment speeds and default estimates are based
on the actual prepayment and default histories of the underlying loan or lease
pool.
Retained Interest in Loan and Lease Securitizations
The Company adopted on January 1, 1997, Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement specifies when financial
assets and liabilities are to be removed from an entity's financial
statements, the accounting for servicing assets and liabilities and the
accounting for assets that can be contractually prepaid in such a way that the
holder would not recover substantially all of its recorded investment.
Under SFAS 125, an entity recognizes only assets it controls and
liabilities it has incurred, discontinues recognition of assets only when
control has been surrendered, and discontinues recognition of liabilities only
when they have been extinguished. SFAS 125 requires that the selling entity
continue to carry retained interests, including servicing assets, relating to
assets it no longer recognizes. Such retained interests are based on the
relative fair values of the retained interests of the subject assets at the
date of transfer. Transfers not meeting the criteria for sale recognition are
accounted for as a secured borrowing with a pledge of collateral. SFAS 125
requires an entity to recognize its obligation to service financial assets
that are retained in a transfer of assets in the form of a servicing asset or
liability. The servicing asset or liability is amortized in proportion to, and
over the period of, net servicing income or loss. Servicing assets and
liabilities are assessed for impairment based on their fair value.
The implementation of SFAS 125 did not have a material impact on the
Company's financial condition or results of operation. Under the provisions of
SFAS 125, securitization interests retained by the Company as a
96
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
result of securitization transactions are held as either available for sale or
trading. The Company may create retained interests in loan and lease
securitizations as a result of the sale of loans and leases into
securitization trusts. Loan and lease securitizations have specific credit
enhancement requirements in the form of overcollateralization which must be
met before the Company receives cash flows due. As the securitized assets
generate excess cash flows, they are initially used to pay down the balance of
the pass-through certificates until such time as the ratio of securitized
assets to pass-through certificates reaches the overcollateralization
requirement specified in each securitization.
This overcollateralization amount is carried on the balance sheet as
retained interest in loan and lease securitizations. After the
overcollateralization requirement and the other requirements specified in the
pooling and servicing agreement have been met, the Company begins to receive
the cash flows from any subordinated bonds or residual interests retained on a
monthly basis. Retained interest in loan and lease securitizations is
classified as a trading asset. To the extent that the future performance
results are less than the Company's initial performance estimates, the
Company's retained interest in loan and lease securitizations will be written
down through a charge to operations. Accretion of income under the interest
method on retained interest in securitizations is included in the caption
"Interest on other financing activities" in the accompanying consolidated
statements of operations and comprehensive income (loss). In determining the
estimated fair values of the retained interest in loan and lease
securitizations, the Company estimates the cash flows received by the Company
after being released by the respective trust and discounts such cash flows at
interest rates determined by management to be rates market participants would
use in similar circumstances. Discount rates ranged from and 15% to 28% and
14% to 28%, as of and for the years ended December 31, 1999 and 1998,
respectively. Quoted market prices are not available as no active market
exists for retained interest in loan and lease securitizations. In estimating
the cash flows, the Company considers default and prepayment rates. The
default rates used by the Company as of and for the years ended December 31,
1999 and 1998 have ranged from 0.3% to 9.4% and 1.0% to 8.0%, respectively,
and the prepayment rates used by the Company have ranged from 4.0% to 39.9%
and 4.0% to 55.0%, respectively.
Loan and Lease Sales and Related Gain or Loss
Loans and leases are sold through either securitizations with servicing
retained by the Company or whole loan sales. Securitizations typically require
credit enhancements in the form of cash reserves or overcollateralization that
are reflected as retained interest in loan and lease securitizations on the
balance sheet. Sales are recognized when the transaction settles and the risks
and rewards of ownership are determined to have been passed to the purchaser.
Gain is recognized to the extent that the selling prices exceed the
carrying value of the loans sold based on the estimated relative fair values
of the assets transferred, assets obtained and liabilities incurred. The
assets obtained in a sale include, generally, retained interest in loan and
lease securitizations, loan servicing assets, and call options. Liabilities
incurred in a sale include, generally, recourse obligations, put options, and
servicing liabilities. In the securitizations completed to date, the Company
retained call options giving it the right to repurchase loans sold when the
outstanding amount of such loans is 1% to 10% or less of the original amount
sold, depending on the terms of the related securitization. As these call
options are equivalent to a cleanup call, the Company has ascribed no value to
them. The securitizations completed to date had no put option features.
Loan Origination Fees
Origination fees received on loans held for sale, net of direct costs
related to the origination of the loans, are deferred until the time of sale
and are included in the computation of the gain or loss on the sale of the
related loans. Commitment fee income is deferred until each loan is funded and
sold, and recorded as a part of
97
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the gain on sale of the loan in the same percentage as such loan is to the
total commitment. Any remaining deferred commitment fee income is recognized
at expiration of the commitment. When exercise of such commitment is deemed
remote, the fee is recognized over the remaining commitment period.
Origination fees on loans held for investment, net of direct costs related
to the origination of the loans, are deferred and amortized over the
contractual lives of the related loans using the interest method. When a loan
is classified as a nonaccrual loan, the related net deferred origination fees
are no longer accreted to income.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation or
amortization. Depreciation on premises and equipment is recorded using the
straight-line method over the estimated useful lives of individual assets (3
to 7 years). Leasehold improvements are amortized over the terms of their
related leases or the estimated useful lives of improvements, whichever is
shorter.
Interest Bearing Deposits
Interest bearing deposits consist of time certificates, investment in
federal funds and money market accounts. Amounts are carried at cost which
approximates market value.
Other Real Estate Owned
Foreclosed real estate is transferred from the loan portfolio at the lower
of the carrying value of the loan or net fair value of the property less
estimated selling costs and is classified as other real estate owned ("OREO").
The excess carrying value, if any, of the loan over the estimated fair value
of the collateral based on appraisal or broker opinion of value less estimated
selling costs is charged to the allowance for loan losses. Any subsequent
impairments in value are recognized through a valuation allowance. Gains and
losses from sales of OREO, provisions for losses on OREO, and net operating
expenses of OREO are recorded in operations and included in the caption "net
expenses of other real estate owned" in the accompanying consolidated
statements of operations and comprehensive income (loss).
Income Taxes
The Company files a combined California franchise tax return and a
consolidated Federal income tax return with all of its operating subsidiaries
except ICG. The Company accounts for income taxes using the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Goodwill
Goodwill is amortized on a straight-line basis over its estimated useful
life of 15 years. Goodwill is reviewed for possible impairment when events or
changed circumstances may affect the underlying basis of the asset. Impairment
is measured by discounting operating income of the related entity at an
appropriate discount
98
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rate. Impairment charges of $11.3 million related to goodwill at IBC are
classified as amortization of goodwill. At December 31, 1999 and 1998,
Goodwill is presented net of accumulated amortization of $21.9 million and
$7.4 million, respectively.
Debt Issue Costs
Capitalized debt issue costs are included in Other Assets and are amortized
to interest expense over the life of the related debt using the interest
method.
Hedging Loans Held for Sale
The Company regularly sells or securitizes fixed and variable rate mortgage
loans. To offset the effects of interest rate fluctuations on the value of its
fixed-rate loans held for sale, the Company in certain cases will hedge
its interest rate risk related to loans held for sale by selling United States
Treasury futures contracts. Unrealized and realized gains and losses on such
positions are deferred as an adjustment to the carrying value of loans and
leases held for sale and included in income as gain or loss on sale of loans
when the related loans are sold.
Management has determined that hedge accounting is appropriate for the
Company's hedging program because the hedged loans expose the Company to price
risk. The futures contracts reduce that risk and are designated as hedges, and
at the inception of the hedge and throughout the hedge period, there is a high
correlation between the price of the futures contracts and the fair value of
the loans being hedged. In the event correlation does not remain high, the
futures contracts will cease to be accounted for as hedges and a gain or loss
will be recognized to the extent the futures results have not been offset by
the price changes of the hedged loans.
Total Rate of Return Swaps
The Company has entered into total rate of return swap contracts with
various investment bank counterparties, the provisions of which entitle the
Company to receive the total return on various commercial and income property
loans and securities in exchange for a floating payment of one month LIBOR
plus a spread. These contracts are off-balance sheet financial instruments.
The Company's cash collateral held by the counterparties is included in
trading securities. Net income or expense on these contracts is included in
interest income, and the contracts are carried at their estimated fair values.
Equity Investments
Equity investments are carried under the equity method of accounting.
Accordingly, the Company records as a part of its earnings its ownership
percentage of the equity investment's net income. Dividends received from such
subsidiaries, if any, are credited to the investment balance and not recorded
as earnings.
The Company records gains from the sale of stock in subsidiaries carried
under the equity method based on the difference between the Company's equity
ownership after the sale and such equity ownership prior to the sale, using
the Company's respective ownership percentages. Deferred income tax
liabilities on such gains are accrued at the time such gains are recognized.
During the third quarter of 1999, the Company determined that we did not
have the ability to exercise significant influence over FMC, and therefore, we
changed to the cost method of accounting for this investment.
Stock Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation",
the Company accounts for stock based employee compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company provides the pro forma
and plan disclosures as set forth in SFAS 123.
99
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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).
Income (Loss) Per Share
Diluted loss per share for 1999 and 1998 was calculated using the weighted
average number of shares outstanding for the respective year ends. Diluted
income per share was calculated using the weighted average number of diluted
common shares outstanding including common stock equivalents which consist of
certain outstanding dilutive stock options for the year ended December 31,
1997. The following table reconciles the number of shares used in the
computations of basic and diluted (loss) income per share for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average common shares outstanding
during the year used to compute basic
(loss) income per share................... 34,517,165 38,228,325 38,610,952
Assumed common shares issued on exercise of
dilutive stock options.................... -- -- 2,244,321
---------- ---------- ----------
Number of common shares used to compute
diluted (loss) income per share........... 34,517,165 38,228,325 40,855,273
========== ========== ==========
</TABLE>
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging
activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure
to variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security, or a foreign-
currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. This statement
is effective for the Company on January 1, 2001. Management is in the process
of determining what effect, if any, adoption of this statement will have on
the financial position and results of operations of the Company.
100
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Supplemental Disclosure of Cash Flow Information
The following information supplements the statements of cash flows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Cash paid during the period for:
Interest...................................... $128,217 $119,169 $119,144
Income taxes.................................. 817 5,884 24,611
Significant non-cash activities:
Loans transferred from held for investment to
held for sale................................ 63,829 197,518 --
Loans transferred to OREO or repossessed
assets....................................... 11,834 10,046 29,359
Loans transferred from held for sale to held
for investment............................... -- -- 37,007
Loans to facilitate the sale of OREO.......... -- 1,011 2,347
Retained interest in loan and lease
securitizations capitalized.................. 1,964 7,182 23,592
Transfer of securities from available for sale
to trading................................... -- -- 15,178
Securities received in consideration of IMH
Termination Agreement........................ -- -- 48,167
Cancellation of note receivable from ICIFC in
consideration of IMH Termination Agreement... -- -- 29,121
Change in unrealized gain (loss) on securities
available for sale........................... 3,802 (3,112) (3,084)
Deconsolidation of SPFC, ICIFC and FMAC:
Decrease in loans held for sale............... -- -- 768,025
Decrease in interest only and residual
certificates................................. -- -- 87,017
Decrease in retained interest in loan
securitizations.............................. -- -- 30,035
Decrease in servicing rights.................. -- -- 23,142
Decrease in accrued interest receivable....... -- -- 5,026
Decrease in other borrowings.................. -- -- 693,016
Decrease in convertible subordinated debt..... -- -- 75,000
Purchase of Imperial Credit Lender Services,
Inc.:
Assets acquired, including goodwill of
$5,000....................................... -- 5,050 --
Liabilities assumed........................... -- 50 --
Common stock issued........................... -- 5,000 --
Purchase of Imperial Warehouse Finance, Inc.
assets:
Assets acquired, including goodwill of
$6,800....................................... -- -- 123,767
Liabilities assumed........................... -- -- 29
Cash paid..................................... -- -- 123,738
Purchase of Auto Marketing Network:
Assets acquired, including goodwill of
$20,770...................................... -- -- 82,484
Liabilities assumed........................... -- -- 81,734
Cash paid..................................... -- -- 750
Purchase of Lewis Horwitz Organization:
Assets acquired, including goodwill of $12.0
million...................................... 19,380 -- --
Liabilities assumed........................... 11,248 -- --
Cash paid..................................... 8,132 -- --
</TABLE>
101
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Investment in FHLB Stock
As a member of the FHLB system, the Company's wholly owned subsidiary, SPB,
is required to maintain an investment in the capital stock of the FHLB in an
amount at least equal to the greater of 1% of residential mortgage assets, or
5% of outstanding borrowings (advances), or 0.3% of total assets. FHLB stock
and loans are pledged to secure FHLB advances.
6. Trading Securities
The following table provides a summary of trading securities as of December
31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
U.S. Treasury Securities.................................. $ 66,997 $ 82,528
FLRT 1996-A interest-only securities...................... 6,349 7,575
SPTL 1997 C-1 interest-only securities.................... 3,351 5,585
SPTL 1996 C-1 interest-only securities.................... 2,279 4,029
IBC 1997-2 B-1 and C-1 securities......................... 12,201 8,395
Commercial mortgage-backed securities..................... 1,722 9,387
Investment in total return swap--Pacifica Partners I LP... 38,151 17,837
Collateral for total return swap--syndicated loans........ 18,750 20,265
Other..................................................... 11,005 15,151
-------- --------
$160,805 $170,752
======== ========
</TABLE>
Gross unrealized gains and losses on trading securities included in income
were $14.6 million and $1.9 million, and $0 and $13.6 million for the years
ended December 31, 1999 and 1998, respectively. The Company also recorded
write-downs of retained interests of $15.0 million and $4.4 million during the
years ended December 31, 1999 and 1998, respectively.
7. Securities Available for Sale
The following table provides a summary of securities available for sale
with a comparison of amortized cost and fair values as of December 31, 1999
and 1998.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1999 Cost Gains Losses Value
----------------- --------- ---------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C>
ICCMIC common stock................ $25,058 $4,176 $ -- $29,234
Cambria Investment Partnership
leveraged bank debt............... 10,000 1,581 -- 11,581
Preferred Stock--Auction Finance
Group............................. 6,500 -- -- 6,500
Avalon total return fund........... 2,164 -- (834) 1,330
Residential mortgage-backed
securities........................ 13,407 83 (662) 12,828
IBC 1997-2 Class A-2 securities.... 12,000 -- -- 12,000
Other.............................. 901 -- -- 901
------- ------ ------- -------
$70,030 $5,840 $(1,496) $74,374
======= ====== ======= =======
</TABLE>
102
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
----------------- --------- ---------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C>
IMH common stock................... $ 9,436 $ -- $ (844) $ 8,592
ICCMIC common stock................ 29,933 -- (1,151) 28,782
Cambria Investment Partnership
leveraged bank debt............... 10,000 54 -- 10,054
Preferred Stock--Auction Finance
Group............................. 6,500 -- -- 6,500
Avalon total return fund........... 5,000 -- (113) 4,887
Other.............................. 1,200 -- -- 1,200
------- ---- ------- -------
$62,069 $ 54 $(2,108) $60,015
======= ==== ======= =======
</TABLE>
Gross realized gains and (losses) on the sale of available for sale
securities were $2.6 million and ($1.1) million, and $0 and ($592,000) for the
years ended December 31, 1999 and 1998, respectively.
Gross realized losses on investments in IMH and ICCMIC common stock
resulting from a decline in market value judged by management to be other than
temporary were $24.5 million and $13.0 million, respectively, for the year
ended December 31, 1998.
8. Loans and Leases Held for Sale
Loans and leases held for sale, at the lower of cost or market, consisted
of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Loans secured by real estate:
One-to four family...................................... $ 10,095 $ 71,189
Multi-family and commercial............................. 252,944 143,763
-------- --------
263,039 214,952
Automobile loans.......................................... -- 64,337
Installment loans......................................... 14,058 29,384
Leases.................................................... 12,301 10,388
-------- --------
$289,398 $319,061
======== ========
</TABLE>
At December 31, 1999 and 1998, loans held for sale were net of $500,000 and
$16.8 million lower of cost or market valuation allowance, respectively. At
December 31, 1999 and 1998, loans held for sale included nonaccrual loans of
$0 and $11.1 million, respectively. Nonaccrual loans are presented in the
table above at the lower of cost or market value.
103
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Loans and Leases Held for Investment, net
Loans and leases held for investment consisted of the following at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Loans secured by real estate:
One-to-four family................................. $93,914 $ 125,616
Multi-family....................................... 35,249 56,229
Commercial......................................... 14,022 25,677
---------- ----------
143,185 207,522
Leases............................................... 1,125 1,048
Consumer and auto loans.............................. 7,072 26,511
Franchise loans...................................... 18,277 50,520
Asset based loans.................................... 748,122 633,299
Loan participations.................................. 216,961 222,106
Mortgage warehouse lines............................. 78,068 181,001
Film and television productions loans................ 23,985 --
Commercial loans..................................... 48,853 34,509
---------- ----------
1,285,648 1,356,516
Loans in process..................................... (5,472) (5,636)
Unamortized premium.................................. 1,389 3,109
Deferred loan fees................................... (8,492) (9,014)
---------- ----------
1,273,073 1,344,975
Allowance for loan and lease losses.................. (31,841) (24,880)
---------- ----------
$1,241,232 $1,320,095
========== ==========
</TABLE>
The Company's loans and leases held for investment are primarily comprised
of first and second lien mortgages secured by residential and income producing
real property in California, leases secured by equipment, asset based loans to
middle market companies mainly in California, loans to experienced franchisees
of nationally recognized restaurant concepts, and participations in syndicated
commercial loans. As a result, the loan portfolio has a high concentration in
the same geographic region. Although the Company has a diversified portfolio,
a substantial portion of its debtors' ability to honor their contracts is
dependent upon the economy of California. The Company's film and television
production loans may carry inherent currency risks to the degree that
underlying distribution contracts are denominated in foreign currency. The
Company may enter into foreign currency hedge contracts to minimize these
risks. At December 31, 1999, the Company did not have any loans secured by
distribution rights denominated in a foreign currency.
104
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Activity in the allowance for loan and lease losses was as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Beginning balance as of January 1............... $ 24,880 $ 26,954 $ 19,999
Provision for loan and lease losses............. 35,340 15,450 20,975
Business acquisitions........................... 1,846 -- 578
Sale of leases.................................. -- -- (900)
Deconsolidation of ICIFC........................ -- -- (687)
-------- -------- --------
62,066 42,404 39,965
-------- -------- --------
Loans and Leases charged off--Core Business
Lines:
Multifamily and commercial loans................ (857) (918) (3,021)
Asset based loans............................... (17,530) (112) (295)
Loan Participations............................. (3,882) -- --
Mortgage warehouse lines........................ (1,625) -- --
Leases.......................................... (2,217) (1,496) (4,860)
-------- -------- --------
(26,111) (2,526) (8,176)
-------- -------- --------
Loans charged off--Non-Core Business:
Single family residential....................... (2,960) (4,661) (2,164)
Consumer loans.................................. (2,611) (15,487) (3,933)
-------- -------- --------
(5,571) (20,148) (6,097)
-------- -------- --------
Total Charge-offs............................... (31,682) (22,674) (14,273)
-------- -------- --------
Recoveries on loans and leases previously
charged off--Core Business:
Multifamily and commercial loans................ 55 142 29
Asset based loans............................... 163 45 --
Leases.......................................... 1,086 1,721 900
-------- -------- --------
1,304 1,908 929
-------- -------- --------
Net charge-offs--Core Business Lines............ (24,807) (618) (7,247)
-------- -------- --------
Recoveries on loans previously charged off--Non-
Core Business:
Single family residential....................... 3 2,401 30
Consumer........................................ 150 841 303
-------- -------- --------
153 3,242 333
-------- -------- --------
Total recoveries................................ 1,457 5,150 1,262
-------- -------- --------
Net charge-offs--Non-core business lines........ (5,418) (16,906) (5,764)
-------- -------- --------
Total net-charge-offs........................... (30,225) (17,524) (13,011)
-------- -------- --------
Balance as of December 31....................... 31,841 24,880 26,954
-------- -------- --------
Loan loss allowance at AMN as of December 31.... 30 857 11,093
-------- -------- --------
$ 31,871 $ 25,737 $ 38,047
======== ======== ========
Loan loss allowance to non accrual loans........ 53.59% 65.11% 53.87%
</TABLE>
As of December 31, 1999, 1998 and 1997, non-accrual and impaired loans
totaled $59.4 million, $39.5 million, and $70.6 million, respectively. Interest
income foregone on nonaccrual loans was $4.4 million, $2.2 million, and $1.8
million, for the years ended December 31, 1999, 1998 and 1997, respectively.
105
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999 and 1998, impaired loans and the related allowance for
loan and lease losses were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -----------------------------
Specific
Specific Allowance
Recorded Allowance Carrying Recorded for Carrying
Investment For Losses Value Investment Losses Value
---------- ---------- -------- ---------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Continuing
operations........... $57,823 $(5,278) $52,545 $34,953 $(820) $34,133
Discontinued
operations of AMN.... 1,596 -- 1,596 4,576 -- 4,576
------- ------- ------- ------- ----- -------
Total impaired
loans.............. $59,419 $(5,278) $54,141 $39,529 $(820) $38,709
======= ======= ======= ======= ===== =======
</TABLE>
Impaired loans averaged $57.5 million, $27.3 million, and $43.6 million
during 1999, 1998 and 1997, respectively.
10. Servicing Rights
Changes in servicing rights were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Beginning Balance............................... $ 4,329 $ 4,731 $14,887
Additions....................................... 1,061 1,084 2,981
Decrease as a result of the ICIFC
deconsolidation................................ -- -- (8,785)
Sales of servicing rights....................... (365) -- (1,264)
Amortization.................................... (4,223) (1,486) (3,088)
------- ------- -------
Ending balance.................................. $ 802 $ 4,329 $ 4,731
======= ======= =======
</TABLE>
The servicing portfolio associated with servicing rights at December 31,
1999 and 1998 was $106.0 million and $732.6 million, respectively.
11. Premises and Equipment, net
Premises and equipment consisted of the following at December 31, 1999 and
1998:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
Premises and equipment.................................... $ 18,146 $18,659
Leasehold improvements.................................... 5,863 1,685
-------- -------
24,009 20,344
Less accumulated depreciation and amortization............ (10,433) (8,680)
-------- -------
$ 13,576 $11,664
======== =======
</TABLE>
106
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Discontinued Operations
Auto Marketing Network ("AMN")
In March 1997, the Company acquired all the outstanding common stock of
AMN, a sub-prime auto lender engaged in the financing of new and used motor
vehicles on a national basis, for $750,000. As part of the acquisition, the
Company advanced $11.6 million to repay amounts owed pursuant to operating
lines of credit and for working capital purposes. The acquisition was recorded
using the purchase method of accounting. The purchase price was allocated to
the net assets acquired based on their fair value and goodwill of
approximately $20.8 million was recorded. Since the March 1997 acquisition
date, AMN posted operating losses and experienced significant increases in
non-performing assets, loan charge-offs and loan loss provisions. In December
1997, the Company developed revised operating projections which indicated that
the goodwill resulting from the AMN acquisition was not recoverable.
Accordingly, the remaining goodwill balance of $20.1 million was written off
during the fourth quarter of 1997.
As of July 31, 1998 (measurement date), management determined to cease
operations at Auto Marketing Network, Inc. ("AMN"). Accordingly, a disposal
plan was formulated, whereby daily operations of AMN were terminated in two
months.
Losses from AMN's discontinued operations, net of tax, were as follows: (In
thousands)
<TABLE>
<CAPTION>
Disposition
Year ended Period from Period from Period from
December 31, August 1, 1998 to January 1, 1998 to March 17 to
1999 December 31, 1998 July 31, 1998 December 31, 1997
------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Loss from discontinued
operations............. $899 $ -- $3,232 $25,347
Loss on disposal of
AMN.................... -- 11,276 -- --
---- ------- ------ -------
Net loss from
discontinued
operations............. $899 $11,276 $3,232 $25,347
==== ======= ====== =======
</TABLE>
During 1999, AMN incurred additional operating losses of $899,000, net of
income taxes, primarily related to legal expenses and mark-to-market
adjustments on AMN securities. The loss on disposal of AMN in 1998 included
charges (net of taxes) for the following items: $5.6 million for securities
and retained interest valuation, $1.2 million for the disposition of furniture
and equipment, $5.6 million for estimated future servicing obligations to a
third party servicer, $1.3 million in liquidation allowances for nonaccrual
loans and repossessed autos, $2.1 million in severance pay, occupancy and
general and administrative expenses. The charges in 1998 were partially offset
by the estimated net interest income on loans and securities for the next year
(disposition period) of $4.5 million.
The net assets of AMN's discontinued operations were as follows: (In
thousands)
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998
------- -------
<S> <C> <C>
Loans held for sale......................................... $ 5,207 $15,161
Securities held for sale.................................... 8,685 7,844
Retained interests.......................................... 12,436 11,280
Income tax asset............................................ 8,971 10,725
Other net assets............................................ 2,193 1,802
------- -------
$37,492 $46,812
======= =======
</TABLE>
107
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AMN's warehouse lines of credit of $0 and $9.2 million are classified as
other borrowings in the consolidated balance sheets at December 31, 1999 and
1998, respectively.
Total non-accrual AMN loans were $1.6 million and $4.6 million as of
December 31, 1999 and 1998, respectively.
13. Business Segments
Business segment financial information is reported on the basis that is used
internally by management in making decisions related to resource allocation and
segment performance. The company's reportable segments are operated and managed
as strategic business units and are organized based on products and services.
Business units operated at different locations are aggregated for reporting
purposes when their products and services are similar. The Company's operations
are divided into eleven business segments as follows:
<TABLE>
<S> <C> <C> <C>
1. Coast Business Credit 6. Income Property Lending Division
2. Imperial Warehouse Finance, Inc. 7. Asset Management Activities
(formerly
PrinCap Mortgage Warehouse, Inc.) 8. Imperial Capital Group, LLC
3. Loan Participation and Investment Group 9. Other Core Operations
4. The Lewis Horwitz Organization 10. Equity Interests
5. Imperial Business Credit, Inc. 11. De-emphasized/Discontinued/Exited
Businesses
</TABLE>
The following describes the 11 business segments:
Coast Business Credit ("CBC"), a division of SPB, provides asset-based
lending to small-to-medium sized businesses secured by the assets of the
borrower. CBC's principal source of revenue is interest earned on asset-based
loans. CBC's principal expenses are interest expense allocations from deposits,
inter-company borrowings, and general and administrative expenses.
Imperial Warehouse Finance, Inc. ("IWF"), a subsidiary of SPB, provides
residential mortgage warehouse lending to mostly small to medium sized brokers
and mortgage bankers on a national basis. IWF derives revenues from referral
fees and interest income on its portfolio of warehouse lines based on the
amount of warehouse loans extended and transaction fees from the broker for
each loan file processed. IWF's principal expenses are interest expense
allocations from deposits, inter-company borrowings, and general and
administrative expenses.
Loan Participation and Investment Group ("LPIG"), a division of SPB, invests
in and purchases senior secured debt of other companies (referred to as a
"participation") in the secondary market. LPIG's principal sources of revenue
are interest earned on participation loans and loan commitment fees. LPIG's
principal expenses are interest expense allocations from deposits, inter-
company borrowings, and general and administrative expenses.
The Lewis Horwitz Organization ("LHO"), a division of SPB, provides senior,
secured financing for independent motion picture and television production.
LHO's principal source of revenue is interest and fees earned on film and
television productions loans. LHO's principal expenses are interest expense,
primarily from allocations of deposits, intercompany borrowings, and general
and administrative expenses.
Imperial Business Credit, Inc. ("IBC"), a wholly owned subsidiary of the
Company, originates, acquires, sells, securitizes and services non-cancellable,
full-payout equipment leases for small and medium-sized businesses in various
industries throughout the United States. IBC derives its principal revenue from
gains recognized on the securitization or sale of leases, from the spread on
portfolios held for investment and held for sale during the warehouse period
and from servicing and related ancillary fees on its servicing portfolio. IBC's
principal expenses are interest expense from warehouse lines of credit, inter-
company borrowings, and general and administrative expenses.
108
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Property Lending Division ("IPL"), a division of SPB, provides
multifamily and commercial mortgage lending to the small loan market for multi-
family apartments and commercial buildings. IPL's principal source of revenue
is gain on sale of and interest earned on mortgage loans. IPL's principal
expenses are interest expense allocations from deposits, inter-company
borrowings, and general and administrative expenses.
Asset Management Activities ("AMA"), includes two wholly owned subsidiaries,
ICCAMC and ICAM. ICCAMC received management fee income through October 22, 1999
for overseeing the day-to-day operations of ICCMIC. ICCAMC's principal expenses
are general and administrative expenses. ICAM's principal source of revenues
are management fee income for managing the assets of Pacifica Partners I L.P.,
Cambria Investment Partnership I, L.P., and Catalina Investment Partnership I,
L.P. ICAM's principal expenses are general and administrative expenses.
Imperial Capital Group, LLC ("ICG"), a majority-owned subsidiary of the
Company, offers individual and institutional investors financial products and
services. ICG provides investment opportunities and research to individual and
institutional investors, raises private and public capital for middle market
companies, trades debt, equity and asset backed securities and provides
investment management services to high net worth individuals. ICG's principal
sources of revenue are investment banking and brokerage fees, gains and losses
on securities trading and mark to market valuations on securities held for
trading. ICG's principal expenses are inter-company interest expense and
general and administrative expenses.
Other Core Operations ("OCO"), includes other areas of business such as
Imperial Credit Lender Services, as well as other support operations. OCO also
includes interest and dividend income from parent company loans and equity
investments, loan servicing income, interest expense on long-term debt, mark-
to-market charges on the securities invested in at the holding company, and the
costs of support functions. The Company provides support to its subsidiaries
through executive management's oversight and advice, accounting and legal
services, merger and acquisitions advice, human resources administration,
office services, and management information systems support.
Income taxes are allocated to the segments based on their separate income or
loss before income taxes. The Company evaluates segment performance based on
net income of the segment. Interest is charged on intercompany borrowings and
certain operating expenses are allocated from OCO to other segments.
Equity Interests, represents the Company's equity investments in other
publicly traded companies. At December 31, 1999, the Company owned no equity
interests in companies. At December 31, 1998, the Company owned equity
interests of 38.4% and 47.2% in two companies; FMC and SPFC. This segment's
source of revenue was the Company's common stock ownership percentage in the
equity investments' reported net income or loss in addition to gains on sales
of the equity investments' stock by the Company, or write-downs from the
impairment of the equity investment. In October 1998, SPFC petitioned for
Chapter 11 bankruptcy protection under the Federal bankruptcy laws. SPFC has
been de-listed from the New York Stock Exchange. As a result of SPFC's
bankruptcy filing, we incurred a write-off totaling $82.6 million for the year
ended December 31, 1998. At December 31, 1998, the Company's investment in SPFC
was $0.
De-emphasized/Discontinued/Exited Businesses ("Exited Businesses"),
represents the Company's business units it decided to either de-emphasize,
discontinue, or exit. The Company decided to de-emphasize, discontinue or exit
these business lines because they were not meeting the Company's expectations
for a variety of reasons. These reasons included: significant credit losses,
insufficient loan production volumes, inadequate gross profit margins, and
risks associated with international lending operations. Each of the de-
emphasized, discontinued or exited business lines was not a profitable
business.
109
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company includes the following significant operations in Exited
Businesses: Auto Lending, Alternative Residential Mortgage, and Consumer Loan
Divisions of SPB, Credito Imperial Argentina ("CIA"), the Company's residential
loan production business in Argentina. Exited Businesses also includes the
Company' former mortgage banking operations, certain problem loan or securities
portfolios, any loan portfolios at SPB from businesses which are no longer
originating new loans and third party servicing on IPLD loans. Exited
Businesses' principal sources of revenue are interest earned on mortgage and
consumer loans and mark to market valuations on loan portfolios. Exited
Businesses' principal expenses are interest expense allocations incurred from
deposits and inter-company borrowings, and general and administrative expenses.
Eliminations. As of December 31, 1999 and 1998, the Company had outstanding
inter-company debt to SPB and ICG of $35.0 million and $5.6 million and $35.0
and $6.3 million, respectively. All inter-company debt and corresponding
interest are eliminated in consolidation. Additionally, the Company's
investments in subsidiaries and inter-company management fees are included in
eliminations.
110
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following represents the operating results and selected financial data
by major business segments for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
At or for the year ended December 31, 1999
----------------------------------------------------------------------------------------
Loan
Participation Imperial Income
Coast Imperial And The Lewis Business Property Asset Imperial
Business Warehouse Investment Horwitz Credit, Lending Management Capital Other Core Equity
Credit Finance, Inc. Group Organization Inc. Division Activities Group, LLC Operations Interests
-------- ------------- ------------- ------------ -------- -------- ---------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans,
net............. $718,966 $ 78,396 $211,292 $21,195 $ 12,649 $252,492 $ -- $ -- $ 51,665 $ 1,250
Total assets.... 869,119 105,680 272,444 36,103 28,440 299,842 (832) 14,245 574,564 1,258
Total deposits.. 767,242 93,255 238,025 15,881 -- 273,449 -- -- (10,081) (1,260)
Interest
income.......... 92,318 11,976 22,547 2,278 4,162 22,625 7 (82) 19,803 267
Interest
expense......... 38,308 7,883 14,188 1,286 1,814 13,419 -- 437 30,829 --
Provision
(recovery) for
loan and lease
losses.......... 21,824 1,190 6,982 351 (350) 142 -- -- 210 --
External
revenue......... 40,379 4,421 3,409 768 1,322 12,026 10,011 26,729 3,751 31,188
Intercompany
revenue......... -- -- -- -- -- -- -- -- 236 --
Intercompany
expense......... -- -- -- -- 1,284 -- 262 -- -- --
Mark to market
on securities
and loans held
for sale........ 189 43 268 -- (11,901) 62 (38) -- 11,016 --
Equity in net
loss of FMC..... -- -- -- -- -- -- -- -- -- (53)
Total revenue... 40,379 4,421 3,409 768 37 12,026 9,748 26,729 3,988 31,188
Depreciation.... 1,579 84 80 7 263 304 300 452 868 2
Amortization of
goodwill........ 1,113 453 -- 200 12,279 -- -- 87 374 --
Amortization of
servicing
rights.......... -- -- -- -- 259 -- -- -- -- --
Income taxes.... 6,449 718 815 3 (8,858) 1,326 (2) 628 (2,400) 12,351
Net income
(loss) from
continuing
operations...... $ 9,673 $ 1,078 $ 1,222 $ 4 $(13,286) $ 1,990 $ (3) $ 942 $ (4,983) $18,527
<CAPTION>
De-
emphasized/
Discontinued/
Exited
Businesses Eliminations Consolidated
------------- ------------ ------------
<S> <C> <C> <C>
Total loans,
net............. $231,731 $ (49,006) $1,530,630
Total assets.... 319,857 (319,105) 2,201,615
Total deposits.. 238,247 -- 1,614,758
Interest
income.......... 38,835 (7,298) 207,438
Interest
expense......... 18,215 (4,772) 121,607
Provision
(recovery) for
loan and lease
losses.......... 4,991 -- 35,340
External
revenue......... (12,427) (2,527) 119,050
Intercompany
revenue......... 1,310 -- 1,546
Intercompany
expense......... -- -- 1,546
Mark to market
on securities
and loans held
for sale........ (28,280) -- (28,641)
Equity in net
loss of FMC..... -- -- (53)
Total revenue... (11,116) (2,527) 119,050
Depreciation.... 455 -- 4,394
Amortization of
goodwill........ -- -- 14,506
Amortization of
servicing
rights.......... 3,964 -- 4,223
Income taxes.... (13,093) (1,011) (3,074)
Net income
(loss) from
continuing
operations...... $(19,592) $ (1,522) $ (5,950)
</TABLE>
111
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At or for the year ended December 31, 1998
----------------------------------------------------------------------------
Loan
Participation Imperial Income
Coast Imperial And Business Property Asset Imperial
Business Warehouse Investment Credit, Lending Management Capital Other Core Equity
Credit Finance, Inc. Group Inc. Division Activities Group, LLC Operations Interests
-------- ------------- ------------- -------- -------- ---------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans,
net............. $623,748 $179,284 $221,030 $ 7,413 $144,573 $ -- $ -- $ 47,907 $ 1,162
Total assets.... 628,636 186,257 241,854 44,899 146,250 3,831 6,774 331,578 60,098
Total deposits.. 674,956 196,410 222,009 -- 162,939 -- -- (2,403) --
Interest
income.......... 76,916 16,747 21,569 5,823 13,336 19 (185) 28,295 83
Interest
expense......... 34,299 9,817 13,249 1,353 6,659 -- 124 30,395 --
(Recovery)
provision for
loan and lease
losses.......... 3,523 704 (391) 1,300 (345) -- -- -- --
External
revenue......... 42,869 8,533 8,877 10,538 17,471 7,143 18,411 (43,991) (66,496)
Intercompany
revenue......... -- -- -- -- -- -- -- 1,770 --
Intercompany
expense......... -- -- -- 910 -- 121 -- -- --
Mark to market
on securities
and loans held
for sale........ (904) (263) (2,104) (2,305) (178) -- -- (4,993) --
Loss on
impairment of
equity
securities...... -- -- -- -- -- -- -- (37,538) (82,600)
Equity in net
income of SPFC.. -- -- -- -- -- -- -- -- 12,739
Equity in net
income of FMC... -- -- -- -- -- -- -- -- 3,235
Total revenue... 42,869 8,533 8,877 9,628 17,471 7,022 18,411 (42,221) (66,496)
Depreciation.... 779 99 96 141 299 33 473 1,157 --
Amortization of
goodwill........ 1,113 453 -- 950 -- -- 36 134 --
Amortization of
servicing
rights.......... -- -- -- -- -- (365) -- -- --
Income taxes.... 9,267 2,352 2,819 (716) 2,476 1,360 (1,012) (23,372) (28,449)
Net income
(loss) from
continuing
operations...... $ 12,435 $ 3,157 $ 3,783 $ (960) $ 3,323 $1,825 $(1,358) $(31,368) $(38,169)
<CAPTION>
De-
emphasized/
Discontinued/
Exited
Businesses Eliminations Consolidated
------------- ------------ ------------
<S> <C> <C> <C>
Total loans,
net............. $455,339 $(41,300) $1,639,156
Total assets.... 813,931 (46,925) 2,417,183
Total deposits.. 460,341 -- 1,714,252
Interest
income.......... 77,650 (4,413) 235,840
Interest
expense......... 31,623 (4,413) 123,106
(Recovery)
provision for
loan and lease
losses.......... 10,659 -- 15,450
External
revenue......... 12,998 (170) 16,183
Intercompany
revenue......... -- -- 1,770
Intercompany
expense......... 739 -- 1,770
Mark to market
on securities
and loans held
for sale........ (31,641) -- (42,388)
Loss on
impairment of
equity
securities...... -- -- (120,138)
Equity in net
income of SPFC.. -- -- 12,739
Equity in net
income of FMC... -- -- 3,235
Total revenue... 12,259 (170) 16,183
Depreciation.... 637 -- 3,714
Amortization of
goodwill........ -- -- 2,686
Amortization of
servicing
rights.......... 1,851 -- 1,486
Income taxes.... (8,789) -- (44,064)
Net income
(loss) from
continuing
operations...... $(11,793) $ -- $ (59,125)
</TABLE>
112
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
At or for the year ended December 31, 1997
---------------------------------------------------------------------------
Loan
Participation Imperial Income
Coast Imperial And Business Property Asset Imperial
Business Warehouse Investment Credit, Lending Management Capital Other Core Equity
Credit Finance, Inc. Group Inc. Division Activities Group, LLC Operations Interests
-------- ------------- ------------- -------- -------- ---------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total loans..... $479,922 $121,888 $195,554 $16,578 $58,282 $ -- $ -- $ 72,665 $ --
Total assets.... 496,230 140,058 195,554 51,640 58,282 5,815 12,720 371,959 118,402
Total deposits.. 425,615 105,703 175,743 -- 53,145 -- -- (12,620) --
Interest
income.......... 50,360 3,265 17,458 10,899 22,834 189 767 24,354 18,847
Interest
expense......... 20,577 1,834 10,343 2,903 12,126 -- -- 25,579 13,921
Provision for
loan and lease
losses
(recovery)...... 4,937 435 564 1,075 (1,930) -- -- 5,000 --
External
revenue......... 30,045 1,584 6,483 20,662 41,201 25,353 8,486 2,330 161,720
Intercompany
revenue......... -- -- -- -- -- -- -- 4,562 --
Intercompany
expense......... -- -- -- 2,363 -- 319 -- -- 1,866
Mark to market
on securities
and loans held
for sale........ -- -- -- -- -- -- -- (341) --
Equity in net
income of SPFC.. -- -- -- -- -- -- -- -- 25,869
Equity in net
loss of FMC..... -- -- -- -- -- -- -- -- (3,050)
Total revenue... 30,045 1,584 6,483 18,299 41,201 25,034 8,486 6,892 159,854
Depreciation.... 284 24 91 190 122 15 635 2,157 298
Amortization of
goodwill........ 1,113 113 -- 955 -- -- -- -- 310
Amortization of
servicing
rights.......... -- -- -- -- -- 637 -- 1,579 --
Income taxes.... 5,788 332 1,699 2,641 13,252 6,408 566 (6,832) 52,533
Net income
(loss) from
continuing
operations...... $ 8,984 $ 515 $ 2,637 $ 4,099 $20,566 $ 9,946 $ 878 $(10,603) $ 81,532
<CAPTION>
De-emphasized/
Discontinued/
Exited
Businesses Eliminations Consolidated
-------------- ------------ ------------
<S> <C> <C> <C>
Total loans..... $502,367 $(41,300) $1,405,956
Total assets.... 701,238 (57,509) 2,094,389
Total deposits.. 408,436 -- 1,156,022
Interest
income.......... 59,270 (4,643) 203,600
Interest
expense......... 35,573 (4,643) 118,213
Provision for
loan and lease
losses
(recovery)...... 10,894 -- 20,975
External
revenue......... 15,602 1,438 314,904
Intercompany
revenue......... -- -- 4,562
Intercompany
expense......... 14 -- 4,562
Mark to market
on securities
and loans held
for sale........ -- -- (341)
Equity in net
income of SPFC.. -- -- 25,869
Equity in net
loss of FMC..... -- -- (3,050)
Total revenue... 15,588 1,438 314,904
Depreciation.... 364 -- 4,180
Amortization of
goodwill........ -- -- 2,491
Amortization of
servicing
rights.......... -- 872 3,088
Income taxes.... (2,342) 222 74,267
Net income
(loss) from
continuing
operations...... $ (3,635) $ 344 115,263
</TABLE>
113
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Deposits
Deposits of $100,000 and over totaled approximately $324.3 million and
$459.6 million at December 31, 1999 and 1998, respectively. Interest expense
associated with certificates of deposit of $100,000 and over was approximately
$18.2 million, $24.2 million, and $15.6 million, for the years ended December
31, 1999, 1998, and 1997, respectively.
15. Borrowings from Federal Home Loan Bank
SPB is approved as a member of the Federal Home Loan Bank ("FHLB") to
borrow up to a maximum of 35% of the assets of SPB. These borrowings must be
fully collateralized by qualifying mortgage loans and may be in the form of
overnight funds or term borrowings at SPB's option. The FHLB advances are
secured by the investment in stock of the FHLB and certain real estate
mortgage loans with a carrying value of $56.5 million and $49.9 million at
December 31, 1999 and 1998, respectively. At December 31, 1999, 1998 and 1997,
FHLB borrowings are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance at year end............................. $ -- $20,000 $ 45,000
Maximum outstanding at any month end............ 30,000 45,000 109,500
Average balance during the year................. 7,603 24,451 57,154
Weighted average rate during the year........... 8.30% 6.67% 5.82%
Weighted average rate at year end............... N/A 5.93% 6.71%
</TABLE>
Interest expense on borrowings from the FHLB was $631,000, $1.6 million,
and $3.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
16. Other Borrowings
Other borrowings primarily consist of revolving warehouse lines of credit
to fund the Company's and its subsidiaries' lending activities. At December
31, 1999 and 1998, approximately $18.2 million and $84 million of loans and
securities were pledged as collateral for other borrowings. These lines of
credit are short term borrowings used in the normal course of business. ICII
and its subsidiaries have various revolving warehouse lines of credit and
repurchase facilities available at December 31, 1999, as follows:
<TABLE>
<CAPTION>
Interest Index
Rate Commitment Outstanding (basis points) Expiration Date
-------- ---------- ----------- -------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Lehman Brothers (Corona
Film Finance Fund)..... 5.50% $66,398 $66,398 Fixed rate January 13, 2000
Imperial Bank (ICII).... 9.25 6,691 6,691 Prime plus 100 September 29, 2000
Other notes payable
(ICII)................. 8.00 -- 1,220 Fixed rate None
------- -------
5.88 $73,089 $74,309
======= =======
</TABLE>
114
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ICII and its subsidiaries had various revolving warehouse lines of credit
and repurchase facilities available at December 31, 1998, as follows:
<TABLE>
<CAPTION>
Interest Index
Rate Commitment Outstanding (basis points) Expiration Date
-------- ---------- ----------- -------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Greenwich Capital
Financial (AMN)........ 6.89% $100,000 $ 9,193 Libor plus 125 April 30, 1999
Lehman Brothers (Corona
Film Finance Fund) .... 4.75 66,692 66,692 Fixed rate January 7, 1999
First Union National
Bank (ICII)............ 5.22 14,879 14,879 Fixed rate January 29, 1999
Greenwich Capital
Financial (ICII)....... 5.94 4,382 4,382 Fixed rate January 14, 1999
First Union National
Bank (IBC)............. 8.07 15,000 5,904 Libor plus 245 March 31, 1999
Other notes payable
(ICII)................. 8.00 -- 1,220 Fixed rate None
-------- --------
5.29 $200,953 $102,270
======== ========
</TABLE>
Interest expense on warehouse lines of credit and repurchase facilities was
$4.0 million, $4.2 million, and $17.9 million for the years ended December 31,
1999, 1998 and 1997, respectively.
17. Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely debentures of the company ("ROPES")
During the second quarter of 1997, Imperial Credit Capital Trust I
("ICCTI"), a wholly-owned subsidiary of the Company organized for the sole
purpose of issuing trust securities, issued $70.0 million of 10.25% Company
obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely debentures of the company ("ROPES") due June 14, 2002 at par.
The ROPES are secured by resettable rate debentures which are general
unsecured obligations of the Company, are and can be redeemed at par upon
their maturity or remarketed as 30 year capital instruments at the Company's
option. Under current tax law, the interest payments on these securities are
tax-deductible. The proceeds from the offering were used for capital
contributions to subsidiaries, strategic acquisitions, investments and general
corporate purposes. During 1999, the Company repurchased and extinguished $8.3
million of ROPES debt resulting in a extraordinary gain of $921,000, net of
income taxes. At December 31, 1999 and 1998, the Company had ROPES debt of
$61.8 million and $70.0 million, respectively. Interest expense on the ROPES
was $7.4 million, $7.8 million and $4.3 million for the years ended
December 31, 1999, 1998 and 1997.
The Trust Indenture for the ROPES includes provisions which limit the
ability of the Company to incur additional indebtedness or issue certain stock
of the Company, to make certain investments, engage in certain transactions
with affiliates, create restrictions on the ability of subsidiaries to pay
dividends or certain other distributions, create liens and encumbrances, or
allow its subsidiaries to issue certain classes of stock. As of December 31,
1999 and 1998, the Company was in compliance with the debt covenants related
to the ROPES.
115
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
18. Senior Notes
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------
Face Unamortized Carrying
Value Discount Value
-------- ----------- --------
<S> <C> <C> <C>
9.75% Senior Notes due 2004................... $ 13,074 $(171) $ 12,903
9.875% Senior Notes due 2007.................. 172,282 -- 172,282
-------- ----- --------
$185,356 $(171) $185,185
======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
Face Unamortized Carrying
Value Discount Value
-------- ----------- --------
<S> <C> <C> <C>
9.75% Senior Notes due 2004................... $ 20,174 $(316) $ 19,858
9.875% Senior Notes due 2007.................. 200,000 -- 200,000
-------- ----- --------
$220,174 $(316) $219,858
======== ===== ========
</TABLE>
During the first quarter of 1997, the Company successfully completed a
$200.0 million offering of 9.875% Senior Notes due 2007 (the "9.875% Senior
Notes"). A portion of the proceeds from the offering was used to repurchase
$69.8 million of the outstanding 9.75% Senior Notes due 2004 (the "9.75%
Senior Notes") on which the Company recorded an extraordinary after-tax loss
of $4.0 million. The remaining proceeds were used to make capital
contributions to subsidiaries, strategic acquisitions, investments, and for
general corporate purposes. The effective interest rate on the tendered notes
was approximately 10.8% after the amortization of original issue discount and
capitalized debt issue costs. The effective interest rate on the new notes is
approximately 10.4% after the amortization of capitalized debt issue costs.
The 9.875% Senior Notes may be redeemed after January 15, 2002 at the
option of the Company until maturity at a declining premium, plus accrued
interest. The 9.875% Senior Notes are general unsecured obligations of the
Company ranking pari passu with all senior indebtedness of the Company, but
are effectively subordinated to the liabilities of SPB. The Indenture for the
9.875% Senior Notes includes provisions which limit the ability of the Company
to incur additional indebtedness or issue certain stock of the Company, to
make certain investments, engage in certain transactions with affiliates,
create restrictions on the ability of subsidiaries to pay dividends or certain
other distributions, create liens and encumbrances, or allow its subsidiaries
to issue certain classes of stock. As of December 31, 1999, the Company was in
compliance with the debt covenants related to the 9.875% Senior Notes.
In January 1994, the Company issued $90.0 million of 9.75% Senior Notes due
2004. At December 31, 1999 and 1998, $13.1 million and $20.2 million of the
9.75% Senior Notes were outstanding. The 9.75% Senior Notes may be redeemed
after January 15, 1999 at the option of the Company until maturity at a
declining premium, plus accrued interest. The 9.75% Senior Notes are unsecured
and rank pari passu with all other senior unsecured indebtedness of the
Company, but are effectively subordinated to the deposits of SPB.
116
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, the Company repurchased and extinguished $27.7 million of
9.875% Senior Notes due 2007 and $7.1 million of 9.75% Senior Notes due 2004
resulting in a extraordinary gain of $4.2 million, net of income taxes. Total
interest expense on the Senior Notes for the years ended December 31, 1999,
1998 and 1997 was $21.5 million, $22.5 million, and $21.7 million,
respectively.
19. Preferred and Common Stock
The Company has authorized 8,000,000 shares of Preferred Stock. The Board
has the authority to issue the preferred stock in one or more series, and to
fix the designations, rights, preferences, privileges, qualifications and
restrictions, including dividend rights, conversion rights, voting rights,
rights and terms of redemption, liquidation preferences and sinking fund terms,
any or all of which may be greater than the rights of the Common Stock.
On May 14, 1999, the Company entered into an agreement with its former
parent Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17,
1999, the Company repurchased 10% or 3,682,536 shares of its outstanding common
stock for $8.00 per share or $29.5 million. The repurchase from Imperial Bank
was financed through the private issuance of $30.0 million Series B 11.50%
Mandatorily Redeemable Cumulative Preferred Stock to a group of independent
investors. During the fourth quarter of 1999, the Company repurchased and
extinguished the $30.0 million Series B 11.50% Mandatorily Redeemable
Cumulative Preferred Stock, incurring an extraordinary loss of $1.1 million,
net of income taxes. Interest expense from date of issuance to date of
extinguishment was $1.5 million.
In the fourth quarter of 1997, the Company's board of directors authorized
the repurchase of up to approximately 5% of the company's common stock, or as
much as 1.9 million shares. During 1998, the Company repurchased and retired
1.9 million shares of common stock under this program at an average price of
$10.62 per share.
As of December 31, 1999, the Company repurchased and retired 4,253,414
shares of common stock under the second share repurchase program at an average
price of $7.83 per share which included the 3,682,536 shares repurchased from
Imperial Bank. The authorized share repurchase under the second repurchase
program is 4,334,276 shares. Since beginning share repurchases in December of
1997, the Company has repurchased a total of 6.2 million shares of common stock
at an average price of $8.70 per share.
On July 1, 1998 the Company established a deferred executive compensation
plan. From July 1, 1998 through December 31, 1999, the Company's management and
directors have made investments net of redemptions of $7.1 million with the
plan's trustee who made net acquisitions of 855,170 shares of common stock at
an average price of $8.31 per share. All shares acquired by the plan's trustee
are acquired for the benefit of the Company's participating management and
directors.
On October 12, 1998, the Company distributed preferred share purchase rights
as a dividend to its shareholders of record at the rate of one right for each
outstanding share of its common stock. The rights are attached to the Company's
common stock and will only be exercisable and trade separately if a person or
group acquires or announces the intent to acquire 15% or more of the Company's
common stock (25% or more for any person or group currently holding 15% or more
of the Company's common stock). Each right will entitle shareholders to buy
one-hundredth of a share of a new series of junior participating preferred
stock at an exercise price of $40.
117
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If the Company is acquired in a merger or other transaction after a person
has acquired 15 percent or more of the Company's outstanding common stock (25%
or more for any person or group currently holding 15% or more of the Company's
common stock), each right will entitle the shareholder to purchase, at the
right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price. The acquiring person
would not be entitled to exercise these rights. In addition, if a person or
group acquires 15% or more of the Company's common stock, each right will
entitle the shareholder (other than the acquiring person) to purchase, at the
right's then-current exercise price, a number of shares of the Company's
common stock having a market value of twice such price. Following the
acquisition by a person of 15% or more of the Company's common stock and
before an acquisition of 50 percent or more of the Company's common stock, the
Company's board of directors may exchange the rights (other than the rights
owned by such person) at an exchange ratio of one share of common stock per
right. Before a person or group acquires beneficial ownership of 15 percent
(or 25% as applicable) or more of the Company's common stock, the rights are
redeemable for $.0001 per right at the option of the Company's board of
directors. The rights will expire on October 2, 2008 unless redeemed prior to
that date. The Company's board is also authorized to reduce the ownership
thresholds referred to above to not less than 10%. The rights are intended to
enable all of the Company's shareholders to realize the long-term value of
their investment in the Company.
20. Income Taxes
Income taxes are included in the accompanying consolidated statements of
operations and comprehensive income as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Income taxes from:
Continuing operations......................... $(3,074) $(44,064) $ 74,267
Discontinued operations....................... (557) (8,675) (15,520)
Extraordinary item............................ 3,446 -- (2,919)
------- -------- --------
Total....................................... $ (185) $(52,739) $ 55,828
======= ======== ========
</TABLE>
118
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's income taxes from continuing operations for the years ended
December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Current:
Federal...................................... $ 440 $ 6,140 $28,848
State........................................ 191 2,019 8,108
------- -------- -------
Total current taxes........................ 631 8,159 36,956
------- -------- -------
Deferred:
Federal...................................... (4,623) (39,701) 31,324
State........................................ (1,630) (15,839) 8,970
------- -------- -------
Total deferred taxes....................... (6,253) (55,540) 40,294
------- -------- -------
Taxes credited to shareholders' equity......... 2,548 3,317 2,916
Reduction of deferred tax liability due to FMC
public offering............................... -- -- (5,899)
------- -------- -------
Taxes on income from continuing operations..... $(3,074) $(44,064) $74,267
======= ======== =======
</TABLE>
The Company had current income taxes payable from continuing operations of
approximately $5.5 million at December 31, 1999 and current income taxes
receivable of $13.1 million at December 31, 1998. Included in the net assets of
discontinued operations were income taxes receivable of $9.0 million and
$10.7 million at December 31, 1999 and 1998, respectively.
119
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes arise from differences in the timing of recognition
of income and expense for tax and financial reporting purposes. The following
table shows the primary components of the Company's net deferred tax liability
at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Deferred tax assets:
REMIC Income......................................... $ 5,011 $ 10,080
Allowances for loan and lease losses................. 14,593 11,461
Mark to market on securities and loans held for
sale................................................ -- 9,468
Leases............................................... 2,021 --
State taxes.......................................... 2,261 2,900
Executive stock options.............................. 450 450
Unrealized loss on securities available for sale..... 1,999 --
Deferred compensation................................ 1,993 630
Depreciation......................................... 372 321
-------- --------
Total.............................................. 28,700 35,310
======== ========
Deferred tax liabilities:
Sales/investments in subsidiaries and equity
securities.......................................... (25,960) (39,570)
Servicing rights..................................... (903) (2,747)
Mark to market on securities and loans held for
sale................................................ (3,081) --
Leases............................................... -- (2,751)
Deferred loan fees................................... (1,971) (1,971)
Unrealized gain on securities available for sale..... -- (907)
Other................................................ (6,118) (2,758)
FHLB stock dividends................................. (1,273) (1,465)
-------- --------
Total.............................................. (39,306) (52,169)
======== ========
Net deferred tax liability............................. $(10,606) $(16,859)
======== ========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Management considers the scheduled reversal
of deferred tax liabilities and available tax carrybacks and future taxable
income in making this assessment. Based upon the schedule of reversals, future
taxable income and available tax carrybacks, management believes it is more
likely than not the Company will realize the deferred tax assets.
A reconciliation of the statutory Federal corporate income tax rate of 35%
to the effective income tax rate on income or loss from continuing operations
is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate................ 35.0 % 35.0 % 35.0 %
Increase (reduction) in rate resulting from:
State income taxes, net of Federal benefit............ 5.0 8.9 6.6
Preferred stock dividends classified as interest
expense............................................ (6.8) -- --
Reduction of deferred tax liability due to FMC
public offering.................................... -- -- (3.1)
Other, net.......................................... 0.9 (1.2) (0.7)
---- ---- ----
Effective income tax rate............................. 34.1 % 42.7 % 39.2 %
==== ==== ====
</TABLE>
120
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
21. Employee Benefit Plans
Profit Sharing and 401(k) Plan
Under the Company's 401(k) plan, employees may elect to enroll on the first
of any month, provided that they have been employed for at least six months.
Employees may contribute up to 14% of their salaries. The Company will match
50% of the first 4% of employee contributions. The Company recorded 401(k)
matching expense of $334,000, $457,000, and $246,000, for the years ended
December 31, 1999, 1998 and 1997, respectively.
An additional Company contribution may be made at the discretion of the
Company. Should a discretionary contribution be made, the contribution would
first be allocated to those employees deferring salaries in excess of 4%. The
matching contribution would be 50% of any deferral in excess of 4% up to a
maximum deferral of 8%.
Should discretionary contribution funds remain following the allocation
outlined above, any remaining Company matching funds would be allocated as a
50% match of employee contributions on the first 4% of the employee's
deferrals. No discretionary contributions were charged to operations for the
years ended December 31, 1999, 1998 and 1997. Company matching contributions
are made as of December 31st each year.
1992 Stock Option Plan
A total of 2,292,632 shares of the Company's Common Stock has been reserved
for issuance under the Company's 1992 Incentive Stock Option and Nonstatutory
Stock Option Plan (the "1992 Stock Option Plan"), which expires by its own
terms in 2002. A total of 734,268 and 868,813 stock options were outstanding
at December 31, 1999 and 1998, respectively.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants of the Company.
Incentive stock options may be granted only to employees. The 1992 Stock
Option Plan is administered by the Board of Directors or a committee appointed
by the Board, which determines the terms of options granted, including the
exercise price, the number of shares subject to the option, and the option's
exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years.
With respect to any participant who owns stock representing more than 10%
of the voting rights of the Company's outstanding capital stock, the exercise
price of any option must be at least equal to 110% of the fair market value on
the date of grant.
1996 Stock Option Plan
The Company adopted the 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards"). The 1996 Stock Option Plan is
administered by a committee of directors appointed by the Board of Directors
(the "Committee"). ISOs may be granted to the officers and key employees of
the Company or any of its subsidiaries.
121
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The exercise price for any option granted under the 1996 Stock Option Plan
may not be less than 100% (110% in the case of ISOs granted to an employee who
is deemed to own in excess of 10% of the outstanding Common Stock) of the fair
market value of the shares of Common Stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
the Company. The effective date of the 1996 Stock Option Plan was June 21,
1996.
A total of 3,000,000 shares of the Company's Common Stock has been reserved
for issuance under the 1996 Stock Option Plan and a total of 2,635,580 and
1,937,220 stock options were outstanding at December 31, 1999 and 1998,
respectively. If an option granted under the 1996 Stock Option Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance
of further options or Awards under the 1996 Stock Option Plan. Unless
previously terminated by the Board of Directors, no options or Awards may be
granted under the 1996 Stock Option Plan after June 21, 2006.
Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO.
Under current law, ISOs may not be granted to any individual who is not
also an officer or employee of the Company or any subsidiary. Each option must
terminate no more than 10 years from the date it is granted (or five years in
the case of ISOs granted to an employee who is deemed to own in excess of 10%
of the combined voting power of the Company's outstanding Common Stock).
Options may be granted on terms providing for exercise in whole or in part at
any time or times during their respective terms, or only in specified
percentages at stated time periods or intervals during the term of the option,
as determined by the Committee. The exercise price of any option granted under
the 1996 Stock Option Plan is payable in full (i) in cash, (ii) by surrender
of shares of the Company's Common Stock already owned by the option holder
having a market value equal to the aggregate exercise price of all shares to
be purchased including, in the case of the exercise of NQSOs, restricted stock
subject to an Award under the 1996 Stock Option Plan, (iii) by cancellation of
indebtedness owed by the Company to the optionholder, or (iv) by any
combination of the foregoing.
The Board of Directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant (with the exception
of adjustments resulting from changes in capitalization), materially modify
the class of participants eligible to receive options or Awards under the 1996
Stock Option Plan, materially increase the benefits accruing to participants
under the 1996 Stock Option Plan or extend the maximum option term under the
1996 Stock Option Plan.
122
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of changes in outstanding stock options under the 1992 and 1996
Stock Option Plans follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares in thousands Shares Price Shares Price Shares Price
------------------- ------ -------- ------ -------- ------ --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
January 1.............. 2,806 $10.62 2,536 $11.41 2,589 $ 8.58
Options granted......... 969 6.84 1,093 11.52 470 18.72
Options exercised....... (96) 2.80 (177) 5.26 (430) 2.61
Options canceled........ (309) 11.12 (646) 16.70 (93) 10.56
----- ----- -----
Options outstanding,
December 31............ 3,370 9.72 2,806 10.62 2,536 11.41
===== ===== =====
Options Exercisable..... 1,279 10.25 911 9.20 678 6.95
</TABLE>
There were 528,921 options available for future grants at December 31,
1999.
Effective January 1, 1996, The Company adopted the disclosure requirements
of SFAS 123, and continued to measure its employee stock-based compensation
arrangements under the provisions of APB 25. Accordingly, no compensation
expense has been recognized for the stock option plans. Had compensation
expense for the Company's stock option plans been determined based on the fair
value at the grant date for awards after 1994 consistent with the provisions
of SFAS 123, the Company's net (loss) income and (loss) income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
------- -------- -------
(In thousands,
except per share data)
<S> <C> <C> <C>
Net (loss) income:
As reported.................................... $(2,828) $(73,633) $85,921
Pro forma...................................... (4,935) (74,996) 81,707
Basic (loss) income per share:
As reported.................................... $ (0.08) $ (1.93) $ 2.23
Pro forma...................................... (0.14) (1.96) 2.12
Diluted (loss) income per share:
As reported.................................... $ (0.08) $ (1.93) $ 2.10
Pro forma...................................... (0.14) (1.96) 2.00
</TABLE>
The effects of applying SFAS 123 for disclosing compensation cost may not
be representative of the effects on reported net income (loss) for future
years.
123
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value at date of grant of options granted during
1999, 1998 and 1997 was $3.85, $4.79, and $11.27 per option, respectively. The
fair value of options at the date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Expected life (years).................................. 5.01 5.11 5.53
Interest rate.......................................... 6.34% 4.54% 5.76%
Volatility............................................. 66.86 66.81 64.33
Dividend yield......................................... 0.00% 0.00% 0.00%
</TABLE>
Deferred Executive Compensation Plans
Effective July 1, 1998, the Company adopted our Deferred Executive
Compensation Plan (the "DEC Plan 1") and the Deferred Executive Compensation
Plan 2 (the "DEC Plan 2", and together with the DEC Plan 1, the "DEC Plans").
The DEC Plans are each administered by a committee appointed by the board of
directors. Any employee who has an annual base salary of at least $100,000 or
who had an annual base salary of at least $100,000 in the prior year and
directors may elect to participate in the DEC Plans. A participant's annual
base salary includes all cash compensation excluding bonuses, commissions,
employee benefits, stock options, relocation expenses, incentive payments,
non-monetary awards, automobile and other allowances. Participants in the DEC
Plans may defer up to 50% of their annual base salary and commissions and/or
up to 100% of their annual bonus payments. Benefits accrued under the DEC
Plans will be paid to all participants, other than participants who have
voluntarily resigned their positions, in the form of a lifetime annuity issued
by a life insurance company. DEC Plan benefits accrue through retirement so
long as the participant remains employed by our company. Participants who
voluntarily resign prior to retirement will be paid all of their vested
benefits under the DEC Plans. If the Company terminates the DEC Plans, the
Company may elect to pay participants in a lump sum, or in a lifetime annuity.
Deferred compensation contributed to DEC Plan 1 is invested in the
Company's common stock. In 1999 and 1998 the Company matched contributions to
the DEC Plan 1, to be paid in our common stock, on a dollar-for-dollar basis
up to $50,000 per participant. The Company ceased matching contributions for
FYE 2000. The Company also reserves the right to make discretionary matches,
to be paid in its common stock, in any year. Matching contributions vest 50% a
year, commencing one year from the date of the matching contribution. Matching
contributions vest completely if a participating employee retires, becomes
permanently disabled, or dies.
Deferred compensation contributed to DEC Plan 2 may be invested in certain
mutual and money market funds. The Company will not make matching
contributions to the DEC Plan 2. All DEC Plan 2 contributions are completely
vested immediately. The Company incurred $1.5 million and $248,000 in expense
for matching contributions to DEC Plan 1 during the years ended December 31,
1999 and 1998, respectively. DEC Plan 1 owned a total of 852,072 and 366,021
shares of ICII common stock at December 31, 1999 and 1998.
22. Executive Compensation
Employment Agreements
On January 1, 1997, the Company entered into a five-year employment
contracts with H. Wayne Snavely, Chairman of the Board, President and Chief
Executive Officer, which provide for minimum annual aggregate compensation of
$450,000 , subject to adjustment for inflation, plus an annual bonus approved
by the Company's Board of the Directors based on the attainment of performance
objectives, including the Company's return on equity, income per share and
increase in the price of the Company's common stock.
124
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of September 1, 1998, Mr. Sampson entered into an employment agreement
that expires on January 31, 2002, which provides for an annual base salary of
$300,000 plus an annual incentive bonus. Mr. Sampson's bonus is equal to 1.5%
of Coast Business Credit's annual pre-tax profit determined in accordance with
generally accepted accounting principles and is contingent upon Coast Business
Credit's annual net profit equaling or exceeding either 2% of its average
assets for the calendar year, exclusive of goodwill, or a pretax return on its
capital for the year of 20%.
Stock Options
On January 1, 1992, options were granted to three senior officers of the
Company to purchase a total of 2,292,628 shares, adjusted for stock dividends
and splits, of the Company's Common Stock. The exercise price of these options
is $0.89 per share of common stock for one-half of the options, with the other
half exercisable at $1.40 per share. These options became exercisable in
September 1995 (vesting was accelerated from January 1, 1997). These options
expire on December 1, 2001 and are not covered by the Company's 1992 or 1996
Stock Option Plans. Compensation expense relating to these options was
recorded in the Company's consolidated financial statements over a four year
period which ended December 31, 1995 for an amount representing the difference
between the exercise price of the options and the market price of the
Company's stock at the grant date. The aggregate amount of compensation
expense recognized on these stock options since their grant date was $2.2
million.
23. Interest Rate Swaps
The Company may enter into interest rate cap, floor, and swap transactions
to manage its exposure to fluctuations in interest rates and market movements
in securities values. These instruments involve, to varying degrees, elements
of credit and interest rate risk. The contract or notional amounts do not
represent exposure to credit loss. Risk originates from the inability of
counterparties to meet the terms of the contracts and from market movements in
securities values and interest rates. The Company controls the credit risk of
its interest rate cap, floor and swap agreements through credit approvals,
limits and monitoring procedures.
During the years ended December 31, 1999 and 1998, the Company entered into
total rate of return swap contracts for investment purposes with various
investment bank counterparties, the provisions of which entitle the Company to
receive the total return on various commercial loans and pay for a floating
payment of one month LIBOR plus a spread. These contracts are off balance
sheet instruments. As of December 31, 1999 and 1998, respectively, the Company
was party to total rate of return swap contracts with a total notional amount
of $83.6 million and $280.4 million, under which the Company was obligated to
pay one month LIBOR plus a weighted average spread of 0.88%, respectively. The
weighted average remaining life of these contracts was 60 months and
31.2 months as of December 31, 1999 and 1998. For the years ended December 31,
1999, 1998 and 1997, the Company recognized $2.9 million, $5.4 million and
$448,000 in income on total return swaps, respectively.
As a part of the Pacifica Partners I LP collateralized loan obligation
("CLO") fund launched by the Company in August 1998, the Company delivered
subordinate bonds of approximately $51.3 million into a total rate of return
swap with the Canadian Imperial Bank of Commerce ("CIBC"). The provisions of
the swap entitle the Company to receive the total return on the subordinate
bonds delivered and pay a floating payment of LIBOR plus a weighted average
spread of 1.36%. The Company delivered cash and various equity securities to
CIBC as collateral for the swap. At December 31, 1999 and 1998, $25.9 million
and $17.8 million was the amount of outstanding cash collateral classified as
Trading Securities on the consolidated balance sheet.
We had amortizing interest rate swaps outstanding at IBC associated with
the IBC Lease Receivables Trust 1997-2 a with notional amounts of $218.6
million and $197.9 million at December 31, 1999 and December 31, 1998,
respectively.
125
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
24. Commitments and Contingencies
Loan Servicing
As of December 31, 1999 and 1998 the Company was servicing loans and leases
for others, directly and through sub-servicing arrangements, totaling
approximately $268.6 million and $930.0 million, respectively. Related
fiduciary funds held in trust for investors in non-interest bearing accounts
totaled $520,000 and $7.6 million at December 31, 1999 and 1998, respectively.
These funds are segregated in special bank accounts and are held as deposits
at SPB. The Company is a guarantor of certain performances and lease servicing
by IBC. The Company is a guarantor for AMN's performance with regards to the
Auto Trust 1997-A securitization.
Sales of Loans and Servicing Rights
In the ordinary course of business, the Company is exposed to liability
under representations and warranties made to purchasers and insurers of leases
and mortgage loans and the purchasers of servicing rights. Under certain
circumstances, the Company is required to repurchase mortgage loans if there
has been a breach of representations or warranties. The Company provided $0
and $4.8 million in 1999 and 1998, respectively, as an allowance for losses on
repurchases of former mortgage banking loans. At December 31, 1999 and 1998,
the related repurchase liability totalled $638,000 and $5.1 million.
During the years ended December 31, 1999 and 1998, respectively, the
Company retained servicing rights on $25.1 million and $190.0 million of
mortgage loans sold through traditional secondary market channels and $132.4
million and $118.7 million on loans and leases sold through securitizations.
Additionally, during the year ended December 31, 1999 and 1998, respectively,
the Company released servicing rights to the purchasers on $258.5 million and
$215.3 million of mortgage loans sold.
Loan Commitments
As of December 31, 1999 and 1998, the Company had unfunded open loan
commitments amounting to $1.1 billion and $1.0 billion, respectively, to fund
loans. There is no exposure to credit loss in this type of commitment until
the loans are funded. Interest rate risk is mitigated by the use of variable
rate loan contracts.
Lease Commitments
Minimum rental commitments under all noncancelable operating leases net of
aggregate sublease payments of $2.4 million at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
2000........................................................ $ 4,480
2001........................................................ 3,928
2002........................................................ 3,468
2003........................................................ 2,699
2004........................................................ 1,685
Thereafter.................................................. 3,008
-------
Total..................................................... $19,268
=======
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $5.2
million, $5.3 million, and $4.0 million, respectively.
126
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Legal Proceedings
Our company is a defendant in a consolidated federal securities class
action, In re Southern Pacific Funding Corporation Securities Litigation, Lead
Case No. CV98-1239-MA, in the U.S. District Court for the District of Oregon.
The action also names as defendants two current directors of ours, and others.
This action was initially filed in October 1998. Plaintiffs allege that SPFC
failed to properly mark down the value of its residual interests, failed to
properly reflect increased levels of prepayments and actual prepayment and
default rates on its loans and made false and misleading public statements
concerning its financial condition. Following a number of motions to dismiss,
defendants answered and alleged affirmative defenses to the second
consolidated complaint on June 22, 1999. On July 21, 1999, the Court certified
a class of persons who purchased the securities of SPFC during the period
October 7, 1997 through October 1, 1998. On September 10, 1999, plaintiffs
filed a third consolidated complaint, alleging claims against our company and
two of its directors (and others) under Section 10(b) and 20(a) of the
Securities Exchange Act of 1934. On September 21, 1999, plaintiffs sought
leave to file a fourth consolidated complaint, alleging claims under Section
10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 12
of the Securities Act of 1933. On December 7, 1999, the Court granted
plaintiffs' motion to file a fourth amended consolidated complaint, denied
defendants' motions to dismiss except as to the Section 12 claim, and granted
plaintiffs' motion to file a supplemental memorandum to add allegations to the
complaint.
Our company and three of its directors are defendants in a consolidated
federal securities class action, In re Imperial Credit Industries, Inc.
Securities Litigation, Case No. 98-8842 SVW, in the U.S. District Court for
the Central District of California. This action, purportedly filed on behalf
of a class of persons who purchased our company's securities during the period
January 29, 1998 through October 1, 1998, was originally filed in November
1998. Plaintiffs allege that defendants made false and misleading statements
and omitted to reveal the truth concerning the value of Imperial Credit
Industries, Inc.'s investments in SPFC and FMC, resulting in an artificial
inflation of the price of our securities. On June 21, 1999, defendants moved
to dismiss plaintiffs' complaints. The matter was fully briefed and the Court
held a hearing on July 26, 1999. At the hearing, the Court granted defendants'
motions to dismiss plaintiffs' complaints, with leave to amend. The Court
subsequently issued a written order on September 7, 1999. Plaintiffs filed a
consolidated amended class action complaint on October 4, 1999, alleging a
claim against our company and three of its directors for violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. On October
22, 1999, defendants moved to dismiss the consolidated amended class action
complaint. On November 22, 1999, plaintiffs were granted leave to file an
amended class action complaint, which plaintiffs filed on December 13, 1999.
The Court held a hearing on defendants' motion to dismiss the second
consolidated amended complaint on January 24, 2000. The Court has not
certified a class, nor have plaintiffs filed a motion for class certification.
We are a defendant in Steadfast Insurance Company v. Auto Marketing Network
Inc. and Imperial Credit Industries, Inc., filed on August 12, 1997 in the
Northern District of Illinois, Case No. 97-C-5696. The plaintiff is seeking
damages in the amount of $27 million allegedly resulting from the fraudulent
inducement to enter into, and the subsequent breach of, a motor vehicle
collateral enhancement insurance policy. In May 1998, we filed a counterclaim
against the plaintiff for $54 million in damages based on the allegation that
the underlying claim was filed in bad faith. In January 1999, the Court
entered a preliminary injunction which enjoined us from transferring assets of
Auto Marketing Network, Inc., in amounts that would cause the total assets of
Auto Marketing Network to be less than $20 million in value. The injunction
has since been removed and the parties are presently engaged in pretrial
discovery. We have moved to dismiss ICII from the lawsuit.
We have been a defendant along with ICCMIC and its directors, which
includes one of our current directors and one former director, in a putative
class action lawsuit filed on July 22, 1999 by Riviera-Enid, a Florida limited
partnership, in Los Angeles Superior Court, Case No. BC213902. The complaint
alleges that the proposed
127
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
merger between a subsidiary of ours and ICCMIC constitutes a breach of
fiduciary duty by the defendants in that, allegedly, the merger price is
unfair to stockholders, the merger price is less than the liquidation value of
ICCMIC's assets and the termination fee for the management contract is
excessive. The complaint also alleges that certain of the directors have
conflicts of interest because of their affiliation with us and that the merger
will benefit us at the expense of ICCMIC other stockholders. The complaint
seeks certification of a class of all stockholders of ICCMIC whose stock will
be acquired in connection with the 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
October 8, 1999, we filed a demurrer to plaintiff's complaint, which is set to
be heard by the Court on November 22, 1999. On November 1, 1999, plaintiff
served an amended class action complaint alleging the same claims but adding
details from ICCMIC's preliminary proxy statement filed with the SEC. The
Court has not certified a class, nor has plaintiff filed a motion for class
certification. On November 3, 1999, ICCMIC's counsel received a letter from
counsel for the plaintiffs asserting their 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 have decided not to move forward with a motion for a temporary
restraining order or permanent injunction at this time. All defendants filed
demurrers to the amended complaint, and on February 4, 2000, the Court granted
ICII's demurrer and dismissed the action against ICII and the individual ICII
defendants with prejudice and without leave to amend. We and ICCMIC believe
that the material allegations of the complaint are without merit.
We intend to vigorously defend all of the above lawsuits.
25. Fair Value of Financial Instruments
Financial instruments include securities, loans receivable, deposits and
borrowings, and various off-balance sheet items. Because no market exists for
a portion of the Company's loans held for investment and securitization
related assets, fair value estimates are based on judgments regarding credit
risk, investor expectation of future economic conditions, normal cost of
administration and other risk characteristics, including interest rate and
prepayment risk. These estimates are subjective in nature and involve
uncertainties and matters of judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the fair value estimates presented do not include the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. The following methods and assumptions
were used by the Company in estimating its fair value disclosures for
financial instruments:
Financial Assets
The carrying values of cash, interest bearing deposits, FHLB stock, and
accrued interest receivable are considered to approximate fair value. The
carrying values of securities held for trading and available for sale
approximate fair value. Such market value is determined by reference to quoted
market prices. When quoted market prices are not available, fair value is
estimated by reference to market values for similar securities or by
discounting cash flows at an appropriate risk rate. The fair value of loans
and leases held for sale is based on sale commitments, discounted cash flow
analysis or prices for similar products. The fair value of loans held for
investment is estimated using a combination of techniques, including
discounting estimated future cash flows and quoted market prices for similar
instruments, taking into consideration the varying degrees of credit risk.
The fair value of servicing rights and securitization related assets is
estimated by discounting future cash flows using appropriate risk, default and
prepayment rates. The fair value of investments in unconsolidated publicly
traded affiliates is based on quoted market prices.
128
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Financial Liabilities
The carrying amounts of deposits due on demand and accrued interest payable
is considered to approximate fair value. For fixed maturity deposits, fair
value is estimated by discounting estimated future cash flows using currently
offered rates for deposits of similar maturities. The fair value of debt is
based on rates currently available to the Company for debt with similar terms
and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of lending commitments is estimated using the fees currently
charged to enter into similar agreements; such estimated fair value is not
material. The fair value of interest rate swaps, forward treasury contracts,
interest rate futures and interest rate swaps is based on quoted market
prices. Total rate of return swaps are carried in securities held for trading
at their fair value.
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Assets:
Cash.............................. $ 33,898 $ 33,898 $ 297,772 $ 297,772
Interest bearing deposits......... 248,182 248,182 1,415 1,415
Investment in Federal Home Loan
Bank stock....................... 6,960 6,960 4,657 4,657
Securities held for trading....... 160,805 160,805 170,752 170,752
Securities available for sale..... 74,374 74,374 60,015 60,015
Loans and leases held for sale.... 289,398 289,638 319,061 319,061
Loans and leases held for
investment, net.................. 1,241,232 1,240,488 1,320,095 1,325,237
Servicing rights.................. 802 802 4,329 4,329
Retained interest in loan and
lease securitizations............ 10,220 10,220 27,011 27,011
Accrued interest receivable....... 8,272 8,272 10,114 10,114
Equity interest in Franchise
Mortgage Acceptance Company...... -- -- 56,334 85,432
Liabilities:
Deposits.......................... $1,614,758 $1,613,143 $1,714,252 $1,722,320
Borrowings from Federal Home Loan
Bank............................. -- -- 20,000 20,000
Other borrowings.................. 74,309 74,309 102,270 102,270
Company obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely debentures of the company
("ROPES")........................ 61,750 47,717 70,000 47,950
Senior notes...................... 185,185 144,444 219,858 147,305
Accrued interest payable.......... 18,811 18,811 25,421 25,421
Off balance sheet:
Interest rate swaps............... $ 218,600 $ 1,400 $ 197,900 $ (2,600)
</TABLE>
129
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
26. Summary of Quarterly Financial Information (unaudited)
<TABLE>
<CAPTION>
Three months ended
-------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Net interest income.......... $25,251 $ 20,368 $ 19,082 $21,130
Other revenues (1)........... 17,813 (11,438) 19,297 42,887
Provision for loan and lease
losses...................... 2,200 22,255 3,675 7,210
Other expenses............... 30,788 29,906 25,233 40,673
Net income (loss)............ 6,762 (25,901) 8,243 8,068
Comprehensive income (loss).. 7,904 (24,018) 8,595 8,493
Income (loss) per share:
Basic...................... $ 0.18 $ (0.74) $ 0.25 $ 0.24
Diluted.................... $ 0.18 $ (0.74) $ 0.24 $ 0.24
Year ended December 31, 1998
Net interest income.......... $25,745 $ 29,070 $ 29,077 $28,842
Other revenues (1)........... 24,745 27,034 (143,343) 10,464
Provision for loan and lease
losses...................... 3,000 4,300 9,500 (1,350)
Other expenses............... 23,937 25,759 39,330 31,809
Net income (loss)............ 12,900 16,262 (109,440) 6,645
Income (loss) per share:
Basic...................... $ 0.33 $ 0.42 $ (2.83) $ 0.18
Diluted.................... $ 0.32 $ 0.40 $ (2.83) $ 0.18
</TABLE>
- --------
(1) Other revenues includes negative mark-to-market and loss on impairment
charges.
27. Selected Financial Information of Subsidiaries and Equity Investment
The following represents summarized financial information with respect to
the operations of SPB, a significant wholly-owned subsidiary of ICII.
<TABLE>
<CAPTION>
As of and for the Year Ended
December 31,
---------------------------------
Southern Pacific Bank 1999 1998 1997
--------------------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Total assets.............................. $1,846,992 $1,976,055 $1,503,807
Deposits.................................. 1,626,153 1,716,688 1,197,696
Borrowings from Federal Home Loan Bank.... -- 20,000 45,000
Other borrowings.......................... 35,000 35,000 70,000
Stockholder's equity...................... 169,962 179,022 157,082
Interest income........................... 183,052 197,325 153,180
Interest expense.......................... 92,162 95,647 80,452
Net noninterest revenue................... (10,033) 2,738 37,047
Noninterest expense....................... 57,202 63,548 41,535
Provision for loan losses................. 31,930 12,500 14,900
(Loss) income before taxes................ (8,275) 28,368 53,339
Net (loss) income......................... (4,969) 16,393 30,824
Comprehensive (loss) income............... (5,316) 16,393 30,824
</TABLE>
130
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
28. Condensed Consolidating Financial Information
The following represents condensed consolidating financial information as of
December 31, 1999 and December 31, 1998, and for the years ended December 31,
1999, 1998 and 1997, with respect to the financial position, results of
operations and cash flows of the Company and its wholly-owned and majority-
owned subsidiaries. On January 17, 1997, the Company sold $200 million of
9.875% Senior Notes due 2007. As of December 31, 1999, the 9.875% Senior Notes
are guaranteed by five of the Company's wholly-owned subsidiaries, IBC, ICAI,
ICCAMC, Imperial Credit Worldwide ("ICW") and AMN (the "Guarantor
Subsidiaries"). As of December 31, 1999, the non-guarantor subsidiaries are
SPB, ICG and ICCTI. FMC was a guarantor subsidiary through September 30, 1997.
Each of the guarantees is full and unconditional and joint and several. The
summarized consolidated financial information is presented in lieu of separate
financial statements and other related disclosures of the wholly-owned
subsidiary guarantors as management has determined that such information is not
material to investors. None of the subsidiary guarantors is restricted from
making distributions to the Company.
IMPERIAL CREDIT INDUSTRIES, INC.
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C> <C> <C> <C>
Cash.................... $ 11,110 $ 1,382 $ 34,852 $ (13,446) $ 33,898
Interest bearing
deposits............... 35,049 -- 213,133 -- 248,182
Investments in Federal
Home Loan Bank stock... -- -- 6,960 -- 6,960
Securities available for
sale and trading....... 74,827 41,460 132,042 (13,150) 235,179
Loans held for sale..... 1,441 12,300 275,657 -- 289,398
Loans held for
investment, net........ 55,721 17,105 1,211,862 (43,456) 1,241,232
Servicing rights........ -- 802 -- -- 802
Retained interest in
loan and lease
securitizations........ -- 10,220 -- -- 10,220
Investment in
subsidiaries........... 255,024 -- -- (255,024) --
Goodwill................ 11,778 4,306 18,877 -- 34,961
Other assets............ 26,230 11,686 27,300 (1,925) 63,291
Net assets of
discontinued
operations............. 44,396 (6,904) -- -- 37,492
-------- ------- ---------- --------- ----------
Total assets.......... $515,576 $92,357 $1,920,683 $(327,001) $2,201,615
======== ======= ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C>
Deposits................ $ -- $ 2,050 $1,626,154 $ (13,446) $1,614,758
Other borrowings........ 7,911 8,456 103,323 (45,381) 74,309
ROPES................... 63,915 (2,165) -- -- 61,750
Senior notes............ 185,185 -- -- -- 185,185
Minority interest in
consolidated
subsidiaries........... 103 2 155 2,424 2,684
Other liabilities....... 53,082 4,341 126 -- 57,549
-------- ------- ---------- --------- ----------
Total liabilities..... 310,196 12,684 1,729,758 (56,403) 1,996,235
-------- ------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 14,150 -- (14,150) --
Common stock............ 97,220 120,551 110,977 (231,528) 97,220
Retained earnings
(deficit).............. 98,437 (64,641) 80,295 (15,654) 98,437
Shares held in deferred
executive compensation
plan................... 7,107 7,107 -- (7,107) 7,107
Accumulated other
comprehensive income
(loss)................. 2,616 2,506 (347) (2,159) 2,616
-------- ------- ---------- --------- ----------
Total shareholders'
equity............... 205,380 79,673 190,925 (270,598) 205,380
-------- ------- ---------- --------- ----------
Total liabilities and
shareholders'
equity............... $515,576 $92,357 $1,920,683 $(327,001) $2,201,615
======== ======= ========== ========= ==========
</TABLE>
131
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income......... $ 21,521 $ 9,639 $183,576 $ (7,298) $207,438
Interest expense........ 32,184 1,595 92,599 (4,771) 121,607
--------- -------- -------- -------- --------
Net interest (expense)
income................. (10,663) 8,044 90,977 (2,527) 85,831
Provision for loan and
lease losses........... 210 3,200 31,930 -- 35,340
--------- -------- -------- -------- --------
Net interest (expense)
income after
provision for loan
and lease losses..... (10,873) 4,844 59,047 (2,527) 50,491
--------- -------- -------- -------- --------
Gain on sale of loans
and leases............. 20 4,398 2,062 -- 6,480
Asset management fees... -- 10,054 -- -- 10,054
Brokerage commission and
investment banking
fees................... -- -- 27,198 -- 27,198
Loan servicing income... 59 4,397 2,429 -- 6,885
Gain (loss) on sale of
equity securities...... 31,434 (298) 1,606 -- 32,742
Equity in net loss of
FMC.................... (53) -- -- -- (53)
Mark to market on
securities and loans
held for sale.......... 11,314 (15,022) (24,933) -- (28,641)
Dividends received from
subsidiaries........... 6,564 -- -- (6,564) --
Other income............ 1,965 3,169 8,760 -- 13,894
--------- -------- -------- -------- --------
Total other income.... 51,303 6,698 17,122 (6,564) 68,559
--------- -------- -------- -------- --------
Total revenues....... 40,430 11,542 76,169 (9,091) 119,050
--------- -------- -------- -------- --------
Expenses:
Personnel expense....... 3,133 14,574 42,634 -- 60,341
Amortization of
servicing rights....... -- 259 3,964 -- 4,223
Occupancy expense....... 784 911 3,963 -- 5,658
Net (income) expenses of
other real estate
owned.................. (23) 717 692 -- 1,386
Professional services... 2,770 2,725 4,770 -- 10,265
Amortization of
goodwill............... 200 12,653 1,653 -- 14,506
General, administrative
and other expense...... 2,454 4,048 23,719 -- 30,221
--------- -------- -------- -------- --------
Total expenses........ 9,318 35,887 81,395 -- 126,600
--------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes,
minority interest,
deferred inter-company
expense and
extraordinary item..... 31,112 (24,345) (5,226) (9,091) (7,550)
Income taxes............ 10,020 (9,789) (3,305) -- (3,074)
Minority interest in
income (loss) of
consolidated
subsidiaries........... 421 (46) 572 527 1,474
--------- -------- -------- -------- --------
Income (loss) from
continuing operations
before equity in
undistributed income of
subsidiaries........... 20,671 (14,510) (2,493) (9,618) (5,950)
Equity in undistributed
(loss) income of
subsidiaries........... (27,520) -- -- 27,520 --
--------- -------- -------- -------- --------
(Loss) income from
continuing operations.. (6,849) (14,510) (2,493) 17,902 (5,950)
Loss from discontinued
operations............. -- (899) -- -- (899)
--------- -------- -------- -------- --------
(Loss) income before
extraordinary item..... (6,849) (15,409) (2,493) 17,902 (6,849)
Extraordinary item--gain
on early extinguishment
of debt, net of income
taxes.................. 4,021 -- -- -- 4,021
--------- -------- -------- -------- --------
Net (loss) income....... (2,828) (15,409) (2,493) 17,902 (2,828)
Preferred stock
dividends.............. -- 2,527 -- (2,527) --
--------- -------- -------- -------- --------
Net (loss) income
available for common
shares................. $ (2,828) $(17,936) $ (2,493) $ 20,429 $ (2,828)
========= ======== ======== ======== ========
</TABLE>
132
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31, 1999
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net cash provided by
operating activities... $ 19,031 $ 4,385 $ 96,793 $ 31,413 $ 151,622
-------- -------- --------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (32,768) 423 (214,422) -- (246,767)
Sale of securities
available for sale... 4,875 -- -- -- 4,875
Purchase of securities
available for sale... (4,050) -- (26,757) 4,050 (26,757)
Net change loans held
for investment....... (11,984) (12,868) (1,524) (865) (27,241)
Proceeds of sale of
OREO................. 1,216 4,907 4,228 -- 10,351
Proceeds of sales of
securities........... 91,709 8,849 -- -- 100,558
Purchases of premises
and equipment........ (1,246) (612) (5,909) -- (7,767)
Purchase of FHLB
stock................ -- -- (1,983) -- (1,983)
Cash utilized for
acquisitions......... (8,132) -- -- -- (8,132)
Net change in
investment in
subsidiaries......... 21,839 -- -- (21,839) --
-------- -------- --------- -------- ---------
Net cash provided by
(used in) investing
activities............. 61,459 699 (246,367) (18,654) (202,863)
-------- -------- --------- -------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- (87,611) (11,883) (99,494)
Advances from Federal
Home Loan Bank....... -- -- 30,000 -- 30,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (50,000) -- (50,000)
Proceeds from issuance
of mandatorily
redeemable cumulative
preferred stock...... 30,000 -- -- -- 30,000
Repurchase of
mandatorily
redeemable cumulative
preferred stock...... (31,353) -- -- -- (31,353)
Net change in other
borrowings........... (12,570) (4,591) (294) (10,506) (27,961)
Repurchase of Senior
Notes................ (27,453) -- -- -- (27,453)
Repurchase of ROPES... (6,628) -- -- -- (6,628)
Capital contributions
from ICII............ (2,681) 2,555 126 -- --
Dividends paid to
ICII................. 6,561 (2,485) (4,076) -- --
Proceeds from exercise
of stock options..... 249 -- -- -- 249
Net change in minority
interest............. 731 94 22 (1,380) (533)
Repurchase and
retirement of stock.. (29,460) -- -- -- (29,460)
-------- -------- --------- -------- ---------
Net cash used in
financing activities... (72,604) (4,427) (111,833) (23,769) (212,633)
-------- -------- --------- -------- ---------
Net change in cash.... 7,886 657 (261,407) (11,010) (263,874)
Cash at beginning of
period............... 3,224 725 296,259 (2,436) 297,772
-------- -------- --------- -------- ---------
Cash at end of
period............... $ 11,110 $ 1,382 $ 34,852 $(13,446) $ 33,898
======== ======== ========= ======== =========
</TABLE>
133
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
As of December 31, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C> <C> <C> <C>
Cash.................... $ 3,224 $ 725 $ 296,259 $ (2,436) $ 297,772
Interest bearing
deposits............... 2,281 423 (1,289) -- 1,415
Investments in Federal
Home Loan Bank stock... -- -- 4,657 -- 4,657
Securities available for
sale and trading....... 118,623 8,421 113,723 (10,000) 230,767
Loans held for sale..... 1,698 33,160 284,203 -- 319,061
Loans held for
investment, net........ 45,029 7,467 1,302,599 (35,000) 1,320,095
Servicing rights........ -- 365 3,964 -- 4,329
Retained interest in
loan and lease
securitizations........ -- 27,011 -- -- 27,011
Investment in FMC....... 56,334 -- -- -- 56,334
Investment in
subsidiaries........... 276,863 -- -- (276,863) --
Goodwill................ -- 16,959 20,539 -- 37,498
Other assets............ 32,247 12,200 28,910 (1,925) 71,432
Net assets of
discontinued
operations............. 43,624 3,188 -- -- 46,812
-------- -------- ---------- --------- ----------
Total assets.......... $579,923 $109,919 $2,053,565 $(326,224) $2,417,183
======== ======== ========== ========= ==========
<CAPTION>
LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C>
Deposits................ $ -- $ -- $1,716,689 $ (2,437) $1,714,252
Borrowings from FHLB.... -- -- 20,000 -- 20,000
Other borrowings........ 20,481 15,097 103,617 (36,925) 102,270
ROPES................... 72,165 (2,165) -- -- 70,000
Senior notes............ 219,858 -- -- -- 219,858
Minority interest in
consolidated
subsidiaries........... (628) 2,109 133 1,603 3,217
Other liabilities....... 34,526 7,253 12,286 -- 54,065
-------- -------- ---------- --------- ----------
Total liabilities..... 346,402 22,294 1,852,725 (37,759) 2,183,662
-------- -------- ---------- --------- ----------
Shareholders' equity:
Preferred stock......... -- 12,000 -- (12,000) --
Common stock............ 129,609 135,279 114,258 (249,537) 129,609
Retained earnings....... 101,265 (63,487) 86,582 (23,095) 101,265
Shares held in deferred
executive compensation
plan................... 3,833 3,833 -- (3,833) 3,833
Accumulated other
comprehensive loss..... (1,186) -- -- -- (1,186)
-------- -------- ---------- --------- ----------
Total shareholders'
equity............... 233,521 87,625 200,840 (288,465) 233,521
-------- -------- ---------- --------- ----------
Total liabilities and
shareholders'
equity............... $579,923 $109,919 $2,053,565 $(326,224) $2,417,183
======== ======== ========== ========= ==========
</TABLE>
134
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income......... $ 30,082 $ 12,962 $197,209 $ (4,413) $ 235,840
Interest expense........ 30,617 1,131 95,771 (4,413) 123,106
--------- -------- -------- -------- ---------
Net interest (expense)
income................. (535) 11,831 101,438 -- 112,734
Provision for loan and
lease losses........... -- 2,950 12,500 -- 15,450
--------- -------- -------- -------- ---------
Net interest (expense)
income after
provision for loan
and lease losses..... (535) 8,881 88,938 -- 97,284
--------- -------- -------- -------- ---------
Gain on sale of loans
and leases............. 46 4,790 10,052 -- 14,888
Asset management fees... -- 7,591 -- -- 7,591
Brokerage commission and
investment banking
fees................... -- -- 18,633 (170) 18,463
Loan servicing (expense)
income................. (434) 4,907 7,510 -- 11,983
Loss on sale of equity
securities............. (179) (50) (363) -- (592)
Equity in net income of
SPFC................... 12,739 -- -- -- 12,739
Equity in net income of
FMC.................... 3,235 -- -- -- 3,235
Mark to market on
securities and loans
held for sale.......... (4,993) (11,604) (25,791) -- (42,388)
Loss on impairment of
equity securities...... (120,138) -- -- -- (120,138)
Dividends received from
subsidiaries........... 25,410 -- -- (25,410) --
Other income............ 362 1,292 11,464 -- 13,118
--------- -------- -------- -------- ---------
Total other (loss)
income............... (83,952) 6,926 21,505 (25,580) (81,101)
--------- -------- -------- -------- ---------
Total revenues....... (84,487) 15,807 110,443 (25,580) 16,183
--------- -------- -------- -------- ---------
Expenses:
Personnel expense....... 4,415 9,715 47,506 -- 61,636
Amortization of
servicing rights....... -- (365) 1,851 -- 1,486
Occupancy expense....... 1,267 942 3,541 -- 5,750
Net (income) expenses of
other real estate
owned.................. (548) 459 (812) -- (901)
Professional services... 2,897 2,773 5,348 (170) 10,848
Amortization of
goodwill............... -- 1,084 1,602 -- 2,686
Provision for loss on
loan repurchase........ 4,750 -- -- -- 4,750
General, administrative
and other expense...... 3,493 4,121 26,967 -- 34,581
--------- -------- -------- -------- ---------
Total expenses........ 16,274 18,729 86,003 (170) 120,836
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations
before income taxes,
minority interest,
deferred inter-company
expense and
extraordinary item..... (100,761) (2,922) 24,440 (25,410) (104,653)
Income taxes............ (55,061) (981) 11,978 -- (44,064)
Minority interest in
(loss) income of
consolidated
subsidiaries........... (1,552) 88 22 (22) (1,464)
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations
before equity in
undistributed income of
subsidiaries........... (44,148) (2,029) 12,440 (25,388) (59,125)
Equity in undistributed
(loss) income of
subsidiaries........... (29,485) -- -- 29,485 --
--------- -------- -------- -------- ---------
(Loss) income from
continuing operations.. (73,633) (2,029) 12,440 4,097 (59,125)
Loss from discontinued
operations............. -- (3,232) -- -- (3,232)
Loss on disposal of
AMN.................... -- (11,276) -- -- (11,276)
--------- -------- -------- -------- ---------
Net (loss) income....... $ (73,633) $(16,537) $ 12,440 $ 4,097 $ (73,633)
========= ======== ======== ======== =========
</TABLE>
135
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Year ended December 31, 1998
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $(50,644) $(27,150) 39,006 $ 1,653 $ (37,135)
-------- -------- -------- -------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... 29,109 726 72,488 -- 102,323
Purchase of securities
available for sale... (16,651) (900) -- -- (17,551)
Sale of securities
available for sale... -- 8,818 -- -- 8,818
Net change loans held
for investment....... 10,884 15,738 (303,251) -- (276,629)
Proceeds of sale of
OREO................. 2,558 9,360 1,825 -- 13,743
Proceeds of sales of
IMH stock............ 867 -- -- -- 867
Purchases of premises
and equipment........ (1,721) (671) (5,441) -- (7,833)
Redemption of FHLB
stock................ -- -- 1,280 -- 1,280
Net change in
investment in
subsidiaries......... 4,591 -- -- (4,591) --
-------- -------- -------- -------- ---------
Net cash provided by
(used in) investing
activities............. 29,637 33,071 (233,099) (4,591) (174,982)
-------- -------- -------- -------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 523,924 31,382 555,306
Advances from Federal
Home Loan Bank....... -- -- 44,500 -- 44,500
Repayments of advances
from Federal Home
Loan Bank............ -- -- (69,500) -- (69,500)
Net change in other
borrowings........... 19,261 (15,153) (47,911) 1,232 (42,571)
Capital contributions
from ICII............ (4,332) 4,332 -- -- --
Dividends paid to
ICII................. 20,915 (16,915) (4,000) -- --
Proceeds from exercise
of stock options..... 1,037 -- -- -- 1,037
Net change in minority
interest............. (1,574) (111) 22 1,706 43
Repurchase and
retirement of stock.. (24,305) -- -- -- (24,305)
-------- -------- -------- -------- ---------
Net cash provided by
(used in) financing
activities............. 11,002 (27,847) 447,035 34,320 464,510
-------- -------- -------- -------- ---------
Net change in cash.... (10,005) (21,926) 252,942 31,382 252,393
Cash at beginning of
period............... 13,229 22,651 43,317 (33,818) 45,379
-------- -------- -------- -------- ---------
Cash at end of
period............... $ 3,224 $ 725 $296,259 $ (2,436) $ 297,772
======== ======== ======== ======== =========
</TABLE>
136
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Year ended December 31, 1997
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenue:
Interest income.......... $ 28,916 $ 8,399 $170,928 $ (4,643) $203,600
Interest expense......... 25,703 2,779 94,374 (4,643) 118,213
-------- -------- -------- -------- --------
Net interest income...... 3,213 5,620 76,554 -- 85,387
Provision for loan and
lease losses............ 5,000 1,075 14,900 -- 20,975
-------- -------- -------- -------- --------
Net interest income
after provision for
loan and lease
losses................. (1,787) 4,545 61,654 -- 64,412
-------- -------- -------- -------- --------
(Loss) gain on sale of
loans and leases........ (4,427) 7,908 66,256 -- 69,737
Asset management fees.... -- 5,810 -- -- 5,810
Brokerage commission and
investment banking
fees.................... -- -- 7,702 -- 7,702
Loan servicing (expense)
income.................. (2,283) 3,943 6,942 872 9,474
Gains on sale of
securities.............. 110,317 411 891 566 112,185
Equity in net income of
SPFC.................... 25,869 -- -- -- 25,869
Equity in net loss of
FMC..................... (3,050) -- -- -- (3,050)
Mark to market on
securities and loans
held for sale........... (341) -- -- -- (341)
Gain on termination of
REIT contract........... -- 19,046 -- -- 19,046
Dividends received from
subsidiaries............ 27,514 -- -- (27,514) --
Other (expense) income... (2,573) 1,820 4,813 -- 4,060
-------- -------- -------- -------- --------
Total other income.... 151,026 38,938 86,604 (26,076) 250,492
-------- -------- -------- -------- --------
Total revenues........ 149,239 43,483 148,258 (26,076) 314,904
-------- -------- -------- -------- --------
Expenses:
Personnel expense........ 4,682 8,548 38,379 -- 51,609
Amortization of servicing
rights.................. 1,580 636 -- 872 3,088
Occupancy expense........ 1,310 598 2,411 -- 4,319
Net expenses of other
real estate owned....... 4,513 (254) 2,268 -- 6,527
Professional services.... 3,611 1,046 5,008 -- 9,665
Amortization of
goodwill................ -- 955 1,536 -- 2,491
Provision for loss on
loan repurchase......... 5,400 -- -- -- 5,400
Loss on restructuring to
Dabney/Resnick/Imperial,
LLC..................... 3,709 -- -- -- 3,709
General, administrative
and other expense....... 4,922 8,880 14,251 -- 28,053
-------- -------- -------- -------- --------
Total expenses........ 29,727 20,409 63,853 872 114,861
-------- -------- -------- -------- --------
Income (loss) before
income taxes, minority
interest, deferred
inter-company expense
and extraordinary item.. 119,512 23,074 84,405 (26,948) 200,043
Income taxes............. 41,611 9,902 22,515 239 74,267
Minority interest in
income of consolidated
subsidiaries............ 10,513 -- 11 (11) 10,513
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before deferred inter-
company expense......... 67,388 13,172 61,879 (27,176) 115,263
Deferred inter-company
expense, net of income
taxes................... (327) -- -- 327 --
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before equity in
undistributed income of
subsidiaries............ 67,715 13,172 61,879 (27,503) 115,263
Equity in undistributed
income of subsidiaries.. 22,201 -- -- (22,201) --
-------- -------- -------- -------- --------
Income (loss) from
continuing operations... 89,916 13,172 61,879 (49,704) 115,263
Loss from discontinued
operations.............. -- (25,347) -- -- (25,347)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item...... 89,916 (12,175) 61,879 (49,704) 89,916
Extraordinary item--Loss
on early extinguishment
of debt, net of income
taxes................... (3,995) -- -- -- (3,995)
-------- -------- -------- -------- --------
Net income (loss)........ $ 85,921 $(12,175) $ 61,879 $(49,704) $ 85,921
======== ======== ======== ======== ========
</TABLE>
137
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
(Year ended December 31, 1997)
<TABLE>
<CAPTION>
Non-
Guarantor Guarantor
ICII Subsidiaries Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by operating
activities............. $ (19,966) $ 7,312 $ 834,215 $(802,998) $ 18,563
--------- -------- --------- --------- ---------
Cash flows from
investing activities:
Net change in interest
bearing deposits..... (31,390) (986) (70,797) 2,804 (100,369)
Purchase of securities
available for sale... (42,938) -- -- -- (42,938)
Sale of securities
available for sale... -- -- 29,354 (23,950) 5,404
Net change loans held
for investment....... (56,088) 47,751 (272,429) 106,801 (173,965)
Proceeds from sales of
stock................ 83,117 411 1,295 565 85,388
Investment in Imperial
Credit Asset
Resolution Inc....... (74,810) -- -- 74,810 --
Cash utilized for
acquisitions......... (750) -- (123,738) -- (124,488)
Net change in
investment in
subsidiaries......... (11,803) -- -- 11,803 --
Other, net............ 3,645 (2,513) (40,377) 69,586 30,341
--------- -------- --------- --------- ---------
Net cash (used in)
provided by investing
activities............. (131,017) 44,663 (476,692) 242,419 (320,627)
--------- -------- --------- --------- ---------
Cash flows from
financing activities:
Net change in
deposits............. -- -- 117,575 (30,737) 86,838
Advances from Federal
Home Loan Bank....... -- -- 50,000 -- 50,000
Repayments of advances
from Federal Home
Loan Bank............ -- -- (145,500) -- (145,500)
Net change in other
borrowings........... (15,363) (58,518) (290,113) 507,499 143,505
Proceeds from offering
of Senior Notes...... 194,500 -- -- -- 194,500
Borrowings from
Imperial Credit
Investment Corp...... 10,000 -- -- (10,000) --
Proceeds from offering
of Remarketed
Securities........... 68,075 -- -- -- 68,075
Repurchase of Senior
Notes................ (73,241) -- -- -- (73,241)
Dividends paid to
ICII................. 18,450 -- (18,450) -- --
Net change in minority
interest............. (44,203) -- 111 (7,670) (51,762)
Other, net............ 781 20 (92,754) 92,734 781
--------- -------- --------- --------- ---------
Net cash provided by
(used in) financing
activities............. 158,999 (58,498) (379,131) 551,826 273,196
--------- -------- --------- --------- ---------
Net change in cash.... 8,016 (6,523) (21,608) (8,753) (28,868)
Cash at beginning of
period............... 5,213 7,973 64,926 (3,865) 74,247
--------- -------- --------- --------- ---------
Cash at end of
period............... $ 13,229 $ 1,450 $ 43,318 $ (12,618) $ 45,379
========= ======== ========= ========= =========
</TABLE>
138
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
29. SPB Regulatory Matters
General
SPB is subject to federal and state regulation and periodic examinations by
the California Department of Financial Institutions and the FDIC. SPB's ability
to pay dividends is limited by federal and state regulation.
California Regulations
California industrial loan law establishes minimum capital levels and other
ratios that limit the ability of the Bank to pay dividends. Under these
regulations, SPB cannot pay dividends if the amount of SPB's non-demand
deposits is greater than 20 times the amount of SPB's "capital not available
for dividends." "Capital not available for dividends" is the amount of equity
capital that is established by the Board of Directors through an amendment to
SPB's by-laws. At its January 1998 meeting, the Directors approved a by-law
amendment declaring $150 million of capital not available for dividends,
representing a $25 million increase from the previously declared amount. At
December 31, 1999 and 1998, the relationships of non-demand deposits to capital
not available for dividends were 10.8 times and 11.4 times, respectively.
Federal Deposit Insurance Corporation Regulations
SPB is subject to capital requirements as administered by the FDIC. Failure
to meet minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by the FDIC that, if undertaken,
could have a direct material effect on SPB's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, SPB must meet specific capital guidelines that involve
quantitative measures of SPB's assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. SPB's capital
amounts and classifications are also subject to qualitative judgments by the
FDIC with respect to components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require SPB to maintain minimum amounts and ratios, set forth in the table
below, of Total and Tier-1 capital to risk-weighted assets and Tier-1 capital
to average assets. Management believes, as of December 31, 1999, that SPB meets
all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized SPB as well-capitalized under the regulatory framework for prompt
and corrective action. To be categorized as well-capitalized, SPB must maintain
minimum total risk-based, Tier-1 risk-based and Tier-1 leverage ratios. The
following table sets forth the capital categories and the SPB's ratios as of
December 31, 1999:
The following table sets forth the capital categories and the Bank's ratios
as of December 31, 1999:
<TABLE>
<CAPTION>
Total Risk-based Tier-1 Risk-based Tier-1 Leverage
Capital Category Ratio Ratio Ratio
---------------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
Well-capitalized........ (greater than or =)10% (greater than or =)6% (greater than or =)5%
Adequately capitalized.. (greater than or =) 8% (greater than or =)4% (greater than or =)4%
Under-capitalized....... < 8% < 4% < 4%
Significantly under-
capitalized............ < 6% < 3% < 3%
Southern Pacific Bank,
December 31, 1999...... 10.67% 7.78% 8.94%
</TABLE>
139
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table presents SPB's actual capital ratios and the
corresponding minimum and well capitalized capital ratio requirements under
the (i) California Leverage limitation, (ii) FDIC Risk-based Capital and Tier
1 Capital regulations, and (iii) the FDIC Leverage ratio regulation as of
December 31, 1999 and 1998.
December 31, 1999
<TABLE>
<CAPTION>
Well
Minimum Capitalized
Actual Requirement Requirement
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation................... $169,962 10.45% $ 81,308 5.00% $ N/A N/A%
Risk-based Capital............ 219,278 10.67 164,445 8.00 205,557 10.00
Risk-based Tier 1 Capital..... 160,018 7.78 82,223 4.00 123,334 6.00
FDIC Leverage Ratio........... 160,018 8.94 71,610 4.00 89,512 5.00
</TABLE>
December 31, 1998
<TABLE>
<CAPTION>
Well
Minimum Capitalized
Actual Requirement Requirement
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
California Leverage
Limitation................... $179,022 10.45% $ 85,688 5.00% $ N/A N/A%
Risk-based Capital............ 221,657 11.12 159,410 8.00 199,264 10.00
Risk-based Tier 1 Capital..... 167,823 8.42 79,705 4.00 119,558 6.00
FDIC Leverage Ratio........... 167,823 8.62 77,861 4.00 97,326 5.00
</TABLE>
The FDIC completed an information systems exam of SPB in May 1998 and the
FDIC and DFI completed a joint examination of SPB for the period ended March
31, 1998. As a result of the examinations, the FDIC requested that SPB enter
into two written memoranda of understanding ("MOUs") addressing deficiencies
identified by the FDIC in SPB's accounting systems and controls, and perceived
deficiencies in SPB's Y2K readiness and contingency planning.
The first MOU addressing these issues was signed by the FDIC and SPB on
November 2, 1998. Under this MOU, SPB is required to take a number of actions
to address and correct the accounting and Y2K preparedness concerns of the
FDIC. SPB, under the direction of its board of directors, developed and
implemented a Y2K readiness plan and budget, with specific deadlines and
action steps. SPB believes it is currently in compliance in all material
respects with FDIC minimum Y2K readiness requirements and guidelines. In the
first quarter of 1999, SPB received an interim satisfactory rating from the
FDIC related to SPB's Y2K preparedness and contingency planning. As a result
of the progress SPB made in implementing its Y2K readiness plan, the FDIC and
California Department of Financial Institutions ("DFI") terminated the
November 2, 1998 Memorandum of Understanding ("MOU") primarily relating to Y2K
concerns, during the third quarter of 1999.
On January 19, 1999, the FDIC and DFI issued a second MOU as a result of
the 1998 joint exam, which addressed accounting controls and policies and
alleged violations of law. Under the second MOU, SPB is required to:
. adopt and implement policies to provide adequate accounting controls
consistent with safe and sound banking practices,
. eliminate or correct violations of law described in the FDIC/DFI
examination, and
. achieve and maintain regulatory capital requirements applicable to a
"well capitalized" depository institution. In addition, under the second
MOU, SPB is allowed to pay dividends to ICII in accordance
140
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with its normal dividend policy. Our policy allows SPB to pay cash
dividends of up to 35% of SPB's net income. Our policy further states that
SPB is prohibited from paying any cash dividend if it is not, immediately
prior and subsequent to the dividend, a "well-capitalized" institution
within the meaning of FDIC regulations.
SPB responded to the FDIC's criticisms in its May 1998 information systems
examination by retaining an internationally-recognized independent accounting
firm to conduct a general ledger account reconciliation project in order to
identify, trace and resolve all outstanding unreconciled general ledger items
on SPB's books and records. Work on this reconciliation project was completed
by December 31, 1998. In consultation with the independent accounting firm,
SPB has developed and implemented new policies and procedures which are
designed to improve the efficiency and timeliness of general ledger
reconciliation tasks and related financial accounting matters. SPB continues
to reconcile all general ledger accounts on a timely basis. Management
believes it is in compliance with the terms of the MOU at December 31, 1999.
141
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
30. Imperial Credit Industries, Inc. (Parent Company Only)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
(In thousands)
ASSETS
------
<S> <C> <C>
Cash....................................................... $ 11,110 $ 3,224
Interest bearing deposits.................................. 35,049 2,281
Securities available for sale.............................. 41,365 69,115
Trading securities......................................... 33,462 49,507
Loans held for sale........................................ 1,441 1,698
Loans held for investment, net............................. 55,721 45,029
Premises and equipment, net................................ 1,846 2,808
Other real estate owned, net............................... 187 318
Investment in FMC.......................................... -- 56,334
Investment in subsidiaries................................. 255,024 276,863
Accrued interest on loans.................................. 2,135 3,216
Goodwill................................................... 11,778 --
Other assets............................................... 22,062 25,906
Net assets of discontinued operations...................... 44,396 43,624
-------- --------
Total assets........................................... $515,576 $579,923
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Other borrowings........................................... $ 7,911 $ 20,481
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely debentures
of the company ("ROPES") 63,915 72,165
Senior Notes............................................... 185,185 219,858
Minority interest in consolidated subsidiaries............. 103 (628)
Other liabilities.......................................... 53,082 34,526
-------- --------
Total liabilities...................................... 310,196 346,402
-------- --------
Shareholders' equity:
Common stock, no par value, authorized 80,000,000 shares;
33,198,661 and 36,785,898 shares issued and outstanding
at December 31, 1999 and 1998, respectively............. 97,220 129,609
Retained earnings........................................ 98,437 101,265
Shares held in deferred executive compensation plan...... 7,107 3,833
Accumulated other comprehensive income--unrealized gain
(loss) on securities available for sale, net............ 2,616 (1,186)
-------- --------
Total shareholders' equity............................. 205,380 233,521
-------- --------
Total liabilities and shareholders' equity............. $515,576 $579,923
======== ========
</TABLE>
142
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998 1997
-------- --------- --------
(In thousands)
<S> <C> <C> <C>
Revenues:
Interest income............................... $ 21,521 $ 30,082 $ 28,916
Interest expense.............................. 32,184 30,617 25,703
-------- --------- --------
Net interest (expense) income............... (10,663) (535) 3,213
Provision for loan and lease losses........... 210 -- 5,000
-------- --------- --------
Net interest expense after provision for loan
and lease losses............................. (10,873) (535) (1,787)
Gain (loss) on sale of loans.................. 20 46 (4,427)
Loan servicing income (expense)............... 59 (434) (2,283)
Loss on impairment of securities.............. -- (120,138) --
Gain (loss) on sale of securities............. 31,434 (179) 110,317
Mark to market on securities.................. 11,314 (4,993) (341)
Dividends received from subsidiaries.......... 6,564 25,410 27,514
Equity in net income of SPFC.................. -- 12,739 25,869
Equity in net (loss) income of FMC............ (53) 3,235 (3,050)
Other income (loss)........................... 1,965 362 (2,573)
-------- --------- --------
Total other income (loss)................... 51,303 (83,952) 151,026
-------- --------- --------
Total revenue................................. 40,430 (84,487) 149,239
-------- --------- --------
Expenses:
Personnel expense............................. 3,133 4,415 4,682
Occupancy expense............................. 784 1,267 1,310
Other expense................................. 5,401 10,592 23,735
-------- --------- --------
Total expenses.............................. 9,318 16,274 29,727
-------- --------- --------
Income (loss) before income taxes, minority
interest, deferred inter-company items and
extraordinary item........................... 31,112 (100,761) 119,512
Income taxes.................................. 10,020 (55,061) 41,611
-------- --------- --------
Income (loss) before minority interest,
deferred inter-company items and
extraordinary item........................... 21,092 (45,700) 77,901
Minority interest in income (loss) of
consolidated subsidiaries.................... 421 (1,552) 10,513
Deferred inter-company expense, net of income
taxes........................................ -- -- (327)
-------- --------- --------
Income (loss) before extraordinary item....... 20,671 (44,148) 67,715
Extraordinary item--income (loss) on
extinguishment of debt, net of income taxes.. 4,021 -- (3,995)
-------- --------- --------
Income (loss) before equity in undistributed
income of subsidiaries....................... 24,692 (44,148) 63,720
Equity in undistributed (loss) income income
of subsidiaries, net of income taxes(1)...... (27,520) (29,485) 22,201
-------- --------- --------
Net (loss) income........................... $ (2,828) $ (73,633) $ 85,921
======== ========= ========
Other comprehensive income (loss)............. 3,802 (3,112) (3,084)
-------- --------- --------
Comprehensive income (loss)................. $ 974 $ (76,745) $ 82,837
======== ========= ========
</TABLE>
- --------
(1) Includes net loss from discontinued operations of $899,000, $14.5 million
and $25.3 million for 1999, 1998 and 1997, respectively.
143
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998 1997
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Net cash provided by (used in) operating
activities..................................... $ 19,031 $(50,644) $ (19,966)
-------- -------- ---------
Cash flows from investing activities:
Net change in interest bearing deposits....... (32,768) 29,109 (31,390)
Proceeds from sale of other real estate
owned........................................ 1,216 2,558 4,637
Purchase of securities available for sale..... (4,050) (16,651) (42,938)
Sale of securities available for sale......... 4,875 -- --
Investment in Imperial Credit Asset Resolution
Inc.......................................... -- -- (74,810)
Proceeds from sale of securities.............. 91,709 867 83,117
Net change in loans held for investment....... (11,984) 10,884 (56,088)
Net change in investment in subsidiaries...... 21,839 4,591 (11,803)
Cash utilized for acquisitions................ (8,132) -- (750)
Purchase of premises and equipment............ (1,246) (1,721) (992)
-------- -------- ---------
Net cash provided by (used in) investing
activities..................................... 61,459 29,637 (131,017)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from offering of Senior Notes due
2007......................................... -- -- 194,500
Proceeds from offering of ROPES............... -- -- 68,075
Repayments of Senior Notes due 2004........... -- -- (73,241)
Borrowings from Imperial Credit Investment
Corporation.................................. -- -- 10,000
Proceeds from issuance of mandatorily
redeemable cumulative preferred stock........ 30,000 -- --
Repurchase and extinguishment of mandatorily
redeemable cumulative preferred stock........ (31,353) -- --
Repurchase and extinguishment of ROPES........ (6,628) -- --
Repurchase and extinguishment of Senior
Notes........................................ (27,453) -- --
Repurchase and retirement of common stock and
warrants..................................... (29,460) (24,305) (551)
Capital contributions to consolidated
subsidiaries................................. (2,681) (4,332) --
Dividends and return of capital received from
consolidated
subsidiaries................................. 6,561 20,915 18,450
Proceeds from exercise of stock options....... 249 1,037 1,332
Net change in other borrowings................ (12,570) 19,261 (15,363)
Net change in minority interest............... 731 (1,574) (44,203)
-------- -------- ---------
Net cash (used in) provided by financing
activities..................................... (72,604) 11,002 158,999
-------- -------- ---------
Net change in cash.............................. 7,886 (10,005) 8,016
Cash at beginning of year....................... 3,224 13,229 5,213
-------- -------- ---------
Cash at end of year............................. $ 11,110 $ 3,224 $ 13,229
======== ======== =========
</TABLE>
144
<PAGE>
IMPERIAL CREDIT INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Disclosure of Cash Flow Information
The following information supplements the condensed statements of cash
flows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Cash paid during the period for:
Interest....................................... $33,911 $28,892 $19,349
Income taxes................................... 817 5,884 24,611
Significant non-cash activities:
Loans transferred to OREO...................... 1,082 2,798 6,751
Change in unrealized gain on securities
available for sale, net....................... 3,802 (3,112) (3,084)
Assets contributed to SPB...................... -- 9,547 --
</TABLE>
145
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<C> <C> <S>
H. Wayne Snavely(1)(4)...... 58 Chairman of the Board, President and Chief
Executive Officer
Brad S. Plantiko(1)(4)...... 44 Executive Vice President, Chief Financial
Officer and Director
Irwin L. Gubman(1).......... 57 General Counsel and Secretary
Paul B. Lasiter(4).......... 33 Senior Vice President and Controller
John G. Getzelman(1)(4)..... 57 President of SPB
Scott B. Sampson(1)(4)...... 57 President of Coast Business Credit
Kevin E. Villani............ 51 Executive Vice President
Stephen J. Shugerman........ 52 Director
Robert S. Muehlenbeck(2).... 52 Director
Perry A. Lerner(2)(3)....... 56 Director
James P. Staes(3)........... 61 Director
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Member of Asset & Liability Committee.
H. Wayne Snavely has been our Chairman of the Board and Chief Executive
Officer since December 1991 and President since February 1996. Mr. Snavely
served as a director of Imperial Bank from 1975 to 1983 and from 1993 to
January 1998. He serves on the Board of Visitors of the Graduate School of
Business Management at Pepperdine University. Mr. Snavely is Chairman of the
Board of ICCMIC.
Brad S. Plantiko has been Executive Vice President and Chief Financial
Officer of the Company since July 1998. From October 1980 to July 1998, Mr.
Plantiko was with KPMG Peat Marwick, LLP, where he was partner in-charge of
its finance company services for the western United States. Mr. Plantiko has
more than 18 years of experience serving banks, thrifts, mortgage banks and
finance companies. He serves on the Board of Visitors of the Graduate School
of Business Management at Pepperdine University. Mr. Plantiko is a member of
the American Institute of Certified Public Accountants.
Irwin L. Gubman has been our General Counsel and Secretary since October
1996. From February 1992 to September 1996, Mr. Gubman was a Partner at
Coudert Brothers serving in various capacities including syndicated lending,
structured finance, and regulatory matters. From December 1970 to September
1991, Mr. Gubman served in various capacities at Bank of America, most
recently as Senior Vice President and Associate General Counsel.
Paul B. Lasiter has been our Senior Vice President and Controller since
November 1992. From June 1988 to November 1992, Mr. Lasiter was a Supervising
Senior Accountant for KPMG Peat Marwick, LLP, specializing in the financial
institutions industry. Mr. Lasiter is a Certified Public Accountant.
146
<PAGE>
John C. Getzelman has been President of SPB since December 1998. Prior to
this, Mr. Getzelman was President of Community Bank of Pasadena, California
from 1992 through 1998. From 1971 to 1992, Mr. Getzelman was associated with
Security Pacific Corporation including 16 years on international assignments
in Latin America and Asia. Mr. Getzelman served as Chairman and CEO of Rainier
Bank in Seattle, a subsidiary of Security Pacific from 1988 to 1992. Mr.
Getzelman is a member of the Board of Trustees of Seattle University, a member
of the boards of the House Ear Institute and the Pasadena Symphony. He is also
a member of the Visiting Committee of the University of Southern California.
Scott B. Sampson has been President of the Coast Business Credit division
of SPB since February 1995. Prior to this, Mr. Sampson was President Of
Security Pacific Business Credit from 1985 to 1994. From 1975 to 1985, Mr.
Sampson was Western Group Manager at Aetna Life and Casualty.
Kevin E. Villani was our Executive Vice President, Finance, from July 1998
to October 1999. Mr. Villani was Executive Vice President and Chief FInancial
Officer from September 1995 through July 1998. Mr. Villani was President of
ICAM and served as a member of our Board of Directors until December 31, 1999,
and is Vice Chairman of the Board of ICCMIC. Mr. Villani joined the University
of Southern California as the Wells Fargo Visiting Professor of Finance in
1990 and remained on the full-time faculty through 1997. From 1985 to 1990, he
was the Executive Vice President and Chief Financial Officer for Imperial
Corporation of America. From 1982 to 1985, Mr. Villani served in various
capacities at the Federal Home Loan Mortgage Corporation, including Chief
Economist and Chief Financial Officer. Mr. Villani resigned as of September
30, 1999 as an executive officer of ICII and resigned as of December 31, 1999
as President of ICAM and as a director of ICII.
Stephen J. Shugerman has been a Director since December 1991. From June
1987 until December 1998, Mr. Shugerman was President of SPB. Mr. Shugerman
has been Vice-Chairman of SPB since December 1998. From June 1985 to May 1987,
Mr. Shugerman was President of ATI Thrift & Loan Association, a privately
owned thrift and loan association, and, from 1979 to 1985, he was Senior Vice
President of Imperial Thrift and Loan Association, a former subsidiary of
Imperial Bank. Mr. Shugerman has recently served as President of the
California Association of Thrift & Loan Companies.
Robert S. Muehlenbeck has been a Director since December 1991. Mr.
Muehlenbeck retired in 1998 as an Executive Vice President of Imperial Bank
with primary responsibility for corporate finance and mergers and
acquisitions. In addition, he also served as President of Imperial Ventures,
Inc., Imperial Bank's venture capital small business investment company and
President of Imperial Credit Corp., an investment and mezzanine lending
entity. Mr. Muehlenbeck was formerly the President of Seaborg, Incorporated
and has been involved in commercial and residential real estate development
and finance activities.
Perry A. Lerner has been a Director since May 1992. He has been a principal
in the investment firm of Crown Capital Group, Inc., since 1996. Mr. Lerner
was with the law firm of O'Melveny & Myers from 1982 to 1997, having been a
partner with the firm from 1984 to 1996. Mr. Lerner was an Attorney-Advisor of
the International Tax Counsel of the United States Treasury Department from
1973 to 1976. Mr. Lerner is a Director of Boss Holdings Inc., a specialty
consumer products company.
James P. Staes has been a Director since December 1999. Mr. Staes, a
commercial banker and retired Navy Captain, served as President and CEO of
Home Bank in Signal Hill, California from 1982 to 1996 and Vice Chairman of
California United Bank from 1996 to 1997. Mr. Staes is a past President of the
California Bankers Association and Southern California Community Bankers
Association. Mr. Staes also served as a director of the Western Independent
Bankers Association and as a member of the Conference of State Bank
Supervisors.
Our directors hold office until the next annual meeting of shareholders and
until their successors are elected and qualified, or until their earlier
resignation or removal. All officers are appointed by and serve at the
discretion of our Board of Directors, subject to employment agreements, where
applicable.
With the exception of Mr. Snavely and Mr. Shugerman, in their capacities as
Chairman and Director of Southern Pacific Funding Corporation, respectively,
no directors or executive officers were involved in any petitions under the
Federal bankruptcy laws during the past five years.
147
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The members of our board of directors who are not employees of our company
receive cash compensation of $7,500 per quarter and $500 for each board of
directors meeting attended and for each committee meeting attended which is
not on the same day as another board meeting. In addition, these non-employee
directors receive options to purchase 10,000 shares of our common stock which
vest on the one-year anniversary of the date of grant and become first
exercisable one year from the date of the grant at a price equal to the fair
market value of the common stock on the date of the grant, and which expire on
the tenth anniversary of the date of the grant.
In addition to the compensation received by directors described above,
Stephen J. Shugerman received additional compensation of $140,268 during the
period from September 1, 1999 to December 31, 1999. Mr. Shugerman was paid
$80,291 after his last day of employment with the Company in satisfaction of
accrued vacation Mr. Shugerman earned while he was an employee of the Company.
Additionally, Mr. Shugerman was paid $59,977 under the terms of his severance
agreement. All of these amounts are included in Mr. Shugerman's compensation
information for 1999 in the table below.
The following table provides information concerning the cash and non-cash
compensation earned and received by our Chief Executive Officer and our four
highly compensated executive officers (the "Named Executive Officers"), other
than our Chief Executive Officer, whose salary and bonus during the fiscal
year ended December 31, 1999 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------ ------------
Name and Principal Fiscal Other Annual Options
Position Year Salary Bonus Compensation Granted
------------------ ------ -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely.......... 1999 $500,000 $ -- $76,558(1) 150,000(2)
President, Chief
Executive 1998 502,114 -- 78,640(1) --
Officer and Chairman 1997 450,000 700,000 29,082(1) --
Brad S. Plantiko.......... 1999 $175,000 $125,471 $63,828(3) 100,000(2)
Executive Vice President 1998 77,403 99,519 55,815(3) 84,000(2)
and Chief Financial
Officer
Irwin L. Gubman........... 1999 $210,385 $ -- $64,703(4) 100,000(2)
General Counsel and
Secretary 1998 201,532 125,000 18,557(4) 26,800(2)
1997 200,000 200,000 16,852(4) 70,000(2)
John C. Getzelman......... 1999 $196,285 $ -- $16,614(5) 50,000(2)
President, Southern
Pacific Bank 1998 15,385 -- 923(5) 50,000(2)
Scott B. Sampson.......... 1999 $300,000 $391,000 $10,228(6) --
President, the Coast 1998 227,302 471,404 13,517(6) 67,000(2)
Business Credit division
of Southern Pacific Bank 1997 200,000 334,527 12,663(6) --
Kevin E. Villani.......... 1999 $350,000 $ -- $66,753(8) 50,000(2)
Executive Vice President,
Finance(7) 1998 352,691 150,000 71,110(8) 34,000(2)
1997 300,000 266,666 17,082(8) 50,000(2)
Stephen J. Shugerman...... 1999 $334,615 $ -- $65,233(10) --
Vice-Chairman of SPB(9) 1998 304,224 -- 71,325(10) --
1997 250,000 501,000 21,882(10) --
</TABLE>
- --------
(1) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our
company of $18,000, $18,000 and $18,000, respectively, and (2) aggregate
contributions paid by our company of $58,558, $60,640 and $11,082,
respectively, under employee benefit plans.
(2) See "--Stock Option Plans" for details regarding the terms of such
options.
148
<PAGE>
(3) In 1999 and 1998, consists of (1) a car allowance paid by our company of
$9,000 and $3,980, respectively, and (2) aggregate contributions paid by
our company of $54,828 and $51,835, respectively, under employee benefit
plans.
(4) In 1999, 1998 and 1997 consists of (1) a car allowance paid by our company
of $9,000, $8,307 and $6,000, respectively, and (2) aggregate
contributions paid by our company of $55,703, $10,250 and $10,852,
respectively, under employee benefit plans.
(5) In 1999 and 1998, consists of (1) a car allowance paid by our company of
$12,000 and $923, respectively, and (2) aggregate contributions paid by
our company of $4,614 and $0, respectively, under employee benefit plans.
(6) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our
company of $6,000, $6,000 and $6,000, respectively, and (2) aggregate
contributions paid by our company of $4,228, $7,517 and $6,663,
respectively, under employee benefit plans.
(7) Mr. Villani served as Chief Financial Officer until July 1998. Mr. Villani
served as Executive Vice President, Finance until September 30, 1999. Mr.
Villani served as a director and President of Imperial Credit Asset
Management until December 31, 1999.
(8) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our
company of $12,000, $10,615, and $6,000, respectively, and (2) aggregate
contributions paid by our company of $54,753, $60,495, and $11,082,
respectively, under employee benefit plans.
(9) Mr. Shugerman resigned as President of SPB effective December 1998. Mr.
Shugerman resigned as Vice Chairman of SPB on September 1, 1999.
(10) In 1999, 1998 and 1997, consists of (1) a car allowance paid by our
company of $7,061, $10,800, and $10,800, respectively, and (2) aggregate
contributions paid by our company of $58,172, $60,525, and $11,082,
respectively, under employment benefit plans.
Option Grants, Exercises and Year End Values
<TABLE>
<CAPTION>
Potential
Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
1999 Percentage Exercise Option Term
Options of Total Price Expiration -----------------
Name Granted Grants Per Option Date 5% 10%
---- ------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
H. Wayne Snavely.... 100,000 10.32% $7.56 1/27/04 $208,938 $461,698
H. Wayne Snavely.... 50,000 5.16 8.00 2/23/04 110,513 244,204
Brad S. Plantiko.... 50,000 5.16 8.00 2/23/04 110,513 244,204
Brad S. Plantiko.... 50,000 5.16 4.00 10/25/04 55,256 122,102
Irwin L. Gubman..... 50,000 5.16 8.00 2/23/04 110,513 244,204
Irwin L. Gubman..... 50,000 5.16 4.00 10/25/04 55,256 122,102
John C. Getzelman... 50,000 5.16 8.00 2/23/04 110,513 244,204
Kevin E. Villani.... 50,000 5.16 8.00 2/23/04 110,513 244,204
</TABLE>
149
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
Number of Number of
Unexercised Unexercised Senior
Options at FY- Management
End Options at
Under the Option FY-End Under the Value of all Unexercised
Shares Plan Option Plan In-the-Money Options at
Acquired on Value Exercisable/ Exercisable/ December 31, 1999
Name Exercise Realized Unexercisable(1) Unexercisable(2) Exercisable/Unexercisable(3)
---- ----------- -------- ---------------- ------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
H. Wayne Snavely........ -- -- 240,000/310,000 917,052/-- $4,683,958/$--
Brad S. Plantiko........ -- -- 16,800/167,200 --/-- --/112,500
Irwin L. Gubman......... -- -- 51,360/175,440 --/-- --/112,500
John C. Getzelman....... -- -- 10,000/90,000 --/-- --/--
Scott B. Sampson........ -- -- --/84,000 --/-- --/--
Kevin E. Villani........ -- -- 116,800/154,000 --/-- 5,999/2,000
Stephen J. Shugerman.... -- -- 60,000/40,000 158,524/-- 768,818/--
</TABLE>
- --------
(1) For a description of the terms of such options, see "--Stock Option Plans."
(2) For a description of the terms of such options, see "--Senior Management
Stock Options."
(3) Based on a price per share of $6.25, which was the price of a share of our
common stock as quoted on the Nasdaq National Market at the close of
business on December 31, 1999.
Employment Agreements
As of January 1, 1997, Mr. Snavely entered into a five-year employment
agreement at an annual base salary of $450,000, subject to adjustment, plus an
annual bonus based on attainment of performance objectives, including our
company's return on equity, earnings per share and increase in the price of our
company's common stock. Mr. Snavely's total cash compensation may not exceed
$1.5 million annually.
Pursuant to the employment agreement with Mr. Snavely, he is entitled to
receive compensation following his termination, as follows: (1) with cause:
base salary shall be paid through the date on which termination occurs, or (2)
without cause (or for "good reason" as defined in the employment agreement),
base salary shall be paid through the date of termination together with the
pro-rata portion of any cash bonus award the employee would be entitled to
receive at year end and a severance amount equal to base salary reduced by the
employee's projected primary social security benefit. The severance amount
shall be further reduced if the executive becomes employed by another company
or becomes an independent contractor of another company and shall be eliminated
entirely if such other company is determined by our board of directors to
compete with our company.
As of September 1, 1998, Mr. Sampson entered into an employment agreement
that expires on January 31, 2002, which provides for an annual base salary of
$300,000 plus an annual incentive bonus. Mr. Sampson's bonus is equal to 1.5%
of Coast Business Credit's annual pre-tax profit determined in accordance with
generally accepted accounting principles and is contingent upon Coast Business
Credit's annual net profit equaling or exceeding either 2% of its average
assets for the calendar year, exclusive of goodwill, or a pretax return on its
capital for the year of 20%.
Pursuant to the employment agreement with Mr. Sampson, he is entitled to
receive compensation following his termination, as follows: (1) with cause or
by mutual agreement or voluntarily by Mr. Sampson: base salary shall be paid
through the date on which termination occurs, or (2) without cause (or if there
is more than a 10 mile change in physical location of employment): base salary
shall be paid through the term of employment together with the prorata portion
of any incentive cash bonus the employee would be entitled to receive for the
year of termination.
Compensation Committee Interlocks and Insider Participation
Our company's Compensation Committee consists of Messrs. Muehlenbeck and
Lerner. Mr. Muehlenbeck retired in 1998 as an Executive Vice President of
Imperial Bank. Mr Lerner is the Manager of Corona Film Finance Fund (in which
ICII is an investor).
150
<PAGE>
Termination Protection Agreements
In January 1999, we entered into termination protection agreements with
Messrs. Snavely, Gubman and Plantiko. The agreements provide for severance
payments to those senior executives in the event of a change in control of our
company and a subsequent termination of any one of these senior executives
within three years of a change in control for any reason. The senior
executives will receive a lump sum payment of three times their respective
base salaries and their highest bonus earned in any of the last three fiscal
years preceding the change in control and a percentage of their respective
bonuses for the year in which the change of control occurs.
In addition, we will continue to provide these senior executives with
medical, dental, life insurance, disability and accidental death and
dismemberment benefits until the third anniversary of the termination unless
the executive becomes employed by another employer, in which case these
coverages will be secondary to those provided by the new employer. All
deferred compensation in respect of each senior executive will also become
fully vested and we will pay such executive in cash all deferred compensation
and any unpaid portion of the executive's bonus. Any amounts payable to an
executive will include additional amounts to cover certain taxes resulting
from those payments.
A change in control for purposes of the termination protection agreements
includes the following events: (1) any person or persons become the beneficial
owner of at least 40% of our outstanding common stock other than by the
acquisition of such common stock directly from our company, or (2) any merger
or other business combination, liquidation or sale of substantially all of our
assets where our shareholders and any trustee or fiduciary of our employee
benefit plans own less than 60% of the surviving corporation, or (3) within
any 24 month period, the persons who were directors immediately before the
beginning of such period cease to constitute at least a majority of our board,
or the board of any successor corporation.
Senior Management Stock Options
Effective January 1992, members of senior management received ten year
options to purchase shares of our company's common stock. Such options are not
covered by our option plans described below. The exercise price of these
options is $0.89 per share for one-half of the options, with the other half
exercisable at $1.40 per share. These options are currently exercisable. H.
Wayne Snavely, Joseph R. Tomkinson, and Stephen J. Shugerman were granted
917,053, 917,053 and 458,526 of such options, respectively.
In April 1996, Mr. Tomkinson sold 750,000 shares of our common stock he
acquired under the option agreement described above. In November 1996, Mr.
Shugerman sold 300,000 shares of our common stock he acquired under the option
agreement described above.
We recognize compensation expense with respect to the senior management
stock options because they were granted at less than the estimated market
value of our common stock. The total compensation expense was $2.2 million,
all of which was recognized as of December 31, 1997. See "Note 22 of Notes to
Consolidated Financial Statements."
Stock Option Plans
1992 Stock Option Plan
A total of 2,292,632 shares of our Common Stock has been reserved for
issuance under our 1992 Incentive Stock Option and Nonstatutory Stock Option
Plan (the "1992 Stock Option Plan"), which expires by its own terms in 2002. A
total of 734,268 options were outstanding at December 31, 1999.
The 1992 Stock Option Plan provides for the grant of "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), and nonqualified stock options
("NQSOs") to employees, officers, directors and consultants. ISOs may be
granted only to employees. The 1992 Stock Option Plan is administered by our
board of directors or a committee appointed by our board,
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<PAGE>
which determines the terms of options granted, including the exercise price,
the number of shares subject to the option, and the option's exercisability.
The exercise price of all options granted under the 1992 Stock Option Plan
must be at least equal to the fair market value of such shares on the date of
grant. The maximum term of options granted under the 1992 Stock Option Plan is
10 years. With respect to any participant who owns stock representing more
than 10% of the voting rights of our outstanding capital stock, the exercise
price of any option must be at least equal to 110% of the fair market value on
the date of grant.
1996 Stock Option Plan
In 1996, we adopted our 1996 Stock Option, Deferred Stock and Restricted
Stock Plan (the "1996 Stock Option Plan"), which provides for the grant of
ISOs that meet the requirements of Section 422 of the Code, NQSOs and awards
consisting of deferred stock, restricted stock, stock appreciation rights and
limited stock appreciation rights ("Awards").
The 1996 Stock Option Plan is administered by a committee of directors
appointed by the board of directors (the "Committee"). ISOs may be granted to
the officers and key employees of the Company or any of its subsidiaries. The
exercise price for any option granted under the 1996 Stock Option Plan may not
be less than 100% (110% in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of our outstanding common stock) of the fair
market value of the shares of common stock at the time the option is granted.
The purpose of the 1996 Stock Option Plan is to provide a means of
performance-based compensation in order to attract and retain qualified
personnel and to provide an incentive to those whose job performance affects
our company. The effective date of the 1996 Stock Option Plan was June 21,
1996. A total of 3,000,000 shares of our common stock is reserved for issuance
under the 1996 Stock Option Plan and a total of 2,635,580 options were
outstanding at December 31, 1999.
If an option granted under the 1996 Stock Option Plan expires or
terminates, or an Award is forfeited, the shares subject to any unexercised
portion of such option or Award will again become available for the issuance
of further options or Awards under the 1996 Stock Option Plan. Unless
previously terminated by our board of directors, no options or Awards may be
granted under the 1996 Stock Option Plan after June 21, 2006.
Options granted under the 1996 Stock Option Plan will become exercisable
upon the terms of the grant made by the Committee. Awards will be subject to
the terms and restrictions of the Award made by the Committee. The Committee
has discretionary authority to select participants from among eligible persons
and to determine at the time an option or Award is granted and in the case of
options, whether it is intended to be an ISO or a NQSO. Under current law,
ISOs may not be granted to any individual who is not also an officer or
employee of our company or any subsidiary.
Each option must terminate no more than 10 years from the date it is
granted (or five years in the case of ISOs granted to an employee who is
deemed to own in excess of 10% of the combined voting power of our outstanding
common stock). Options may be granted on terms providing for exercise in whole
or in part at any time or times during their respective terms, or only in
specified percentages at stated time periods or intervals during the term of
the option, as determined by the Committee.
The exercise price of any option granted under the 1996 Stock Option Plan
is payable in full: (1) in cash (2) by surrender of shares of the Company's
Common Stock already owned by the option holder having a market value equal to
the aggregate exercise price of all shares to be purchased including, in the
case of the exercise of NQSOs, restricted stock subject to an Award under the
1996 Stock Option Plan, (3) by cancellation of indebtedness owed by the
Company to the optionholder, or (4) by any combination of the foregoing.
Our board of directors may from time to time revise or amend the 1996 Stock
Option Plan, and may suspend or discontinue it at any time. However, no such
revision or amendment may impair the rights of any participant under any
outstanding options or Award without such participant's consent or may,
without shareholder approval, increase the number of shares subject to the
1996 Stock Option Plan or decrease the exercise price of a stock
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<PAGE>
option to less than 100% of fair market value on the date of grant (with the
exception of adjustments resulting from changes in capitalization), materially
modify the class of participants eligible to receive options or Awards under
the 1996 Stock Option Plan, materially increase the benefits accruing to
participants under the 1996 Stock Option Plan or extend the maximum option
term under the 1996 Stock Option Plan.
Profit Sharing and 401(k) Plan
On July 1, 1993, we terminated participation in Imperial Bancorp's 401(k)
and profit sharing plans, and we established our own 401(k) plan. On September
30, 1993, Imperial Bancorp transferred all plan assets to our company. Under
our 401(k) plan, employees may elect to enroll on the first of any month,
provided that they have been employed for at least six months. Employees may
contribute up to 14% of their salaries. We will match 50% of the first 4% of
employee contributions. We recorded 401(k) matching expense of $334,000,
$457,000 and $246,000, for the years ended December 31, 1999, 1998, and 1997,
respectively.
We may make an additional contribution at our discretion. If we made a
discretionary contribution, the contribution would first be allocated to those
employees deferring salaries in excess of 4%. The matching contribution would
be 50% of any deferral in excess of 4% up to a maximum deferral of 8%. If
discretionary contribution funds remain following the allocation outlined
above, then any remaining company discretionary contributions would be
allocated as a 50% match of employee contributions, on the first 4% of the
employee's deferrals. There were no discretionary contributions charged to
operations in 1999, 1998, or 1997. We make matching contributions as of
December 31st each year.
Deferred Executive Compensation Plans
Effective July 1, 1998, we adopted our Deferred Executive Compensation Plan
(the "DEC Plan 1") and our Deferred Executive Compensation Plan 2 (the "DEC
Plan 2", and together with the DEC Plan 1, the "DEC Plans"). The DEC Plans are
each administered by a committee appointed by our board of directors. Any of
our employees who have an annual base salary of at least $100,000 or who had
an annual base salary of at least $100,000 in the prior year and our directors
may elect to participate in the DEC Plans. A participant's annual base salary
includes all cash compensation excluding bonuses, commissions, employee
benefits, stock options, relocation expenses, incentive payments, non-monetary
awards, automobile and other allowances. Participants in the DEC Plans may
defer up to 50% of their annual base salary and commissions and/or up to 100%
of their annual bonus payments. Benefits accrued under the DEC Plans will be
paid to all participants, other than participants who have voluntarily
resigned their positions, in the form of a lifetime annuity issued by a life
insurance company. DEC Plan benefits accrue through retirement so long as the
participant remains employed by our company. Participants who voluntarily
resign prior to retirement will be paid all of their vested benefits under the
DEC Plans. If we terminate the DEC Plans, we may elect to pay participants in
a lump sum, or in a lifetime annuity.
Deferred compensation contributed to DEC Plan 1 will be invested in our
common stock. In 1998 and 1999, we matched contributions to the DEC Plan 1, to
be paid in our common stock, on a formula basis up to $50,000 per participant
provided minimum returns or equity have been met. The Company has elected not
to match contributions in FYE 2000. We also reserve the right to make
discretionary matches, to be paid in our common stock, in any year. Matching
contributions will vest 50% a year, commencing one year from the date of the
matching contributions. Matching contributions will vest completely if a
participating employee retires, becomes permanently disabled, or dies.
Deferred compensation contributed to DEC Plan 2 may be invested in certain
mutual and money market funds. We will not make matching contributions to the
DEC Plan 2. All DEC Plan 2 contributions are completely vested immediately.
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<PAGE>
Limitations on Directors' Liabilities and Indemnification
Our company and our subsidiaries' Articles of Incorporation and Bylaws
provide for indemnification of our officers and directors to the full extent
permitted by law. The General Corporation Law of the State of California
permits a corporation to limit, under certain circumstances, a director's
liability for monetary damages in actions brought by or in the right of the
corporation. Our company's and our subsidiaries' Articles of Incorporation
also provide for the elimination of the liability of directors for monetary
damages to the full extent permitted by law.
We also entered into agreements to indemnify our directors and officers in
addition to the indemnification provided for in the Articles of Incorporation
and Bylaws. These agreements, among other things, indemnify our directors and
officers for certain expenses (including attorneys' fees), judgments, fines,
and settlement amounts incurred in any action or proceeding, including any
action by or in the right of our company, on account of services as our
director or officer, as a director or officer of any of our subsidiaries, or
as a director or officer of any other enterprise to which the person provides
services at our request. We believe that these provisions and agreements are
necessary to attract and retain qualified persons as directors and officers.
We have directors' and officers' liability insurance in the amount of $20.0
million. At present, there is no pending litigation or proceeding involving a
director, officer or employee of the Company as to which indemnification is
sought, nor are we aware of any threatened litigation or proceeding that may
result in claims for indemnification, except as set forth in Item 3. Legal
Proceedings.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
January 31, 2000, by (I) each director of the Company, (ii) the Chief
Executive Officer and the four most highly compensated executive officers
whose salary exceeded $100,000 for the year ended December 31, 1999, (iii)
each person who is known to the Company to own beneficially more than 5% of
the Common Stock, and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated, the Company believes that the
beneficial owners of the Common Stock listed below have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
Number of Shares % of Total
Beneficial Owner(1) Beneficially Owned Outstanding(2)
------------------- ------------------ --------------
<S> <C> <C>
Wallace R. Weitz & Company(3)............... 8,890,700 25.4
H. Wayne Snavely(4)......................... 1,774,904 5.1
Stephen J. Shugerman(5)..................... 331,027 *
Perry A. Lerner(6).......................... 141,091 *
Robert S. Muehlenbeck(7).................... 126,187 *
James P. Staes.............................. 500 *
Paul B. Lasiter(8).......................... 80,171 *
Irwin L. Gubman(9).......................... 80,468 *
Brad S. Plantiko(10)........................ 52,259 *
John G. Getzelman(11)....................... 10,000 *
Scott B. Sampson(12)........................ 43,269 *
Kevin E. Villani(13)........................ 123,570 *
All Directors and Officers as a Group (12
persons)(14)............................... 2,775,213 7.9%
</TABLE>
- --------
* Less than 1%.
(1) Each of such persons may be reached through our company at 23550
Hawthorne Boulevard, Building One, Suite 110, Torrance, California
90505, telephone (310) 373-1704.
(2) Percentage ownership is based on 35,067,441 shares of common stock
outstanding as of January 31, 2000.
(3) Based upon a Schedule 13G filed with the Company reflecting beneficial
ownership as of December 31, 1999. The shares are owned by various
investment advisory clients of Wallace R. Weitz & Co., which is deemed a
beneficial owner of the shares only by virtue of the direct or indirect
investment and/or voting discretion they possess pursuant to the
provisions of investment advisory agreements with such clients.
(4) Includes 1,177,052 shares subject to stock options exercisable within 60
days of January 31, 2000.
(5) Includes 218,524 shares subject to stock options exercisable within 60
days of January 31, 2000.
(6) Includes 126,422 shares subject to stock options exercisable within 60
days of January 31, 2000.
(7) Includes 90,022 shares subject to stock options exercisable within 60
days of January 31, 2000.
(8) Includes 17,000 shares subject to stock options exercisable within 60
days of January 31, 2000.
(9) Includes 51,360 shares subject to stock options exercisable within 60
days of January 31, 2000.
(10) Includes 16,800 shares subject to stock options exercisable within 60
days of January 31, 2000.
(11) Includes 10,000 shares subject to stock options exercisable within 60
days of January 31, 2000.
(12) Includes 39,800 shares subject to stock options exercisable within 60
days of January 31, 2000.
(13) Includes 116,800 shares subject to stock options exercisable within 60
days of January 31, 2000. Mr. Villani resigned from ICII in September
1999 and from our subsidiary ICAM in December 1999, and resigned from
our board of directors as of the latter date.
(14) Includes 1,868,780 shares subject to stock options exercisable within 60
days of January 31, 2000.
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<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Sale of Holdings by former Principal Shareholder and Outstanding Line of
Credit
On May 14, 1999, we entered into an agreement with our former parent
Imperial Bank, a subsidiary of Imperial Bancorp (NYSE:IMP). On May 17, 1999,
we repurchased 10% or 3,682,536 shares of our outstanding common stock for
$8.00 per share or $29.5 million. At December 31, 1999, Imperial Bank owns no
shares of ICII common stock.
In October 1999, we purchased the Lewis Horwitz Organization and certain
loan portfolios from Imperial Bancorp. As part of the transaction, a line of
credit was established with Imperial Bank in order to fund the acquisition. As
of December 31, 1999, the outstanding balance for the line of credit was $6.7
million.
Relationships with IMH
In December 1997, we negotiated a termination of the management agreement
between ICAI and IMH (the "Termination Agreement"). We received consideration
pursuant to the Termination Agreement comprised of 2,009,310 shares of IMH
common stock and certain securitization-related assets. Additionally, we
agreed to cancel our note receivable from ICIFC, the origination unit of IMH,
in the amount of $29.1 million. We recorded the IMH common stock and the
securitization related assets at their estimated fair values of approximately
$35.0 million and $13.1 million, respectively, for a total of $48.1 million.
This amount, when netted with the $29.1 million cancellation of the ICIFC note
receivable resulted in the gain on termination of the management agreement of
approximately $19.0 million.
Pursuant to the IMH Registration Rights Agreement IMH agreed to file one or
more registration statements under the Securities Act in the future for shares
of IMH held by ICAI pursuant to the Termination Agreement, subject to certain
conditions. Pursuant to the IMH Registration Rights Agreement, IMH will use
its reasonable efforts to cause such registration statements to be kept
continuously effective for the public sale from time to time of the shares of
IMH held by ICAI pursuant to the Termination Agreement. ICAI contributed the
shares to ICII. During the years ended December 31, 1999, 1998 and 1997, we
sold 1,887,110 shares, 122,200 shares and 374,538 shares of IMH stock. At
December 31, 1999, we owned no shares of IMH common stock.
Relationships with ICCMIC
ICCMIC Management Agreement
On October 20, 1997, ICCMIC entered into a management agreement (the
"ICCMIC Management Agreement") with Imperial Credit Commercial Asset
Management Corporation ("ICCAMC"), a wholly-owned subsidiary of ICII, for an
initial term expiring on October 20, 1999. Mr. Snavely is the Chairman of
ICCMIC's board of directors. On July 23, 1999, we announced the signing of a
definitive merger agreement by which a wholly owned subsidiary of ours would
acquire all of the outstanding shares of ICCMIC (consisting of the 25,930,000
shares not already owned by us and certain of our affiliates and subsidiaries)
for a cash purchase price of $11.50 per share. (See--Item 8, "Notes to
Consolidated Financial Statements--Note 2) for further information).
Fees under the management agreement were payable in arrears. ICCAMC's base
and incentive fees and reimbursable costs and expenses are calculated by
ICCAMC within 45 days after the end of each quarter, and such calculation
promptly delivered to ICCMIC. ICCMIC is obligated to pay such fees, costs and
expenses within 60 days after the end of each fiscal quarter. ICCMIC paid
ICCAMC $5.9 million, $6.3 million and $940,000 in fees related to the ICCMIC
Management Agreement during the years ended December 31, 1999, 1998 and 1997.
Other Items
In November 1999, ICCMIC purchased from SPB approximately $25 million in
principal amount of mortgage loans at a price of par plus accrued interest and
with the right to resell those loans to SPB at par plus
156
<PAGE>
accrued interest on or after February 28, 2000 or earlier upon the termination
of the merger agreement. During 1999, SPB repurchased from ICCMIC certain
multifamily and commercial real estate loans with an aggregate principal
balance of $47.3 million. ICCMIC is presently negotiating with ICII to resolve
certain claims that ICCMIC may have against SPB, ICII or both in connection
with the repurchased loans and other loans that ICCMIC previously purchased
from SPB. ICII has informed ICCMIC that it believes ICCMIC's claims, which
aggregate to approximately $1.4 million, are largely without merit.
Mortgage Loan and Other Asset Purchases
In 1998, ICCMIC purchased a pool of multifamily and commercial mortgage
loans from SPB and from the Company for an aggregate purchase price of
approximately $190.0 million plus interest.
Equity Investment
As of December 31, 1999, we own 9.0% of the outstanding common stock of
ICCMIC. ICCMIC invests primarily in performing multifamily and commercial
loans and in mortgage backed securities.
Other Matters
In October 1997, we loaned H. Wayne Snavely, our Chairman and Chief
Executive Officer, $1,999,998 for the purpose of assisting him to purchase
ICCMIC common stock. The loan was evidenced by a promissory note maturing June
14, 2002, secured by a deed of trust and stock of ICCMIC held by such
individual. The note bears interest at an annual rate of 10.4% and was payable
in semi-annual installments commencing June 15, 1998. At January 31, 2000, the
remaining balance was $288,182, for Mr. Snavely. This loan was made in our
ordinary course of business, on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons, and did not involve more than normal risk of
collectibility or present other unfavorable features.
On December 22, 1999, we loaned H. Wayne Snavely, Brad S. Plantiko, Irwin
L. Gubman, Paul B. Lasiter, and John C. Getzelman each $61,050 in connection
with their purchase of $81,400 of Imperial Credit Asset Resolution, Inc.
("ICARI"), Preferred Stock. ICARI is a 100% owned consolidated subsidiary of
our parent company, ICII. Each loan is evidenced by a promissory note maturing
on December 22, 2019, and is secured by the Preferred Stock of ICARI purchased
by each of the above named executive officers. Each note bears interest at an
annual rate of 10.4% and is payable in semi-annual installments commencing
June 15, 2000. At January 31, 2000, the outstanding balance of each note was
$61,050 for each of the above named executive officers. Each of these loans
was made in our ordinary course of business, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons, and did not involve more than
normal risk of collectibility or present other unfavorable features.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Imperial Credit Industries, Inc.
/s/ H. Wayne Snavely
By: _________________________________
H. Wayne Snavely
Chairman of the Board, President
and Chief Executive Officer
Date: February 25, 2000
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints H. Wayne Snavely and Irwin L. Gubman and each
of them, his true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection wherewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each said attorneys-in fact and agents or any of them or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ H. Wayne Snavely Chairman of the Board, February 25, 2000
____________________________________ President and Chief
(H. Wayne Snavely) Executive Officer and
Director (Principal
Executive Officer)
/s/ Brad S. Plantiko Executive Vice President, February 25, 2000
____________________________________ Chief Financial Officer,
(Brad S. Plantiko) and Director (Principal
Financial Officer and
Principal Accounting
Officer)
/s/ Stephen J. Shugerman Director February 25, 2000
____________________________________
(Stephen J. Shugerman)
/s/ Robert S. Muehlenbeck Director February 25, 2000
____________________________________
(Robert S. Muehlenbeck)
/s/ Perry A. Lerner Director February 25, 2000
____________________________________
(Perry A. Lerner)
/s/ James P. Staes Director February 25, 2000
____________________________________
(James P. Staes)
</TABLE>
158
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8K
(a) Exhibits are listed in the table below.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<S> <C>
3.1(S) Articles of Incorporation, as amended of Registrant.
3.2(S) Bylaws of Registrant.
4.1(S) Form of Common Stock Certificate.
4.2# Indenture relating to 9 7/8% Senior Notes, dated as of January 23, 1997, with
forms of 9 7/8% Senior Notes.
4.3+ Certificate of Trust of Imperial Credit Capital Trust I.
4.4+ Amended and Restated Declaration of Trust of Imperial Credit Capital Trust I,
with form of Remarketed Redeemable Par Securities, dated June 9, 1997.
4.5+ Indenture relating to the Resettable Rate Debentures, dated as of June 9, 1997,
with forms of Resettable Rate Debentures.
4.6+ Remarketing Agreement, by and among, the Registrant, the Trust and Lehman
Brothers, Inc., dated as of June 9, 1997.
4.7+ Guarantee Agreement by the Registrant, for the benefit of the Holders of
Remarketed Redeemable Par Securities, Series B.
10.1(S) Form of Indemnification Agreement for directors and officers.
10.2(S) 1992 Incentive Stock Option Plan and Nonstatutory Stock Option Plan and form of
Stock Option Agreement thereunder.
10.3* 1996 Stock Option, Deferred Stock and Restricted Stock Plan effective as of
June 21, 1996.
10.4(S) Senior Management Stock Option Agreement dated effective as of January 1, 1992
by and between Registrant and H. Wayne Snavely.
10.5** Senior Management Stock Option Agreement dated effective as of January 1, 1992
by and between Registrant and Joseph R. Tomkinson.
10.6** Senior Management Stock Option Agreement dated effective as of January 1, 1992
by and between Registrant and Stephen J. Shugerman.
10.7** Amendment No. 1 to Senior Management Stock Option Agreement by and between
Registrant and H. Wayne Snavely, effective as of January 1, 1992.
10.8** Amendment No. 1 to Senior Management Stock Option Agreement by and between
Registrant and Joseph R. Tomkinson, effective as of January 1, 1992.
10.9** Amendment No. 1 to Senior Management Stock Option Agreement by and between
Registrant and Stephen J. Shugerman, effective as of January 1, 1992.
10.10** Amendment No. 2 to Senior Management Stock Option by and between Registrant and
H. Wayne Snavely, effective as of September 30, 1995.
10.11** Amendment No. 2 to Senior Management Stock Option by and between Registrant and
Joseph R. Tomkinson, effective as of September 30, 1995.
10.12** Amendment No. 2 to Senior Management Stock Option by and between Registrant and
Stephen J. Shugerman, effective as of September 30, 1995.
10.13*** Employment agreement dated as of January 1, 1997 by and between Registrant and
H. Wayne Snavely.
10.15*** Employment agreement dated as of January 1, 1997 by and between Registrant and
Stephen J. Shugerman.
</TABLE>
159
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.16*** Registration Rights Agreement dated as of August 26, 1997, by and among
Registrant, FLRT, Inc., and Franchise Mortgage Acceptance Company.
10.17+ Agreement for Purchase and Sale of Real Estate Loans between Southern
Pacific Bank and Imperial Credit Commercial Mortgage Investment Corp.,
dated as of October 1, 1997.
10.18+ Agreement for Purchase and Sale of Mortgage-Backed Securities between Southern
Pacific Bank and Imperial Credit Commercial Mortgage Investment Corp., dated
as of October 22, 1997.
10.19+ Agreement for Purchase of Mortgage-Backed Securities between Registrant and
Imperial Credit Commercial Mortgage Investment Corp., dated as of October 22,
1997.
10.20*** Registration Rights Agreement dated as of December 29, 1997, by and between
ICAI and IMH.
10.21*** Termination Agreement dated as of December 19, 1997, by and between ICAI
and IMH.
10.22*** Promissory Note Secured by Stock Pledge and Deed of Trust dated as of
October 21, 1997, Between Registrant and H. Wayne Snavely.
10.24## Deferral of Executive Compensation Plan effective
July 1, 1998.
10.25## Deferral of Executive Compensation Plan, Plan I, effective
January 1, 1999.
10.26## Deferral of Executive Compensation Plan, Plan II, Effective
January 1, 1999.
10.28## Termination Protection Agreement, effective as of January 27, 1999, by and
between Registrant and H. Wayne Snavely.
10.29## Termination Protection Agreement, effective as of January 27, 1999, by and
between Registrant and Irwin L. Gubman.
10.30## Termination Protection Agreement, effective as of January 27, 1999, by and
between Registrant and Brad S. Plantiko.
10.31 Employment Agreement dated as of September 18, 1995, by and between Registrant
and Scott B. Sampson.
10.32 Amendment to Employment Agreement by and between Registrant and Scott B.
Sampson, effective as of September 1, 1998.
10.33 Asset Purchase Agreement by and between Registrant and Imperial Bank, dated as
of October 1, 1999.
10.34 Servicing Agreement between Registrant and Imperial Bank, effective as of
October 1, 1999.
10.35 Assignment and Assumption Agreement, dated as of October 1, 1999, between
Imperial Bank and Registrant.
10.36 Services Agreement between Registrant and Southern Pacific Bank,
effective October 1, 1999.
10.37 Severance Agreement between The Lewis Horwitz Organization and Imperial
Bank, effective September 30, 1999.
10.38 General Assignment and Assumption of Loan between Imperial Bank and
Registrant, dated October 1, 1999.
10.39 Form of Endorsement to Note between Imperial Bank and the Registrant, dated
October 1, 1999.
10.40 Employment Severance Agreement, Settlement Agreement and General Release,
effective September 1, 1999, between Registrant and Stephen J. Shugerman.
10.41 Employment Severance Agreement, Settlement Agreement and General Release,
effective September 30, 1999, between Registrant and Kevin E. Villani.
11 Statement Regarding Computation of Earnings
Per Share.
21 Subsidiaries of
Registrant.
</TABLE>
160
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
23.1.1 Consent of KPMG
LLP.
24 Power of Attorney (included on signature page of
Form 10-K).
27 Financial Data
Schedule
</TABLE>
- --------
(S) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-45606) and Amendments No. 1, 2 and 3 filed with the
SEC on February 10, 1992, April 20, 1992, May 7, 1992 and May 18, 1992,
respectively.
+ Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-30809) filed on July 3, 1997.
# Incorporated by reference to Registrant's Registration Statement on Form
S-4 (Registration No. 333-22141) filed with the SEC on February 19, 1997.
* Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-13805) filed October 9, 1996.
** Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-15149) filed October 31, 1996.
*** Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
+ Incorporated by reference to Imperial Credit Commercial Mortgage
Investment Corp.'s Form 10-Q for the quarter ended September 30, 1997.
## Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998.
(b) Report on Form 8-K
The Registrant filed the following Report on Form 8-K during the three
months ended December 31, 1999; on November 5, 1999, the Registrant filed a
press release announcing the sale of 4.3 million shares of Bay View Capital
Corporation common stock.
161
<PAGE>
EXHIBIT 10.31
EMPLOYMENT AND NON-COMPETITION AGREEMENT
----------------------------------------
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT is made as of this 18th
day of September, 1995, by and between CoastFed Business Credit Corporation, a
California corporation ("Employer" or "CBCC"), which is a wholly-owned
subsidiary of Imperial Credit Industries, Inc., a California corporation
("ICII"), and Scott B. Sampson, an individual ("Employee"), with reference to
the following facts:
R E C I T A L S
---------------
WHEREAS, ICII (or its assignee) is purchasing all of the outstanding
capital stock (the "Stock") of Employer pursuant to that Stock Purchase
Agreement among ICII, Coast Federal Bank, Federal Savings Bank and Employer
dated as of September 18, 1995 (the "Purchase Agreement");
WHEREAS, Employee is knowledgeable of and skillful in Employer's business,
and has well established business relationships and contacts in the current
business of Employer which includes, but is not limited to, financial services
and loans to business borrowers (the "Business");
WHEREAS, ICII expects to receive the benefit of the sole use of all trade
marks, service marks, tradenames or fictitious business names of Employer;
WHEREAS, Employee is knowledgeable and responsible in part for developing
Employer's trade secrets, including confidential information concerning product
and service marketing plans and strategy, customer needs and peculiarities, and
customer lists and detail information (the "Trade Secrets");
WHEREAS, Employee has significant business acumen and financial strength to
conduct an enterprise upon termination of his employment relationship with
Employer as described hereunder which would compete with the Business in the
markets currently served by Employer, and each of Employer and ICII desires that
Employee not participate in such a competing business;
WHEREAS, ICII would not enter into the Purchase Agreement unless it is
assured that it will be able to operate the Business of Employer without
competition from Employee;
WHEREAS, Employee has agreed not to compete with Employer or use any
confidential and/or proprietary business information regarding the business of
Employer to the detriment of Employer or ICII during the term of this Agreement,
in order to induce ICII to enter into the Purchase Agreement and to perform its
obligations thereunder;
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WHEREAS, Employer desires that Employee be employed as President and
Chief Operating Officer of Employer, such employment to become effective on the
Closing Date (as that term is defined in the Purchase Agreement); and
WHEREAS, Employee is willing to be employed by Employer as described
under the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter contained, and for other good and valuable consideration,
it is hereby agreed by and between the parties hereto as follows:
1. Employment, Services, and Duties. Employer hereby employs Employee and
--------------------------------
Employee hereby accepts such employment full-time as President and Chief
Operations Officer of Employer, with the powers and duties consistent with such
position. Employee agrees to devote 100% of all working hours to rendering the
services as President and Chief Operations Officer of Employer. Employee shall
render his services to Employer by and subject to the instructions and
directions of Employer's Chief Executive Officer to whom Employee shall
directly report.
2. Term and Termination
--------------------
2.1 Unless sooner terminated pursuant to Paragraph 2.2 hereof,
Employee's employment shall commence on the Closing Date (as that term is
defined in the Purchase Agreement) and shall continue for a period of five (5)
years unless extended by the mutual agreement of Employer and Employee (the
"Term").
2.2 Employee's employment shall terminate prior to the expiration of
the Term upon the happening of any of the following events:
(a) Voluntary termination by Employee which is not subject to
Section 2.2(g) herein;
(b) Upon the death of Employee;
(c) Upon dissolution and termination of the Employer;
(d) For cause by the Employer, that is to say only:
(i) if Employee is convicted of (or pleads nolo contendere
to) or at any time prior to employment by Employer has been convicted of (or
pled nolo contendere to) a crime of dishonesty or breach of trust or crime
leading to incarceration of more than ninety (90) days (including, without
2
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limitation, embezzlement or theft from Employer) or the payment of a penalty or
fine of $10,000, or more;
(ii) upon a determination by Employer that Employee has
engaged in willful misconduct, gross negligence, or gross or habitual neglect in
the performance of his duties under this Agreement, or has committed an act of
fraud, theft or dishonesty against Employer;
(iii) if Employee has materially breached any of the terms
of this Agreement or any other material legal obligation to Employer including,
without limitation, a breach of trust or fiduciary duty involving Employer or a
material violation of policies or procedures of Employer and has not cured any
such breach within thirty (30) days after having been given written notice
thereof by Employer; or
(iv) Any determination of "cause" as used in this Section
2.2(d) shall be made only in good faith by an affirmative majority vote of the
Board of Directors (not counting Employee, if a director) of the Employer;
(e) By mutual agreement between Employer and Employee;
(f) Upon the good faith determination of the Board of Directors
of Employer that Employee has become so physically or mentally disabled as to be
incapable of satisfactorily performing his duties hereunder for a period of one
hundred and eighty (180) consecutive days, such determination based upon a
certificate as to such physical or mental disability issued by a licensed
physician and/or psychiatrist (as the case may be) employed by Employer; or
(g) Without cause by Employer.
2.3 Except as set forth in Sections 4, 5, 6 and 7 herein, in the
event that Employee's employment is terminated pursuant to Sections 2.2(a), (b),
(c), (d), (e) or (f) herein, neither Employer nor Employee shall have any
remaining duties or obligations hereunder, except that Employer shall pay to
Employee, or his representatives, on the date of termination of employment
("Termination Date"),
(i) such compensation as is due pursuant to Section 3.1(a)
herein, prorated through the Termination Date; and
(ii) expense reimbursements and car allowances due and
owing to Employee as of the Termination Date.
2.4 Except as set forth in Sections 4, 5, 6 and 7 herein, in the
event that Employee's employment is terminated pursuant to Section 2.2(g)
herein, neither Employer nor Employee
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shall have any remaining duties or obligations hereunder, except that Employer
shall pay to Employee, or his representatives, on the Termination Date,
(i) all such compensation as is due pursuant Section
3.1(a) through the Term;
(ii) whatever non-discretionary bonus or incentive
compensation is provided by any plan for the year of termination, prorated
through the Termination Date; and
(iii) expense reimbursements and car allowances due and
owing to Employee as of the Termination Date.
2.5 This Agreement shall terminate (and Employee's employment shall
not in any way have been deemed to have commenced hereunder) in the event of the
termination of the Purchase Agreement pursuant to Section 9.1 therein.
2.6 In the event that ICII, Employer or any assignee or affiliate
thereof causes the physical location of Employer to be moved to an area outside
of a ten mile radius from that address known as 12121 wilshire Boulevard, Los
Angeles, California 90025-1174, Employee may deem this Agreement terminated by
giving written notice to Employer. In such event, Employee's sole remedy and
rights hereunder shall be limited to the right to receive from Employer all such
compensation as is referenced in section 2.4 (i), (ii) and (iii) herein.
2.7 This Agreement shall not be terminated by any:
(a) Merger, whether the Employer is or is not the surviving
corporation; or
(b) Transfer of all or substantially all of the assets or
capital stock of the Employer.
In the event of any such merger, transfer of assets or capital
stock, dissolution, liquidation, or consolidation, the surviving corporation or
transferee, as the case may be, shall be bound by and shall have the benefits
of this Agreement, and the Employer shall take all action to ensure that such
corporation or transferee is bound by the provisions of this Agreement.
3. Compensation
------------
3.1 As the total consideration for the services which Employee agrees
to render hereunder, Employee is entitled to the following:
(a) A salary of Two Hundred Thousand Dollars ($200,000) per year
("Salary"), payable in equal installments
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<PAGE>
twice monthly on those days when Employer normally pays its employees;
(b) An annual incentive bonus in an amount equal to 1.50% of
CBCC's annual pre-tax profit as determined in accordance with generally accepted
accounting principles consistently applied ("GAAP") prior to payment of bonuses
to Employee and Jack Baruch and amortization of goodwill. Payment of said bonus
shall be contingent upon the Company's annual net profit equalling or exceeding
an amount equal to the equivalent of 2.00% of Employer's average assets, not
including goodwill, or a pre-tax return on capital of 20.00%, each as determined
in accordance with GAAP. For purposes of this section 3.1(b), capital shall be
deemed to be equal to Twelve Million Dollars ($12,000,000) and Seller's cost of
funds in making calculations hereunder shall be deemed to be the rate that Bank
of America announces from time to time as its prime lending rate, as in effect
on the first date of each calendar month, less two percent.
(c) Reimbursement for reasonable and necessary business and
entertainment expenses incurred by him in connection with the performance of his
duties hereunder. Employer shall reimburse the Employee for all such expenses
upon presentation by the Employee, from time to time, of an itemized account of
such expenditures. In the event that any Federal, state or local government
agency or authority determines to disallow any such expenses which are
reimbursed to Employee, Employee agrees, to the extent that such determination
involves the Employee, to reimburse Employer for all such disallowed expenses
and for all penalties incurred by Employer;
(d) Employee shall be entitled to four (4) weeks vacation time
each year without loss of compensation. Employee may be absent from his
employment only at such times as Employer shall determine from time to time.
Employee's vacation shall be under Employer's usual policies applicable to all
employees;
(e) Employee shall be entitled to a monthly car allowance of
Five Hundred Dollars ($500) payable by the fifth day of each month;
(f) On the Closing Date (as that term is defined in the Purchase
Agreement), ICII shall grant Employee incentive stock options to purchase ten
thousand (10,000) shares of ICII's Common Stock under ICII's Stock Option Plan
(the "Plan"), such options to be governed by the terms of the Plan;
(g) Employer agrees to provide Employee with insurance coverages
and other benefits available to all employees of Employer under its group plans;
and
5
<PAGE>
(h) Such other benefits as the Board of Directors of Employer,
in its sole discretion, may from time to time provide.
3.2 Employer shall have the right to deduct from the compensation due
to Employee hereunder any and all sums required for social security and
withholding taxes and for any other federal, state, or local tax or charge which
may be in effect or hereafter enacted or required as a charge on the
compensation of Employee.
4. Non-Competition
---------------
(a) During Employee's employment hereunder, and for a period of one
(1) year following a termination of this Agreement by Employee hereunder,
Employee shall not, directly or indirectly, engage or participate in, prepare or
set up, assist or have any interest in any person, partnership, corporation,
firm, association, or other business organization, entity or enterprise (whether
as an employee, officer, director, agent, security holder, creditor, consultant
or otherwise) that engages in any activity, which is the same as, similar to, or
competitive with any activity now engaged in by Employer or in any way relating
to the Business currently conducted by Employer in those geographic areas where
Employer conducts the Business.
(b) Nothing contained in this Agreement shall be deemed to preclude
Employee from purchasing or owning, directly or beneficially, as a passive
investment, one percent (1%) or less of any class of a publicly traded
securities or any entity if he does not actively participate in or control,
directly or indirectly, any investment or other decisions with respect to such
entity.
5. Confidentiality.
---------------
Employee shall keep all Trade Secrets confidential; use Trade Secrets
only in the course of his duties hereunder; maintain in trust, as Employer's
property, all documents concerning Employer's Business, including his own work
papers of any kind including telephone directories and notes, and any and all
copies thereof in his possession or under his control; and transfer to Employer
all documents that belong to Employer and any and all copies that are in his
possession or under his control when his Employment terminates, or at any other
time upon request by Employer.
6. Injunctive Relief
-----------------
Employee hereby acknowledges and agrees that it would be difficult to
fully compensate Employer for damages resulting from the breach or threatened
breach of Sections 4 and 5, herein and, accordingly, that Employer shall be
entitled to temporary
6
<PAGE>
and injunctive relief, including temporary restraining orders, preliminary
injunctions and permanent injunctions, to enforce such Sections without the
necessity of proving actual damages therewith. This provision with respect to
injunctive relief shall not, however, diminish Employer's right to claim and
recover damages or enforce any other of its legal and/or equitable rights or
defenses.
7. Severable Provisions
--------------------
The provisions of this Agreement are severable and if any one or more
provisions may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any partially unenforceable provisions
to the extent enforceable, shall nevertheless be binding and enforceable.
8. Reference Provision
-------------------
(a) Each controversy, dispute or claim between the parties arising
out of or relating to this Agreement, which controversy, dispute or claim is not
settled in writing within thirty (30) days after the "Claim Date" (defined as
the date on which a party subject to the Agreement gives written notice to the
other that a controversy, dispute or claim exists), will be settled by binding
arbitration in Los Angeles, California in accordance with the provisions of the
American Arbitration Association, which shall constitute the exclusive remedy
for the settlement of any controversy, dispute or claim, and the parties waive
their rights to initiate any legal proceedings against each other in any court
or jurisdiction other than the Superior Court of Los Angeles (the "Court"). Any
decision rendered by the arbitrator and such arbitration will be final, binding
and conclusive and judgment shall be entered pursuant to CCP Section 644 in any
court in the State of California having jurisdiction.
(b) Except as expressly set forth in this Agreement, the arbitrator
shall determine the manner in which the proceeding is conducted, including the
time and place of all hearings, the order of presentation of evidence, and all
other questions that arise with respect to the course of the proceeding. All
proceedings and hearings conducted before the arbitrator, except for trial,
shall be conducted without a court reporter, except that when any party so
requests, a court reporter will be used at any hearing conducted before the
arbitrator. The party making such a request shall have the obligation to arrange
for any pay for the court reporter. The costs of the court reporter shall be
borne equally by the parties.
(c) The arbitrator shall be required to determine all issues in
accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will
7
<PAGE>
be applicable to the reference proceeding. The arbitrator shall be empowered to
enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The arbitrator shall issue a single judgement at the close of the
proceeding which shall dispose of all of the claims of the parties that are the
subject of the proceeding. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgement entered by the arbitrator. The parties hereto expressly reserve the
right to findings of fact, conclusions of law, a written statement of decision,
and the right to move for a new trial or a different judgment, which new trial,
if granted, is also to be a proceeding governed under this provision.
9. Binding Agreement
-----------------
This Agreement shall inure to the benefit of and shall be binding upon
Employer, its successors and assigns. In the event that ICII assigns its rights
to purchase the Stock under Section 1.6 of the Purchase Agreement, all
references to Employer set forth herein shall mean such assignee.
10. Captions
--------
The Section captions are inserted only as a matter of convenience and
reference and in no way define, limit or describe the scope of this Agreement or
the intent of any provisions hereof.
11. Entire Agreement
----------------
This Agreement contains the entire agreement of the parties relating
to the subject matter hereof, and the parties hereto have made no agreements,
representations or warranties relating to the subject matter of this Agreement
that are not set forth otherwise herein. This Agreement supersedes any and all
prior agreements, written or oral, between Employee and Employer and its
affiliates. Any such prior agreements are hereby terminated and of no further
effect and Employee by the execution hereof agrees that any compensation
provided for under any such prior agreement(s) is specifically superseded and
replaced by the provision of this Agreement. No modification of this Agreement
shall be valid unless made in writing and signed by the parties hereto and
unless such writing is made by an executive officer of Employer. The parties
hereto agree that in no event shall an oral modification of this Agreement be
enforceable or valid.
12. Governing Law
-------------
This Agreement shall be governed and construed in accordance with the
laws of the State of California.
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<PAGE>
13. Notices. All notices and other communications under this Agreement
-------
shall be in writing (including, without limitation, telegraphic, telex,
telecopy or cable communication) and mailed, telegraphed, telexed, telecopied,
cabled or delivered by hand or by a nationally recognized courier service
guaranteeing overnight delivery to a party at the following address (or to such
other address as such party may have specified by notice given to the other
party pursuant to this provision):
If to the Employee, to:
Scott B. Sampson
CoastFed Business Credit Corporation
12121 wilshire Boulevard, Suite 114
Los Angeles, California 90025
Telephone: (310) 820-6681
Facsimile: (310) 826-2884
with a copy to:
___________________________________
___________________________________
___________________________________
Telephone: ________________________
Facsimile: ________________________
Attention: ________________________
If to the Employer or ICII, to:
Imperial Credit Industries, Inc.
3701 Skypark Drive, Building #6, Suite 130
Torrance, California 90505
Telephone: (310) 791-8222
Facsimile: (310) 791-8226
Attention: H. Wayne Snavely,
Chairman of the Board
with a copy to:
Freshman, Marantz, Orlanski, Cooper & Klein
Eighth Floor, East Tower
9100 Wilshire Boulevard
Beverly Hills, California 90212
Telephone: (310) 273-1870
Facsimile: (310) 274-8293
Attention: Thomas J. Poletti, Esq.
All such notices and communications shall, when mailed, telegraphed, telexed,
telecopied, cabled or delivered, be effective three days after deposit in the
mails, delivered to the telegraph company, confirmed by telex answerback,
telecopied with confirmation of receipt, delivered to the cable company,
delivered by hand to the addressee or one day after delivery to the courier
service.
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<PAGE>
14. Attorney's Fees. In the event that any party shall bring an action or
---------------
proceeding in connection with the performance, breach or interpretation hereof,
then the prevailing party in such action as determined by the court or other
body having jurisdiction shall be entitled to recover from the losing party in
such action, as determined by the court or other body having jurisdiction, all
reasonable costs and expense of litigation or arbitration, including reasonable
attorney's fees, court costs, costs of investigation and other costs reasonably
related to such proceeding.
IN WITNESS WHEREOF, this Employment Agreement is executed as of the
day and year first above written.
"EMPLOYER"
CoastFed Business Credit
Corporation
By: /s/ Jack Baruch
---------------------------------
Name: Jack Baruch
Title: CEO
"EMPLOYEE"
/s/ Scott B. Sampson
------------------------------------
SCOTT B. SAMPSON
10
<PAGE>
EXHIBIT 10.32
AMENDMENT
TO EMPLOYMENT AND
NON-COMPETITION AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AND NON-COMPETITION AGREEMENT (the
"Amendment"), is made as of September 1, 1998 by and among Southern Pacific
Bank, a California corporation (the "Employer", as successor employer for
purposes of this Amendment to CoastFed Business Credit Corporation), which is a
wholly-owned subsidiary of Imperial Credit Industries, Inc., a California
corporation ("ICII"), and Scott B. Sampson, an individual ("Employee"), with
reference to the following facts:
RECITAL
WHEREAS, the parties previously entered into that certain Employment and
Non-Competition Agreement (the "Agreement") dated as of the 18th day of
September 1995 in connection with the purchase by ICII of all of the outstanding
capital stock of CoastFed Business Credit Corporation as of that date; and
WHEREAS, Employee, the President and Chief Operating Officer of Employer's
Coast Business Credit Division, has been instrumental in building a profitable
and growing business, in part due to his business relationships and contacts and
his development of Employer's Trade Secrets (as defined in the Agreement), and
Employer and ICII desire to extend and enhance the term of Employee's retention
in such capacity; and
WHEREAS, Employee is willing to continue his employment by Employer under
the terms and conditions herein stated.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained and for other good and valuable consideration, it is
hereby agreed by and among the parties hereto as follows:
1. The Agreement is amended as follows:
Section 2.1 is amended in its entirety to read:
"2.1 Unless sooner terminated pursuant to paragraph 2.2 hereof, Employee's
employment shall continue until September 1, 2001, unless extended by the mutual
agreement of Employer and Employee (the "Term")."
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Section 3.1(a) is amended in its entirety to read:
"(a) A salary of Three Hundred Thousand Dollars ($300,000) per year
("Salary"), payable in equal installments bi-weekly on those days when Employer
normally pays its employees;"
Section 3.1(b) is amended in its entirety to read:
"(b)(i) An annual incentive bonus in an amount equal to 1.5% of Employer's
Coast Business Credit Division's annual pre-tax profit as determined in
accordance with generally accepted accounting principles consistently applied
("GAAP") prior to payment of bonuses to Employee and Jack Baruch and
amortization of goodwill. Payment of said bonus shall be contingent upon the
Coast Business Credit Division's annual net profit equalling or exceeding (i) an
amount equal to 2% of said Division's average assets for the calendar year, not
including goodwill, or (ii) a pre-tax return on capital for the calendar year of
20%, each as determined in accordance with GAAP. For purposes of this Section
3.1(b), the amount of capital assigned to the Division shall be calculated
quarterly for the measurement year in accordance with bank regulatory risk-
adjusted capital guidelines and related Call Report requirements, but in no
event shall be less than that percentage of the Employer's consolidated capital
that the Division's average assets (and related off-balance sheet items)
represent as a percentage of the Employer's average total assets (including its
off-balance sheet exposure) for that year. The Coast Business Credit Division's
cost of funds in making calculations hereunder shall be deemed to be the rate
that Bank of America or its successor announces from time to time as its prime
or reference lending rate as in effect on the first day of each calendar month,
less 2%.
(ii) Effective the date of this Amendment, Employee shall receive a
stock option grant entitling Employee to purchase 50,000 shares of common stock
of Imperial Credit Industries, Inc. pursuant to a separate Stock Option
Agreement to be executed between ICII and Employee. In addition, Employee shall
have the vesting of all previously awarded and outstanding grants of options to
acquire ICII's common stock immediately accelerated, with the result that all of
such existing options (not including the current grant of options to acquire
50,000 shares) may be exercised at any time on or after the date of this
Amendment."
Section 4 is amended in its entirety to read:
"4.1 Non-Competition
---------------
The Employee acknowledges and recognizes the highly competitive nature of
the business of Employer, including all of its divisions and affiliates, as well
as his significant participation in the ownership of the common stock of ICII.
If Employee terminates his employment hereunder, then until the second
anniversary of the Employee's termination of
2
<PAGE>
employment (such date being hereafter referred to as the "Restricted Date"), the
following shall apply:
(a) The Employee will not directly or indirectly engage (as owner,
stockholder, partner or otherwise, except as a holder of fewer than 5% of the
outstanding shares or other equity interests of a company whose shares or other
equity interests are publicly traded) in any business which competes with the
business of the Employer at the time of the Employee's resignation.
(b) The Employee will not directly or indirectly induce any employee of the
Employer to engage in any activity in which the Employee is prohibited from
engaging by paragraph (a) above or to terminate his employment with the
Employer, and will not directly or indirectly employ or offer employment to any
person who was employed by the Employer unless such person shall have been
terminated without cause or ceased to be employed by the Employer for a period
of at least 12 months.
(c) Except for actions which Employee may take or maintain to enforce or
assert rights hereunder or be compelled to take or maintain pursuant to judicial
or regulatory proceedings, the Employee will not make any statement or take any
action intended to impair the goodwill or the business reputation of the
Employer, or to be otherwise detrimental to the interests of the Employer,
including any action or statement intended, directly or indirectly, to benefit a
competitor of the Employer.
(d) It is expressly understood and agreed that although the Employee and
the Employer consider the restrictions contained in this Section 4.1 to be
reasonable, if a final judicial determination is made by a court of competent
jurisdiction that the time or territory or any other restriction contained in
this Agreement is an unenforceable restriction against the Employee, the
provisions of this Agreement shall not be rendered void but shall be deemed
amended to apply as to such maximum time and territory and to such maximum
extent as such court may judicially determine or indicate to be enforceable.
Alternatively, if any court of competent jurisdiction finds that any restriction
contained in this Agreement is unenforceable, and such restriction cannot be
amended so as to make it enforceable, such finding shall not affect the
enforceability of any of the other restrictions contained herein.
4.2 Proprietary Information
-----------------------
Through the Restricted Date, the Employee shall not use for his personal
benefit, or disclose, communicate or divulge to, or use for the direct or
indirect benefit on any person, firm, association or company other than the
Employer, any Proprietary Information. "Proprietary Information" means
information relating to the properties, prospects, products, services or
operations of the Employer or any direct or indirect affiliate thereof that is
not generally known, is proprietary to the Employer or such affiliate and is
made known to the Employee or learned or acquired by the Employee while in the
employ of the Employer,
3
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including, without limitation, information concerning Trade Secrets of the
Employer, or any of the Employer's affiliates and any improvements relating to
the products of the Employer in accounting, marketing, selling, financing and
other business methods and techniques. However, Proprietary Information shall
not include (A) at the time of disclosure to the Employee such information that
was in the public domain or later entered the public domain other than as a
result of a breach of an obligation herein; or (B) subsequent to disclosure to
the Employee, Employee received such information from a third party under no
obligation to maintain such information in confidence, and the third party came
into possession of such information other than as a result of a breach of an
obligation herein. All materials or articles of information of any kind
furnished to the Employee by the Employer or developed by the Employee in the
course of his employment thereunder are and shall remain the sole property of
the Employer; and if the Employer requests the return of such information at any
time during, upon or after the termination of the Employee's employment
hereunder, the Employee shall immediately deliver the same to the Employer.
4.3. Ownership of Proprietary Information
------------------------------------
The Employee agrees that all Proprietary Information shall be the sole
property of the Employer and its assigns, and the Employer and its assigns shall
be the sole owner of all licenses and other rights in connection with such
Proprietary Information. At all times, until the Restricted Date, the Employee
will keep in the strictest confidence and trust all Proprietary Information and
will not use or disclose such Proprietary Information, or anything relating to
such information, without the prior written consent of the Employer, except as
many be necessary in the ordinary course of performing his duties under this
Agreement.
4.4 Documents and Other Property
----------------------------
All materials or articles of information of any kind furnished to the
Employee in the course of his employment hereunder are and shall remain the sole
property of the Employer; and if the Employer requests the return of such
information at any time during, upon or after the termination of the Employee's
employment hereunder, the Employee shall immediately deliver the same to the
Employer. The Employee will not, without the prior written consent of the
Employer, retain any documents, data or property, or any reproduction thereof of
any description, belonging to the Employer or pertaining to any Proprietary
Information.
4.5 Customer Lists
--------------
The Employee will not during, or for a period of two years after the
termination of, his employment (i) disclose the Employer's customer lists or any
part thereof to any person, firm, corporation, association or other entity for
any reason or purpose whatsoever, (ii) assist in
4
<PAGE>
obtaining any of the Employer's existing customers for any competing business,
or (iii) encourage any customer to terminate its relationship with the
Employer."
Section 13 is amended in its entirety to read:
"All notices and other communications under the Agreement shall be in
writing, and mailed, telecopied or delivered by hand or by a nationally
recognized courier service to a party at the following address:
If to the Employee: Coast Business Credit
12121 Wilshire Boulevard
Suite 1111
Los Angeles, CA 90025
Attn: Scott Sampson
If to the Employer: Southern Pacific Bank
12300 Wilshire Boulevard
Suite 100
Los Angeles, CA 90025
Attn: Stephen Shugerman
If to ICII: Imperial Credit Industries, Inc.
Building One, Suite 110
23550 Hawthorne Boulevard
Torrance, CA 90505
Attn: H. Wayne Snavely
With cc to: Irwin L. Gubman
All such notices and communications shall, when mailed, telecopied or
delivered, be effective (i) three days after deposit in the mails, (ii) when
telecopied with telephonic confirmation of receipt, (iii) when delivered by hand
to the addressee or (iv) one day after delivery to the courier service."
2. All other terms, conditions and provisions of the Agreement shall
remain in full force and effect throughout the Term, unless amended in a writing
signed by all parties hereto. All future references to the Agreement shall mean
the Agreement as amended by this Amendment, the parties intending that the
Agreement and the Amendment be read and interpreted as one instrument.
5
<PAGE>
IN WITNESS WHEREOF, this Amendment is executed as of the day and year first
above written.
Employee: Employer:
SOUTHERN PACIFIC BANK
_____________________________ By:__________________________________________
Scott B. Sampson Name: Stephen Shugerman
Title: President and Chief Executive Officer
IMPERIAL CREDIT INDUSTRIES, INC.
By:___________________________________________
Name: H. Wayne Snavely
Title: Chairman, President and Chief Executive
Officer
6
<PAGE>
EXHIBIT 10.33
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement"), dated as of October 1, 1999,
is entered into between Imperial Bank, a California banking corporation
("Seller") and Imperial Credit Industries, Inc., a California corporation
("Buyer").
RECITALS
A. Seller owns and operates an operating division known as the Lewis
Horwitz Organization ("LHO").
B. LHO, as lender, has heretofore entered into contracts, and commitments
to enter into contracts, which represent loans, advances, debts, liabilities or
obligations for monetary amounts (whether or not such amounts are liquidated or
determinable) primarily for the production of motion pictures and television
shows, which together with all covenants and duties regarding such amounts, of
any kind or nature shall be referred to herein individually as a "Loan" and
collectively as the "Loans", evidenced by promissory notes (which together with
any assignment, reinstatement, extension, endorsement or modification thereof
shall be referred to herein individually as a "Note" and collectively as the
"Notes"), secured by various assets pursuant to security agreements and other
financing documents. All of the documents and instruments evidencing, securing,
guaranteeing or pertaining to a Loan are hereinafter collectively referred to as
the "Loan Documents".
C. LHO has heretofore provided certain letters of credit (individually a
"Letter of Credit" and collectively the "Letters of Credit") for the production
of motion pictures and television shows or series. All obligations respecting a
Letter of Credit or the Letters of Credit are hereinafter collectively referred
to as the "Letter of Credit Obligations".
D. Seller desires to sell, and Buyer desires to purchase all of Seller's
right, title and interest under the Loans, the Loan Documents and Letters of
Credit including all security therefor, together with substantially all of the
other assets, properties and rights of Seller associated with LHO, on the terms
and subject to the conditions set forth in this Agreement.
AGREEMENT
In consideration of the mutual promises and covenants contained herein, and
intending to be legally bound hereby, the parties agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
---------------------------
1.1. Assets. Upon the terms and subject to the conditions set forth in
------
this Agreement, at the Initial Closing (as defined in Section 3.1 hereof) Seller
shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall
purchase, acquire and accept from Seller, the following assets, properties and
rights:
<PAGE>
(a) All of Seller's beneficial right, title and interest in and to
the Loans set forth on Schedule 1.1(a) and all Loan Documents related thereto,
and all rights in collateral securing the Loans (Seller's record ownership in
the Loans will be transferred to Buyer at one or more Subsequent Closings
pursuant to Section 3.4 below);
(b) All equipment, furniture, fixtures and other items of tangible
and intangible personal property listed on Schedule 1.1(b) (which Schedule shall
list property purchased at the Initial Closing and, at Buyer's option, property
which may be used by Buyer after the Initial Closing and purchased prior to
December 31, 1999) plus (i) any replacements or additions thereto in the
ordinary course of business before the Initial Closing Date or December 31, 1999
(as applicable), less (ii) any such items of personal property disposed of in
the ordinary course of business before the Initial Closing Date or December 31,
1999 (as applicable) (collectively, the "Personal Property");
(c) All rights, benefits and interests of Seller under contracts,
agreements, leases, purchase orders and other commitments listed on Schedule
1.1(c) and under all similar agreements entered into by Seller between the date
hereof and the Initial Closing Date (collectively, the "Contracts");
(d) All inventories of catalogues, marketing brochures and materials
and other printed and written materials relating to LHO;
(e) All rights under or pursuant to all warranties, representations
and guarantees made by vendors, suppliers, manufacturers and contractors in
connection with the operation of LHO or affecting the Assets;
(f) All customer and vendor lists and all Loan Documents and related
files, documents, books, records and other data; and
(g) All other assets set forth on Schedule 1.1(g) hereto.
Buyer shall make the Contracts, Loan Documents and related files, books, records
and other data sold to Buyer pursuant to this Agreement available to Seller for
inspection and/or copying to the extent Seller reasonably requests access for a
valid business purpose.
1.2. Delivery of Assets. At the Initial Closing, Seller shall deliver
------------------
possession of the Assets to Buyer by delivering: (a) all intangible Assets to
Buyer at 23550 Hawthorne Boulevard, Bldg. One, Torrance, California, by means of
such methods as are mutually acceptable to the parties; and (b) all other Assets
to Buyer at such place as may be agreed to by the parties (and delivering to
Buyer the keys to any premises included in said other Assets). Seller shall
also at the Initial Closing deliver title to the Assets by executing bills of
sale and/or forms of assignment pursuant to forms prepared by Buyer and
reasonably acceptable to Seller.
1.3. Excluded Assets. Notwithstanding anything to the contrary contained
---------------
in Section 1.1 hereof for the avoidance of doubt, Seller is not selling,
assigning, transferring, conveying or delivering to the Buyer any of the
following assets, properties, rights, contracts and claims (collectively, the
"Excluded Assets"):
2
<PAGE>
(a) Seller's tax returns, tax and financial records and reports and
other documents and records pertaining to LHO that Seller is required by law to
retain or that will be necessary or advisable for Seller to retain, in its
reasonable discretion, for tax or other purposes;
(b) Other than collateral for Loans, Seller's accounts receivable,
cash, cash deposits and other cash equivalents, rights or entitlement to cash
refunds, rebates (whether in respect of suppliers, guarantors, insurers or
otherwise), or other deposits and tax refunds with respect to LHO; and
(c) Except as provided by Section 1.4(d) below, Assets related to
employee benefit plans, retirement plans, pension plans, savings plans and other
employee plans.
Seller shall retain the records referred to in Section 1.3(a) and shall make
such records available to Buyer for inspection and/or copying to the extent
Buyer reasonably requests access for a valid business purpose.
1.4. Assumption of Liabilities. At the Initial Closing, Buyer shall assume
-------------------------
and shall pay or perform, when due, only the following liabilities and
obligations of Seller pertaining to LHO (collectively, the "Assumed
Liabilities"):
(a) All liabilities and obligations under (i) Unfunded Loan
Commitments (as defined below) and (ii) under the Loans and Loan Documents as
provided in Section 1.6 below;
(b) All Letter of Credit Obligations (which will be paid in the
manner provided by Section 2.3 below) under the Letters of Credit set forth on
Schedule 1.4(b) (individually a "Letter of Credit" and collectively "Letters of
Credit");
(c) All liabilities and obligations under the Contracts arising from
and after the Initial Closing Date; and
(d) All liabilities and obligations to Lewis Horwitz ("Horwitz") and
Arthur Stribley under the Imperial Bancorp Deferred Compensation Plan (the
"Transferred Plan Obligations").
For purposes of this Agreement, an Unfunded Loan Commitment shall mean a loan
commitment (a) which is 100% unfunded; and (b) for which no contracts,
agreements or other commitments have been entered into with the borrower or
third parties which would make it impractical, in the opinion of Buyer, to
assume the applicable commitment at the Initial Closing.
1.5. No Other Liabilities Assumed. Notwithstanding any provisions in this
----------------------------
Agreement or any other writing to the contrary, Buyer is assuming only the
Assumed Liabilities and is not assuming any other liability or obligation of
Seller or LHO of whatever nature whether in existence on the Initial Closing
Date or arising thereafter. All such other liabilities and obligations shall be
retained by and remain obligations and liabilities of Seller. Without limiting
the liabilities that Buyer is not assuming, Buyer will not assume or agree to
pay or discharge:
(a) Liabilities, if any, incurred by Seller as a result of any act
performed or transaction entered into in violation of any of the terms and
conditions of this Agreement;
3
<PAGE>
(b) Except as provided in Section 6.7, liabilities or obligations of
Seller for any federal, state or local taxes, including, without limitation,
income, excise, franchise, personal property, ad valorem, sales, use, gross
receipts, withholding and payroll taxes, with respect to LHO;
(c) Other liabilities or obligations to employees of LHO existing on
or before the Initial Closing Date, including, without limitation, salaries,
bonuses, health and welfare benefits, accrued vacation and sickness benefits,
expense reimbursement obligations, commissions, pension and profit-sharing
obligations and any other liability or obligation under any other stock,
insurance, retirement or employee benefit plan of any kind;
(d) liabilities of Seller arising out of or in connection with the
negotiation, execution or performance of this Agreement, including costs and
expenses of consultants and brokers, if any; and
(e) liabilities arising out of or related to any litigation set forth
in Schedule 1.5(e) hereto.
1.6. Rights and Liabilities Respecting Loans. From and after the Initial
---------------------------------------
Closing Date and until the Loans are sold by Seller to Buyer in accordance with
Section 3.4 below, legal and record title to the Loans and Loan Documents
(herein, "Unsold Loans") will remain with Seller. However, from and after the
Initial Closing Date, except as otherwise provided in Section 8.1 hereof, all
economic risk and benefits associated with the Unsold Loans and the related Loan
Documents are expressly assumed by, and transferred to, Buyer, except that
Seller shall fund any outstanding commitments respecting a partially-funded Loan
and the related Loan Documents until the Loan is purchased by Buyer in
accordance with Section 3.4. From and after the Initial Closing Date Seller
shall receive all payments and receivables from Unsold Loans and apply such
payments (and amounts in "customer charges accounts", if any) and receivables on
a daily basis to principal, interest, fees and amounts due attorneys and other
third parties in accordance with past practice pursuant to instructions from
Buyer and the Servicing Agreement referred to in Section 1.7 below. Buyer shall
be entitled to receive all income ("Income") from Unsold Loans attributable to
any period following the Initial Closing Date (other than recoveries of amounts
previously charged off, which will belong 50% to Seller and 50% to Buyer) minus
a funding fee equal to total average assets less total average liabilities
attributable to LHO multiplied by Seller's published prime rate as in effect
from time to time minus 2.5% (calculated on an actual/actual basis) (the
"Interest Rate"), which amount (net of amounts due Seller for the applicable
period under the Services Agreement) shall be paid to the party entitled thereto
within 15 days following the end of each calendar month.
1.7. Servicing. Following the Initial Closing, Buyer shall assume complete
---------
responsibility for the servicing and administration of the Loans pursuant to the
Servicing Agreement attached hereto as Exhibit 1.7 including, but not limited
to, the collection of all payments thereunder for the account of Seller, and
Seller shall have no further servicing or administrative responsibilities with
respect to the Loans. During such time as Buyer is servicing Loans, the parties
shall use their best efforts to cooperate and take all necessary steps to
facilitate the proper application of funds. In the event of a misapplication of
funds between Seller and Buyer, such funds will be transferred to the party
entitled thereto within one business day
4
<PAGE>
following the determination of the proper application. The amount of any
misapplied funds which are not paid within such timeframe shall bear interest at
the Interest Rate until such funds are properly applied.
1.8. Prorations. At the Closing and any Subsequent Closing, the parties
----------
will make ordinary and customary prorations respecting assets, liabilities and
prepaid expenses otherwise not addressed by this Agreement, such that Seller
will be entitled to the income earned and be responsible for the costs and
expenses incurred (or attributable to the period) prior to the Initial Closing
or a Subsequent Closing (as applicable) and Buyer will be entitled to the income
earned and be liable for the costs and expenses incurred (or attributable to the
period) after the Initial Closing or Subsequent Closing (as applicable).
ARTICLE II
PURCHASE PRICE
--------------
2.1. Purchase Price. The purchase price for the Assets shall be:
--------------
(a) as respects each Loan, the amount specified in Section 3.5 below;
(b) the assumption of the liabilities specified in Section 1.4;
(c) $600,000; and
(d) cash in the aggregate amount of the sum of the net book values of
the assets set forth in any Schedule referred to in Section 1.1. As respects any
assets set forth in Section 1.1(b) which are not purchased at the Initial
Closing, but which Buyer has the option to purchase prior to December 31, 1999,
Buyer shall pay Seller as additional consideration an amount equal to the
depreciation or amortization taken by Seller with respect to such assets on a
monthly basis from the Initial Closing Date to the earlier of the date of
purchase of such assets by Buyer or December 31, 1999.
2.2. Payments. All payments shall be made by wire transfer of immediately
--------
available funds to the account of the party entitled thereto.
2.3. Letter of Credit Obligations. After the Initial Closing Date, Buyer
----------------------------
shall pay to Seller a fee of 1% per annum on the gross amount of all outstanding
Letter of Credit Obligations. Such fee shall be paid by Buyer to Seller within
five days following the end of each calendar quarter. Letter of Credit
Obligations shall be funded by Seller and, once funded, shall be deemed Unsold
Loans subject to all terms and conditions of this Agreement.
2.4. Allocation of Purchase Price. The purchase price of the Assets will
----------------------------
be allocated in accordance with the values allocated to the Assets on the
various Schedules hereto. Subject to the requirements of any applicable tax
law, all tax returns and reports filed by Buyer and Seller shall be prepared
consistently with such allocation. In the event of any adjustment to the
purchase price hereunder, Buyer and Seller agree to adjust such allocation to
reflect such adjustment and to file consistently any tax returns and reports
required as a result of such adjustment. Each of the parties agrees to
cooperate with the other party in the preparation and filing of any tax returns
required under any applicable law.
5
<PAGE>
2.5. Assignment of Right to Purchase. Buyer shall have the right to assign
-------------------------------
all or any portion of its rights to purchase the Assets or the Loans hereunder
to any third party which controls, is controlled by, or is otherwise an
affiliate of, Buyer. In the event of any such assignment all references to
Buyer hereunder shall thereafter also include assignee.
ARTICLE III
THE CLOSING
-----------
3.1. Time and Place of Initial Closing. The closing (the "Initial
---------------------------------
Closing") of the transactions contemplated by this Agreement (other than the
purchase and sale of Loans which will take place at a Subsequent Closing as
provided in Section 3.4) shall take place on October 1, 1999, or, if later, the
date that is three business days after all of the conditions to the Initial
Closing (other than conditions which by their terms are to be satisfied on the
Initial Closing Date) are satisfied (the "Initial Closing Date"), at the offices
of Loeb & Loeb LLP, 1000 Wilshire Boulevard, Suite 1800, Los Angeles, California
90017, or at another date, time and place agreed upon in writing by the parties.
The Initial Closing shall be effective as of the close of business on the
Initial Closing Date.
3.2. Seller's Initial Closing Deliveries. At the Initial Closing, Seller
-----------------------------------
shall deliver to Buyer (or provide Buyer with) the following:
(a) a Bill of Sale in form and substance reasonably satisfactory to
Buyer's legal counsel respecting the Personal Property;
(b) an Assignment and Assumption Agreement in the form of Exhibit
3.2(b) respecting the Contracts;
(c) a services agreement in the form of Exhibit 3.2(c) hereof;
(d) a release from Horwitz in the form of Exhibit 3.2(d)-1;
(e) a wire transfer of immediately available funds in an amount equal
to the Transferred Plan Obligations;
(f) originals of all files, documents, papers, agreements, books of
account and other records to be sold to Buyer;
(g) all required consents to assignment of Contracts, executed by all
required parties;
(h) resolutions of Seller's Board of Directors authorizing the
transactions referenced herein, certified by Seller's secretary;
(i) the documents and agreements referred to in Section 3.4(c) below,
to the extent any Loan is purchased at the Initial Closing; and
6
<PAGE>
(j) all other documents, instruments and writings required to be
delivered by Seller at or before the Initial Closing pursuant to this Agreement
or otherwise reasonably required by Buyer in connection herewith.
3.3. Buyer's Initial Closing Deliveries. At the Initial Closing, Buyer
----------------------------------
shall deliver to Seller the following:
(a) the purchase price for all Assets and Loans to be purchased at
the Initial Closing;
(b) an Assignment and Assumption Agreement in the form of Exhibit
3.2(b) respecting the Contracts;
(c) a services agreement in the form of Exhibit 3.2(c) hereof;
(d) a release from Horwitz in the form of Exhibit 3.2(d)-1;
(e) resolutions of Buyer's Board of Directors authorizing the
transactions referenced herein, certified by Buyer's secretary;
(f) the documents and agreements referred to in Section 3.4(c)
required to be signed by Buyer, to the extent any Loan is purchased at the
Initial Closing; and
(g) all other documents, instruments and writings required to be
delivered by Buyer at or before the Initial Closing pursuant to this Agreement
or otherwise reasonably required by Seller in connection herewith.
3.4. Purchase and Sale of Loans; Subsequent Closings. Following the
-----------------------------------------------
Initial Closing Date, but subject to Buyer's right to refinance Loans as
provided by Section 3.4(e) below, Buyer shall purchase from Seller and Seller
shall sell to Buyer Loans at one or more subsequent closings (each, a
"Subsequent Closing") as follows:
(a) On or before March 31, 2000 (or any other date specified on
Schedule 1.1(a), if different), whole Loans with a Gross Book Value of at least
$50,000,000 and, in addition, whole Loans with an aggregate Gross Book Value
equal to or exceeding (but only to the extent necessary to transfer a whole
Loan) all amounts funded by Seller with respect to commitments under the Loan
Documents after the Initial Closing Date and Letter of Credit Obligations.
Seller will notify Buyer in writing of such total commitments funded by Seller.
(b) On or before December 29, 2000, all remaining Loans.
(c) In order to purchase a Loan, Buyer shall deliver a written notice
to Seller which shall indicate the Loans to be purchased and the date of the
Subsequent Closing respecting such Loans (a "Subsequent Closing Date"). At least
one business day prior to a Subsequent Closing Date, the Purchase Price (as
defined below) shall be paid by federal wire transfer of immediately available
funds to Seller. Following Seller's receipt of the Purchase Price, upon the
Subsequent Closing Date Seller shall deliver to Buyer fully-executed copies of
the following:
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<PAGE>
(i) an Assignment Agreement in the form of Exhibit 3.4(c)(i);
(ii) the original executed note(s) respecting the Loan;
(iii) an endorsement to the Note(s) in the form of Exhibit
3.4(c)(iii), which shall be attached to the Note;
(iv) an Assignment of any copyright mortgage respecting the
Loan;
(v) the executed originals of all of the Loan Documents (or, if
unavailable), copies of such Loan Documents; and
(vi) a Uniform Commercial Code Assignment Statement, California
Form UCC-2 (collectively, the "UCC Assignment").
Each of Seller and Buyer agree to execute and deliver, or to be caused to be
executed and delivered, all such other instruments, and to take all such other
actions, as the other party may reasonably request in order to effectuate the
purchase and sale of the Loans including, without limitation, notices to
distributors and laboratories.
(d) Notwithstanding the provisions of Sections 3.4(a) and 3.4(b)
above, Buyer hereby grants Seller the right (the "Put Right") exercisable at any
time following the Initial Closing Date to sell to Buyer any Loan which Seller
has classified "Nonaccrual". A Loan will be classified as Nonaccrual when (i)
any interest payment is 90 or more days past due, (ii) any principal payment is
90 or more days past due, or (iii) the interest reserve respecting the Loan has
been fully utilized, and the sum of the estimated cash flow from executed
distribution contracts and the estimated cash flow from remaining unsold primary
territories is less than the loan balance (both principal and projected interest
accruals prior to full repayment). In order to exercise the Put Right, Seller
shall deliver written notice to Buyer which will indicate the Loans to be
purchased and the Loan Closing Date (such date not to be less than three
business days after the date of delivery of the Put Notice). Upon receipt of the
Put Notice, Buyer shall purchase the Loan on the specified Loan Closing Date in
the manner contemplated by Section 3.4(c) above. Loans purchased pursuant to
this Section 3.4(d) shall be credited to the loan purchase commitment set forth
in Section 3.4(a).
(e) In lieu of purchasing any Loan, Buyer shall have the right to
refinance, or cause to be refinanced, any Loan and utilize the proceeds of such
refinancing to pay off all outstanding obligations under the Loan.
(f) Notwithstanding anything to the contrary set forth in this
Agreement, Buyer may assign its obligations to purchase any Loan to a nominee.
Any such assignment shall not release Buyer from its obligations to Seller with
respect to such Loan.
(g) For purposes of this Agreement, the term "Gross Book Value" shall
mean the principal amount of a Loan (or Loans, as the context may require), plus
any other amount then due or accrued with respect to the Loan(s), minus the
amount of any prepaid fee or other amount which has not yet been earned, all as
effected on the books and records of Seller.
8
<PAGE>
3.5. Purchase Price.
--------------
(a) The purchase price (the "Purchase Price") of any Loan shall be
the gross carrying value of such Loan on the books and records of Seller;
provided, however, that as respects the first $20,000,000 Purchase Price of
Loans designated as "Nonaccrual" and sold to Buyer pursuant to Section 3.4(d)
above, Buyer shall be entitled to a credit of $3,637,840, representing a reserve
applicable to such Nonaccrual loans. The amount of such reserve credited to the
Purchase Price shall be determined by multiplying the $3,637,840 reserve by a
fraction, the numerator of which is the Purchase Price of the Loans to be sold
to Buyer and the denominator of which is $20,000,000, until the entire
$3,637,840 reserve has been applied to the Purchase Price in accordance with
this Section 3.5. In the event the entire reserve has not been applied to the
Purchase Price by March 31, 2000, Buyer shall be entitled to credit the balance
of such $3,637,840 reserve to any Loan purchased after such date. It is
understood by the parties that additional unallocated reserves at Seller are not
being credited to Buyer.
(b) Notwithstanding the foregoing, Buyer shall not be obligated to
purchase any "Nonaccrual loan" referred to in Section 3.5(a) hereto if:
(i) said Loan is the subject of a fraudulent scheme by the
borrower of which Seller had actual knowledge; or
(ii) there existed any fraud by Seller or any of its agents in
connection with the origination of such Loan.
3.6. Loan Repurchase Right. For a period of 365 days following the
---------------------
purchase of any Loan (other than any Loan "put" to Buyer pursuant to Section
3.4(d)) by Buyer, Seller shall have the right, exercisable by delivery of
written notice to Buyer, to reacquire such Loan at a purchase price equal to
105% of the gross carrying value of such Loan on the books of Buyer. In the
event Seller exercises a right to reacquire a Loan, such Loan shall be
transferred to Seller pursuant to agreements and instruments equivalent to those
utilized to sell such Loan to Buyer hereunder. Any reconveyance of Loans from
Buyer to Seller shall be on an "as is" and "with all faults" basis in the same
manner as provided in Section 5.7 hereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller hereby represents and warrants to Buyer, as of the date hereof, the
Closing Date, and any Loan Closing Date, as follows:
4.1. Due Organization. Seller is a banking association duly organized and
----------------
validly existing under the laws of California.
4.2. Due Authorization; Enforceability. This Agreement and the other
---------------------------------
agreements, instruments and documents to be executed and delivered pursuant
hereto (the "Assignment Documents") to which Seller is a party have been duly
and validly authorized, executed and delivered by Seller, and are the legal,
valid and binding obligations of Seller, enforceable against Seller in
accordance with their respective terms. Neither the execution, delivery, nor
performance of this Agreement by Seller nor the execution, delivery and
performance of any
9
<PAGE>
other documents referenced herein to which Seller is a party will (i) violate,
or constitute a breach or default (whether upon lapse of time and/or the
occurrence of any act or event or otherwise) under, (A) the charter documents or
by-laws of Seller or (B) any Contract, (ii) result in the imposition of any
encumbrance against any Asset, or (iii) violate any law. No registration with,
or consent or approval of, or any other action by, any governmental authority or
other person is required in connection with the execution, delivery and
performance of this Agreement or the Assignment Documents by Seller.
4.3. Financial Statements.
--------------------
(a) Unaudited Financial Statements. Seller has delivered to Buyer
------------------------------
unaudited balance sheets for LHO at December 31, 1996, 1997 and 1998 and the
related statements of operations for the periods then ended. Seller has also
delivered to Buyer interim balance sheets for LHO at March 31, 1999, and the
related statements of operations for the three-month periods then ended. All
such financial statements accurately reflect the amounts of gross Loans,
capitalized fees and fixed assets as of the dates thereof.
(b) No Other Material Liabilities or Contingencies. Seller does not
----------------------------------------------
have any material liabilities of any nature as they relate to the business of
LHO, whether accrued, absolute, contingent or otherwise, and whether due or to
become due, probable of assertion or not, except liabilities that (i) are
reflected or disclosed in the balance sheet included in the interim financial
statements referred to in Section 4.3(a) above or (ii) were incurred after
December 31, 1998 in the ordinary course of business.
4.4. Loans. With respect to any and all Loans:
-----
(a) Schedule 1.1(a) hereto accurately identifies each Loan;
(b) Except for any applicable loan participations, the Loans have not
been assigned or pledged by Seller;
(c) Seller is not in material default under any such Loans;
(d) All of the Loans represent transactions which occurred in the
ordinary course of LHO's business; and
(e) Except as provided under any applicable loan participations, the
payments under such Loans have not been assigned, pledged or otherwise
hypothecated by Seller.
4.5. No Liens. Seller has good title to the Assets and has not heretofore
--------
assigned, encumbered or otherwise transferred the Assets, the Loans and/or the
Loan Documents or any of its right, title or interest in and to the Assets, the
Loans and/or any of the Loan Documents to any other person.
4.6. Litigation. To Seller's knowledge, there is no action, proceeding,
----------
suit, investigation or inquiry pending that questions the validity of this
Agreement or that would prevent or hinder the consummation of the transactions
contemplated hereby.
10
<PAGE>
4.7. Taxes. Seller has filed all federal, state, local and other returns,
-----
reports and information (collectively, the "Returns") required to be filed by it
with respect to Taxes (as defined below) relating to LHO and has timely paid or
will pay all Taxes shown to be due on the Returns. "Taxes" means all taxes,
charges, fees, levies and other assessments, including, without limitation,
income, excise, property, payroll, sales, use, franchise and other taxes,
imposed by any federal, state, local or foreign taxing authority, including any
interest, penalties or additions. All Returns filed are correct and complete in
all material respects and except for timing adjustments, no additional Taxes are
owed by Seller with respect to the periods covered by the Returns.
4.8. Permits. There exist no transferable regulatory permits, licenses,
-------
authorizations, certificates, registrations and other approvals necessary for
the operation of LHO.
4.9. Contracts. There is no existing material default or violation by
---------
Seller under any of the Contracts, and no event has occurred which (with or
without notice or lapse of time, or both) would constitute a material default or
cause the acceleration of any of Seller's obligations thereunder or result in
the creation or imposition of any lien on the Assets. Seller is not aware of
any material default by any other party to any Contract or of any event which
(with or without notice or lapse of time, or both) would constitute a material
default by any other party with respect to its obligations under any Contract.
4.10. Brokers and Finders. Seller has not employed any broker, finder,
-------------------
agent or investment banker, dealt with anyone purporting to act in that capacity
or agreed to pay any brokerage fee, finder's fee or commission with respect to
the transactions contemplated by this Agreement.
4.11. Accuracy of Information. None of the information supplied or to be
-----------------------
supplied by or on behalf of Seller (a) to any person for inclusion in any
document or application filed with any governmental entity in connection with
the transactions contemplated by this Agreement or (b) in this Agreement or the
Schedules or exhibits hereto contains any untrue statement of a material fact,
or omits to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading. All documents required to be filed by
Seller with any governmental entity in connection with this Agreement and the
other documents referenced herein or the transactions contemplated hereby or
thereby will comply in all material respects with the provisions of applicable
law.
4.12. No Other Representations or Warranties. Except as set forth in this
--------------------------------------
Agreement, Seller makes no representations or warranties with respect to the
Assets or the transactions contemplated hereby.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer hereby represents and warrants to Seller, as of the date hereof, the
Closing Date, and any Loan Closing Date, as follows:
11
<PAGE>
5.1. Due Organization. Buyer is a corporation duly organized, validly
----------------
existing and in good standing under the laws of the State of California and has
all corporate powers to carry out its business.
5.2. Due Authorization; Enforceability. This Agreement and the Assignment
---------------------------------
Documents to which Buyer is a party have been duly and validly authorized,
executed and delivered by Buyer, and are the legal, valid and binding
obligations of Buyer, enforceable against Buyer in accordance with their
respective terms. No registration with, or consent or approval of, or any other
action by, any governmental authority or other person is required in connection
with the execution, delivery and performance of this Agreement or the Assignment
Documents by Buyer.
5.3. Litigation. To the best of Buyer's knowledge, no proceedings are
----------
pending or threatened against or affecting Buyer before any governmental
authority which could reasonably be expected to materially and adversely affect
any action taken or to be taken by Buyer under this Agreement.
5.4. Sophistication. Buyer is a sophisticated buyer with respect to the
--------------
Loans and Loan Documents, has adequate information concerning the business and
financial condition of each borrower to make an informed decision regarding the
purchase of the Loans and Loan Documents and has made its own analyses,
examinations, and investigations in making its decision to enter into this
Agreement and to purchase the Loans and Loan Documents independently without
reliance upon any oral or written information from Seller or its employees,
affiliates, agents or representatives, including, without limitation, any
statements or representations of Seller concerning the genuineness, accuracy or
completeness of the Loan Documents, the validity or enforceability of the Loan
Documents, the collectibility of the Loans or the validity, enforceability or
perfection of Seller's security interest in the collateral for the Loans.
5.5. No Other Warranties. Buyer acknowledges that Seller has not made and
-------------------
is not making any representation or warranty, whether express or implied, except
as expressly set forth in this Agreement. Buyer acknowledges that the sale of
the Loans and Loan Documents by Seller to Buyer is irrevocable, and that Buyer
shall have no recourse to Seller, except with respect to breaches of
representations, warranties, covenants and agreements of Seller expressly set
forth in this Agreement.
5.6. Consideration. Buyer acknowledges that the consideration paid
-------------
pursuant of this Agreement for the purchase of the Loans and Loan Documents may
differ both in kind and amount from any payments or distributions which may
ultimately be received with respect thereto. Except as may be provided in
Section 8.1 hereof, as of the Initial Closing, Buyer hereby assumes all risk of
loss, whether full or partial, which is inherent with the credit and all
collateral and collectibility risks associated therewith, without any continuing
obligation of Seller to assist any Borrower in connection therewith, including
the risk that any Borrower and one or more of its affiliates may become the
subject of a proceeding under Chapter 11 of Title 11 of the United States Code,
as amended. Buyer is not an agent for Seller in this transaction.
12
<PAGE>
5.7. As Is Purchase. Buyer is purchasing the Loans and the Loan Documents
--------------
"as is" and "with all faults" and, except as may be provided in Section 8.1
hereof, Buyer waives all claims Buyer may have which are known to Buyer, or
which could or should have been known to Buyer as a result of Buyer's due
diligence, credit analyses, examinations and investigations of the Loans, the
Loan Documents and the collateral, arising out of any actual or alleged defect
in or defense to the Loans or the payment of all or any portion thereof.
5.8. Brokers and Finders. Buyer has not employed any broker, finder, agent
-------------------
or investment banker, dealt with anyone purporting to act in that capacity or
agreed to pay any brokerage fee, finder's fee or commission with respect to the
transactions contemplated by this Agreement.
ARTICLE VI
ADDITIONAL COVENANTS
--------------------
Between the date hereof and the Closing Date, Buyer and Seller covenant and
agree that they will act in accordance with the following:
6.1. Consents. Each party shall use all commercially reasonable efforts to
--------
obtain any consents required from third parties for the consummation of the
transactions contemplated hereby. If any such consent shall not be obtained,
Seller shall cooperate with Buyer in a reasonable arrangement designed to
provide Buyer with the benefit of any such consents or approvals.
6.2. Reasonable Efforts. Each party shall use all commercially reasonable
------------------
efforts to effectuate the transactions contemplated hereby and to fulfill the
conditions to the obligations of the other party set forth in Article VII.
6.3. Sublease. Buyer shall be entitled to remain in the premises currently
--------
occupied by LHO at 1840 Century Park East, Suite 1000, through December 31, 1999
on a sublease basis. The rent for the subleased premises shall be all rent
payable by Seller under the master lease for the entire premises covered by
Suite 1000 (space currently occupied and not occupied by LHO). By delivery of
written notice to Seller prior to November 30, 1999, Buyer shall have the right
to elect to take an assignment (or, if necessary to obtain the landlord's
consent, a sublease) to such premises for the balance of the term of the master
lease, subject to the receipt of all applicable consents from the landlord. As
a condition to exercising its right to take an assignment or sublease of the
master lease, Buyer must exercise its right to acquire all property listed on
Schedule 1.1(b) prior to December 31, 1999.
6.4. Employees.
---------
(a) Affected Employees. "Affected Employees" means those employees of
------------------
LHO listed on Schedule 6.4(a) who are employed by Buyer immediately after the
Initial Closing.
(b) Offer of Employment. Prior to Initial Closing, Buyer shall offer
-------------------
employment to all Affected Employees on terms, taken as a whole, reasonably
comparable to those provided to such Affected Employees by Seller. Buyer shall
give Affected Employees
13
<PAGE>
credit for prior service to Seller for purposes of the vesting of benefits under
Buyer's employee benefit plans.
(c) Benefits. Except as provided by Sections 1.4(d) and 6.4(b) above,
--------
Buyer shall have no obligation to assume, continue or maintain any of the
employee benefit plans, programs, policies, agreements or arrangements
sponsored, maintained, contributed to or required to be contributed to by Seller
for the benefit of any employee or former employee of LHO or any other person
who is or has in the past been providing services to LHO. Buyer shall make
available to all Affected Employees those employee benefits that Buyer generally
makes available to its employees on the same terms and conditions to which
Buyer's employees generally are subject. Buyer shall not terminate any Affected
Employee for a period of 120 days after the Closing Date, except for cause. If
Buyer terminates any of the Affected Employees within 12 months of the Closing
Date, other than for cause, it shall provide such terminated Affected Employee
with severance benefits comparable to those that would have been available to
the Affected Employee under Seller's standard severance policies.
(d) Retained Responsibilities. Seller shall satisfy, or cause its
-------------------------
insurance carriers to satisfy, all claims for benefits, whether insured or
otherwise (including, but not limited to, workers' compensation, vacation, paid
time off, life insurance, medical and disability programs), under Seller's
employee benefit programs brought by, or in respect of, Affected Employees and
other employees and former employees of LHO, which claims arise out of events
occurring on or before the Closing Date, in accordance with the terms and
conditions of those programs or applicable statutes.
(e) Notification of Payments. Buyer shall notify Seller in writing of
------------------------
all payments made to Horwitz and Arthur Stribley under Buyer's (or its
affiliates) deferred compensation plan(s) respecting liabilities and amounts
transferred to Buyer pursuant to Sections 1.4(d) and 3.2(e) above. In this
regard, the first payments to Horwitz and Arthur Stribley from said deferred
benefit plan(s) shall be deemed attributable to the liabilities and amounts so
transferred to Buyer until such time as such amounts equal the Transferred Plan
Obligations.
6.5. Hart-Scott-Rodino Act Filings. Buyer and Seller shall cooperate in
-----------------------------
making all filings required to be made under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act"), with all governmental authorities
having jurisdiction with respect to the purchase of Assets under this Agreement.
6.6. Necessary Assets. The parties understand and intend that the Assets
----------------
purchased by Buyer include all Assets which are necessary or appropriate for the
conduct of the LHO business after the Initial Closing in the same manner as the
LHO business was conducted by Seller. If after the Initial Closing Date Buyer
reasonably determines that it has not acquired an asset necessary for Buyer to
carry on the LHO business as conducted by Seller before the Closing Date, Seller
shall use all commercially reasonable efforts to either sell such Asset(s) to
Buyer or provide Buyer with rights to the use of such Assets. This Section is
not intended to apply to Seller's financial, accounting and other software
systems currently utilized by LHO.
14
<PAGE>
6.7. No Announcements. Neither party hereto will make any announcement
----------------
regarding or disclose the terms of the transactions contemplated by this
Agreement, except as required by law, without the other party's consent and
approval of the text of such announcement, which consent and approval shall not
be unreasonably withheld.
6.8. Sales Taxes. Buyer shall pay Seller and Seller shall collect from
-----------
Buyer on the Closing Date any sales tax owing in respect of the purchase of the
Assets. Seller shall promptly file all necessary sales tax returns and pay all
sales taxes due following the Closing Date. As soon as practicable following
the Closing Date, Seller shall deliver to Buyer receipts from the appropriate
taxing authorities showing that all sales taxes owing have been paid.
6.9. Proration of Taxes. Personal and real property taxes with respect to
------------------
the Assets will be prorated as of the Initial Closing, with Seller liable to the
extent such items relate to any time period up to and including the Initial
Closing and Buyer liable to the extent such items relate to periods subsequent
to Initial Closing.
6.10. Competition. Following the Initial Closing and any Subsequent
-----------
Closing, the parties will remain free to compete with one another respecting the
origination of loans and other businesses of the type carried on by LHO.
6.11. Loan Fees. Following the Initial Closing, Seller shall continue to
---------
account for deferred Loan fees in the same manner as immediately prior to the
Initial Closing.
ARTICLE VII
CLOSING CONDITIONS
------------------
7.1. Conditions Precedent to Seller's Obligations. Seller's obligation to
--------------------------------------------
consummate the transactions contemplated at the Initial Closing Date are, at its
option, subject to satisfaction, at or before the Initial Closing Date, of the
following conditions:
(a) The representations and warranties of Buyer set forth in this
Agreement shall be accurate in all material respects as of the Initial Closing
Date as if made on and as of said Closing Date;
(b) Buyer shall in all material respects have complied with or
performed all of the terms, covenants and conditions to be complied with or
performed by Buyer on or before the Initial Closing Date;
(c) No action, claim, suit or governmental proceeding shall have been
instituted, and no order, decree or judgment of any court, agency or other
governmental authority shall have been rendered, against Buyer or Seller to
restrain or prohibit this Agreement or the consummation of the transactions
contemplated hereby;
(d) Buyer shall have delivered to Seller all of the closing
deliveries specified in Section 3.3;
15
<PAGE>
(e) Seller shall have received the releases specified in Section
3.3(d). Without limitation, the release from Horwitz will release Seller from
all obligations under that certain Employment Agreement dated July 23, 1997
between Seller and Lewis P. Horwitz, as amended;
(f) All consents, approvals and authorizations of, and all filings
and registrations with, all federal, state and local governmental authorities
and any third persons (including Horwitz) required for consummation of the
transactions contemplated hereby shall have been obtained or made; and
(g) The waiting period required under the HSR Act and the regulations
promulgated thereunder shall have expired or terminated.
7.2. Conditions Precedent to Buyer's Obligations. Buyer's obligation to
-------------------------------------------
consummate the transactions contemplated hereby at the Initial Closing Date are,
at its option, subject to satisfaction, at or before the Initial Closing Date,
of the following conditions:
(a) The representations and warranties of Seller set forth in this
Agreement shall be accurate in all material respects as of the Closing Date as
if made on and as of the Initial Closing Date;
(b) Seller shall in all material respects have complied with or
performed all of the terms, covenants and conditions to be complied with or
performed by Seller on or before the Initial Closing Date;
(c) No action, claim, suit or governmental proceeding shall have been
instituted, and no order, decree or judgment of any court, agency or other
governmental authority shall have been rendered, against Buyer or Seller to
restrain or prohibit this Agreement or the consummation of the transactions
contemplated hereby;
(d) Seller shall have delivered to Buyer all of the closing
deliveries specified in Section 3.2;
(e) Buyer shall have entered into an employment agreement with
Horwitz in the form and substance satisfactory to Buyer.
(f) All consents, approvals and authorizations of, and all filings
and registrations with, all federal, state and local governmental authorities
and any third persons (including Horwitz) required for consummation of the
transactions contemplated hereby shall have been obtained or made; provided,
--------
however, that receipt of any third-party consent where the failure to obtain
- -------
such consent would not have a material adverse effect on the Assets or LHO shall
not be a condition to Buyer's obligation to close hereunder; and
(g) The waiting period required under the HSR Act and the regulations
promulgated thereunder shall have expired or terminated.
16
<PAGE>
ARTICLE VIII
INDEMNIFICATION
---------------
8.1. Indemnification by Seller. On and after the Initial Closing Date,
-------------------------
Seller shall indemnify, hold harmless and defend Buyer and its directors,
officers, employees and agents for, from and against any and all Losses (as
defined below) incurred by Buyer arising out of or in connection with:
(a) Any breach or inaccuracy of any representation or warranty of
Seller made in this Agreement or in the schedules or exhibits hereto;
(b) Any failure by Seller to fulfill any of its covenants or other
agreements hereunder;
(c) any claims for compensation and other employee benefits
(including, but not limited to, severance pay, disability benefits, health,
workers' compensation, and death benefits) accruing prior to the Initial Closing
with respect to persons who were employed by Seller on or prior to the Initial
Closing Date;
(d) any environmental claim or any remedial action arising out of or
based upon anything relating to the operation of LHO prior to the Initial
Closing;
(e) any Loan referenced in Section 3.5(b) hereof; and
(f) any liabilities not assumed by Buyer and the conduct of the LHO
business before the Initial Closing.
8.2. Indemnification by Buyer. On and after the Initial Closing Date,
------------------------
Buyer shall indemnify, hold harmless and defend Seller and its directors,
officers, employees and agents for, from and against any and all Losses (as
defined below) incurred by Seller arising out of or in connection with:
(a) Any Loan or Letter of Credit Obligation;
(b) Any breach or inaccuracy of any representation or warranty of
Buyer made in this Agreement or in any certificate delivered hereunder;
(c) Any failure by Buyer to fulfill any of its covenants or other
agreements hereunder; or
(d) The Assumed Liabilities and the conduct of the LHO business after
the Initial Closing.
8.3. Definitions. As used in this Article XIII, the term "Losses" means
-----------
(i) all losses, damages, liabilities, costs and expenses, including interest
from the date of loss to the time of payment, and penalties of every kind,
nature or description; and (ii) any out-of-pocket costs, including, without
limitation, reasonable expenses of investigation, reasonable attorneys' and
paralegals' fees (at trial, on appeal, in connection with any petition for
review and in any agency
17
<PAGE>
proceeding) and reasonable consulting, expert and accounting fees incurred in
investigating, defending or prosecuting any claim.
8.4. Repurchase Option. Upon delivery by Buyer hereunder of notice to
-----------------
Seller with respect to indemnification solely under Section 8.1(e) hereof with
respect to any Loan, Seller shall be entitled, within thirty (30) days following
such notice, to tender to Buyer an amount equal to the Gross Book Value of such
Loan, net of any principal payments received by Buyer with respect to such Loan
or Loans following Buyer's purchase of the Loan, at which time Buyer will assign
such Loan to Seller.
8.5. Indemnification Payments. The indemnitor under this Article VIII
------------------------
shall pay any sums due and owing by it to an indemnitee by wire transfer or
certified check within thirty (30) days after the date of the determination of
liability pursuant to this Agreement. Any overdue amounts payable by the
indemnitor shall bear interest at an annual rate equal to the published prime
rate of Seller as in effect from time to time minus 2.5%, based on a year of 365
days and the number of days elapsed.
8.6. Notice; Defense of Third-Party Claims.
-------------------------------------
(a) Notice. If any indemnified party intends to seek indemnification
------
under this Article VIII, that party shall deliver a written notice to the
indemnifying party; provided that failure to give notice shall not relieve the
indemnifying party of its obligations hereunder, except to the extent it has
been prejudiced by that failure.
(b) Defense of Third-Party Claims. The indemnifying party shall have
-----------------------------
the right to conduct and control, through its own counsel, the defense,
compromise or settlement of any third-party claim, action or suit involving the
indemnified party or the Assets as to which indemnification is sought, and the
indemnified party shall cooperate and furnish any records, information and
testimony and attend any conferences, discovery proceedings, hearings, trials
and appeals as the indemnifying party may reasonably request. The indemnified
party shall be entitled at any time to participate in (but not direct) the
defense of any such claim, action or proceeding through its own counsel and at
its own expense.
8.7. Survival. The representations and warranties contained in this
--------
Agreement or in any document delivered pursuant to or in connection with the
Initial Closing shall survive the Initial Closing for a period of 24 months
thereafter (the "Survival Date"). If notice of one or more claims subject to
indemnification is given on or before the Survival Date, the indemnification
right hereunder shall survive until all such claims have been finally resolved
and all indemnification rights have been satisfied.
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.1. Dispute Resolution. Any dispute, controversy or claim between the
------------------
parties relating to, or arising out of or in connection with this Agreement (or
any subsequent agreements or amendments thereto), including as to its existence,
enforceability, validity, interpretation, performance, breach or damages,
including claims in tort, whether arising before or after the termination of
this Agreement, shall be settled only as follows: First, an authorized business
18
<PAGE>
representative of each party shall meet in an attempt to resolve any dispute.
If the dispute is not resolved by such representatives, then either of Buyer or
Seller may make a written demand for formal dispute resolution, at which time
the dispute will be resolved by binding arbitration in Los Angeles, California,
pursuant to the Commercial Arbitration Rules, as then amended and in effect, of
the American Arbitration Association (the "Rules"), subject to the following:
(a) There shall be one arbitrator, who shall be selected under the
normal procedures prescribed in the Rules.
(b) Subject to legal privileges, each party shall be entitled to
discovery in accordance with the Federal Rules of Civil Procedure.
(c) At the arbitration hearing, each party may make written and oral
presentations to the arbitrator, present testimony and written evidence and
examine witnesses.
(d) The arbitrator's decision shall be in writing, shall be binding
and final and may be entered and enforced in any court of competent
jurisdiction.
(e) No party shall be eligible to receive, and the arbitrator shall
not have the authority to award, exemplary or punitive damages.
(f) Each party to the arbitration shall pay one-half of the fees and
expenses of the arbitrator and the American Arbitration Association.
(g) The arbitrator shall not have the power to amend this Agreement.
9.2. Counterpart Execution; Telecopies. This Agreement may be executed in
---------------------------------
any number of counterparts, each of which, when so executed and delivered, shall
be an original, but all of which together shall constitute one agreement binding
all of the parties hereto. Transmission by telecopier of an executed
counterpart of this Agreement shall be deemed to constitute due and sufficient
delivery of such counterpart, provided that the party so delivering such
counterpart shall, promptly after such delivery, deliver the original of such
counterpart of this Agreement to the other party hereto.
9.3. Amendments; Waivers. No amendment of any provision of this Agreement
-------------------
shall be effective unless it is in writing and signed by Seller and Buyer and no
waiver of any provision of this Agreement, nor consent to any departure by
Seller or Buyer therefrom, shall be effective unless it is in writing and signed
by the party affected thereby, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. No failure or delay on the part of either party hereto in exercising any
right hereunder shall operate as a waiver thereof by such party nor shall any
single or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right.
9.4. Notices. All notices, demands, requests and other communications
-------
required hereunder shall be in writing and shall be deemed to have been given:
(i) upon delivery if personally delivered; (ii) upon receipt if sent by
facsimile, with receipt confirmed; (iii) three (3) days after deposit in the
United States Mail when delivered, postage prepaid, by certified or registered
mail; or (iv) one (1) day after deposit with a nationally recognized overnight
delivery
19
<PAGE>
service marked for delivery on the next business day, addressed to the party for
whom it is intended at its address hereinafter set forth:
If to Seller:
Imperial Bank
9920 South La Cienega Boulevard
Inglewood, California 90301
Attention: Richard M. Baker
Telephone: (310) 417-5929
Facsimile No.: (310) 417-5695
with copies thereof to:
Loeb & Loeb LLP
1000 Wilshire Boulevard, Suite 1800
Los Angeles, California 90017
Attention: Robert S. Barry, Jr., Esq.
Telephone: (213) 688-3606
Facsimile No.: (213) 688-3460
and if to Buyer:
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard, Bldg. One
Suite 240
Torrance, California 90505
Attention: Irwin L. Gubman, General Counsel
Telephone: (310) 791-8040
Facsimile No.: (310) 791-8230
with copies thereof to:
Freshman, Marantz, Orlanski, Cooper & Klein
9100 Wilshire Boulevard
Eighth Floor, East Tower
Beverly Hills, California 90212
Attention: Thomas J. Poletti, Esq.
Telephone: (310) 285-1629
Facsimile: (310) 274-8357
Any party may designate a change of address by written notice to the others,
given at least ten (10) days before such change of address is to become
effective.
9.5. No Third-Party Beneficiary. This Agreement and each of the provisions
--------------------------
hereof (including representations, warranties and covenants, if any) are solely
for the benefit of Seller and Buyer and the respective successors and permitted
assigns of the foregoing. No provisions of this Agreement or of any of the
documents and certificates executed in connection herewith (including any
representations and warranties) shall be construed as creating in any other
person
20
<PAGE>
or entity other than Buyer and Seller and the respective successors and their
permitted assigns any rights of any nature whatsoever.
9.6. Other Transactions. Seller may accept deposits from, lend money to,
------------------
act as trustee under indentures or in general engage in any kind of business
with any borrower under a Loan (a "Borrower") or any of its subsidiaries,
owners, partners or affiliates (collectively, the "Borrowers' Affiliates"), or
any person who may do business with or own interests in any of them. Subject to
the limitations imposed by the Non-Competition Agreement, Buyer acknowledges
that Seller holds other outstanding indebtedness of the Borrowers and collateral
for the same. Buyer shall have no interest under this Agreement or any of the
other Assignment Documents in any credits previously or hereafter extended to
any Borrower or any of the Borrower's Affiliates by Seller or any property taken
as security for such loans other than the Loans pursuant to the Loan Documents.
Nothing herein shall in any manner be deemed to limit or preclude the right of
Seller to enter into any other such arrangements or to exercise any rights or
remedies available in connection therewith, including the exercise of any right
of setoff or the rights available as a matter of law.
9.7. Attorneys' Fees. In the event any legal action is undertaken in order
---------------
to enforce or interpret any provision of this Agreement, the prevailing party in
such legal action, as determined by the court, shall be entitled to receive from
the other party the prevailing party's reasonable attorneys' fees and court
costs.
9.8. Time of Essence; Context. Time is of the essence of this Agreement
------------------------
and of every part hereof. When the context and construction so require, all
words used in the singular herein shall be deemed to have been used in the
plural and the masculine shall include the feminine and the neuter and vice
versa.
9.9. Assignment. Subject to Section 3.4(f), Seller and Buyer hereby
----------
acknowledge that this Agreement is personal to them, and that they shall have no
right to assign any of their respective rights or obligations under this
Agreement (including any representations and warranties included herein) without
the prior written consent of the other.
9.10. Successors and Assigns. Subject to the provisions of Section 9.9
----------------------
above, all of the terms, covenants and conditions contained herein and in the
other documents and certificates executed in connection herewith shall apply to
and be binding upon, and inure to the benefit of Seller and Buyer and their
successors and any permitted assigns under Section 9.9 above.
9.11. Entire Agreement. This Agreement, together with the Assignment
----------------
Documents, sets forth the entire understanding between the parties hereto with
respect to the subject matter hereof, superseding all prior written or oral
understandings, and may not be terminated, modified or amended in any way except
by a written agreement signed by each of the parties hereto.
9.12. Governing Law. Buyer and Seller expressly agree that this Agreement
-------------
shall be governed by, interpreted under and construed and enforced in accordance
with the laws of the State of California (without giving effect to California
principles of conflicts of laws). Buyer and Seller each irrevocably submit to
the exclusive jurisdiction of any California state or federal
21
<PAGE>
court sitting in the County of Los Angeles, State of California, over any suit,
action or proceeding arising out of or relating to this agreement.
9.13. Severability. If any provision in this Agreement is found by a court
------------
of competent jurisdiction to be in violation of any applicable law, and if such
court should declare such provision of this Agreement to be unlawful, void,
illegal or unenforceable in any respect, the remainder of this Agreement shall
be construed as if such unlawful, void, illegal or unenforceable provision were
not contained therein, and the rights, obligations and interests of the parties
hereto under the remainder of this Agreement shall continue in full force and
effect undisturbed and unmodified in any way.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers as of the date first above written.
Seller:
Imperial Bank, a California corporation
By: /s/ [ILLEGIBLE]^^
------------------------------------
Title: EVP
------------------------------
By: /s/ [ILLEGIBLE]^^
------------------------------------
Title: SVP, CC & Secretary
------------------------------
Buyer:
Imperial Credit Industries, Inc., a
California corporation
By: /s/ [ILLEGIBLE]^^
------------------------------------
Title: Senior Vice President
------------------------------
By: /s/ [ILLEGIBLE]^^
------------------------------------
Title: General Counsel
------------------------------
22
<PAGE>
EXHIBIT 10.34
SERVICING AGREEMENT
between
IMPERIAL CREDIT INDUSTRIES, INC.
("Servicer")
and
IMPERIAL BANK
("Bank")
October 1, 1999
<PAGE>
SERVICING AGREEMENT ("Agreement"), dated as of October 1, 1999, by and
between Imperial Bank, a California banking corporation (the "Bank") and
Imperial Credit Industries, Inc., a California corporation (herein, together
with its successors and assigns, called "Servicer").
PRELIMINARY STATEMENT
---------------------
WHEREAS, the Bank and Servicer have entered into an Asset Purchase
Agreement dated October 1, 1999 (the "Asset Purchase Agreement") pursuant to
which Servicer will purchase certain entertainment-related Loans (the "Loans"),
all as more fully set forth in the Asset Purchase Agreement; and
WHEREAS, the parties hereto desire to enter into this Agreement to provide,
among other things, for the servicing of the Loans by Servicer until such Loans
are purchased by Servicer. For its services hereunder, Servicer will be
compensated as set forth in this Agreement.
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the Servicer and the Bank agree as follows:
ARTICLE 1
DEFINITION
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SECTION 1.1 Defined Terms.
-------------
All capitalized term used herein and not otherwise defined herein shall
have the meanings ascribed to them in the Loan Documents for each Loan or in the
Asset Purchase Agreement.
"Agreement" means this Servicing Agreement as originally executed and as
amended or supplemented from time to time in accordance with the terms hereof.
"Bankruptcy Law" means any day other than (i) a Saturday or a Sunday, or
(ii) a day on which banking institutions in the State of California are
authorized or obligated by law or executive order to remain closed.
"Defaulted Loan" shall mean a Loan which is delinquent in payment of any
scheduled Payment or other term of the collateral for the Loan.
"Loan Collateral" shall mean with respect to a Loan, the related security
agreement copyright mortgage and all collateral for the Loan.
"Loan Documents" shall mean with respect to a Loan, those instruments,
agreements, guaranty documents, certificates or other writings, now or hereafter
executed and delivered by
<PAGE>
the borrower in respect of such Loan as the same may be modified, amended,
consolidated, continued or extended from time to time.
"Remittance Date" shall mean the 15th day of each month or, if such 15th
day is not a Business Day, the next succeeding Business Day.
ARTICLE 2
ADMINISTRATION AND SERVICING OF LOANS
-------------------------------------
SECTION 2.1 Servicer to Act as Servicer.
---------------------------
(a) Engagement of Servicer. Servicer is hereby authorized to and
----------------------
shall service and administer the Loans in accordance with the terms of this
Agreement. Servicer shall have full power and authority, acting alone and
subject only to the specific requirements and prohibitions of this Agreement, to
take any and all actions, or to refrain from taking any such actions and to do
any and all things in connection with such servicing and administration which it
may deem necessary or desirable.
(b) General Servicing Procedures. Servicer agrees that its servicing
----------------------------
of the Loans shall be carried out in accordance with Bank's past practices.
Without limiting the forgoing, Servicer shall not release or waive the right to
collect the stated, non-default rate of interest on, the unpaid balance of, or
any yield maintenance amount payable in respect of any Loan. Servicer agrees to
furnish Bank, from time to time, with copies of financial statements or audit
reports of Servicer as may be reasonably requested by Bank. Servicer shall
notify Bank (i) if any extension of a scheduled maturity of a Loan is required,
or (ii) if in the judgment of Servicer a Loan has become impaired to the extent
that payment of principal and interest as scheduled will be in default. In such
event, Servicer will provide Bank with Servicer's recommended course of action.
(c) Acceleration of Loans. Subject to Section 2.5 hereof, Servicer
---------------------
shall accelerate any Loan and commence foreclosure efforts in respect of any
Loan Collateral securing a Loan which is a Defaulted Loan in accordance with the
terms of the Loan Documents; provided, however, that at least two (2) Business
-------- -------
days prior to commencing any such foreclosure Servicer shall provide Bank with
notice which describes in writing the basis for commencing such foreclosure and
a reasonable estimate of any costs expected to be incurred in connection with
such foreclosure that will be borne by Bank as owner of the Loan. Bank shall
have two Business Days from receipt of such notice to request Servicer to take
any reasonable action other than or in addition to such foreclosure, within the
limits of applicable law.
Without limiting the generality of the foregoing, but subject to the
provisions of this Agreement, Servicer is hereby authorized and empowered by
Bank to execute and deliver, in Servicer's own name, on behalf of Bank, any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge, and all other comparable instruments, with respect to the Loans
and with respect to the Loan Collateral, including, without limitation,
consenting to sales,
<PAGE>
transfers or encumbrances of the Loan Collateral or assignments and assumptions
of the Loans in accordance with the terms thereof.
(d) Actions to Perfect Security Interests. Servicer shall take all
-------------------------------------
actions that are necessary or desirable to maintain continuous perfection and
priority (subject to permitted encumbrances) of the mortgages and security
interests granted by the Borrowers in the Loan Collateral subject to the terms
of Loan Documents and this Agreement, including, but not limited to, obtaining
the execution by the Borrowers and the recording, registering, filing, re-
recording, re-registering and refiling of all mortgages, assignments, security
agreements, financing statements, continuation statements or other instruments
as are necessary to maintain the mortgages and security interests granted by the
Borrowers under the respective Loans. Servicer shall file or cause to be filed
(i) all financing statements on Form UCC-1 and, as may be required by Bank, all
assignments of financing statements on Form UCC.3 and (ii) as may be required by
Bank, all copyright mortgage assignments and assignments of copyright mortgages
as are customarily required to be filed to perfect a security interest in the
Loans.
SECTION 2.2 Collection of Loan Payments and Remittances
-------------------------------------------
(a) Collection of Payments. Subject to the provisions of Section 2.1
----------------------
and 2.5 herein, Servicer shall use its best efforts to cause the collection of
all payments called for under terms and provisions of each Loan. In addition to
any other customary services which Servicer may perform, Servicer shall perform
the following servicing and collection supervision activities:
(1) perform standard accounting services and general record
keeping services with respect to the Loans;
(2) respond to any telephone and written inquiries of Borrowers
concerning the Loans;
(3) keep Borrowers informed of the proper place and method for
making payments with respect to the Loans:
(4) contact Borrowers to effect collection and to discourage
delinquencies in the payment of Loans, doing so by any lawful means, including,
but not limited to, the following:
(i) transmittal of routine past due notices;
(ii) preparing and mailing collection letters;
(iii) contacting delinquent Borrowers by telephone to
encourage payment;
(iv) transmittal of reminder notices to delinquent
Borrowers; and
<PAGE>
(v) initiating and pursuing termination or foreclosure
actions deemed necessary by Servicer;
(5) report tax information to Borrowers, if any, as required by
law; and
(6) take such other action as may be necessary or appropriate to
carry out the duties and obligations imposed upon the Servicer pursuant to terms
of this Section 2.2.
(b) Subject to the provisions of the Asset Purchase Agreement, the
Servicer shall make such remittances to Bank as are required under Section 1.6
of the Asset Purchase Agreement.
SECTION 2.3 Records.
-------
Servicer shall retain all data (including, without limitation, computerized
records) relating directly to or maintained in connection with the servicing of
the Loans at the address of Servicer set forth in Section 6.4 or at such other
place where the servicing offices of Servicer are located, and shall give Bank
access to all data at all reasonable times.
SECTION 2.4 Servicing Compensation.
----------------------
Servicer is providing services under this Agreement as additional
consideration for the Loans to be purchased under the Asset Purchase Agreement.
As a consequence, no additional compensation shall be payable to Servicer for
the performance of its duties and obligations hereunder.
SECTION 2.5 Realization upon Defaulted Loans.
--------------------------------
(a) Acceleration and Foreclosure of Defaulted Loans. In accordance
-----------------------------------------------
with the servicing procedures specified in Section 2.1, Servicer shall
accelerate any Loan, and foreclose upon any Loan Collateral securing a Loan that
is a Defaulted Loan. In connection with the commencement of foreclosure
proceedings against any Loan Collateral securing a Defaulted Loan, Servicer
shall follow such practices and procedures as it shall deem necessary or
advisable and as shall be consistent with the servicing standards set forth in
Section 2.1 hereof. In addition, Servicer shall comply in all material respects
with all applicable laws in connection with the foreclosure of any Loan
Collateral and may commence and prosecute any proceedings in respect of such
related Loan in the name of and on behalf of Bank. Servicer shall not acquire
any Loan Collateral except on behalf of Bank in connection with a Defaulted
Loan.
(b) Costs and Expenses of Actions Taken in Respect of Defaulted
-----------------------------------------------------------
Loans. Subject to the following sentence, Bank, as owner of a Defaulted
- -----
Loan, shall be responsible for all reasonable out-of-pocket costs and expenses
(including reasonable attorneys' fees) incurred by Servicer in connection with
any action taken in respect of such Loan. Such costs shall be advanced by
Servicer and reimbursed by Bank upon the final disposition of such Defaulted
Loan by Bank, whether through a foreclosure liquidation sale or through sale of
such Loan by Bank.
<PAGE>
ARTICLE 3
STATEMENTS AND REPORTS
----------------------
SECTION 3.1 Reporting by Servicer.
---------------------
Servicer shall ensure that Bank's records contain the following information
with respect to each Loan:
(i) loan number;
(ii) borrower name;
(iii) beginning principal balance;
(iv) principal received;
(v) interest received at the stated rate;
(vi) number of days Loan is owned by Bank for such month;
(vii) total payment to Bank; and
(viii) ending principal balance
ARTICLE 4
THE SERVICER
------------
SECTION 4.1 Representation and Warranties Concerning Servicer.
-------------------------------------------------
Servicer represents and warrants to Bank, as of the date hereof, as
follows:
(a) Servicer (i) has been duly organized and is validly existing and
in good standing as a corporation organized and existing under the laws of the
State of California, (ii) has qualified to do business as a foreign corporation
and is in good standing in each jurisdiction where the character of its
properties or the nature of its activities makes such qualification necessary
and where failure to so qualify would have a material and adverse effect on its
ability to perform its obligations hereunder, and (iii) has full power,
authority and legal right to own its properties, to carry on its business as
presently conducted, and to enter into and perform it obligations under this
Agreement.
(b) The execution and delivery by Servicer of this Agreement are
within the corporate power of Servicer and have been duly authorized by all
necessary corporate action on the part of Servicer. Neither the execution and
delivery of this Agreement, nor the consummation of the transactions herein
contemplated, nor compliance with the provisions hereof, will conflict with or
result in a breach of, or continue a default under, any of the provisions of any
law, governmental rule, regulation, judgment, decree or order binding on
Servicer or its properties or the charter or bylaws of Servicer, or any of the
provisions of any indenture, mortgage, contract or other instrument to which the
Servicer is a party or by which it is bound or result in the creation or
imposition of any lien, charge or encumbrance upon any of its property pursuant
to the terms of any such indenture, mortgage, contract or other instrument.
<PAGE>
(c) Servicer is not required to obtain the consent of any other party
or consent, license, approval or authorization, or registration or declaration
with, any governmental authority, bureau or agency in connection with the
execution, delivery, performance by Servicer of this Agreement, or validity or
enforceability of this Agreement against Servicer.
(d) This Agreement has been duly executed and delivered by Servicer
and constitutes a legal, valid and binding instrument enforceable against
Servicer in accordance with its terms (subject to applicable Bankruptcy Laws and
to general principles of equity).
(e) Servicer is not in default under any agreement, contract,
instrument or indenture to which Servicer is a party or by which it or its
properties is or are bound, or with respect to any order of any court,
administrative agency, arbitrator or governmental body, which would have a
material adverse effect on the transactions contemplated hereunder, and no event
has occurred which with notice or lapse of time or both would constitute such a
material default with respect to any such agreement, contract, instrument or
indenture, or with respect to any such order of any court, administrative
agency, arbitrator or governmental body.
SECTION 4.2 Servicer's Responsibilities.
---------------------------
(a) Limitations of Responsibility and Liabilities of Servicer.
---------------------------------------------------------
Servicer will have no responsibility under this Agreement other than to render
the services specifically called for hereunder in good faith. Servicer, its
affiliates, its directors, officers, shareholders and employees will not be
liable to Bank or others, except by reason of acts constituting bad faith,
willful misfeasance, gross negligence or reckless disregard of its duties.
(b) Right to Receive Instructions. In the event that Servicer is
-----------------------------
unable to decide between alternative courses of action, or is unsure as to the
application of any provision of this Agreement, or such provision is ambiguous
as to its application, or is, or appears to be, in conflict with any other
applicable provision, or in the event that this Agreement permits any
determination by Servicer or is silent or is incomplete as to the course of
action which Servicer is required to take with respect to a particular set of
facts, Servicer may give notice (in such form as shall be appropriate under the
circumstances) to Bank requesting instruction in accordance with the Asset
Purchase Agreement and, to the extent that Servicer shall have acted or
refrained from acting in good faith in accordance with any such instructions
received from Bank, Servicer shall not be liable on account of such action or
inaction. If Servicer shall not have received appropriate instructions within
two Business Days of such notice (or within such reasonable shorter period of
time as may be specified in such notice) Servicer may, but shall be under no
duty to, take or refrain from taking such action, not inconsistent with this
Agreement, as Servicer shall deem to be in the best interest of Bank, and
Servicer shall have no liability to any person for such action or inaction
except for Servicer's own willful misconduct or gross negligence.
(c) Reliance. Servicer conclusively may rely on and shall be
--------
protected in acting or refraining from acting when doing so, in each case in
accordance with any signature or other document believed by it to be genuine and
believed by it to be signed by the proper party or parties. Servicer may accept
a certified copy of a resolution of the board of directors or other governing
body of any corporate party as conclusive evidence that such resolution has been
duly adopted by such body and that the same is in full force and effect. As to
any fact or matter the
7
<PAGE>
manner or ascertainment of which is not specifically prescribed herein, Servicer
may for all purposes hereof rely on a certificate, signed by the president or
any vice president of the relevant party, as to such fact or matter, and such
certificate shall constitute full protection to Servicer for any action taken or
omitted to be taken by it in good faith in reliance thereon.
(d) Use of Agents: Advice of Counsel. In the exercise and
--------------------------------
performance of its duties and obligations hereunder or under the Asset Purchase
Agreement, Servicer (i) may act directly or through agents or attorneys pursuant
to agreements entered into with any of them and Servicer shall not be liable for
the default or misconduct of such agents or attorneys if such agents or
attorneys shall have been selected by Servicer with reasonable care; and (ii)
may, at the expense of Servicer, consult with counsel accountants and other
skilled persons to be selected with reasonable care and employed by it, and
Servicer shall not be liable for anything done, suffered or omitted reasonably
and in good faith by it in accordance with the advice or opinion of any such
counsel, accountants or other skilled person.
SECTION 4.3 Assignment.
----------
(a) Servicer may engage a subservicer to perform Servicer's duties
hereunder, or assign this agreement to any Affiliate of Servicer, and Servicer
may resign or engage any other person as subservicer to perform Servicer's
duties hereunder, or assign this Agreement to any other person; provided that
no assignment or resignation shall be effective unless and until a successor
servicer consented to by Bank (which consent shall not be unreasonably withheld)
executes and delivers to Bank an agreement in form and substance reasonably
satisfactory to Bank, which contains an agreement to perform and observe, or in
the case of an assignment or assumption by such successor entity of the due and
punctual performance and observance of each covenant and condition to be
performed or observed by Servicer under this Agreement. From and after such
effectiveness, successor servicer shall be "Servicer" hereunder. Except as
provided in this Section 4.3(a), the Servicer may not assign this Agreement or
any of its rights, powers, duties or obligations hereunder without the prior
consent of Bank, which consent shall not be unreasonably withheld.
(b) The duties and obligations of Servicer under this Agreement shall
continue until this Agreement shall have been terminated as provided in Section
5.1, and shall survive the exercise by Bank of any right or remedy under this
Agreement, or the enforcement by Bank of any provision of this Agreement.
ARTICLES
TERMINATION OF AGREEMENT
------------------------
SECTION 5.1 Termination of Agreement.
-------------------------
The respective duties and obligations of Servicer and Bank created by this
Agreement shall terminate concurrently with the sale by Bank of all Loans. Upon
termination of this Agreement pursuant to this Section 5.1, Servicer shall pay
over to Bank all monies due to Bank pursuant to the Sale Agreement.
<PAGE>
ARTICLE 6
MISCELLANEOUS
-------------
SECTION 6.1 Dispute Resolution.
------------------
Any dispute, controversy or claim between the parties relating to, or
arising out of or in connection with this Agreement (or any subsequent
agreements or amendments thereto), including as to its existence,
enforceability, validity, interpretation, performance, breach or damages,
including claims in tort, whether arising before or after the termination of
this Agreement, shall be settled only as follows: First, an authorized business
representative of each party shall meet in an attempt to resolve any dispute. If
the dispute is not resolved by such representatives, then either of Servicer or
Bank may make a written demand for formal dispute resolution, at which time the
dispute will be resolved by binding arbitration in Los Angeles, California,
pursuant to the Commercial Arbitration Rules, as then amended and in effect, of
the American Arbitration Association (the "Rules"), subject to the following:
(a) There shall be one arbitrator, who shall be selected under the
normal procedures prescribed in the Rules.
(b) Subject to legal privileges, each party shall be entitled to
discovery in accordance with the Federal Rules of Civil Procedure.
(c) At the arbitration hearing, each party may make written and oral
presentations to the arbitrator, present testimony and written evidence and
examine witnesses.
(d) The arbitrator's decision shall be in writing, shall be binding
and final and may be entered and enforced in any court of competent
jurisdiction.
(e) No party shall be eligible to receive, and the arbitrator shall
not have the authority to award, exemplary or punitive damages.
(f) Each party to the arbitration shall pay one.half of the fees and
expenses of the arbitrator and the American Arbitration Association.
(g) The arbitrator shall not have the power to amend this Agreement.
SECTION 6.2 Counterpart Execution; Telecopies.
---------------------------------
This Agreement may be executed in any number of counterparts, each of
which, when so executed and delivered, shall be an original, but all of which
together shall constitute one agreement binding all of the parties hereto.
Transmission by telecopier of an executed counterpart of this Agreement shall be
deemed to constitute due and sufficient delivery of such counterpart, provided
that the party so delivering such counterpart shall, promptly after such
delivery, deliver the original of such counterpart of this Agreement to the
other party hereto.
<PAGE>
SECTION 6.3 Amendments; Waivers.
-------------------
No amendment of any provision of this Agreement shall be effective unless
it is in writing and signed by Bank and Servicer and no waiver of any provision
of this Agreement, nor consent to any departure by Bank or Servicer therefrom,
shall be effective unless it is in writing and signed by the party affected
thereby, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. No failure or delay on
the part of either party hereto in exercising any right hereunder shall operate
as a waiver thereof by such party nor shall any single or partial exercise of
any right hereunder preclude any other or further exercise thereof or the
exercise of any other right.
SECTION 6.4 Notices.
-------
All notices, demands, requests and other communications required hereunder
shall be in writing arid shall be deemed to have been given: (i) upon delivery
if personally delivered; (ii) upon receipt if sent by facsimile, with receipt
confirmed; (iii) three (3) days after deposit in the United States Mail when
delivered, postage prepaid, by certified or registered mail; or (iv).one (1) day
after deposit with a nationally recognized overnight delivery service marked for
delivery on the next business day, addressed to the party for whom it is
intended at its address hereinafter set forth:
If to Bank:
Imperial Bank
9920 South La Cienega Boulevard
Inglewood, California 90301
Attention: Richard M. Baker
Telephone: (310) 417-5929
Facsimile No.: (310) 417-5695
and if to Servicer:
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard, Bldg. One
Suite 240
Torrance, California 90505
Attention: Irwin L. Gubman, General Counsel
Telephone: (310) 791-8040
Facsimile No.: (310) 791-8230
Any party may designate a change of address by written notice to least ten
(10) days before such change of address is to become effective. the others,
given at
SECTION 6.5 No Third-Party Beneficiaries.
----------------------------
This Agreement and each of the provisions hereof (including
representations, warranties and covenants, if any) are solely for the benefit of
Bank and Servicer and the respective successors and permitted assigns of the
foregoing. No provisions of this Agreement or of any of the documents and
certificates executed in connection herewith (including any representations and
warranties) shall be construed as creating in any other person or entity other
than Servicer
<PAGE>
and Bank and the respective successors and their permitted assigns any rights of
any nature whatsoever.
SECTION 6.6 Attorneys' Fees.
---------------
In the event any legal action is undertaken in order to enforce or
interpret any provision of this Agreement, the prevailing party in such legal
action, as determined by the court, shall be entitled to receive from the other
party the prevailing party's reasonable attorneys' fees and court costs.
SECTION 6.7 Time of Essence: Context.
------------------------
Time is of the essence of this Agreement and of every part hereof. When the
context and construction so require, all words used in the singular herein shall
be deemed to have been used in the plural and the masculine shall include the
feminine and the neuter and vice versa.
SECTION 6.8 Successors and Assigns.
----------------------
All of the terms, covenants and conditions contained herein and in the
other documents and certificates executed in connection herewith shall apply to
and be binding upon, and inure to the benefit of Bank and Servicer and their
successors and assigns.
SECTION 6.9 Entire Agreement.
----------------
This Agreement, together with the Asset Purchase Agreement and Assignment
Documents, sets forth the entire understanding between the parties hereto with
respect to the subject matter hereof, superseding all prior written or oral
understandings, and may not be terminated, modified or amended in any way except
by a written agreement signed by each of the parties hereto.
SECTION 6.10 Governing Law.
-------------
Servicer and Bank expressly agree that this Agreement shall be governed by,
interpreted under and construed and enforced in accordance with the laws of the
State of California (without giving effect to California principles of conflicts
of laws). Servicer and Bank each irrevocably submit to the exclusive
jurisdiction of any California state or federal court sitting in the County of
Los Angeles, State of California, over any suit, action or proceeding arising
out of or relating to this agreement.
<PAGE>
SECTION 6.11 Severability.
------------
If any provision in this Agreement is found by a court of competent
jurisdiction to be in violation of any applicable law, and if such court should
declare such provision of this Agreement to be unlawful, void, illegal or
unenforceable in any respect, the remainder of this Agreement shall be
construed as if such unlawful, void, illegal or unenforceable provision were not
contained therein, and the rights, obligations and interests of the parties
hereto under the remainder of this Agreement shall continue in full force and
effect undisturbed and unmodified in any way.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers thereunto duly authorized as of the
day and year first above written.
Imperial Bank, a California corporation
By: _____________________________________
Title: ______________________________
By: _____________________________________
Title: ______________________________
Imperial Credit Industries, Inc., a
California corporation
By: _____________________________________
Title: ______________________________
By: _____________________________________
Title: ______________________________
<PAGE>
EXHIBIT 10.35
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
This Assignment and Assumption Agreement (this "Assignment") dated as of
October 1, 1999 is entered into between Imperial Bank, a California banking
corporation ("Assignor"), and Imperial Credit Industries, Inc., a California
corporation ("Assignee"), with reference to the following facts:
A. Assignor, as Seller, and Assignee, as Buyer, previously entered into
that certain Asset Purchase Agreement dated as of October 1, 1999 (the "Purchase
Agreement");
B. Pursuant to the terms of the Asset Purchase Agreement, Assignor is
conveying to Assignee all of Assignor's right, title and interest in certain
contracts and agreements more fully described in Exhibit A hereto (the
"Contracts").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Assignor and Assignee hereby agree
as follows:
1. Assignment. Assignor hereby assigns, conveys, transfers and sets over
----------
to Assignee all of Assignor's rights related to or connected with the Contracts.
2. Assumption. Assignee hereby:
----------
(a) accepts the foregoing Assignment; and
(b) assumes and agrees to perform all of the obligations of Assignor
under the Contracts.
3. Further Assurances. Assignor and Assignee each agree to execute such
------------------
other documents and perform such other acts as may be necessary or advisable to
effect the intent of this Assignment.
<PAGE>
4. Counterparts. This Assignment may be executed in one or more
------------
counterparts, each of which shall be deemed a part of an original and all of
which shall constitute one and the same Assignment.
IN WITNESS WHEREOF, the parties have executed this Assignment as of the
date set forth above.
Assignor:
Imperial Bank, a California corporation
By: ___________________________________
Title: ____________________________
By: ___________________________________
Title: ____________________________
Assignee:
Imperial Credit Industries, Inc., a
California corporation
By: ___________________________________
Title: ____________________________
By: ___________________________________
Title: ____________________________
2
<PAGE>
EXHIBIT A
1. Adrian Ward -- Consultant
2. Collection Administration Agreement -- TYLK LLC
3. Collection Administration Agreement -- Echo Lake Productions, LLC
4. FIDEC -- 50% participation in loan guarantee
5. KBL Participations Konprod Inc. Loan #: 776025188-3
6. KBL Participations -- Contre Films Loan #: 776025169-5
7. KBL Participations -- Kudzu Prod. Loan #: 775075217-3
8. Agent for KBL--LTZ II, Inc.
9. Agent for KBL -- Cheese Sandwich, Inc.
10. Agent for KBL -- Muse Prods (Tracker), Inc.
11. Contemporary Versions/Crystal Sly One More Loan (1)
12. License agreement re: Use of Lewis Horwitz's name
13. Maintenance agreement -- Pacific Plants
__________________
(1) These represent loan commitments for multiple films. In each case the
borrower is the same for all films and the loans are cross-collateralized.
<PAGE>
EXHIBIT 10.36
SERVICES AGREEMENT
This Services Agreement is entered into as of October 1, 1999 by and
between Imperial Credit Industries, Inc., a California corporation ("ICII"), and
Southern Pacific Bank, a California industrial loan company ("Southern
Pacific").
A. ICII and Southern Pacific are parties to that certain Asset Purchase
Agreement dated as of October 1, 1999 (the "Asset Purchase Agreement");
B. Pursuant to the Asset Purchase Agreement, ICII and Southern Pacific
now wish to arrange for the provision of certain services by ICII to Southern
Pacific on the terms and conditions set forth herein.
For good and valuable consideration, the adequacy of which is hereby
acknowledged, the parties agree as follows:
1. Services: Term. Commencing on the date hereof and continuing
--------------
until December 31, 2000 (the "Initial Term"), ICII will perform the services
(the "Services") enumerated on Exhibit "A" attached hereto for and on behalf of
Southern Pacific. Additional services may be added to Exhibit "A" at any time by
mutual agreement of the parties hereto.
2. Compensation. Southern Pacific will pay ICII fees for Services as
------------
provided on Exhibit "A" attached hereto. ICII will provide Southern Pacific with
a detailed summary of charges for each service then being rendered on a monthly
basis. Payment for the Services shall be deducted from amounts due Southern
Pacific under the Asset Purchase Agreement.
3. Expenses. Southern Pacific shall reimburse ICII for all out-of-
--------
pocket expenses incurred in connection with the services rendered pursuant to
this Agreement including, without limitation, advertising, legal and other
reasonable professional fees; provided, however, ICII shall obtain Southern
Pacific's prior approval on a case-by-case basis before incurring legal fees.
ICII will include itemized expenses in the invoice for Services rendered
referred to in Section 2 above.
4. Documentation and Disputes. In the event that any of ICII's
--------------------------
charges are based upon hourly rates or upon allocation of a combined cost,
Southern Pacific will be provided, upon request, with documentation supporting
the amount charged.
5. Confidential Information.
------------------------
(a) The parties agree: (i) to hold in trust and maintain
confidential, (ii) not to disclose to others without prior written approval from
the other party, (iii) not to use for any purpose, other than such purposes as
may be authorized in writing by the other party, and (iv) to prevent duplication
of and disclosure to any other party, any Information received from the other
party by the receiving party under this Agreement.
<PAGE>
(b) "Information" shall mean all results of the Services,
information disclosed by either party after the date hereof, whether orally,
visually, in writing, or in other tangible form, and includes, but is not
limited to, technical information, economic plans, computer information data
bases, and the like in connection with this Agreement.
(c) The foregoing obligations of confidentiality, non-disclosure
and non-use shall not apply to any Information to the extent that the obligated
party can show that: (i) such Information is or becomes knowledge generally
available to the public other than through the acts or omissions of the
obligated party; (ii) such Information is or becomes available to the obligated
party on a non-confidential basis from a third party having the legal right to
disclose such information, (iii) such Information relates to historical
activities of the other party prior to the date hereof; or (iv) disclosure of
such Information is required under applicable law or regulations or is made
pursuant to the request of any regulatory authority having jurisdiction over the
obligated party.
6. Standard of Care. ICII shall perform the Services for Southern
----------------
Pacific with the same degree of care, skill and prudence customarily exercised
by ICII for its own operations.
7. Furnishing Information and Witnesses. ICII agrees to make
------------------------------------
available to Southern Pacific, upon Southern Pacific's written request, ICII's
officers, employees and agents as witnesses to the extent that such persons may
reasonably be required in connection with any legal, administrative or other
proceedings relating to the Services in which Southern Pacific may from time to
time be involved. Southern Pacific agrees to reimburse ICII for its out-of-
pocket expenses incurred in making such officers, employees and agents available
as witnesses.
8. Indemnification. The parties hereto shall indemnify, defend and
---------------
hold each other, their shareholders, directors, officers and employees harmless
from and against all direct damages, losses and out-of-pocket expenses
(including reasonable legal fees) arising out of any third party claims caused
by or arising out of any failure in the performance of any obligation or
agreement of the other party hereunder. Neither party shall be liable to the
other party for indirect or consequential damages.
9. Assignment or Transfer. Neither party shall assign or transfer
----------------------
any of its rights under this Agreement without the prior written approval of the
other party, except no such approval shall be required for an assignment to an
affiliate or a successor to all or a substantial portion of the assets or the
business of either party, provided that such affiliate or successor assumes such
party's obligations hereunder with respect to the rights assigned or
transferred. This Agreement shall be binding on the parties' respective
permitted or approved successors and assigns.
10. Notices. All notices, demands, requests and other communications
required hereunder shall be in writing and shall be deemed to have been given:
(i) upon delivery if personally delivered; (ii) upon receipt if sent by
facsimile, with receipt confirmed; (iii) three (3) days after deposit in the
United States Mail when delivered, postage prepaid, by certified or registered
mail; or (iv) one (1) day after deposit with a nationally recognized overnight
delivery
2
<PAGE>
service marked for delivery on the next business day, addressed to the party for
whom it is intended at its address hereinafter set forth:
If to ICII;
Imperial Credit Industries, Inc.
23550 Hawthorne Boulevard, Bldg. One
Suite 240
Torrance, California 90505
Attention: Irwin L. Gubman, General Counsel
Telephone: (310) 791-8040
Facsimile No.: (310) 791-8230
and if to Southern Pacific;
Southern Pacific Bank
_______________________________________
_______________________________________
Attention: ___________________________
Telephone: ____________________________
Facsimile No.: ________________________
Any party may designate a change of address by written notice to the
others, given at least ten (10) days before such change of address is to become
effective.
11. Entire Agreement. This Agreement (including the exhibits hereto
----------------
and provisions of the Asset Purchase Agreement incorporated by reference) is
intended to embody the final, complete and exclusive agreement among the parties
with respect to the subject,matter hereof; is intended to supersede all prior
agreements, understandings and representations written or oral, with respect
thereto; and may not be contradicted by evidence of any such prior or
contemporaneous agreement, understanding or representation, whether written or
oral.
12. Governing Law and Venue. This Agreement is to be governed by and
-----------------------
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed wholly within such State, and without regard
to the conflicts of laws principles thereof. Any suit brought hereon, whether in
contract, tort, equity or otherwise, shall be brought in the state or federal
courts sitting in Los Angeles County, California, the parties hereto hereby
waiving any claim or defense that such forum is not convenient or proper. Each
party hereby agrees that any such court shall have in personam jurisdiction over
it, consents to service of process in any manner prescribed in Section 10 or in
any other manner authorized by California law, and agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner specified
bylaw.
13. Binding Effect. This Agreement and the rights, covenants,
--------------
conditions and obligations of the respective parties hereto and any instrument
or agreement executed pursuant hereto shall be binding upon the parties and
their respective successors, assigns and legal representatives.
3
<PAGE>
EXHIBIT "A"
Monthly Allocation
Financial Services Group Operations Support $level of activity
Normal charges relating to LHO customer deposit accounts for which LHO is
receiving credit for balances as offset of loan portfolio funding costs. Charges
are based on actual level of activity summarized in monthly statement (currently
averaging approximately $3,500.00/mo.)
Courier Services $200.00
Daily messenger service between LHO and Imperial Bank for interoffice mail,
deposits, reports and other items necessary for delivery between the two
entities.
Operations Center $pass through expenses
Provides for services handled by the Imperial Bank Operations Center, including
technology management of the connection between LHO and Imperial for M&I on-line
access and to support the remaining dedicated equipment at LHO, Optical System
access for report review, and managing the data associated with the number of
loan notes, commitments and general ledger accounts open on the M&I system for
LHO. Charges are based on level of activity as summarized in monthly billing
allocation (currently averaging approximately $2,000.00/mo.)
Lending Services Operations $16.00 per note
Provides for expenses associated with the personnel providing daily operations
support on the LHO loan portfolio. This amount will scale down based upon the
declining portfolio over the transition period. Will include servicing for LHO
loans purchased by Southern Pacific that will remain on Imperial's M&I system
under branch #33333.
Loan Administration/Credit Administration/Credit Review $7.50 per note
Provides for loan administration review and approval of loans renewals,
monitoring of performance of loan portfolio to comply with due diligence
requirements, review of GAP results and attendance at GAP meetings. Provides for
ongoing review of loan portfolio for credit quality and adherence to loan policy
and procedures.
Insurance-Office space related $pass through allocation
Costs associated with insurance coverage for LHO premises (currently
averaging approximately $ 165.00/mo.).
<PAGE>
14. Counterparts. This Agreement may be executed simultaneously in
------------
any number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. In making proof of
this Agreement it shall not be necessary to produce or account for more than one
counterpart.
15. Section Headings, The section headings of this Agreement are for
----------------
convenience of reference only and shall not be deemed to alter or affect any
provision hereof.
16. Severability. In the event that any provision or any part of any
------------
provision of this Agreement shall be void or unenforceable for any reason
whatsoever, then such provision shall be stricken and of no force and effect.
However, unless such stricken provision goes to the essence of the consideration
bargained for by a party, the remaining provisions of this Agreement shall
continue in full force and effect, and to the extent required, shall be modified
to preserve their validity.
17. No Third-Party Rights. Except as contemplated by Section 9
---------------------
hereof, nothing in this Agreement, whether express or implied, is intended to
confer any rights or remedies under or by reason of this Agreement on any
persons or entities other than the parties to it and their respective successors
and assigns, nor is anything in this Agreement intended to relieve or discharge
the obligation or liability of any third persons or entities to any party to
this -Agreement, nor shall any provision give any third persons or entities any
right of subrogation or action against any party to this Agreement.
18. Ambiguities. The parties acknowledge that each party and its
-----------
counsel has materially participated in the drafting of this Agreement and
consequently the rule of contract interpretation that ambiguities, if any, in
the writing be construed against the drafter, shall not apply.
19. Resolution Disputes. Any dispute, controversy or claim between
-------------------
the parties relating to, or arising out of or in connection with this Agreement
(or any subsequent agreements or amendments thereto), including as to its
existence, enforceability, validity, interpretation, performance, breach or
damages, including claims in tort, whether arising before or after the
termination of this Agreement, shall be settled only as follows: First, an
authorized business representative of each party shall meet in an attempt to
resolve any dispute. If the dispute is not resolved by such representatives,
then either of Buyer or Seller may make a written demand for formal dispute
resolution, at which time the dispute will be resolved by binding arbitration in
Los Angeles, California, pursuant to the Commercial Arbitration Rules, as then
amended and in effect, of the American Arbitration Association (the "Rules")
subject to the following:
(a) There shall be one arbitrator, who shall be selected under
the normal procedures prescribed in the Rules.
(b) Subject to legal privileges, each party shall be entitled to
discovery in accordance with the Federal Rules of Civil Procedure.
(c) At the arbitration hearing, each party may make written and
oral presentations to the arbitrator, present testimony and written evidence and
examine witnesses.
5
<PAGE>
(d) The arbitrator's decision shall be in writing, shall be binding
and final and may be entered and enforced in any court of competent
jurisdiction.
(e) No party shall be eligible to receive, and the arbitrator shall
not have the authority to award, exemplary or punitive damages.
(f) Each party to the arbitration shall pay one-half of the fees and
expenses of the arbitrator and the American Arbitration Association.
(g) The arbitrator shall not have the power to amend this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective duly authorized officers as of the date first above written.
ICII:
Imperial Credit Industries, Inc., a California
corporation
By: ______________________________________
Title: _______________________________
By: ______________________________________
Title: _______________________________
Southern Pacific:
Southern Pacific Bank, a California
industrial loan company
By: ______________________________________
Title: _______________________________
By: ______________________________________
Title: _______________________________
5
<PAGE>
EXHIBIT 10.37
SEVERANCE AGREEMENT
AND RELEASE OF ALL CLAIMS
This Severance Agreement and Release of All Claims ("Release") is made and
entered into by and between Lewis Horwitz ("Employee"), and Imperial Bank
("Employer") as of this 30th day of September 1999.
WHEREAS, Employee has been employed by a division of Employer, and Employer
has determined to sell that division by which Employee has been employed, which
transaction will result in the termination of Employee's employment with
Employer; and
WHEREAS, the parties hereto desire to enter into an agreement providing
certain benefits to Employee because of his past services;
NOW THEREFORE, in order to provide those benefits, to sever the employment
relationship between the parties, to settle any and all claims, and in
consideration of the mutual promises, covenants and representations contained
herein, the parties hereto agree as follows:
1. Termination of Employment
-------------------------
Employee agrees that his active employment with Employer pursuant to that
certain Employment Agreement dated as of July 23, 1997, as amended and modified
(the "Employment Agreement") was terminated on September 30, 1999. Upon said
termination of active employment with Employer, Employee was paid for all
services through that date. In addition, Employee received all accrued and
earned vacation pay benefits as of the date of termination and all outstanding
options in favor of Employee to acquire stock of Employer become fully vested.
As of September 30, 1999, the Employment Agreement shall be deemed terminated.
2. Non-Admission of Liability
--------------------------
This Release is an amicable manner in which to terminate the employment
relationship between the parties hereto and is not intended to be, nor shall it
be construed as, any type of admission by either party hereto. Said parties
hereby expressly deny any legal liability of any kind arising from the
employment relationship or the termination thereof, or from or on any other
basis, and enter into this Release only as the most economically efficient way
to terminate that relationship and avoid any future litigation.
3. Release by Employee
-------------------
In consideration of $600,000 being paid to Employee concurrently herewith,
Employee on behalf of himself and his heirs, successors and assigns hereby fully
and forever releases and discharges Employer, and each and all of its parent
corporations, subsidiaries and affiliated companies, its predecessors,
successors and assigns, and their respective stockholders, directors, officers,
representatives, employees, agents, and heirs, successors and assigns, of and
from any and all liabilities, claims, demands, contracts, debts, obligations
arid causes of action, in law, equity, or otherwise, that Employee, individually
or jointly, has held, now holds or may hold in the future, known or unknown,
concealed or hidden, suspected or unsuspected, which
<PAGE>
was created or arose out of any matter, cause, thing or transaction whatsoever,
as of the effective date of this Release, including but not limited to: (i) any
and all rights under the federal Civil Rights Acts of 1964 and 1991, the
California Fair Employment and Housing Act, and all other laws governing the
employment relationship, or relating to employment discrimination or harassment
of any type, (ii) any claim under or related to the Employee Retirement Income
Security Act ("ERISA"), (iii) any claim for any employment benefit of any type,
(iv) any benefits under any retirement plan, or (v) any claim of retaliation
under any state or federal statute or any common-law theory. Employee represents
that he has brought no legal or administrative action or proceeding which is
currently pending before any state or federal court, agency, or other tribunal
or body against Employer or any of its parent corporations, subsidiaries and
affiliated companies, its predecessors, successors and assigns, or any of their
respective stockholders, directors, officers, representatives, employees,
agents, heirs, successors and assigns.
Initialled: ____
4. Waiver Claims Under Age Discrimination Employment Act
-----------------------------------------------------
Employee understands and acknowledges that this Agreement constitutes a
voluntary waiver of any and all rights and claims against Employer as of the
Effective Date of this Agreement whether or not Employee is aware of them
including, without limitation, rights or claims arising under the Age
Discrimination in Employment Act of 1967, 29 U.S.C. (S) 621, et seq.. Employee
has waived rights or claims pursuant to this Agreement and in exchange for
consideration, the value of which exceeds payment or remuneration to which he
was already entitled; he is hereby advised to consult with an attorney
concerning this Agreement prior to executing it; he was given a period of at
least 21 days to consider the terms of this Agreement before executing this
Agreement on the date first written above, but has specifically elected not to
utilize such 21 day consideration period; and, he may rescind this Agreement at
any time during the seven (7) days following execution of this Agreement and
that this Agreement does not become effective or enforceable until the
revocation period has expired, which will be the Effective Date of the.is
Agreement.
5. Release by Employer
-------------------
Employer on behalf of itself and each of its predecessors, successors and
assigns, fully releases and discharges Employee of and from any and all
liabilities, claims, demands, contracts, debts, obligations and causes of
action, in law, equity, or otherwise, that Employer, individually or jointly,
has held, now holds or may hold in the future, known or unknown, concealed or
hidden, suspected or unsuspected, which was created or arose out of any matter,
cause, thing or transaction whatsoever, from the beginning of time to the date
hereof. Notwithstanding the foregoing, the following obligations and covenants
shall not be released:
(a) The provisions of Section 7 of the Employment Agreement relating
to confidentiality.
(b) The License Agreement dated as of July 23, 1997 between Employer
and Employee (which License Agreement is being concurrently assigned to Imperial
Credit
2
<PAGE>
Industries, Inc. by Employer pursuant to that certain Asset Purchase Agreement
between Employer and Imperial Credit Industries, Inc. of even date).
Initiated: ___ (by _________________)
6. General Release
---------------
Employer and Employee intend that this Release, once duly executed, shall
be effective as a complete and final bar to each and every liability, claim,
demand, contract, debt, obligation and causes of action, in law, equity, or
otherwise, that Employer and Employee have or might have against Employer, as
released above, as provided by California Civil Code Section 1541. Employer and
Employee hereby relinquish all rights and benefits conferred by the provisions
of Section 1542 of the California Civil Code which reads as follows:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
Employer and Employee have read and understood the foregoing provisions of
California Civil Code Section 1542.
7. Voluntary Agreement
-------------------
Employer and Employee have had the opportunity to consult with independent
counsel and to secure independent advice and counsel concerning every aspect.of
this Release and the rights and liabilities they are hereby relinquishing.
Employer and Employee fully understand that they are giving up all rights to
pursue any legal claim against each other which arises out of the employment
relationship or termination thereof, or otherwise. Employee and Employer have
entered into this Agreement of their own free will after having had the
opportunity to consult with any advisor that they desired.
Initialed: ____ Initialed: ____ (by _________________ for Employer)
8. Attorney Fees
-------------
Each party hereto agrees to bear his or its own legal fees and costs which
may arise as a result of this matter, and each of them hereby waives any and all
claims he or it may have against the other, individually or severally, for
attorneys' fees or costs, except that in the event an action or proceeding is
brought to enforce the terms of this Release the prevailing party shall be
entitled to recover his or its costs and attorney fees.
9. Confidentiality
---------------
Employee agrees to keep the terms, amount and fact of this Release
completely confidential, and agrees not to publish, disseminate,or disclose any
information concerning this Release to anyone, except members of his immediate
family, provided that disclosure to the immediate family members is conditioned
on the fact that they agree to keep said information confidential and not
disclose it to others.
3
<PAGE>
10. Arbitration
-----------
Any controversy or claim arising out of or relating to this Agreement, or
breach of this Agreement, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment on the award rendered by the arbitrators may be entered in any court
having jurisdiction. There shall be three arbitrators, one to be chosen directly
by each party at will, and the third arbitrator to be selected by the two
arbitrators so chosen. Each party shall pay the fees of the arbitrator he or it
selects and of his or its own attorneys, and the expenses of his or its
witnesses and all other fees and costs, shall be borne equally by the parties.
11. Entire Agreement/Applicable Law
-------------------------------
This Release contains the entire agreement of the parties, and any other
promise, inducement, or representation, oral or written, not set forth in this
Release shall have no force or effect. This Release shall be binding upon the
heirs, executors, administrators, successors, assigns and representatives of
Employee and on the parent corporations, subsidiaries and affiliated companies
of Employer, as well as its predecessors, successors and assigns, and their
respective stockholders, directors, officers, representatives, employees,
agents, and heirs, successors and assigns. This Release shall be construed under
the laws of the State of California.
IN WITNESS WHEREOF, the parties have duly executed this Release as of the
date first set forth above.
__________________________________
Lewis Horwitz
"Employee"
Imperial Bank, a California corporation
By _______________________________
4
<PAGE>
EXHIBIT 10.38
GENERAL ASSIGNMENT AND ASSUMPTION OF LOAN
-----------------------------------------
FOR VALUE RECEIVED, the undersigned, Imperial Bank, a California banking
corporation ("Assignor"), hereby sells, assigns and transfers to Imperial Credit
Industries, Inc., a California corporation ("Assignee"), all of Assignor's
right, title and interest in, to and under the Loan more fully described on
Exhibit A (the "Loan") and any and all agreements, instruments and documents
executed and delivered pursuant thereto (collectively the "Loan Documents").
In consideration of the foregoing sale, assignment and transfer, Assignee
hereby agrees to assume and comply with and perform as of and after the date
hereof all of Assignor's duties, obligations, liabilities and responsibilities
under or in connection with the Loan and the Loan Documents, whether known or
unknown. From and after the date hereof, Assignee agrees to observe and be bound
by the terms and conditions of the Loan Documents and by the obligations of
Assignor thereunder as fully and to the same extent as if Assignee had been an
original party thereto.
This General Assignment and Assumption of Loan shall be binding upon and
shall inure to the benefit of Assignor and Assignee and their respective
successors and assigns.
This General Assignment and Assumption of Loan is made without
representation or warranty by or recourse of any kind except as set forth in
that certain Asset Purchase Agreement dated as of October 1, 1999, between
Assignor and Assignee.
This General Assignment and Assumption shall be governed by, and construed
in accordance with, the laws of the State of California.
<PAGE>
This General Assignment and Assumption of Loan may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this General Assignment
and Assumption of Loan to be executed by their respective officers thereunto
duly authorized, as of the date first above written.
Dated: ______________, 1999
Imperial Bank, a California banking
corporation, as Assignor
By: ___________________________________
Its: __________________________________
By: ___________________________________
Its: __________________________________
Imperial Credit Industries, Inc., a
California corporation, as Assignee
By: ___________________________________
Its: __________________________________
By: ___________________________________
Its: __________________________________
2
<PAGE>
Exhibit A
Description of Loan: _______________________________
Name of Borrower: __________________________________
Date of Loan Agreement: ____________________________
Original Principal of Note from Borrower: $ ________
<PAGE>
CONSENT AND RELEASE
The undersigned hereby consents to the foregoing sale, assignment and
transfer by the Assignor to the Assignee and to the Assignee's assumption of all
of Assignor's duties, obligations, liabilities and responsibilities under or in
connection with the Loans and the Loan Documents, whether known or unknown, as
of and after the date of said sale, assignment and transfer. The undersigned
releases Assignor from all of its obligations under or in connection with the
Loans and the Loan Documents as of the date of said sale, assignment and
transfer.
Dated: ______________, 1999
[Name of Borrower]
By: ___________________________________
Its: __________________________________
By: ___________________________________
Its: __________________________________
<PAGE>
EXHIBIT 10.39
FORM OF ENDORSEMENT TO NOTE
---------------------------
This Endorsement to Note applies to that certain Note in the original
principal amount of $_____________ executed by________________ (the "Borrower")
to the order of Imperial Bank (the "Bank") pursuant to that certain Loan
Agreement, dated as of _____________ 19__, between the Borrower and the Bank.
PAY TO THE ORDER OF IMPERIAL CREDIT INDUSTRIES, INC.
without recourse, representation or warranty of any kind except as set forth in
that certain Asset Purchase Agreement, dated October 1, 1999 between the Bank
and Imperial Credit Industries, Inc.
Dated:____________ 1999 Imperial Bank
By: __________________________
Name: ________________________
Title:________________________
By: __________________________
Name: ________________________
Title:________________________
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(a) Loans
<TABLE>
<CAPTION>
August 31, 1999
-------------------------------------------------------
Loan Current Undisbursed L H 0
Item Borrower Number Loan Balance Amount Prin Balance
- ---- -------- ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
1 3357554 CANADA, INC. 776025235 $2,187,857.00 - $ 1,246,085.83
2 9039-7746 QUEBEC/INDEPENDENT 776025213 2,015,000.00 - 1,382,639,85
3 AR PRODUCTIONS, INC. 776025268 2,900.000.00 940,671.54 1,762,404.46
4 AFTER SEX, INC. 776025272 725,000.00 198,466,52 526,533.48
5 AMERICAN FILM INSTITUTE 776025259 762.500.00 237,500.00 2,262,500.00
6 APRIL U.K. LTD. 776025118 1,350,000.00 - 772,030,78
7 ASHOK AMRITRAJ 776025103 50,000.00 8,750.00 10.00 (1)
8 BASE CAMP PROD. 776025204 2,480,000,00 64,835.12 814,040.45
9 BEAT, LLC 776025276 1,784,665.00 511,596,00 1,273,069.00
10 BEST FILM LTD. 776025246 3,335,250.00 224,462.22 2,355,385.96
11 BIG ISLAND PROD 776025146 1,421,326,11 1,115.94 256,762.19
12 BLOODLINE FILMS 776025185 3,100,000.00 18,820.44 1,015,298.66
13 BLPROD, INC. 776025166 1,080,000.00 - 611,540.41
14 BLUE HERON LLC 776025232 1,713,000.00 71,717.31 1,631,282.69
15 BLUE LIGHT SPECIAL 776025227 575,000.00 20,826.03 493,448.41
16 BLUE RIDER INT'L 776025244 800,000.00 454,665.11
17 BOB FILMS, INC. #3 776025223 2,675,053.00 - 1,756,577.75
18 BOB FILMS, INC. #4 776025223 1,561,184.00 - 744,179.75
19 BON BECKET FILMS 776025207 1,577,000.00 72,091.23 902,996.75
20 BOUNTY FILM PROD. 776025119 1,180,000,00 - 536,623.29
21 BRASS RING PROD. 776025230 5,439,500.00 204,392.05 1,170,775.75
22 BUFFALO 66, INC. 776025149 2,375,000.00 - 301,255.62
23 BUKRA FILMS, INC. 776025174 971,050.00 1,819.61 412,642.92
24 BURNS, MICHAEL 776025222 500,000.00 - 240,090.79 (1)
25 CELEBRATION PICTURES 776025256 805,000.00 - 765,000.00
26 CHAIN OF COMMAND 776025266 1,939,335.00 208,279.84 1,705,265,16
27 CONPROD, INC. 776025188 8,000,000.00 961.19 1,231,956.15
28 CONTEMPORARY VER. #4 776025186 604,000,00 10,686.73 200,719.02
29 CONTEMPORARY VER. #5 776025186 654,000.00 36,617.88 436,686.80
30 CONTEMPORARY VER. #6 776025186 599,000.00 63,292.35 421,749.55
31 CONTRE FILMS, INC. #4 776025169 2,067,000.00 81,290.02 439,346.16
32 CONTRE FILMS, INC. #5 776025169 2,409,875.00 90,971.32 818,520.91
33 DESERT BLUE LLC 776025205 1,012,000.00 413.18 213,252.04
34 DESERT SHOOTER 776025139 877,000.00 2,824.97 171,170.53
35 DESERT THUNDER, INC 776025211 861,000,00 15,202.26 60,526.34
38 DISORDER PRODUCTIONS 776025212 3,650,000.00 26,933.79 2,958,617.85
37 ED ANCOATS #3 776025120 295,343.46 - 75,564.74
38 ED ANCOATS #4 776025120 1,341,593.02 43.70 66,205.65
39 ED ANCOATS #5 776025120 1,341,593.02 1,139.82 55,219.61
40 ED ANCOATS #6 776025120 1,127,000.00 1,567.88 532,674.57
41 ENTERPRISE RELEASING 776025267 600,000.00 25,635.79 545,264.21
42 ESCAPE TO GRIZZLY 776025255 1,250,000.00 99,780.23 1,070,273.27
43 ETERNITY PICTURES 776025191 1,309,000.00 - 1,078,074.30
44 FILM FINANCES, INC. 776025254 172,659.70 - 172,659.70
45 FINAL V. FILMS, INC. 776025236 1,340,000.00 61,587.02 867,962.15
48 FLIP SHIP FILMS 776025243 1,500,000.00 79,720.71 1,236,100.10
47 FRIES/SCHULTZ FILMS 700000914 746,798.74 - 641,756.54
48 GFT/PAQUIN DIST. 776025264 100,000.00 4,494.28 95,505.72
49 GALLERY MOTION, LTD. 776025260 3,435,000.00 189,379,87 3,161,480.13
50 GALLERY MOTION 776025158 6,869,500.00 - 4,130,287.17
51 GOLDEN FILMS 776025239 454,000.00 182,194.84 271,805.16
52 GOLDEN FILMS 776025239 454,000.00 43,240.18 410,759.82
53 GOLDEN FILMS 776025239 454,000.00 173,699.68 280,300.32
54 GOLDEN FILMS 776025239 454,000.00 221,654.23 232,345.77
</TABLE>
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(a) - Loans
<TABLE>
<CAPTION>
August 31, 1999
-------------------------------------------------
Loan Current Undisbursed L H O
Item Borrower Number Loan Balance Amount Prin. Balance
---- -------- ------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
55 GOLDEN FILMS 776025239 454,000.00 391,718.00 62,282.00
56 GOOSED LLC 776025208 1,350,000.00 36,729.45 859,170.55
57 HANNIBAL, INC. 776025257 135,500.00 9,802.53 116,047.47
58 HIGH CONCEPTS PROD 776025194 2,250,000.00 72,470.15 383,236.28
59 HIGHBALL PROD 776025150 418,000.00 - 365,375.25
60 HIJACKED FILMS, INC 776025195 1,435,000.00 13,041.00 296,893.28
61 HITMAN'S PRODUCTION 776025226 2,488,000.00 77,508.86 1,787,289.11
62 JUDGEMENT CINEMA 776025242 2,265,500.00 142,570.47 1,513,168.54
63 JUNGLE BOY DIST. 776025111 2,020,000.00 - 1,492,461.01
64 KEYSTONE FLM P. XVIII 776025184 2,210,000.00 51,002.47 73,003.81
65 KINGSBOROUGH LIONS #4 776025209 3,937,451.00 30,638.91 3,158,524.32
66 KIRKPATRICK & MCCLAINE 776025192 400,000.00 - 64,610.27
67 KUDZU PRODUCTIONS 776025217 4,385,000.00 176,040.67 174,658.98
68 LC PRODUCTIONS, INC. 776025183 1,528,000.00 - 1,128,088.32
69 LEORA FILMS, INC. 776025125 779,000.00 - 267,956.09
70 LAVETTA ENT. 776025250 475,000.00 187,101.12 179,858.88
71 LORICA FILMS PROD. 776025231 1,420,000.00 - 719,964.55
72 LOVE STINKS 776025275 6,100,000.00 463,700.00 3,438,500.00
73 LUZARDERO, LLC #3 776025189 1,775,000.00 6,112.08 218,844.56
74 MAHAR FILMS, INC. 776025237 1,300,000.00 - 832,862.71
75 MEET PRINCE CHARMING 776025234 625,000.00 35,141.55 145,026.42
76 MICHAEL ANGEL 776025229 523,375.00 5,987.56 353,852.28
77 MILES PLATTING #3 776025142 1,071,000.00 - 289,213.63
78 MILES PLATTING #4 776025142 1,092,000.00 - 362,611.33
79 MJM COMPANY 776025156 1,231,000.00 235.00 1,068,893.30
80 MOLECULAR FILMS 776025132 1,340,000.00 - 93,961.67
81 MOONSTONE ENT. 776025202 1,320,000.00 - 414,766.42
82 MR. JEALOUSY 776025137 3,716,000.00 20,147.30 798,600.18
83 NEW METRO 1, INC. 776025175 1,892,000.00 5,230.47 1,465,772.17
84 NIGHT VISION FILM 776025130 572,598.57 - 498,825.26
85 OVERDONE PROD. 776025140 2,210,000.00 - 872,374.71
86 OVERSEAS FILMGROUP 776025114 3,045,000.00 - 1,795,000.00
87 PARADISE LOST S.E. 776025154 1,613,000.00 192,548.45 715,653.01
88 PARTNERS IN CRIME 776025253 1,762,000.00 109,942.33 1,424,731.61
89 PAVILION PICTURE PART. 776025251 1,064,000.00 98,418.65 965,581.35
90 RANGERS PRODUCTIONS 776025263 1,250,000.00 277,246.69 966,773.31
91 REPLYEARTH LTD. 776025273 2,446,000.00 1,236,521.83 1,209,478.17
92 RESTRAINED FILMS 776025221 1,850,000.00 43,105.98 680,981.49
93 ELIE SAMAHA 776025198 500,000.00 1,825.00 498,175.00 (1)
94 SEAWOLF PICTURES, INC. 776025155 1,086,000.00 - 480,876.98
95 SETTLEMENT ASS. 776025218 820,000.00 11,254.17 396,872.01
96 SHEPHERD PROD., INC. 776025165 1,100,000.00 258.87 121,941.61
97 SHADOW OF THE VAMPIRE 776025261 5,990,000.00 1,617,181.80 3,784,794.60
98 SPILL PROD., INC. 700000922 629,016.36 - 496,714.60
99 SPLIT CARD FILMS, INC. 776025206 2,500,000.00 - 1,314,139.58
100 ANDREW STEVENS 776025199 500,000.00 8,075.00 491,925.00 (1)
101 STIGMA PRODUCTIONS 776025252 560,000.00 19,969.82 371,762.64
102 TENNESSEE VALLEY 776025131 3,655,000.00 - 1,668,276.36
103 TERMINAL FORCE II 776025134 1,410,354.00 - 97,836.49
104 THE BULLFIGHTER'S 776025249 2,800,000.00 362,406.94 2,737,093.06
105 THE TRIANGLE GRP 776025187 600,000.00 - 543,573.66
106 TOMORROW FILMS 776025200 250,000.00 - 135,000.00
107 TOMORROW FILMS 776025200 150,000.00 - 150,000.00
108 TWICE RMVED PROD 776025121 1,600,000.00 9,368.44 88,858.35
</TABLE>
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(a) - Loans
<TABLE>
<CAPTION>
August 31, 1999
-------------------------------------------------------
Loan Current Undisbursed L H 0
Item Borrower Number Loan Balance Amount Prin Balance
- ---- -------- ------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
109 TWO LIONS DIST 776025271 1,985,000.00 - 1,117,489.41
110 TWO LIONS DIST 776025241 1,550,000.00 - 732,664.68
111 TYCUS PRODUCTION 776025210 1,300,000.00 32,159.88 65,003.87
112 UNDERCURRENT FILM 776025161 1,338,000.00 - 517,021.50
113 VIRGIN SUICIDES, LLC 776025238 2,900,000.00 510,777.53 2,169,738.32
114 VOLTAGE PROD 776025143 1,653,000.00 34.50 612,132.97
115 WOMAN WANTED 776025248 2,700,000.00 - 1,813,009.06
116 WORKIN MAN #6 700000933 1,100,000.00 - 14,760.92
--------------------------------------------------------
$193,705,877.98 $10,434,949.24 $98,943,402.30
========================================================
</TABLE>
(1) These are non-revolving personal loans to be refinanced within two weeks of
the initial closing date.
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(b) - Tangible and Intangible Property
See attached schedule.
<PAGE>
September 28, 1999
10:30 AM Imperial Bancorp
NET BOOK VALUE REPORT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Co In-Svc Dep Rem Unadjusted Salvage Curr Current Accum Pct
SYS No Ext Ast No Desc Date Meth Life Basic * $176 Value Thru Depreciation Sec 175 Net Bk Value Dep
- ---------------------------------------------------------------------------------------------------------------------------------
Book: Internal FY: December
---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
001792 000 000205 LHO LEASER 09/01/89 SLMM 00 00 9723.00 0.00 06/99 9723,00 0.00 0.00 100.0
008543 000 000269 LEASEHOLD 08/01/93 SLMM 00 00 1844.00 0.00 06/99 1644.00 0.00 0.00 100,0
008555 000 000269 LEASEHOLD 03/01/33 SLMM 00 00 2075.00 0.00 06/99 2075.00 0.00 0.00 100.0
012667 000 30988 TENANT IMP 02/20/98 SLMM 03 01 121035.60 0.00 08/93 39611.65 0.00 81423.95 32.7
014046 000 32056 TENANT IMP 06/01/96 SLMM 05 09 2215.00 0.00 08/99 395.53 0.00 1919.47 17.9
----------- --------- ---------- ------- ------------
Asset Type 2000 Count= 5 136692.60 0.00 53449.18 0.00 83243.42
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
Net 136692.60 0.00 53449.18 0.00 83243.42
----------- --------- ---------- ------- ------------
002270 000 000212 IBM PC 2 5 04/01/90 SLMM 00 00 3133.11 0.00 06/99 3133.11 0.00 0.00 100.0
002313 000 000213 IBM PC 843 04/01/90 SLMM 00 00 4235.85 0.00 06/99 4235.55 0.00 0.00 100.0
002314 000 000213 IBM PC 843 04/01/90 SLMM 00 00 4235.85 0.00 06/99 4235.85 0.00 0.00 100.0
006628 000 000247 EXC DAP DS 06/01/91 SLMM 00 00 3420.75 0.00 06/99 3420.75 0.00 0.00 100.0
007439 000 000257 DELL 2MB C 08/01/92 SLMM 00 00 4112.96 0.00 06/99 4112.96 0.00 0.00 100.0
007802 000 000261 DELL COMPU 12/01/92 SLMM 00 00 3463.24 0.00 06/99 3488.24 0.00 0.00 100.0
007923 000 000262 DELL NL25 01/01/93 SLMM 00 00 2103.41 0.00 06/99 2103,41 0.00 0.00 100.0
009345 000 000276 DATA CABLI 08/31/94 SLMM 00 00 2243.11 0.00 08/99 2243.17 0.00 0.00 100,0
009809 000 000281 IBM PC MOD 06/20/95 SLMM 00 1O 2088.68 0.00 08/99 1740.58 0.00 348.10 83.3
009908 000 000282 MULTISYNC 08/07/95 SLMM 00 11 592.89 0.00 08/99 453.10 0.00 109.79 81.7
010195 000 000285 HP LASERJE 03/25/96 SLMM 00 00 1645.96 0.00 06/99 1645.36 0.00 0.00 100.0
011421 000 000297 MEMORY UPG 03/06/97 SLMM 00 06 1567.03 0.00 08/99 1305.95 0.00 261.18 83.3
011543 000 000298 TOSHIBA SA 04/09/97 SLMM 00 07 2970.30 0.00 08/99 2393.15 0.00 577.65 80.6
012045 000 000303 HP LASERJE 08/13/97 SLMM 01 00 1067.92 0.00 08/99 711.94 0.00 355.98 66.7
012390 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012391 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 09/99 1447.88 0.00 1034.19 58.3
012392 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012393 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012394 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012395 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012396 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012397 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 09/99 1447.88 0.00 1034.19 58.3
012398 000 000307 DELL P5MMX 12/09/97 SLMM 01 03 2487.07 0.00 08/99 1447.98 0.00 1034.19 58.3
012399 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012400 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012401 000 000307 DELL P5MMX 12/08/97 SLMM 01 03 2482.07 0.00 08/99 1447.88 0.00 1034.19 58.3
012997 000 31307 CISCO 2501 04/15/98 SLMM 01 07 2700.32 0.00 08/99 1275.15 0.00 1425.17 47.2
013357 000 31667 TOSHIBA LI 05/20/98 SLMM 01 09 3104.10 0.00 08/99 1293.38 0.00 1810.72 41.7
013499 000 31809 DELL P6266 06/11/98 SLMM 01 09 2308.97 0.00 08/99 962.07 0.00 1346.90 41.7
013500 000 31810 DELL P6266 06/11/98 SLMM 01 09 2308.97 0.00 08/99 962.07 0.00 1346.90 41.7
----------- --------- ---------- ------- ------------
Asset Type 6150 Count= 30 77119.82 0.00 57127.15 0.00 19992.67
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
Net 77119.82 0.00 57127.15 0.00 19992.67
----------- --------- ---------- ------- ------------
010260 000 000285 M&I SALESP 04/12/96 SLMM 00 00 5458.83 0.00 06/99 5458.83 0.00 0.00 100.0
</TABLE>
<PAGE>
September 28, 1999
10:30 AM Imperial Bancorp
NET BOOK VALUE REPORT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Co In-Svc Dep Rem Unadjusted Salvage Curr Current Accum Pct
SYS No Ext Ast No Desc Date Meth Life Basic * $176 Value Thru Depreciation Sec 179 Net Bk Value Dep
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
----------- --------- ---------- ------- ------------
Asset Type 6199 Count= 1 5458.83 0.00 5458.83 0.00 0.00
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
Net 5458.83 0.00 5458.83 0.00 0.00
----------- --------- ---------- ------- ------------
001798 000 000205 TYPEWRITER 09/01/89 SLMM 00 00 1192.00 0.00 06/99 1192.00 0.00 0.00 100.0
----------- --------- ---------- ------- ------------
Asset Type 6202 Count= 1 1192.00 0.00 1192.00 0.00 0.00
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
Net 1192.00 0.00 1192.00 0.00 0.00
----------- --------- ---------- ------- ------------
007378 000 000257 ENCODER 06/01/92 SLMM 00 00 1699.52 0.00 06/99 1699.52 0.00 0.00 100.0
----------- --------- ---------- ------- ------------
Asset Type 6208 Count= 1 1699.52 0.00 1699.52 0.00 0.00
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
Net 1699.52 0.00 1699.52 0.00 0.00
----------- --------- ---------- ------- ------------
001820 000 000205 COPIER 09/01/89 SLMM 00 00 6962.00 0.00 06/99 6962.00 0.00 0.00 100.0
012719 000 31040 9940 DPC S 03/06/98 SLMM 03 06 16622.38 0.00 08/99 4986.86 0.00 11636.02 30.0
----------- --------- ---------- ------- ------------
Asset Type 6210 Count= 2 23584.88 0.00 11948.86 0.00 11636.02
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
Net 23584.88 0.00 11948.86 0.00 11636.02
----------- --------- ---------- ------- ------------
012482 000 000308 NEFAX 596 01/09/98 SLMM 03 04 2289.59 0.00 08/99 763.20 0.00 1526.39 33.3
013021 000 31331 NEFAX 791 04/15/98 SLMM 03 07 3942.57 0.00 08/99 1117.06 0.00 2825.51 28.3
----------- --------- ---------- ------- ------------
Asset Type 6212 Count= 2 6232.16 0.00 1880.26 0.00 4351.90
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
Net 6232.16 0.00 1880.26 0.00 4351.90
----------- --------- ---------- ------- ------------
001807 000 000205 TELEPHONE 09/01/89 SLMM 00 00 5853.00 0.00 06/99 5853.00 0.00 0.00 100.0
001815 000 000205 CAR PHONE 09/01/89 SLMM 00 00 1246.00 0.00 06/99 1246.00 0.00 0.00 100.0
007566 000 000259 TELEPHONE 10/01/92 SLMM 00 01 435.16 0.00 08/99 430.00 0.00 5.16 98.8
012374 002 000306 DATA CABLI 11/30/97 SLMM 05 03 11736.96 0.00 08/99 7934.25 0.00 8802.71 25.0
012801 000 31111 SCOTTEL - 03/24/98 SLMM 05 07 52614.52 0.00 08/99 10648.17 0.00 41966.35 20.2
012856 000 31166 TELEMANEME 03/26/98 SLMM 05 07 2144.37 0.00 08/99 433.97 0.00 1710.40 20.2
----------- --------- ---------- ------- ------------
Asset Type 6216 Count= 6 74030.01 0.00 21545.39 0.00 52484.62
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
----------- --------- ---------- ------- ------------
</TABLE>
<PAGE>
September 28, 1999
10:30 AM Imperial Bancorp
NET BOOK VALUE REPORT
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Co In-Svc Dep Rem Unadjusted Salvage Curr Current Accum Pct
SYS No Ext Ast No Desc Date Meth Life Basis + S179 Value Thru Depreciation Sec 179 Net Bk Value Dep
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net 74030.01 0.00 21545.39 0.00 52484.62
------------ -------- ------------ -------- ------------
013523 000 31833 PANASONIC 06/17/98 SLMM 05 10 6214.13 0.00 08/99 1035.69 0.00 5178.44 16.7
------------ -------- ------------ -------- ------------
Asset Type 6228 Count= 1 6214.13 0.00 1035.69 0.00 5178.44
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 6214.13 0.00 1035.69 0.00 5178.44
------------ -------- ------------ -------- ------------
012841 000 31151 "U" SHAPE 03/25/98 SLMM 05 07 9022.65 0.00 08/99 1826.01 0.00 7196.64 20.2
------------ -------- ------------ -------- ------------
Asset Type 6312 Count= 1 9022.65 0.00 1826.01 0.00 7196.64
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 9022.65 0.00 1826.01 0.00 7196.64
------------ -------- ------------ -------- ------------
001812 000 000205 UPHOLSTERY 09/01/89 SLMM 00 00 4320.00 0.00 06/99 4320.00 0.00 0.00 100.0
007810 000 000261 BATTERY CH 12/01/92 SLMM 00 03 291.19 0.00 08/99 280.80 0.00 10.39 96.4
012812 000 31122 RUG 03/25/98 SLMM 05 07 4259.65 0.00 08/99 862.01 0.00 3397.58 20.2
012819 000 31129 MIRROR FRA 03/25/98 SLMM 05 07 2608.84 0.00 08/99 527.98 0.00 2080.86 20.2
012826 000 31136 WELCR SIDE 03/25/98 SLMM 05 07 3994.44 0.00 08/99 808.40 0.00 3196.04 20.2
012839 000 31149 WALL CONSO 03/25/98 SLMM 05 07 4259.65 0.00 08/99 862.07 0.00 3397.58 20.2
012840 000 31150 MIRROR 03/25/98 SLMM 05 07 3177.15 0.00 08/99 642.99 0.00 2534.16 20.2
013435 000 31745 48"x48" VI 05/27/98 SLMM 05 09 2728.20 0.00 08/99 487.17 0.00 2241.03 17.9
013439 000 31749 ENTRY HALL 05/27/98 SLMM 05 09 1122.81 0.00 08/99 200.50 0.00 922.31 17.9
------------ -------- ------------ -------- ------------
Asset Type 6398 Count= 9 26761.93 0.00 8991.98 0.00 17769.95
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 26761.93 0.00 8991.98 0.00 17769.95
------------ -------- ------------ -------- ------------
012806 000 31116 RUSSELL HO 03/24/98 SLMM 05 07 3985.36 0.00 08/99 806.56 0.00 3178.80 20.2
012808 000 31118 WOLCOTT - 03/24/98 SLMM 05 07 7003.03 0.00 08/99 1417.29 0.00 5585.74 20.2
------------ -------- ------------ -------- ------------
Asset Type 6399 Count= 2 10988.39 0.00 2223.85 0.00 8764.54
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 10988.39 0.00 2223.85 0.00 8764.54
------------ -------- ------------ -------- ------------
012816 000 31126 COUNTRY EN 03/25/98 SLMM 05 07 2211.40 0.00 08/99 447.55 0.00 1763.85 20.2
------------ -------- ------------ -------- ------------
Asset Type 6602 Count= 1 2211.40 0.00 447.55 0.00 1763.85
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 2211.40 0.00 447.55 0.00 1763.85
------------ -------- ------------ -------- ------------
</TABLE>
<PAGE>
September 28, 1999
10:30 AM Imperial Bancorp
NET BOOK VALUE REPORT
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Co In-Svc Dep Rem Unadjusted Salvage Curr Current Accum Pct
SYS No Ext Ast No Desc Date Meth Life Basis + S179 Value Thru Depreciation Sec 179 Net Bk Value Dep
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
011717 000 000300 FOUR DRAME 05/27/97 SLMM 04 09 1000.38 0.00 08/99 321.56 0.00 678.82 32.1
015167 000 33175 FIREPROOF 08/10/99 SLMM 06 11 1681.67 0.00 08/99 20.02 0.00 1661.65 1.2
------------ -------- ------------ -------- ------------
Asset Type 6604 Count= 2 2682.05 0.00 341.58 0.00 2340.47
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 2652.05 0.00 341.58 0.00 2340.47
------------ -------- ------------ -------- ------------
012820 000 31130 C0UNTRY FR 03/25/98 SLMM 05 07 5811.99 0.00 08/99 1176.23 0.00 4635.75 20.2
012829 000 31139 LOUNGE CHA 03/25/98 SLMM 05 07 5179.78 0.00 08/99 1048.29 0.00 4131.49 20.2
012842 000 31152 SWIVEL CHA 03/25/98 SLMM 05 07 2419.40 0.00 08/99 489.64 0.00 1929.76 20.2
012843 000 31153 SECRETARIA 03/25/98 SLMM 05 07 1174.61 0.00 08/99 237.71 0.00 936.90 20.2
------------ -------- ------------ -------- ------------
Asset Type 6606 Count= 4 14585.77 0.00 2951.87 0.00 11833.90
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 14585.77 0.00 2951.87 0.00 11633.90
------------ -------- ------------ -------- ------------
001816 000 000205 CONFERENCE 09/01/89 SLMM 00 00 2814.00 0.00 06/99 2814.00 0.00 0.00 100.0
012814 000 31124 END TABLE 03/25/98 SLMM 05 07 1526.34 0.00 08/99 308.90 0.00 1217.44 20.2
032815 000 31125 COUNTRY EN 03/25/98 SLMM 05 07 2781.33 0.00 08/99 562.88 0.00 2218.45 20.2
012818 000 31128 COUNTRY EN 03/25/98 SLMM 05 07 2049.19 0.00 08/99 414.72 0.00 1634.47 20.2
012821 000 31131 COUNTRY EN 03/25/98 SLMM 05 07 6677.96 0.00 08/99 1351.51 0.00 5326.45 20.2
012830 000 31140 COFFEE TAB 03/25/98 SLMM 05 07 2045.94 0.00 08/99 414.06 0.00 1631.88 20.2
012831 000 31141 END TABLE 03/25/98 SLMM 05 07 1566.93 0.00 08/99 317.12 0.00 1249.81 20.2
012832 000 31142 TABLE LAMP 03/25/98 SLMM 05 07 1769.90 0.00 08/99 358.19 0.00 1411.71 20.2
012835 000 31145 42x24x18 C 03/25/98 SLMM 05 07 1891.68 0.00 08/99 382.85 0.00 1508.83 20.2
012837 000 31147 TABLE LAMP 03/25/98 SLMM 05 07 1391.03 0.00 08/99 281.53 0.00 1109.50 20.2
------------ -------- ------------ -------- ------------
Asset Type 6608 Count= 10 24514.30 0.00 7205.76 0.00 17308.54
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 24514.30 0.00 7205.76 0.00 17308.54
------------ -------- ------------ -------- ------------
012875 000 31185 CREDENZA 2 03/27/98 SLMM 05 07 1722.80 0.00 08/99 348.68 0.00 1374.12 20.2
013437 000 31747 2O"X72" CR 05/27/98 SLMM 05 09 1879.95 0.00 08/99 335.70 0.00 1544.25 17.9
013440 000 31750 REPAIR ON 05/27/98 SLMM 05 09 1697.89 0.00 08/99 303.19 0.00 1394.70 17.9
------------ -------- ------------ -------- ------------
Asset Type 6610 Count= 3 5300.64 0.00 987.57 0.00 4313.07
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 5300.64 0.00 987.57 0.00 4313.07
------------ -------- ------------ -------- ------------
012813 000 31123 SOFA 03/25/98 SLMM 05 07 4164.39 0.00 08/99 842.79 0.00 3321.60 20.2
012827 000 31137 SOFA 03/25/98 SLMM 05 07 3539.79 0.00 08/99 716.38 0.00 2823.41 20.2
012834 000 31144 SOFA 03/25/98 SLMM 05 07 4489.68 0.00 08/99 908.52 0.00 3581.06 20.2
</TABLE>
<PAGE>
September 28, 1999
10:30 AM Imperial Bancorp
NET BOOK VALUE REPORT
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Co In-Svc Dep Rem Unadjusted Salvage Curr Current Accum Pet
SYS No Ext Ast No Desc Date Meth Life Basis + S179 Value Thru Depreciation Sec 179 Net Bk Value Dep
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------ -------- ------------ -------- ------------
Asset Type 6612 Count= 3 12193.86 0.00 2467.79 0.00 9726.07
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 12193.86 0.00 2467.79 0.00 9726.07
------------ -------- ------------ -------- ------------
012822 000 31132 36x72 "L" 03/25/98 SLMM 05 07 46365.44 0.00 08/99 9383.50 0.00 36981.94 30.2
------------ -------- ------------ -------- ------------
Asset Type 6616 Count= 1 46365.44 0.00 9383.50 0.00 36981.94
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 46365.44 0.00 9383.50 0.00 36981.94
------------ -------- ------------ -------- ------------
012337 000 000306 LINEAR FEE 11/24/97 SLMM 05 03 4937.20 0.00 08/99 1234.32 0.00 3702.88 25.0
------------ -------- ------------ -------- ------------
Asset Type 6620 Count= 1 4937.20 0.00 1234.32 0.00 3702.88
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 4937.20 0.00 1234.32 0.00 3702.88
------------ -------- ------------ -------- ------------
013771 000 31781 SIGN 08/24/98 SLMM 06 00 1672.97 0.00 08/99 239.00 0.00 1433.97 14.3
------------ -------- ------------ -------- ------------
Asset Type 6802 Count= 1 1672.97 0.00 239.00 0.00 1433.97
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 1672.97 0.00 239.00 0.00 1433.97
------------ -------- ------------ -------- ------------
Grand Total Count= 97 493460.55 0.00 193637.66 0.00 299822.89
Less disposals and transfers 0.00 0.00 0.00 0.00 0.00
------------ -------- ------------ -------- ------------
Net 493460.55 0.00 193637.66 0.00 299822.89
============ ======== ============ ======== ============
<CAPTION>
- ---------------------------------------------------Calculation Assumptions--------------------------------------------------
Book Short Years Midquarter Convention Adjustment Convention
---- ----------- --------------------- ---------------------
<S> <C> <C> <C>
Internal (N) (N) Immediate
- ----------------------------------------------------Asset Grouping/Sorting--------------------------------------------------
</TABLE>
Group: 7605
Include Assets that meet the following conditions:
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(c) - Leased Property
None
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(d) - Assumed Contracts
Item Contracts
- ---- ---------
1 Adrian Ward - Consultant
2 Collection Administration Agreement - Tylk LLC
3 Collection Administration Agreement - Echo Lake Productions, LLC
4 F1DEC - 50% Participation in Loan Guarantee
5 KBL Participations - Conprod. Inc. Loan #: 778025188-3
6 KBL Participations - Contre Films Loan #: 776025169-5
7 KBL Participations - Kudzu Prod. Loan #: 775075217-3
8 Agent for KBL - LTZ II, Inc.
9 Agent for KBL - Cheese Sandwich, Inc.
10 Agent for KBL - Muse Prods (Tracker), Inc.
11 Contempory Versions/Crystal Sky - One more loan (1)
12 License agreement re: Use of Lewis Horwitz's name
13 Maintenance agreement - Pacific Plants
Note
- ----
(1) This represents a loan commitment for a multiple film deal. The borrower is
the same for all films and the,loans are cross collateralized.
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(e) - Licenses and Permits
None
<PAGE>
Lewis Horwitz Organization
Schedule 1.1(i) - Other Assets to be Purchased
<TABLE>
<CAPTION>
Net Book
Description Value
----------- -----
<S> <C>
Membership @ American Film Marketing $ 5,000.00
Film - Jack Frost $356,656.38
</TABLE>
<PAGE>
Lewis Horwitz Organization
Schedule 1.4(b) - Letters of Credit
<TABLE>
<CAPTION>
Expiration
Beneficiary Borrower Film Title Officer Amount Date SB #
----------- -------- ---------- ------ ------ ---- ----
<S> <C> <C> <C> <C> <C> <C>
Kredietbank Luxembourg Digging To China Prod Digging to Chin A. Stribley $1,60,172.28 12/30/99 0SF98000509
Kredietbank Luxembourg Heat II Prod. Acapulco Heat II A. Stribley $ 233,662.04 11/15/99 0SF98000205
Kredietbank Luxembourg Conan Ent. LLC Conan A. Stribley $ 335,196.28 2/29/00 0SF98000218
</TABLE>
<PAGE>
EXHIBIT 10.40
EMPLOYMENT SEVERANCE AGREEMENT,
SETTLEMENT AGREEMENT AND GENERAL RELEASE
----------------------------------------
This Employment Severance Agreement, Settlement Agreement, and General
Release ("Agreement") is made and entered into by and among Stephen J. Shugerman
("Employee"), Imperial Credit Industries, Inc. ("ICII") and Southern Pacific
Bank ("SPB") (collectively, the "Employer").
Employee has been an employee of Employer and his active employment has
ended effective September 1, 1999 (the "Termination Date"), notwithstanding
that Employee and SPB had entered into that certain Employment and Non-
Competition Agreement as of January 1, 1997 (the "Employment Agreement").
Employee and Employer desire to settle fully and finally any differences between
them, including, but not limited to, any differences that might arise out of
Employee's employment with Employer, and the termination thereof.
In consideration of the mutual covenants and conditions hereof, the parties
agree as follows:
l. General Construction
--------------------
This Agreement shall not in any way be construed as an admission by the
parties that either has acted wrongfully or performed inadequately during the
period of Employee's employment.
2. Termination of Employment
-------------------------
Employee represents, understands and agrees that his active employment with
Employer has ended on the Termination Date specified above. Employee has vacated
his office at SPB and will not otherwise seek or demand employment with
Employer. In addition, Employee shall resign as of September 1, 1999, from the
Board of Directors of SPB. Employee and Employer represent that neither has
filed and neither will file any complaints, charges or lawsuits with any
governmental agency or any court related to the termination of Employee's
employment.
3. Severance Pay; Director Fees
----------------------------
Employer agrees to pay Employee (i) $146,530 for all accrued vacation and
(ii) his current Base Salary (as defined in the Employment Agreement and
subsequently adjusted to $300,000 per annum) due for work completed, to the
Termination Date. Severance compensation equal to Employee's current Base Salary
shall be paid in the form of salary
-1-
<PAGE>
continuation through December 31, 2000, less appropriate deductions including
employee benefit contributions. Employee shall be entitled to all benefits of
employment other than vacation accrual, automobile allowance, and such other
matters as are set forth in paragraph 4 below, during the current Base Salary
continuation period. Effective January 1, 2001, all such benefits of employment
shall cease. Employee shall remain a Director of ICII for so long as the ICII
Board of Directors and shareholders, respectively, shall nominate and elect him
to that position, and Employee shall receive all director fees and expenses
normally paid to non-employee Directors of ICII.
4. Medical Coverage; Other Benefits
--------------------------------
(a) Without limiting the materiality of other paragraphs of this
Agreement, it is agreed that the provisions of this paragraph 4 are a material
part of this Agreement.
(b) Employer agrees to maintain Employee on an Employer health care plan
through the end of the current Base Salary continuation period, under the same
terms applicable to existing employees of Employer.
(c) Employer may elect to change the plan offered to all Employer's
employees and in such event, Employee agrees to accept the level of coverage
offered to all existing employees at his level.
(d) Employee's benefit period under COBRA shall begin on January 1, 2001.
(e) Employee's eligibility to participate in ICII's Deferred Executive
Compensation Plan ("DEC") shall continue for so long as Employee remains a
Director of ICII. Amounts previously contributed as Employer matching funds
shall continue to vest according to the terms of the DEC Plan for so long as
Employee remains a Director of ICII.
(f) Employee's participation in the ICII 401k Plan shall cease on the
Termination Date.
(g) All unexercised grants of ICII common stock options previously issued
to Employee shall remain outstanding and shall continue to vest in accordance
with each such option grant's original vesting schedule for so long as Employee
remains a Director of ICII.
(h) Employee and Employer agree to cooperate fully with one another in
implementing the provisions of this paragraph 4.
5. Confidentiality
---------------
Both parties represent and agree that they will keep the terms, payment
amounts and existence of the Agreement completely confidential, and that they
will not hereafter disclose
-2-
<PAGE>
any information concerning this Agreement to anyone other than the Employee's
spouse, prospective employers and professional advisors of Employee and
representatives, employees, agents and regulatory authorities of Employer, who,
if told such matters, will be informed of this confidentiality clause, except as
required by legal process.
6. Representation
--------------
Employee and Employer represent and agree that (i) they fully understand
their right to discuss all aspects of this Agreement with their respective
attorneys, if any, if they desire, (ii) they each have carefully read and fully
understand all of the provisions of this Agreement and (iii) they are
voluntarily entering into this Agreement.
7. General Release
---------------
As a material inducement to Employer's decision to enter into this
Agreement, Employee hereby irrevocably and unconditionally releases, acquits and
forever discharges the Employer and its owners, stockholders, predecessors,
successors, assigns, agents, directors, officers, employees, representatives,
attorneys, divisions, subsidiaries, affiliates (and agents, directors, officers,
employees, representatives and attorneys of such parent companies, divisions,
subsidiaries and affiliates), and all persons acting by, through, under or in
concert with any of them, or any of them, from any and all charges, complaints,
claims, liabilities, obligations, promises, agreements, controversies, damages,
actions, causes of action, suits, rights, demands, costs, losses, debts and
expenses (including attorneys' fees and costs actually incurred) of any nature
whatsoever, known or unknown, suspected or unsuspected, including, but not
limited to rights under federal, state or local laws which Employee now has,
owns or holds, or claims to have, own or hold, or which Employee at any time
heretofore had, owned or held, or claimed to have, own or hold, or which
Employee at any time hereinafter may have, own or hold, or claim to have, own or
hold against Employer or any of the other parties, including any claims for
compensation or benefits that could be asserted under the Employment Agreement,
but not including claims arising out of the breach of this Agreement.
Employee expressly waives and relinquishes all rights and benefits afforded
by Section 1542 of the Civil Code of the State of California, and does so
understanding and acknowledging the significance of such specific waiver of
Section 1542. Section 1542 of the Civil Code of the State of California states
as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Thus, notwithstanding the provisions of Section 1542, and for the purpose
of implementing a full and complete release and discharge of the parties,
Employee expressly acknowledges that this Agreement is intended to include in
its effect, without limitation, all
-3-
<PAGE>
claims which Employee does not know or suspect to exist in his favor at the time
of execution hereof, and this Agreement contemplates the extinguishment of all
such claim or claims, except any claim arising out of the breach of this
Agreement.
Notwithstanding the foregoing or any other provision hereof, paragraph
(Section) 5 and paragraphs (Sections) 10 through 17 of the Employment Agreement
shall remain in full force and effect for so long as Employee remains a Director
of ICII.
8. Revocation
----------
Employee has a period of seven (7) days following the execution of this
Agreement by all parties hereto to revoke this Agreement by providing written
notice of such revocation to Irwin L. Gubman, ICII's and SPB's General Counsel.
This Agreement shall not become effective or enforceable until this seven (7)
day revocation period has expired without Employee having exercised Employee's
right of revocation.
9. Federal Age Discrimination in Employment Act
--------------------------------------------
Employee fully understands, acknowledges and agrees that among the claims
Employee is waiving, releasing and forever discharging by the execution of this
Agreement are all claims arising under the Federal Age Discrimination in
Employment Act of 1967, 29 U.S.C. section 621 et seq. Employee further fully
-------
understands, acknowledges and agrees that Employee:
(a) Has been given at least twenty-one (21) days within which to consider
this Agreement before executing it.
(b) Has carefully read and fully understands all of the terms and
provisions of this Agreement.
(c) Is, by the execution of this Agreement, waiving, releasing and forever
discharging Employer from all claims that Employee has or may have against the
Employer, including but not limited to any claims of age discrimination.
(d) Knowingly and voluntarily agrees to all of the terms and provisions of
this Agreement.
(e) Knowingly and voluntarily intends to be legally bound by all of the
terms and provisions of this Agreement.
(f) Was previously advised, and is hereby further advised, in writing to
consult with an attorney of Employee's choice before executing this Agreement.
-4-
<PAGE>
(g) Has a period of seven (7) days following the execution of this
Agreement by all parties hereto to revoke this Agreement by providing written
notice of such revocation to Irwin L. Gubman and was previously advised, and is
hereby further advised, in writing that this Agreement shall not become
effective or enforceable until this seven (7) day revocation period has expired
without Employee having exercised Employee's right of revocation.
(h) Understands that any claims under the Federal Age Discrimination in
Employment Act of 1967, 29 U.S.C. section 621 et seq., that may arise after the
------
date this Agreement is executed by all parties hereto are not waived.
If Employee does not revoke this Agreement within the seven (7) day revocation
period described in paragraph 8 above, Employee agrees to mail to Irwin L.
Gubman the original of a letter Employee has executed confirming Employee has
not exercised Employee's right to revoke. Promptly after Irwin L. Gubman
receives said letter as executed by Employee, Employer agrees to implement
paragraph 3 of this Agreement.
10. General Provisions
------------------
(a) The provisions of this Agreement are severable, and if any part of it
is found to be unenforceable, the other paragraphs shall remain fully valid and
enforceable. This Agreement shall survive the termination of any arrangements
contained herein.
(b) The terms of this Agreement shall inure to the benefit of and be
binding upon the parties and their successors, agents, heirs, parent companies,
subsidiaries and assigns.
(c) Any controversy or claim arising out of or relating to this Agreement
or the breach thereof (including the arbitrability of any controversy or claim),
shall be settled by arbitration in the City of Los Angeles in accordance with
the laws of the State of California by one arbitrator. If the parties cannot
agree on the appointment of an arbitrator, then the arbitrator shall be
appointed by the American Arbitration Association. The arbitration shall be
conducted in accordance with the rules of the American Arbitration Association,
except with respect to the selection of an arbitrator which shall be as provided
in this Paragraph 20. The cost of any arbitration proceeding hereunder shall be
borne equally by the Employer and the Employee. The award of the arbitrator
shall be binding upon the parties. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
If it shall be necessary or desirable for the Employee to retain legal
counsel and incur other costs and expenses in connection with the enforcement of
any or all of his rights under this Agreement, and provided that the Employee
substantially prevails in the enforcement of such rights, the Employer shall pay
(or the Employee shall be entitled to recover from the Employer, as the case may
be) the Employee's reasonable attorneys' fees and costs and expenses in
connection with the enforcement of his rights including the enforcement of any
arbitration award.
-5-
<PAGE>
(d) This Agreement and any amendment or supplement hereto may be executed
in several counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) This Agreement contains the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes any prior
agreement, negotiations and other dealings between the parties. This Agreement
may only be amended in writing by a written amendment signed by both the
Employer and Employee.
This Agreement is executed by or on behalf of the parties as of the date
set forth after each party's signature.
______________________________
Name:
Date:
IMPERIAL CREDIT INDUSTRIES, INC. SOUTHERN PACIFIC BANK
By:________________________________ By:__________________________________
Date: Date:
-6-
<PAGE>
EXHIBIT 10.41
EMPLOYMENT SEVERANCE AGREEMENT,
SETTLEMENT AGREEMENT AND GENERAL RELEASE
----------------------------------------
This Employment Severance Agreement, Settlement Agreement, and General Release
("Agreement") is made and entered into by and between Kevin E. Villani
("Employee") and Imperial Credit Industries, Inc. (the "Employer").
Employee has been an employee of Employer and his active employment with
Employer has ended effective September 30, 1999 (the "Termination Date"),
notwithstanding that Employee and Employer had entered into that certain
Employment and Non-Competition Agreement dated as of January 1, 1997 (the
"Employment Agreement"). Employee and Employer desire to settle fully and
finally any differences between them, including, but not limited to, any
differences that might arise out of Employee's employment with Employer, and the
termination thereof.
In consideration of the mutual covenants and conditions hereof, the parties
agree as follows:
l. General Construction
--------------------
This Agreement shall not in any way be construed as an admission by
the parties that either has acted wrongfully or performed inadequately during
the period of Employee's employment.
2. Termination of Employment
-------------------------
Employee represents, understands and agrees that his active employment
with Employer has ended on the Termination Date. Employee's status as President
and Director of Imperial Credit Asset Management, Inc. ("ICAM") shall terminate
on December 31, 1999. Employee shall remain a Director and the Vice Chairman of
Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC") (unless, in the
case of the Vice Chairman position, the directors of ICCMIC appoint new
officers) and of Imperial Credit Commercial Asset Management Corp. ("ICCAMC")
until the latter of the Effective Time of the Merger or the payment for the
Management Contract by or on behalf of ICCMIC (as these terms are defined in the
Merger Agreement between ICCMIC and Employer dated July 22, 1999 (the "Merger
Agreement")). Employee will not otherwise seek or demand employment with
Employer or any of its subsidiaries. Employee's resignation from all of
Employer's subsidiary boards, officer positions and committees shall be
effective on the Termination Date, except as specified above, and provided that
Employee shall resign as of December 31, 1999, from the Board of Directors of
Employer and Southern Pacific Bank. Employee and Employer represent that
-1-
<PAGE>
neither has filed and neither will file any complaints, charges or lawsuits with
any governmental agency or any court related to the termination of Employee's
employment.
3. Compensation and Severance Consideration
-----------------------------------------
(a) Employer agrees to pay Employee for all accrued but unused
vacation days through December 31, 1999, such payment to be made promptly after
that date. ICAM shall pay Employee his current Base Salary from the Termination
Date through December 31, 1999. Thereafter, in consideration of and conditioned
upon Employee's success in bringing about the merger with ICCMIC and the
successful implementation of the Merger Agreement, severance compensation equal
to Employee's current Base Salary shall be paid in the form of salary
continuation through December 31, 2002, less deductions for taxes and employee
benefit contributions. Employee shall be entitled to all benefits of employment
other than vacation accrual, automobile allowance, and such other matters as are
set forth in Paragraph 4 below, during the Base Salary continuation period.
Effective January 1, 2003, all such benefits of employment shall cease.
Notwithstanding the provisions of the final two sentences of the last paragraph
of Section 9 of the Employment Agreement (i.e., the final two sentences of the
paragraph beginning "Severance Amount"), in the event the Employee becomes an
employee or independent contractor of one or more companies following the
Termination Date, the Severance Amount shall be adjusted to equal the annual
rate of $350,000 minus the Employee's annual compensation in excess of $150,000
pro rated at his new employers. No Severance Amount shall be paid if the
Employee's total annual cash compensation at his new employers exceeds $500,000.
Employee agrees to cooperate fully with Employer in the timely determination of
the annual amount of such other compensation and shall, upon request, provide
Employer with copies of his W-2 statements, Form 1099s, tax returns on Form 1040
and other documents as may reasonably be requested by Employer.
(b) Employer agrees to pay Employee a cash bonus for Employee's
performance during calendar year 1999 of $200,000 contingent upon the successful
funding and closing of a collateralized loan obligation fund identified as
Pacifica Partners Enhanced Loan Investment Ltd. Notwithstanding the preceding
sentence, if the total dollar amount of assets acquired by the Fund is less than
$250 million, no cash bonus shall be required to be paid for 1999 performance,
although Employer retains the sole discretion to pay a reduced cash bonus.
(c) Employer agrees to pay Employee a $50,000 cash bonus at such time
as Employee receives payment of his account balance pursuant to Section 7.2 of
the DEC Plan (as defined below).
(d) In connection with and as a result of (i) the successful closing
of the ICCMIC merger or (ii) payment by ICCMIC or a third party acquiror of
ICCMIC to ICCAMC for the termination of the Management Contract, Employer agrees
to pay Employee a success bonus in the amount of 1 1/2% of the positive
difference between the appraised value of the Management Contract and $15
million or 1 1/2% of the amount paid by or on behalf of ICCMIC
-2-
<PAGE>
for termination of the Management Contract in excess of $15 million,
respectively. By way of example, at an appraised value of $35 million, the
success bonus will be $300,000.
(e) Employer and ICCMIC have entered into the Merger Agreement.
Employer recognizes that Employee was required to cancel his outstanding grants
of ICCMIC common stock options so that Employer could qualify under applicable
Maryland law to enter into the Merger Agreement and that such options are
currently valued, based on the $11.50 per share offer price in the Merger
Agreement, at $1.10 per share for options issued at $15.00 and $2.50 per share
for options issued at $9.00. Accordingly, Employer agrees to pay Employee at
the Effective Time of the Merger (as that term is defined in the Merger
Agreement) for all of his canceled ICCMIC options, or, if such Merger Agreement
is terminated in favor of a Superior Proposal, (as that term is defined in the
Merger Agreement), at the same per share dollar amount as the active employees
of ICCAMC shall receive and at the same time as such active employees receive
value for their ICCMIC options.
(f) If the merger with ICCMIC is consummated by Employer, then
Employer agrees to establish a separate bonus pool consisting of 5% of the
profits to be realized by Employer upon closing of the merger transaction and
upon further liquidation of ICCMIC's assets. Employer's Chief Executive Officer
("CEO"), using a conservative definition of "profits" defined as the before tax
(equivalent) cash profits realized in the acquisition of ICCMIC and liquidation
of ICCMIC assets, taking into account among other things Employer's customary
capital charge, a deduction for the full appraised value of the Management
Contract, and the value of Employer's stock ownership in ICCMIC at $11.50 per
share or as may be increased following appraisal of the Management Contract,
will certify that the calculation of "profits" conforms with the methodologies
and calculations agreed with the Chairman of Employer's Compensation Committee,
as indicated in the projected pro-forma "Value of Acquisition" attached as
Exhibit A. Employer agrees to pay Employee 3% of the profits as so determined
in recognition of Employee's role, including in his capacity as a Consultant to
Employer, in completing and implementing the merger transaction and related
asset liquidation. The initial distribution shall be made from cash available as
a result of the funds held by ICCMIC post-merger and amounts received upon
liquidation of ICCMIC assets in excess of the acquisition purchase price, which
includes Employer's stock ownership in ICCMIC, the capital charge to ICCMIC, the
full appraisal value of the Management Contract and related transaction expenses
required to be paid by ICCMIC and Employer. Subsequent distributions will be
made upon liquidation of ICCMIC assets and will take into account all tax
benefits available, or reasonably estimated to be available, to Employer as a
result of the merger and sale of ICCMIC assets through December 31, 2000, such
date being the date of final distribution to Employee from this bonus pool. If
a Superior Proposal is accepted by the Board and shareholders of ICCMIC or for
any other reason no transaction between Employer and ICCMIC occurs, this bonus
pool shall not be established and Employee shall receive no payment hereunder.
-3-
<PAGE>
4. Medical Coverage; Other Benefits
--------------------------------
(a) Without limiting the materiality of other paragraphs of this
Agreement, it is agreed that the provisions of this Paragraph 4 are a material
part of this Agreement.
(b) Employer agrees to maintain Employee on an Employer health care
plan through the end of the current Base Salary continuation period, under the
same terms applicable to existing employees of Employer.
(c) Employer may elect to change the plan offered to all Employer's
employees and in such event, Employee agrees to accept the level of coverage
offered to all existing employees at his level.
(d) Employee's benefit period under COBRA shall begin on January 1,
2003.
(e) Employee's eligibility to participate in ICII's Deferred
Executive Compensation Plan ("DEC") and the ICII 401(k) Plan shall cease upon
Employee's termination of his employment status at ICAM. Amounts previously
contributed as Employer matching funds shall continue to vest according to the
terms of the DEC Plan and the ICII 401(k) Plan for so long as Employee remains
an employee of ICAM.
(f) All unexercised grants of ICII common stock options previously
issued to Employee shall remain outstanding and shall continue to vest in
accordance with each such option grant's original vesting schedule until
June 30, 2002, provided that Employee remains a consultant to Employer until
that date, pursuant to a separate Agreement for Consulting Services between
Employee and Employer, effective as of September 30, 1999.
(g) Employee and Employer agree to cooperate fully with one another
in implementing the provisions of this Paragraph 4.
5. Confidentiality
---------------
Both parties represent and agree that they will keep the terms,
payment amounts and existence of the Agreement completely confidential, and that
they will not hereafter disclose any information concerning this Agreement to
anyone other than the Employee's spouse, prospective employers and professional
advisors of Employee and representatives, employees, agents and regulatory
authorities of Employer, who, if told such matters, will be informed of this
confidentiality clause, except as required by legal process.
6. Representation
--------------
Employee and Employer represent and agree that (i) they fully
understand their right to discuss all aspects of this Agreement with their
respective attorneys, if any, if they
-4-
<PAGE>
desire, (ii) they each have carefully read and fully understand all of the
provisions of this Agreement and (iii) they are voluntarily entering into this
Agreement.
7. General Release
---------------
As a material inducement to Employer's decision to enter into this
Agreement, Employee hereby irrevocably and unconditionally releases, acquits and
forever discharges the Employer and its owners, stockholders, predecessors,
successors, assigns, agents, directors, officers, employees, representatives,
attorneys, divisions, subsidiaries, affiliates (and agents, directors, officers,
employees, representatives and attorneys of such parent companies, divisions,
subsidiaries and affiliates), and all persons acting by, through, under or in
concert with any of them, or any of them, from any and all charges, complaints,
claims, liabilities, obligations, promises, agreements, controversies, damages,
actions, causes of action, suits, rights, demands, costs, losses, debts and
expenses (including attorneys' fees and costs actually incurred) of any nature
whatsoever, known or unknown, suspected or unsuspected, including, but not
limited to rights under federal, state or local laws which Employee now has,
owns or holds, or claims to have, own or hold, or which Employee at any time
heretofore had, owned or held, or claimed to have, own or hold, or which
Employee at any time hereinafter may have, own or hold, or claim to have, own or
hold against Employer or any of the other parties, including any claims for
compensation or benefits that could be asserted under the Employment Agreement,
but not including claims arising out of the breach of this Agreement.
Employee expressly waives and relinquishes all rights and benefits
afforded by Section 1542 of the Civil Code of the State of California, and does
so understanding and acknowledging the significance of such specific waiver of
Section 1542. Section 1542 of the Civil Code of the State of California states
as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Thus, notwithstanding the provisions of Section 1542, and for the
purpose of implementing a full and complete release and discharge of the
parties, Employee expressly acknowledges that this Agreement is intended to
include in its effect, without limitation, all claims which Employee does not
know or suspect to exist in his favor at the time of execution hereof, and this
Agreement contemplates the extinguishment of all such claim or claims, except
any claim arising out of the breach of this Agreement.
Notwithstanding the foregoing or any other provision hereof, Section 5
regarding indemnification, Section 9(c) and Sections 10 through 17 of the
Employment Agreement shall remain in full force and effect for the period set
forth in the Employment Agreement, except as modified by this paragraph, as
follows: (i) the proviso in Section 9(c) of the Employment Agreement concerning
suspension of severance payments and benefits shall
-5-
<PAGE>
apply only in the case of employment or retention in an asset management
capacity in the reasonable opinion of Employer's Board of Directors; (ii) the
term "affiliates" in Sections 10(a) and (b) of the Employment Agreement shall
apply only to legal subsidiaries of the Employer; and (iii) Section 10(a) of the
Employment Agreement shall apply only to the asset management business. For the
avoidance of doubt, Employee understands and agrees that Section 10 of the
Employment Agreement applies without regard to geographic limitations to, among
other things, ICAM, its officers and the collateralized loan obligation and
hedge funds it manages and advises, and Employee will not accept employment or
consult with any such officers if they should leave ICAM, unless Employee
obtains the prior written consent of Employer.
8. Nondisparagement, Cooperation and Support
------------------------------------------
(a) Employee agrees not to make any disparaging remarks about
Imperial Credit Industries, Inc., its subsidiaries or affiliates, or any of its
or their officers, directors and employees. Employee agrees to observe fully the
restrictions of Section 10 (c) of the Employment Agreement in this regard.
(b) Employee represents and agrees that he will not voluntarily
provide testimony, documents, information or any other material to any party or
their counsel involved in litigation against Employer or threatened litigation
against Employer. If requested by any party or their counsel to provide such
testimony, documents, information or other materials, Employee agrees to notify
the Office of the General Counsel of Employer, in writing, within forty-eight
(48) hours of such a request. Such written notification shall be made to
Irwin L. Gubman, Esq., 23550 Hawthorne Blvd., Suite 240, Torrance, CA 90505.
(c) If served with a valid subpoena or other valid formal process,
Employee agrees to meet with counsel designated by Employer to prepare for his
testimony, production of documents, information or other materials. Employee
agrees that he will cooperate with counsel designated by Employer for such
purposes. Employer will reimburse Employee for any documented lost salary or
other documented and reasonable out-of-pocket expenses connected with such
cooperation. If Employee provides testimony, documents, information or other
materials in response to a valid subpoena or other valid formal judicial
process, Employee agrees to provide only truthful and accurate testimony in any
proceeding involving Employer.
(d) Employee agrees that, for the duration of his Agreement for
Consulting Services and for two years beyond its termination, he will not
advise, participate, act in concert, conspire, form or join any group, or work
or consult with any party seeking to acquire control of Employer or its
subsidiaries or its or their major divisions. For this purpose, "control" shall
mean "Change in Control" as defined in Section 1(b)(3) of Employer's DEC Plan,
amended January 27, 1999; provided, however, that this Section 8(d) shall not
apply to any proposed transaction approved in advance by the Incumbent Directors
of Employer's Board (as defined in Section 1(b)(3)(iii) of the DEC Plan).
-6-
<PAGE>
(e) Violation of this Paragraph 8 in the good faith opinion of the
Board of Directors of Employer (the "Board") shall result in the immediate
termination of this Agreement. Prior to any such decision by the Board,
Employee shall be given a reasonable opportunity to be heard before the full
Board. Employer also may pursue any other remedy available at law or in equity.
9. Revocation
----------
Employee has a period of seven (7) days following the execution of
this Agreement by all parties hereto to revoke this Agreement by providing
written notice of such revocation to Irwin L. Gubman, ICII's General Counsel.
This Agreement shall not become effective or enforceable until this seven (7)
day revocation period has expired without Employee having exercised Employee's
right of revocation.
10. Federal Age Discrimination in Employment Act
--------------------------------------------
Employee fully understands, acknowledges and agrees that among the
claims Employee is waiving, releasing and forever discharging by the execution
of this Agreement are all claims arising under the Federal Age Discrimination in
Employment Act of 1967, 29 U.S.C. section 621 et seq. Employee further fully
-------
understands, acknowledges and agrees that Employee:
(a) Has been given at least twenty-one (21) days within which to
consider this Agreement before executing it.
(b) Has carefully read and fully understands all of the terms and
provisions of this Agreement.
(c) Is, by the execution of this Agreement, waiving, releasing and
forever discharging Employer from all claims that Employee has or may have
against the Employer, including but not limited to any claims of age
discrimination.
(d) Knowingly and voluntarily agrees to all of the terms and
provisions of this Agreement.
(e) Knowingly and voluntarily intends to be legally bound by all of
the terms and provisions of this Agreement.
(f) Was previously advised, and is hereby further advised, in writing
to consult with an attorney of Employee's choice before executing this
Agreement.
(g) Has a period of seven (7) days following the execution of this
Agreement by all parties hereto to revoke this Agreement by providing written
notice of such revocation to Irwin L. Gubman and was previously advised, and is
hereby further advised, in
-7-
<PAGE>
writing that this Agreement shall not become effective or enforceable until this
seven (7) day revocation period has expired without Employee having exercised
Employee's right of revocation.
(h) Understands that any claims under the Federal Age Discrimination
in Employment Act of 1967, 29 U.S.C. section 621 et seq., that may arise after
------
the date this Agreement is executed by all parties hereto are not waived.
If Employee does not revoke this Agreement within the seven (7) day
revocation period described in Paragraph 8 above, Employee agrees to mail to
Mr. Gubman the original of a letter Employee has executed confirming Employee
has not exercised Employee's right to revoke. Promptly after receipt of said
letter as executed by Employee, Employer agrees to implement Paragraph 3 of this
Agreement.
11. General Provisions
------------------
(a) The provisions of this Agreement are severable, and if any part
of it is found to be unenforceable, the other paragraphs shall remain fully
valid and enforceable. This Agreement shall survive the termination of any
arrangements contained herein.
(b) The terms of this Agreement shall inure to the benefit of and be
binding upon the parties and their successors, agents, heirs, parent companies,
subsidiaries and assigns.
(c) Any controversy or claim arising out of or relating to this
Agreement or the breach thereof (including the arbitrability of any controversy
or claim), shall be settled by arbitration in the City of Los Angeles in
accordance with the laws of the State of California by one arbitrator. If the
parties cannot agree on the appointment of an arbitrator, then the arbitrator
shall be appointed by the American Arbitration Association. The arbitration
shall be conducted in accordance with the rules of the American Arbitration
Association, except with respect to the selection of an arbitrator which shall
be as provided in this Paragraph 11. The cost of any arbitration proceeding
hereunder shall be borne equally by the Employer and the Employee. The award of
the arbitrator shall be binding upon the parties. Judgment upon the award
rendered by the arbitrator may be entered in any court having jurisdiction
thereof.
If it shall be necessary or desirable for the Employee to retain
legal counsel and incur other costs and expenses in connection with the
enforcement of any or all of his rights under this Agreement, and provided that
the Employee substantially prevails in the enforcement of such rights, the
Employer shall pay (or the Employee shall be entitled to recover from the
Employer, as the case may be) the Employee's reasonable attorneys' fees and
costs and expenses in connection with the enforcement of his rights including
the enforcement of any arbitration award.
-8-
<PAGE>
(d) This Agreement and any amendment or supplement hereto may be
executed in several counterparts, each of which shall be deemed an original, but
all of which together shall constitute one and the same instrument.
(e) This Agreement contains the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes any prior
agreement, negotiations and other dealings between the parties. This Agreement
may only be amended in writing by a written amendment signed by both the
Employer and Employee.
THIS AGREEMENT is executed by or on behalf of the parties as of the date set
forth after each party's signature.
___________________________________
Name: Kevin E. Villani
Date:
IMPERIAL CREDIT INDUSTRIES, INC.
By:________________________________
Date:
-9-
<PAGE>
EXHIBIT A
---------
ICCMIC LIQUIDATION BONUS PLAN
1. BACKGROUND
ICII has entered into a definitive agreement to acquire ICCMIC. The
transaction has taken about eight months to engineer and negotiate. Closing
this transaction offers ICII to earn substantial profits over and above the
profits available from the sale of the ICCMIC management contract. The profits
will be partly locked in at the time of close, and partly at risk. This
proposed profit sharing program provides the appropriate incentive compensation
to maximize the value to ICII. It is conservatively structured to safeguard
shareholder value. It is a temporary plan, and does not supplant any existing
plans.
2. DEFININITION OF PROFITS
Profits are to be (conservatively) defined as before tax (equivalent) cash
profits, after a full capital charge and the deduction for the value of the
management contract. The attached Value of Acquisition exhibit updates the
previous exhibits, extended in several ways. First, all numbers are presented
in discounted present value terms. Second, the value of tax benefits that are
still at risk at closing are discounted by two thirds. Hence the projected
pro-forma risk adjusted return is show as $61.570 million. Approximately three
fourths will be locked in at close (since the tax benefits not locked in are
already discounted). The remaining value depends on the prices achieved for
the assets yet to be liquidated. The transaction does not anticipate requiring
ICII liquidity.
3. DISTRIBUTION OF BONUS POOL
The total bonus pool is 5% of profits, as defined above. Kevin Villani will
receive a minimum of 3% of profits, with the remaining 2% distributed according
to a formula agreed to by Wayne and Kevin. The initial distribution will be
made at closing for the discounted value of tax benefits in the schedule, and
any other realized benefit from liquidation of assets up to that point.
Subsequent distributions will be made at the end of each quarter, with the last
distribution no later than December 31, 2000.
-10-
<PAGE>
EXHIBIT 11
IMPERIAL CREDIT INDUSTRIES, INC.
STATEMENT REGARDING COMPUTATION OF (LOSS) INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
(Loss) income from continuing operations before extraordinary item $(5,950) $(59,125) $115,263
Operating loss from discontinued operations of AMN, net of income taxes (899) (3,232) (25,347)
Loss on disposal of AMN, including provision of $3.7 million for operating
losses during phase-out period, net of $6.6 million of income taxes -- (11,276) --
------- -------- --------
(Loss) income before extraordinary item (6,849) (73,633) 89,916
Extraordinary item--gain (loss) on early extinguishment of debt, net of
Income taxes 4,021 -- (3,995)
------- -------- --------
Net (loss) income $(2,828) $(73,633) $ 85,921
======= ======== ========
Weighted -average common shares outstanding used to compute basic income
(loss) per share 34,517 38,228 38,611
Assumed common shares issued on exercise of stock options -- -- 2,244
------- -------- --------
Number of common shares used to compute diluted income (loss) per share 34,517 38,228 40,855
======= ======== ========
Basic (loss) income per share:
- ------------------------------
(Loss) income from continuing operations before extraordinary items $ (0.17) $ (1.55) $ 2.99
Loss from discontinued operations, net of income taxes (0.02) (0.08) (0.66)
Loss on disposal of AMN, net of income taxes -- (0.30) --
Extraordinary item--gain (loss) on early extinguishment of debt, net of income
taxes 0.11 -- (0.10)
------- -------- --------
Net (loss) income per common share $ (0.08) $ (1.93) $ 2.23
======= ======== ========
Diluted (loss) income per share:
- --------------------------------
(loss) income from continuing operations $ (0.17) $ (1.55) $ 2.82
Loss from discontinued operations, net of income taxes (0.02) (0.08) (0.62)
Loss on disposal of AMN, net of income taxes -- (0.30) --
Extraordinary item--gain (loss) on early extinguishment of debt, net of income
taxes 0.11 -- (0.10)
------- -------- --------
Net (loss) income per common share $ (0.08) $ (1.93) $ 2.10
======= ======== ========
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
--------------------------
<TABLE>
<CAPTION>
Subsidiary Name State of Incorporation
--------------- ----------------------
<S> <C>
Southern Pacific Bank California
Imperial Warehouse Finance, Inc. California
Imperial Business Credit, Inc. California
Imperial Credit Advisors, Inc. California
Imperial Credit Worldwide, Ltd. California
Imperial Capital Group, LLC Delaware
Imperial Credit Asset Management, Inc. California
ICII Ventures, Inc. California
Skypark Capital Management, Inc. Delaware
Imperial Credit Asset Resolution, Inc. California
ICII Acquisition Corp. Maryland
Corona Film Finance Fund, LLC Delaware
Imperial Credit Lender Services, Inc. California
Imperial Credit Commercial Asset California
Management Corporation
</TABLE>
<PAGE>
EXHIBIT 23.1.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Imperial Credit Industries, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 333-13805 and 333-15149) on Form S-8 and (Nos. 333-22141 and 333-30809)
on Form S-3 of Imperial Credit Industries, Inc. of our report dated January
24, 2000, relating to the consolidated balance sheets of Imperial Credit
Industries, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations and comprehensive income (loss),
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1999, which report appears in the
December 31, 1999 annual report on Form 10-K of Imperial Credit Industries,
Inc.
KPMG LLP
Los Angeles, California
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 33,898 297,772
<INT-BEARING-DEPOSITS> 248,182 1,415
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 160,805 170,752
<INVESTMENTS-HELD-FOR-SALE> 74,374 60,015
<INVESTMENTS-CARRYING> 0 0
<INVESTMENTS-MARKET> 0 0
<LOANS> 1,273,073 1,344,975
<ALLOWANCE> 31,841 24,880
<TOTAL-ASSETS> 2,201,615 2,417,183
<DEPOSITS> 1,614,758 1,714,252
<SHORT-TERM> 74,309 122,270
<LIABILITIES-OTHER> 60,233 57,282
<LONG-TERM> 246,935 289,858
0 0
0 0
<COMMON> 97,220 129,609
<OTHER-SE> 105,544 105,098
<TOTAL-LIABILITIES-AND-EQUITY> 2,201,615 2,417,183
<INTEREST-LOAN> 178,229 200,827
<INTEREST-INVEST> 25,841 28,965
<INTEREST-OTHER> 3,368 6,048
<INTEREST-TOTAL> 207,438 235,840
<INTEREST-DEPOSIT> 86,582 87,030
<INTEREST-EXPENSE> 121,607 123,106
<INTEREST-INCOME-NET> 85,831 112,734
<LOAN-LOSSES> 35,340 15,450
<SECURITIES-GAINS> 32,742 (592)
<EXPENSE-OTHER> 128,074 119,372
<INCOME-PRETAX> (7,550) (104,653)
<INCOME-PRE-EXTRAORDINARY> (6,849) (73,633)
<EXTRAORDINARY> 4,021 0
<CHANGES> 0 0
<NET-INCOME> (2,828) (73,633)
<EPS-BASIC> (.08) (1.93)
<EPS-DILUTED> (.08) (1.93)
<YIELD-ACTUAL> 4.52 5.86
<LOANS-NON> 59,419 39,529
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 24,880 26,954
<CHARGE-OFFS> 31,682 22,674
<RECOVERIES> 1,457 5,150
<ALLOWANCE-CLOSE> 31,841 24,880
<ALLOWANCE-DOMESTIC> 31,841 24,880
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,536 214
</TABLE>